SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 205497
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission Registrant, State of Incorporation I.R.S. Employer
File Number Address and Telephone Number Identification No.
- - - ----------- ---------------------------------- ------------------
0-25595 NIAGARA MOHAWK HOLDINGS, INC. 16-1549726
(a New York corporation)
300 Erie Boulevard West
Syracuse, New York 13202
315-474-1511
1-2987 NIAGARA MOHAWK POWER CORPORATION 15-0265555
(a New York corporation)
300 Erie Boulevard West
Syracuse, New York 13202
315-474-1511
Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [ X ] NO [ ]
The number of shares outstanding of each of the issuer's classes of voting
stock, as of October 31, 1999, were as follows:
Shares
Registrant Title Outstanding
- - - --------------------------------- ---------------------------- -----------
Niagara Mohawk Holdings, Inc. Common Stock, $0.01 par value 187,284,863
Niagara Mohawk Power Corporation Common Stock, $1.00 par value 187,364,863
(all held by Niagara Mohawk
Holdings, Inc.)
<PAGE>
FILING FORMAT
This Quarterly Report on Form 10-Q is a combined quarterly report being filed
separately by two registrants: Niagara Mohawk Holdings, Inc. ("Holdings") and
Niagara Mohawk Power Corporation ("Niagara Mohawk"). Holdings became the
holding company for Niagara Mohawk on March 18, 1999. (See Item 1. Financial
Statements - Notes to Consolidated Financial Statements - Note 1. Summary of
Significant Accounting Policies - "Formation of Holding Company"). Except
where the context clearly indicates otherwise, any references in this report
to "Holdings" includes all subsidiaries of Holdings including Niagara Mohawk.
Niagara Mohawk makes no representation as to the information contained in this
report in relation to Holdings and its subsidiaries other than Niagara Mohawk.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
FORM 10-Q - For the Quarter Ended September 30, 1999
PART I. FINANCIAL INFORMATION
Glossary of Terms
Item 1. Financial Statements
Consolidated Financial Statements:
NIAGARA MOHAWK HOLDINGS, INC.
-----------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
NIAGARA MOHAWK POWER CORPORATION
--------------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Review by Independent Accountants
Independent Accountants' Report on the Limited Review of the Interim
Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
GLOSSARY OF TERMS
TERM DEFINITION
- - - ---- ----------
CTC Competitive transition charges: a mechanism established in Niagara
Mohawk's POWERCHOICE agreement to recover stranded costs from
customers
Dth Dekatherm: one thousand cubic feet of gas with a heat content of
1,000 British Thermal Units per cubic foot
EBITDA A non-GAAP measure of cash flow which is calculated as: earnings
before interest charges, interest income, income taxes,
depreciation and amortization, amortization of nuclear fuel,
allowance for funds used during construction, MRA regulatory
asset amortization, and extraordinary items
FERC Federal Energy Regulatory Commission
GAAP Generally Accepted Accounting Principles
GRT Gross Receipts Tax
GWh Gigawatt-hour: one gigawatt-hour equals one billion watt-hours
IPP Independent Power Producer: any person that owns or operates, in
whole or in part, one or more Independent Power Facilities,
including the purchasers of Niagara Mohawk's generation assets
IPP Party Independent Power Producers that were a party to the MRA
KWh Kilowatt-hour: a unit of electrical energy equal to one kilowatt
of power supplied or taken from an electric circuit steadily for
one hour
MRA Master Restructuring Agreement - a Niagara Mohawk agreement,
including amendments thereto, which terminated, restated or amended
certain IPP Party power purchase agreements effective June 30, 1998
MRA Recoverable costs to terminate, restate or amend IPP Party
regulatory contracts, which have been deferred and are being amortized and
asset recovered under Niagara Mohawk's POWERCHOICE agreement
MW Megawatt: one million watts
NRC Nuclear Regulatory Commission
NYISO New York Independent System Operator
NYPP New York Power Pool
POWERCHOICE Niagara Mohawk's five-year electric rate agreement, which
agreement incorporates the MRA, approved by the PSC in an order dated
March 20, 1998, and which became effective September 1, 1998
PPA Power Purchase Agreement: long-term contracts under which a
utility is obligated to purchase electricity from an IPP
PRP Potentially Responsible Party
PSC New York State Public Service Commission
SFAS Statement of Financial Accounting Standards No. 71
No. 71 "Accounting for the Effects of Certain Types of Regulation"
Unit 1 Nine Mile Point Nuclear Station Unit No. 1
Unit 2 Nine Mile Point Nuclear Station Unit No. 2
<PAGE>
PART I
------
ITEM 1. FINANCIAL STATEMENTS
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------------- --------------- ----------- -----------
(in thousands of dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric . . . . . . . . . . . . . . . . . . . $ 946,556 $ 902,500 $2,597,743 $2,624,530
Gas. . . . . . . . . . . . . . . . . . . . . . 83,009 77,246 465,220 463,460
Other. . . . . . . . . . . . . . . . . . . . . 4,662 28 4,719 364
-------------------- --------------- ----------- -----------
1,034,227 979,774 3,067,682 3,088,354
-------------------- --------------- ----------- -----------
OPERATING EXPENSES:
Fuel for electric generation . . . . . . . . . 53,079 80,045 157,183 178,433
Electricity purchased. . . . . . . . . . . . . 319,417 279,148 714,496 992,068
Gas purchased. . . . . . . . . . . . . . . . . 48,803 45,869 220,587 245,945
Other operation and maintenance expenses . . . 230,265 226,245 656,555 704,692
Amortization of MRA regulatory asset . . . . . 96,625 32,184 289,874 32,184
POWERCHOICE charge . . . . . . . . . . . . . . - - - 263,227
Depreciation and amortization. . . . . . . . . 79,752 88,867 268,677 264,877
Other taxes. . . . . . . . . . . . . . . . . . 107,965 116,185 328,988 357,666
-------------------- --------------- ----------- -----------
935,906 868,543 2,636,360 3,039,092
-------------------- --------------- ----------- -----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . 98,321 111,231 431,322 49,262
Other income . . . . . . . . . . . . . . . . . . . . 7,479 44,080 4,065 62,118
-------------------- --------------- ----------- -----------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . 105,800 155,311 435,387 111,380
Interest charges . . . . . . . . . . . . . . . . . . 117,661 133,658 377,896 265,109
Preferred dividend requirement of subsidiary . . . . 8,991 9,137 27,039 27,531
-------------------- --------------- ----------- -----------
INCOME (LOSS) BEFORE FEDERAL AND FOREIGN
INCOME TAXES. . . . . . . . . . . . . . . . . . . (20,852) 12,516 30,452 (181,260)
Federal and foreign income taxes . . . . . . . . . . (2,199) 4,000 23,570 (50,337)
-------------------- --------------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. . . . . . . (18,653) 8,516 6,882 (130,923)
Extraordinary item - Loss from the extinguishment
of debt, net of income taxes (Note 5) . . . . . . (13,054) - (23,804) -
-------------------- --------------- ----------- -----------
NET INCOME (LOSS) (NOTE 1) . . . . . . . . . . . . . $ (31,707) $ 8,516 $ (16,922) $ (130,923)
==================== =============== =========== ===========
Average number of shares of common stock
outstanding (in thousands). . . . . . . . . . . . 187,365 187,365 187,365 159,049
BASIC AND DILUTED EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK BEFORE EXTRAORDINARY ITEM . . . . $ (0.10) $ 0.05 $ 0.04 $ (0.82)
EXTRAORDINARY ITEM PER AVERAGE SHARE OF
COMMON STOCK. . . . . . . . . . . . . . . . . . . (0.07) - (0.13) -
-------------------- --------------- ----------- -----------
BASIC AND DILUTED EARNINGS (LOSS) PER AVERAGE
SHARE OF COMMON STOCK . . . . . . . . . . . . . . $ (0.17) $ 0.05 $ (0.09) $ (0.82)
==================== =============== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 December 31,
(UNAUDITED) 1998
-------------- --------------
(in thousands of dollars)
<S> <C> <C>
UTILITY PLANT:
Electric plant. . . . . . . . . . . . . . . . . . $ 7,816,113 $ 8,826,650
Nuclear fuel. . . . . . . . . . . . . . . . . . . 627,716 604,213
Gas plant . . . . . . . . . . . . . . . . . . . . 1,244,466 1,179,716
Common plant. . . . . . . . . . . . . . . . . . . 363,020 349,066
Construction work-in-progress . . . . . . . . . . 323,927 471,802
-------------- -------------
Total utility plant . . . . . . . . . 10,375,242 11,431,447
Less - Accumulated depreciation and amortization. 4,193,143 4,553,488
-------------- -------------
Net utility plant . . . . . . . . . . 6,182,099 6,877,959
-------------- -------------
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . 466,687 411,106
-------------- -------------
CURRENT ASSETS:
Cash, including temporary cash investments
of $130,347 and $122,837, respectively . . . . 145,909 172,998
Funds held for the repurchase of common stock . . 9,394 -
Account receivable (less allowance for doubtful
accounts of $63,200 and $47,900, respectively) 501,253 427,588
Materials and supplies, at average cost:
Coal and oil for production of electricity . . 7,802 42,299
Gas storage. . . . . . . . . . . . . . . . . . 45,355 38,803
Other. . . . . . . . . . . . . . . . . . . . . 98,911 118,855
Refundable Federal income taxes . . . . . . . . . - 130,411
Prepaid taxes . . . . . . . . . . . . . . . . . . 35,241 17,282
Other . . . . . . . . . . . . . . . . . . . . . . 27,047 22,208
-------------- -------------
870,912 970,444
-------------- -------------
REGULATORY ASSETS (NOTE 3):
MRA regulatory asset. . . . . . . . . . . . . . . 3,775,787 4,045,647
Swap contract regulatory asset. . . . . . . . . . 583,209 535,000
Regulatory tax asset. . . . . . . . . . . . . . . 425,898 425,898
IPP buyout costs. . . . . . . . . . . . . . . . . 134,651 41,971
Deferred environmental restoration costs (Note 2) 220,000 220,000
Unamortized debt expense. . . . . . . . . . . . . 46,176 51,922
Postretirement benefits other than pensions . . . 49,878 52,701
Other . . . . . . . . . . . . . . . . . . . . . . 88,984 95,090
-------------- -------------
5,324,583 5,468,229
-------------- -------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . 106,895 133,449
-------------- -------------
$ 12,951,176 $ 13,861,187
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 December 31,
(UNAUDITED) 1998
--------------- --------------
(in thousands of dollars)
<S> <C> <C>
CAPITALIZATION (NOTE 1):
COMMON STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value; authorized
300,000,000 shares; issued 187,364,863 . . . . . . $ 1,874 $ -
Common stock of Niagara Mohawk - $1.00 par value;
authorized 250,000,000 shares; issued 187,364,863. - 187,365
Capital stock premium and expense . . . . . . . . . . 2,548,108 2,362,531
Accumulated other comprehensive income. . . . . . . . (26,567) (25,794)
Retained earnings . . . . . . . . . . . . . . . . . . 629,118 646,040
--------------- --------------
3,152,533 3,170,142
PREFERRED STOCK OF SUBSIDIARY:
Not subject to mandatory redemption . . . . . . . . . 440,000 440,000
Subject to mandatory redemption . . . . . . . . . . . 61,370 68,990
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . 5,382,844 6,417,225
--------------- --------------
TOTAL CAPITALIZATION . . . . . . . . . . . . . 9,036,747 10,096,357
--------------- --------------
CURRENT LIABILITIES:
Long-term debt due within one year . . . . . . . . . . . . . 273,621 312,240
Sinking fund requirements on redeemable preferred
stock of subsidiary. . . . . . . . . . . . . . . . . . . 7,620 7,620
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 235,132 197,124
Payable on outstanding bank checks . . . . . . . . . . . . . 60,853 39,306
Customers' deposits. . . . . . . . . . . . . . . . . . . . . 15,176 17,148
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . . . 10,038 6,254
Accrued interest . . . . . . . . . . . . . . . . . . . . . . 95,586 132,236
Accrued vacation pay . . . . . . . . . . . . . . . . . . . . 38,891 38,727
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,372 91,877
--------------- --------------
815,289 842,532
--------------- --------------
REGULATORY AND OTHER LIABILITIES (NOTE 3):
Accumulated deferred income taxes. . . . . . . . . . . . . . 1,503,045 1,511,417
Liability for swap contracts . . . . . . . . . . . . . . . . 740,776 693,363
Deferred gain on sale of assets. . . . . . . . . . . . . . . 115,064 -
Employee pension and other benefits. . . . . . . . . . . . . 244,532 235,376
Unbilled gas revenues. . . . . . . . . . . . . . . . . . . . 8,652 30,652
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 267,071 231,490
--------------- --------------
2,879,140 2,702,298
--------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 3):
Liability for environmental restoration. . . . . . . . . . . 220,000 220,000
--------------- --------------
$ 12,951,176 $ 13,861,187
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------------- ------------
(in thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (16,922) $ (130,923)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
POWERCHOICE charge. . . . . . . . . . . . . . . . . . . . . - 263,227
Depreciation and amortization . . . . . . . . . . . . . . . 268,677 264,877
Amortization of MRA regulatory asset. . . . . . . . . . . . 289,874 32,184
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 21,022 22,007
Extraordinary loss on extinguishment of debt, net of taxes. 23,804 -
Provision for deferred income taxes . . . . . . . . . . . . (15,642) 97,638
Net accounts receivable (net of changes in accounts
receivable sold) . . . . . . . . . . . . . . . . . . . . (95,665) 35,646
Materials and supplies. . . . . . . . . . . . . . . . . . . 17,762 (2,061)
Accounts payable and accrued expenses . . . . . . . . . . . 46,198 (50,175)
Accrued interest and taxes. . . . . . . . . . . . . . . . . (20,684) 130,289
MRA regulatory asset. . . . . . . . . . . . . . . . . . . . 1,418 (4,107,118)
Deferral of MRA interest rate savings . . . . . . . . . . . 22,941 -
Refundable income taxes . . . . . . . . . . . . . . . . . . 130,411 -
Changes in other assets and liabilities . . . . . . . . . . (85,883) 147,040
----------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . 587,311 (3,297,369)
----------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction additions . . . . . . . . . . . . . . . . . . . . . . (176,183) (268,645)
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,503) (21,479)
----------------- ------------
Acquisition of utility plant. . . . . . . . . . . . . . . . . . (199,686) (290,124)
Materials and supplies related to construction . . . . . . . . . . 1,399 177
Accounts payable and accrued expenses related to construction. . . 11,549 (12,544)
Proceeds from the sale of generation assets. . . . . . . . . . . . 780,000 -
Other investments. . . . . . . . . . . . . . . . . . . . . . . . . (55,578) (29,077)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,467) (949)
----------------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. . 532,217 (332,517)
----------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction in long-term debt. . . . . . . . . . . . . . . . . . . . (1,125,020) (60,000)
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . - 3,286,178
Issuance of Niagara Mohawk common stock. . . . . . . . . . . . . . - 316,389
Funds held for the repurchase of common stock. . . . . . . . . . . (9,394) -
Reduction in preferred stock of subsidiary . . . . . . . . . . . . (7,620) (10,120)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,583) (13,847)
----------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . (1,146,617) 3,518,600
----------------- ------------
NET DECREASE IN CASH. . . . . . . . . . . . . . . . . . . . . . . . . (27,089) (111,286)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . 172,998 378,232
----------------- ------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . $ 145,909 $ 266,946
================= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 387,029 $ 205,496
Income taxes refunded . . . . . . . . . . . . . . . . . . . . . $ (122,456) $ (7,318)
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Niagara Mohawk issued 20,546,264 shares of common stock, valued at $14.75
per share ($303.1 million) to the IPP Parties on June 30, 1998.
On March 18, 1999, Holdings issued 187,364,863 shares of common stock in a
share-for-share exchange for Niagara Mohawk's outstanding common stock.
The accompanying notes are in integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- ------------ ----------- -----------
(in thousands of dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric . . . . . . . . . . . . . . . . . . $ 853,588 $ 859,597 $2,451,220 $2,506,048
Gas. . . . . . . . . . . . . . . . . . . . . 73,708 71,034 442,558 433,893
-------------- ------------ ----------- -----------
927,296 930,631 2,893,778 2,939,941
-------------- ------------ ----------- -----------
OPERATING EXPENSES:
Fuel for electric generation . . . . . . . . 53,079 80,045 157,183 178,433
Electricity purchased. . . . . . . . . . . . 231,462 240,068 575,786 866,677
Gas purchased. . . . . . . . . . . . . . . . 39,672 39,760 198,432 216,372
Other operation and maintenance expenses . . 222,010 223,481 641,924 697,787
Amortization of MRA regulatory asset . . . . 96,625 32,184 289,874 32,184
POWERCHOICE charge . . . . . . . . . . . . . - - - 263,227
Depreciation and amortization. . . . . . . . 79,584 88,767 268,255 264,540
Other taxes. . . . . . . . . . . . . . . . . 105,858 116,039 326,570 356,961
-------------- ------------ ----------- -----------
828,290 820,344 2,458,024 2,876,181
-------------- ------------ ----------- -----------
OPERATING INCOME . . . . . . . . . . . . . . . . . 99,006 110,287 435,754 63,760
Other income (deductions). . . . . . . . . . . . . 4,940 45,024 (2,967) 47,620
-------------- ------------ ----------- -----------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . 103,946 155,311 432,787 111,380
Interest charges . . . . . . . . . . . . . . . . . 117,661 133,658 377,896 265,109
-------------- ------------ ----------- -----------
INCOME (LOSS) BEFORE FEDERAL AND FOREIGN
INCOME TAXES. . . . . . . . . . . . . . . . . . (13,715) 21,653 54,891 (153,729)
Federal and foreign income taxes . . . . . . . . . (3,326) 4,000 22,337 (50,337)
-------------- ------------ ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. . . . . . (10,389) 17,653 32,554 (103,392)
Extraordinary item - Loss from the extinguishment
of debt, net of income taxes (Note 5) . . . . . (13,054) - (23,804) -
-------------- ------------ ----------- -----------
NET INCOME (LOSS) (NOTE 1) . . . . . . . . . . . . (23,443) 17,653 8,750 (103,392)
Dividends on preferred stock . . . . . . . . . . . 8,991 9,137 27,039 27,531
-------------- ------------ ----------- -----------
BALANCE AVAILABLE FOR COMMON STOCK . . . . . . . . $ (32,434) $ 8,516 $ (18,289) $ (130,923)
============== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 December 31,
(UNAUDITED) 1998
-------------- -------------
(in thousands of dollars)
<S> <C> <C>
UTILITY PLANT:
Electric plant. . . . . . . . . . . . . . . . . . $ 7,816,113 $ 8,826,650
Nuclear fuel. . . . . . . . . . . . . . . . . . . 627,716 604,213
Gas plant . . . . . . . . . . . . . . . . . . . . 1,244,466 1,179,716
Common plant. . . . . . . . . . . . . . . . . . . 363,020 349,066
Construction work-in-progress . . . . . . . . . . 323,927 471,802
-------------- -------------
Total utility plant . . . . . . . . . 10,375,242 11,431,447
Less - Accumulated depreciation and amortization. 4,193,143 4,553,488
-------------- -------------
Net utility plant . . . . . . . . . . 6,182,099 6,877,959
-------------- -------------
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . 334,967 411,106
-------------- -------------
CURRENT ASSETS:
Cash, including temporary cash investments
of $87,633 and $122,837, respectively. . . . . 102,377 172,998
Funds held for the repurchase of common stock . . 9,394 -
Account receivable (less allowance for doubtful
accounts of $61,300 and $47,900, respectively) 466,895 427,588
Materials and supplies, at average cost:
Coal and oil for production of electricity . . 7,802 42,299
Gas storage. . . . . . . . . . . . . . . . . . 43,325 38,803
Other. . . . . . . . . . . . . . . . . . . . . 98,911 118,855
Refundable taxes. . . . . . . . . . . . . . . . . - 130,411
Prepaid taxes . . . . . . . . . . . . . . . . . . 35,241 17,282
Other . . . . . . . . . . . . . . . . . . . . . . 22,756 22,208
-------------- -------------
786,701 970,444
-------------- -------------
REGULATORY ASSETS (NOTE 3):
MRA regulatory asset. . . . . . . . . . . . . . . 3,775,787 4,045,647
Swap contract regulatory asset. . . . . . . . . . 583,209 535,000
Regulatory tax asset. . . . . . . . . . . . . . . 425,898 425,898
IPP buyout costs. . . . . . . . . . . . . . . . . 134,651 41,971
Deferred environmental restoration costs (Note 2) 220,000 220,000
Unamortized debt expense. . . . . . . . . . . . . 46,176 51,922
Postretirement benefits other than pensions . . . 49,878 52,701
Other . . . . . . . . . . . . . . . . . . . . . . 88,984 95,090
-------------- -------------
5,324,583 5,468,229
-------------- -------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . 106,635 133,449
-------------- -------------
$ 12,734,985 $ 13,861,187
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 December 31,
(UNAUDITED) 1998
--------------- --------------
(in thousands of dollars)
<S> <C> <C>
CAPITALIZATION:
COMMON STOCKHOLDERS' EQUITY:
Common stock of Niagara Mohawk - $1.00 par value;
authorized 250,000,000 shares; issued 187,364,863 . . . . . . . $ 187,365 $ 187,365
Capital stock premium and expense. . . . . . . . . . . . . . . . . 2,362,617 2,362,531
Accumulated other comprehensive income . . . . . . . . . . . . . . (3,970) (25,794)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . 419,567 646,040
--------------- --------------
2,965,579 3,170,142
--------------- --------------
CUMULATIVE PREFERRED STOCK, AUTHORIZED 3,400,000 SHARES, $100 PAR VALUE:
Non-redeemable (optionally redeemable), issued 2,100,000 shares. . 210,000 210,000
Redeemable (mandatorily redeemable), issued 186,000 shares . . . . 16,800 18,600
and 204,000 shares, respectively
CUMULATIVE PREFERRED STOCK, AUTHORIZED 19,600,000 SHARES, $25 PAR VALUE:
Non-redeemable (optionally redeemable), issued 9,200,000 shares. . 230,000 230,000
Redeemable (mandatorily redeemable), issued 2,015,602 shares
and 2,248,403 shares, respectively. . . . . . . . . . . . . . . 44,570 50,390
--------------- --------------
501,370 508,990
--------------- --------------
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,382,844 6,417,225
--------------- --------------
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . . 8,849,793 10,096,357
--------------- --------------
CURRENT LIABILITIES:
Long-term debt due within one year. . . . . . . . . . . . . . . . . . . . 273,621 312,240
Sinking fund requirements on redeemable preferred stock . . . . . . . . . 7,620 7,620
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,671 197,124
Payable on outstanding bank checks. . . . . . . . . . . . . . . . . . . . 60,853 39,306
Customers' deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,176 17,148
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,031 6,254
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,586 132,236
Accrued vacation pay. . . . . . . . . . . . . . . . . . . . . . . . . . . 38,891 38,727
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,029 91,877
--------------- --------------
780,478 842,532
--------------- --------------
REGULATORY AND OTHER LIABILITIES (NOTE 3):
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . . 1,508,639 1,511,417
Liability for swap contracts. . . . . . . . . . . . . . . . . . . . . . . 740,776 693,363
Deferred gain on sale of assets . . . . . . . . . . . . . . . . . . . . . 115,064 -
Employee pension and other benefits . . . . . . . . . . . . . . . . . . . 244,532 235,376
Unbilled gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 8,652 30,652
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267,051 231,490
--------------- --------------
2,884,714 2,702,298
--------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 3):
Liability for environmental restoration . . . . . . . . . . . . . . . . . 220,000 220,000
--------------- --------------
$ 12,734,985 $ 13,861,187
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
-------------- ------------
(in thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ 8,750 $ (103,392)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
POWERCHOICE charge. . . . . . . . . . . . . . . . . . . . . - 263,227
Depreciation and amortization . . . . . . . . . . . . . . . 268,255 264,540
Amortization of MRA regulatory asset. . . . . . . . . . . . 289,874 32,184
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 21,022 22,007
Extraordinary loss on extinguishment of debt, net of taxes. 23,804 -
Provision for deferred income taxes . . . . . . . . . . . . (15,644) 97,638
Net accounts receivable (net of changes in accounts
receivable sold) . . . . . . . . . . . . . . . . . . . . (72,990) 35,646
Materials and supplies. . . . . . . . . . . . . . . . . . . 19,433 (2,061)
Accounts payable and accrued expenses . . . . . . . . . . . 26,975 (50,175)
Accrued interest and taxes. . . . . . . . . . . . . . . . . (21,834) 130,289
MRA regulatory asset. . . . . . . . . . . . . . . . . . . . 1,418 (4,107,118)
Deferral of MRA interest rate savings . . . . . . . . . . . 22,941 -
Refundable income taxes . . . . . . . . . . . . . . . . . . 130,411 -
Changes in other assets and liabilities . . . . . . . . . . (84,901) 147,377
-------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . 617,514 (3,269,838)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction additions . . . . . . . . . . . . . . . . . . . . . . (176,183) (268,645)
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,503) (21,479)
-------------- ------------
Acquisition of utility plant. . . . . . . . . . . . . . . . . . (199,686) (290,124)
Materials and supplies related to construction . . . . . . . . . . 1,399 177
Accounts payable and accrued expenses related to construction. . . 6,743 (12,544)
Proceeds from the sale of generation assets. . . . . . . . . . . . 780,000 -
Other investments. . . . . . . . . . . . . . . . . . . . . . . . . 58,033 (29,077)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,632) (949)
-------------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. . 638,857 (332,517)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reductions in long-term debt . . . . . . . . . . . . . . . . . . . (1,125,020) (60,000)
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . - 3,286,178
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . - 316,389
Reduction in preferred stock . . . . . . . . . . . . . . . . . . . (7,620) (10,120)
Corporate restructuring to establish holding company . . . . . . . (89,618) -
Preferred dividends paid . . . . . . . . . . . . . . . . . . . . . (27,039) (27,531)
Common stock dividend paid to Holdings . . . . . . . . . . . . . . (63,718) -
Funds held for the repurchase of common stock. . . . . . . . . . . (9,394) -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,583) (13,847)
-------------- ------------
NET CASH PROVIDED BY (USED) IN FINANCING ACTIVITIES. . (1,326,992) 3,491,069
-------------- ------------
NET DECREASE IN CASH. . . . . . . . . . . . . . . . . . . . . . . . . (70,621) (111,286)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . 172,998 378,232
-------------- ------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . $ 102,377 $ 266,946
============== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 387,029 $ 205,496
Income taxes refunded . . . . . . . . . . . . . . . . . . . . . $ (123,799) $ (7,318)
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
On March 18, 1999, Niagara Mohawk's outstanding common stock was exchanged on
a share-for-share basis for Holdings' common stock.
On March 31, 1999, Niagara Mohawk distributed the stock of Opinac as a
dividend to Holdings, which included cash of $89.6 million.
Niagara Mohawk issued 20,546,264 shares of common stock, valued at $14.75
per share ($303.1 million) to the IPP Parties on June 30, 1998.
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HOLDING COMPANY FORMATION: On March 18, 1999, Niagara Mohawk Power Corporation
("Niagara Mohawk") was reorganized into a holding company structure in
accordance with its Agreement and Plan of Exchange between Niagara Mohawk and
Niagara Mohawk Holdings, Inc. ("Holdings"). Niagara Mohawk's outstanding common
stock was exchanged on a share-for-share basis for Holdings' common stock.
Niagara Mohawk's preferred stock and debt were not exchanged as part of the
share exchange and will continue as obligations of Niagara Mohawk.
SUBSIDIARIES: On March 31, 1999, Niagara Mohawk distributed its ownership in the
stock of Opinac North America, Inc. ("Opinac") as a dividend to Holdings. As a
result, the net assets and accumulated other comprehensive income of Opinac are
no longer included in Niagara Mohawk's consolidated balance sheet as of
September 30, 1999. The dividend completed the holding company structure, with
Holdings owning the stock of its two subsidiaries, Niagara Mohawk and Opinac.
Niagara Mohawk and its subsidiaries manage all regulated activities and comprise
98 percent of the assets and 94 percent of the revenues of Holdings. Opinac and
its subsidiaries manage all other activities including an energy marketing
company and investments in energy related services.
BASIS OF PRESENTATION: This Quarterly Report on Form 10-Q is a combined report
of Holdings and Niagara Mohawk, a regulated electric and gas utility subsidiary.
The Notes to the Consolidated Financial Statements apply to both Holdings and
Niagara Mohawk. Holdings' consolidated financial statements include the
accounts of Holdings and its wholly owned subsidiaries, including Niagara
Mohawk. Niagara Mohawk's consolidated financial statements include its accounts
as well as those of its wholly owned subsidiaries.
Holdings' prior period consolidated financial statements have been prepared from
Niagara Mohawk's prior period consolidated financial statements, except that
accounts have been reclassified to reflect Holdings' structure.
Holdings and Niagara Mohawk, in the opinion of management, have included all
adjustments (which include normal recurring adjustments) necessary for a fair
statement of the results of operations for the interim periods presented. These
financial statements for 1999 are subject to adjustment at the end of the year
when they will be audited by independent accountants. These financial
statements and notes thereto should be read in conjunction with the audited
financial statements included in Niagara Mohawk's 1998 Annual Report on Form
10-K, and Holdings and Niagara Mohawk's 1999 combined quarterly reports on Form
10-Q.
Niagara Mohawk's electric sales tend to be substantially higher in summer and
winter months as related to weather patterns in its service territory; gas sales
tend to peak in the winter. Notwithstanding other factors, Niagara Mohawk's
quarterly net income will generally fluctuate accordingly. Therefore, the
earnings for the three-month and nine-month periods ended September 30, 1999
should not be taken as an indication of earnings for all or any part of the
balance of the year. The closing of the MRA, which occurred on June 30, 1998,
and the implementation of POWERCHOICE on September 1, 1998 have depressed and
will continue to substantially depress earnings during the five-year term of
POWERCHOICE. However, operating cash flows have substantially improved. Also
affecting comparability of the financial statements is the closing on the sale
of Niagara Mohawk's coal-fired generation plants on June 11, 1999 and the
closing on the sale of Niagara Mohawk's hydro generation assets on July 29,
1999. See Note 3. Rate and Regulatory Issues and Contingencies for further
discussions of the sales.
The consolidated cash flow statements for Holdings and Niagara Mohawk have been
presented to reflect the closing on the sale of the fossil and hydro generation
assets, such that certain individual line items are net of the effects of the
sale.
COMPREHENSIVE INCOME: Comprehensive income is the change in the equity of a
company, not including those changes that result from shareholder transactions.
While the primary component of comprehensive income is reported net income or
loss, the other components of comprehensive income relate to foreign currency
translation adjustments, additional minimum pension liability recognition and
unrealized gains and losses associated with certain investments held as
available for sale. The primary difference in comprehensive income between
Holdings and Niagara Mohawk is the treatment of Niagara Mohawk's preferred
dividends and reported net income or loss. Total comprehensive income (loss)
for the three months and nine months ended September 30, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
Company: 1999 1998 1999 1998
- - - ------------------------ --------- -------- -------- --------
(in millions of dollars)
<S> <C> <C> <C> <C>
Holdings. . . . . . . $ (31.2) $ 4.2 $(17.7) $(137.5)
Niagara Mohawk. . . . (23.4) 13.3 5.4 (110.0)
</TABLE>
NEW ACCOUNTING STANDARD: In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities." The new standard requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from the changes in the
values of the derivatives will be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. Holdings and Niagara
Mohawk will be required to adopt this standard in 2001. Niagara Mohawk has
identified swap contracts, entered into as part of the MRA and generation asset
sales agreements, as derivative instruments and has recorded a liability at
estimated fair value under SFAS No. 80, "Accounting for Futures Contracts."
These swap contracts qualify as hedges of future purchase commitments and will
continue to qualify as hedges under SFAS No. 133. See Note 3. Rate and
Regulatory Issues and Contingencies for additional discussion of the accounting
for the swap contracts. Holdings and Niagara Mohawk continue to assess the
applicability of this new standard to other contractual obligations.
HOLDINGS' COMMON STOCK: The PSC approved Niagara Mohawk's petition to purchase
up to $800 million of Holdings' common stock. Niagara Mohawk estimates,
depending on market conditions, that it may purchase up to 40 million shares of
Holdings' common stock over a six year period extending through 2005, of which
Holdings' Board of Directors has approved a program to repurchase 20 million
shares through December 31, 2001.
In the third quarter of 1999, Niagara Mohawk entered into two agreements which
expire in less than one year, whereby two agents would purchase up to 9 million
shares of Holdings' common stock on Niagara Mohawk's behalf. At any time prior
to the expiration of these agreements, Niagara Mohawk can repurchase the common
stock from the agents and is required to reimburse these agents (in stock and/or
cash) for the costs they incurred to buy the stock plus a carrying charge. The
two agents have incurred a total of approximately $140.3 million or $15.60 per
share to purchase the 9 million shares. In addition, Niagara Mohawk intends to
purchase additional shares on the open market. As of October 31, 1999, Niagara
Mohawk has not repurchased the 9 million shares from the agents but has
purchased 80,000 shares on the open market. However, Niagara Mohawk has placed
approximately $9.4 million on deposit as collateral for the purchases, in
accordance with the provisions of one of the agreements. The shares repurchased
by the agents, but not yet paid for by Niagara Mohawk, remain in the number of
shares outstanding in computing earnings per share.
NOTE 2. CONTINGENCIES
ENVIRONMENTAL ISSUES: The public utility industry typically utilizes and/or
generates in its operations a broad range of hazardous and potentially hazardous
wastes and by-products. Niagara Mohawk believes it is handling identified
wastes and by-products in a manner consistent with federal, state and local
requirements and has implemented an environmental audit program to identify any
potential areas of concern and aid in compliance with such requirements.
Niagara Mohawk is also currently conducting a program to investigate and
remediate, as necessary, to meet current environmental standards, certain
properties associated with former gas manufacturing and other properties which
Niagara Mohawk has learned may be contaminated with industrial waste, as well as
investigating identified industrial waste sites as to which it may be determined
that Niagara Mohawk has contributed. Niagara Mohawk has also been advised that
various federal, state or local agencies believe certain properties require
investigation and has prioritized the sites based on available information in
order to enhance the management of investigation and remediation, if necessary.
Niagara Mohawk is currently aware of 137 sites with which it has been or may be
associated, including 85 which are Niagara Mohawk-owned. With respect to
non-owned sites, Niagara Mohawk may be required to contribute some proportionate
share of remedial costs. Although one party can, as a matter of law, be held
liable for all of the remedial costs at a site, regardless of fault, in
practice, costs are usually allocated among PRPs. Niagara Mohawk has denied any
responsibility at certain of these PRP sites and is contesting liability
accordingly.
Investigations at each of the Niagara Mohawk-owned sites are designed to (1)
determine if environmental contamination problems exist; (2) if necessary,
determine the appropriate remedial actions; and (3) where appropriate, identify
other parties who should bear some or all of the cost of remediation. Legal
action against such other parties will be initiated where appropriate. After
site investigations are completed, Niagara Mohawk expects to determine
site-specific remedial actions and to estimate the attendant costs for
restoration. However, since investigations are ongoing for most sites, the
estimated cost of remedial action is subject to change.
Estimates of the cost of remediation and post-remedial monitoring are based upon
a variety of factors, including identified or potential contaminants; location,
size and use of the site; proximity to sensitive resources; status of regulatory
investigation and knowledge of activities at similarly situated sites.
Additionally, Niagara Mohawk's estimating process includes an initiative where
these factors are developed and reviewed using direct input and support obtained
from the New York State Department of Environmental Conservation ("DEC").
Actual Niagara Mohawk expenditures are dependent upon the total cost of
investigation and remediation and the ultimate determination of Niagara Mohawk's
share of responsibility for such costs, as well as the financial viability of
other identified responsible parties since clean-up obligations are joint and
several. Niagara Mohawk has denied any responsibility at certain of these PRP
sites and is contesting liability accordingly.
As a consequence of site characterizations and assessments completed to date and
negotiations with PRPs, Niagara Mohawk has accrued a liability in the amount of
$220 million, which is reflected in Niagara Mohawk's and Holdings' Consolidated
Balance Sheets at September 30, 1999 and December 31, 1998. The potential high
end of the range is presently estimated at approximately $750 million, including
approximately $340 million in the unlikely event Niagara Mohawk is required to
assume 100% responsibility at non-owned sites. The amount accrued at September
30, 1999 and December 31, 1998 incorporates a method to estimate the liability
for 22 of Niagara Mohawk's largest sites, which relies upon a decision analysis
approach. This method includes developing several remediation approaches for
each of the 22 sites, using the factors previously described, and then assigning
a probability to each approach. The probability represents Niagara Mohawk's
best estimate of the likelihood of the approach occurring using input received
directly from the DEC. The probable costs for each approach are then calculated
to arrive at an expected value. While this approach calculates a range of
outcomes for each site, Niagara Mohawk has accrued the sum of the expected
values for these sites. The amount accrued for Niagara Mohawk's remaining sites
is determined through feasibility studies or engineering estimates, Niagara
Mohawk's estimated share of a PRP allocation or where no better estimate is
available, the low end of a range of possible outcomes is used. In addition,
Niagara Mohawk has recorded a regulatory asset representing the remediation
obligations to be recovered from ratepayers. POWERCHOICE provides for the
continued application of deferral accounting for expense recognition resulting
from this effort.
In October 1997, Niagara Mohawk submitted a draft feasibility study to the DEC,
which included Niagara Mohawk's Harbor Point site and five surrounding non-owned
sites. The study indicates a range of viable remedial approaches and associated
cost estimates, however, a final determination has not been made concerning the
remedial approach to be taken. This range consists of a low end of $21 million
and a high end of $360 million, with an expected value calculation of $56
million, which is included in the amounts accrued at September 30, 1999 and
December 31, 1998. The range represents the total costs to remediate the
properties and does not consider contributions from other PRPs, the amount of
which Niagara Mohawk is unable to estimate. Niagara Mohawk has received
comments from the DEC on the draft feasibility study, which will facilitate
completion of the land-based feasibility study phase by the end of 1999. Niagara
Mohawk is continuing to work on the water-based feasibility study, which it
expects to submit to the DEC in the spring of 2000. At this time, Niagara
Mohawk cannot predict the nature of the DEC proposed remedial action plan or the
range of remediation costs the DEC will require. While Niagara Mohawk does not
expect to be responsible for the entire cost to remediate these properties, it
is not possible at this time to determine its share of the cost of remediation.
In May 1995, Niagara Mohawk filed a complaint, pursuant to applicable Federal
and New York State law, in the U.S. District Court for the Northern District of
New York against several defendants seeking recovery of past and future costs
associated with the investigation and remediation of the Harbor Point and
surrounding sites. The New York State Attorney General moved to dismiss Niagara
Mohawk's claims against the state of New York, the New York State Department of
Transportation and the Thruway Authority and Canal Corporation under the
Comprehensive Environmental Response, Compensation and Liability Act. Niagara
Mohawk opposed this motion. On April 3, 1998, the Court denied the New York
State Attorney General's motion as it pertains to the Thruway Authority and
Canal Corporation, and granted the motion relative to the state of New York and
the Department of Transportation. The case management order, as amended by the
Court, establishes December 31, 1999 as the trial ready date. As a result,
Niagara Mohawk cannot predict the outcome of the pending litigation against the
defendants or the allocation of Niagara Mohawk's share of the costs to remediate
Harbor Point and the surrounding sites.
NOTE 3. RATE AND REGULATORY ISSUES AND CONTINGENCIES
Holdings and Niagara Mohawk's financial statements conform to GAAP, including
the accounting principles for rate-regulated entities with respect to its
regulated operations. Niagara Mohawk discontinued application of regulatory
accounting principles to its fossil and hydro generation business as of December
31, 1996. Substantively, SFAS No. 71 permits a public utility, regulated on a
cost-of-service basis, to defer certain costs, which would otherwise be charged
to expense, when authorized to do so by the regulator. These deferred costs are
known as regulatory assets, which in the case of Niagara Mohawk, are
approximately $5.3 billion at September 30, 1999. These regulatory assets are
probable of recovery.
Under POWERCHOICE, a regulatory asset was established for the costs of the MRA
and is being amortized over a period generally not to exceed ten years. Niagara
Mohawk's rates under POWERCHOICE have been designed to permit recovery of the
MRA regulatory asset. Niagara Mohawk is also permitted to defer and amortize
the cost of any additional IPP buyouts. In 1999, there have been three IPP
contracts terminated for a total consideration (cash and/or notes) of $104.2
million. Deferred costs associated with IPP buyouts must generally be amortized
over five years, unless PSC approval is obtained for a different amortization
period. Niagara Mohawk retains the annual net savings during the remaining term
of POWERCHOICE. Niagara Mohawk is negotiating buyouts and amendments of other
IPP contracts, but is unable to determine the timing and outcome of these
negotiations.
Niagara Mohawk, as part of the MRA, entered into restated contracts with eight
IPPs. The contracts have a term of ten years and are structured as indexed swap
contracts where Niagara Mohawk receives or makes payments to the IPP Parties
based upon the differential between the contract price and a market reference
price for electricity. Niagara Mohawk has recorded the liability for these
contractual obligations and recorded a corresponding regulatory asset since
payments under these restated contracts are authorized under POWERCHOICE. The
swap contract regulatory asset includes the fair value of the difference between
the estimated future market prices and the indexed contract prices for the
notional quantities of power in the restated PPA contracts and will be amortized
over ten years ending in June 2008, as notional quantities are settled. The
amount of this regulatory asset will fluctuate as estimates of future market and
contract prices change over the term of the contracts, and will decrease over
the life of the contracts as notional quantities are settled. In the three
months and nine months ended September 30, 1999, there have been no changes in
the assumptions and estimates used to value the regulatory asset or liability
associated with these indexed swap contracts.
POWERCHOICE requires Niagara Mohawk to divest its portfolio of fossil and hydro
generation assets. On June 11, 1999, Niagara Mohawk completed the sale of its
two coal-fired generation plants for $355 million. On July 29, 1999, Niagara
Mohawk completed the sale of its hydroelectric generation plants for $425
million. On October 6, 1999, Niagara Mohawk announced an agreement to sell its
Albany oil and gas-fired generation plant to PSEG Power LLC ("PSEG") for $47.5
million. The Albany plant has a net book value of approximately $33.0 million
as of September 30, 1999. Niagara Mohawk could also receive up to an additional
$11.5 million if PSEG chooses to pursue the redevelopment of the Albany plant.
The agreement with PSEG includes a "Post Closing Property Tax Adjustment" to be
settled on the first ten anniversaries of the closing date. If actual property
taxes exceed a predetermined amount, Niagara Mohawk will pay PSEG. If the
property taxes are lower, then PSEG will pay Niagara Mohawk. The predetermined
amount is based upon the taxes paid by Niagara Mohawk at the time of the sale,
which approximate $6.7 million. During the ten years, the predetermined amount
will be lowered by $0.5 million each year. Niagara Mohawk is pursuing a
reduction in the taxes paid on the facility. Niagara Mohawk expects to complete
the Albany sale transaction in the first quarter of 2000. On October 22, 1999,
Niagara Mohawk completed the sale of its share of the Oswego oil and gas-fired
plant for $80 million. The sale of the Roseton Steam Station, of which Niagara
Mohawk owns 25%, is being pursued by Central Hudson Gas and Electric Corporation
("Central Hudson"). Niagara Mohawk's share of the plant has a net book value of
approximately $39 million as of September 30, 1999. In May 1999, Niagara Mohawk
entered into an agreement with Central Hudson, to sell its interest in the plant
to Central Hudson at approximately net book value by July 1, 2002, if the
interest has not been previously sold, subject to regulatory approval.
The following table shows Niagara Mohawk's electric plant assets as of September
30, 1999 and December 31, 1998, which shows the impact on Niagara Mohawk's
electric plant from the completed sales through September 30, 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 December 31, 1998
------------------- ------------------
ORIGINAL NET BOOK Original Net Book
PLANT TYPE COST VALUE Cost Value
- - - ---------------------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Fossil . . . . . . . . . . . $ 843,604 $ 350,920 $1,519,697 $ 711,651
Nuclear (1) . . . . . . . . 2,261,085 1,442,076 2,252,596 1,475,645
Hydro. . . . . . . . . . . . - - 448,212 214,351
Transmission and
Distribution. . . . . . . 4,229,667 2,838,069 4,142,255 2,795,782
Other/General. . . . . . . . 481,757 328,034 463,890 331,878
------------ ------------ ---------- ----------
Total Electric Plant . . . . $ 7,816,113 $ 4,959,099 $8,826,650 $5,529,307
============ ============ ========== ==========
1 - Excludes nuclear fuel
</TABLE>
The POWERCHOICE agreement provides for deferral and future recovery of net
losses, if any, resulting from the sale of the fossil and hydro generation asset
portfolio. As of September 30, 1999, Niagara Mohawk has recorded a regulatory
liability of $115.1 million for the net gain on the sale of its two coal-fired
generation plants and its hydro generation assets. The net gain is included in
Niagara Mohawk's September 30, 1999 balance sheet as "Deferred Gain on the Sale
of Assets." No carrying charges are being recorded on this deferred liability.
The amount of this regulatory deferral is subject to change as a result of post
closing adjustments on the sales, transaction costs, the effects of curtailment
accounting on pension and other post employment retirement benefits, the
incentive amount awarded in POWERCHOICE, the accounting treatment relating to
the hydro PPAs, and the outcome of the sale of the remaining fossil assets.
Niagara Mohawk has requested of the PSC that the net gain recorded as of
September 30, 1999 be reduced to the extent that the actual amount incurred on
the hydro PPAs over the next few years exceeds the forecasted amount reflected
in POWERCHOICE. After all the fossil and hydro sales transactions have been
completed, Niagara Mohawk estimates that it will have a net loss (stranded
costs) in the range of $100 to $110 million, including an estimate of the hydro
PPA. Niagara Mohawk is required to submit to the PSC a final accounting of the
costs and proceeds from the sale of its assets during the first quarter of
2000. Niagara Mohawk will be able to begin recovery of the losses and
incentives starting in 2003.
Niagara Mohawk will also incur severance costs as a result of these sales.
Under POWERCHOICE, Niagara Mohawk is allowed to recover up to $10 million in
severance and other costs and as of September 30, 1999, has incurred
approximately $2.7 million in severance and other costs. At this time, Niagara
Mohawk is unable to determine the total amount of severance and other costs it
will incur, since there are different options available to those employees who
decide not to transfer with the new owners. Of the 627 employees that could
have transferred to the new owners of Huntley, Dunkirk, Oswego and the hydro
assets, 465 employees elected to do so. The remaining eligible employees
either retired or remained employed at Niagara Mohawk.
As part of the transaction to sell the Huntley and Dunkirk coal-fired
generation plants, Niagara Mohawk entered into PPAs to purchase energy and
capacity from the buyer, NRG Energy, Inc. ("NRG"). Niagara Mohawk was required
to purchase a portion of the energy generated by the two coal-fired plants;
however, it had call options to purchase additional energy if needed. The
aggregate energy and capacity costs in the PPAs are above forecasted future
market prices. The PPAs will convert to financial swaps ("swaps") with the same
economic terms as the energy contracts, with no physical delivery of energy, on
the last day of the month following the implementation of the NYISO. The
agreements expire in June of 2003. As of September 30, 1999, Niagara Mohawk has
recorded an $82.6 million swap contract liability for the present value of the
difference between the contract energy prices and projected market prices and
has recorded a corresponding swap contract regulatory asset. The asset and
liability will amortize over the remaining term of the swaps as nominal energy
quantities are settled and may be adjusted as periodic reassessments are made of
future energy prices. These amounts are included with the similar financial
swap asset and liability that arose from the IPP swap agreements as part of the
MRA (see Note 1. "New Accounting Standards").
Niagara Mohawk has also signed PPAs associated with the sales of its hydro
generation assets and the Oswego oil and gas fired generation plant. The hydro
PPA calls for the purchase of all energy and capacity through September 2001 at
prices that approximate forecasted future market prices. Niagara Mohawk
anticipates that the energy and capacity to be purchased under the hydro PPA to
be at quantities approximating historical generation levels, subject to the
effects of water flow availability. The Oswego PPA is primarily a contract for
capacity with a nominal amount of energy at prices above forecasted future
market prices. Since these contracts call for the actual physical delivery of
energy and the rights to installed capacity, and do not convert to financial
swap agreements, the PPAs are not included in the regulatory asset and liability
for swap contracts.
In connection with the pending sale of the Albany plant, Niagara Mohawk has
entered into a contract with the new owner that is intended to compensate PSEG
for the costs of running the plant. This contract expires on September 30,
2003. The agreement starts out as a contract to buy power and capacity but
converts to a financial agreement when the NYISO begins. Since the NYISO
should be in operation before the sale agreement is completed, the physical
delivery portion of the contract will probably not occur.
The Albany contract converts to an exchange of payments that are based on
the market price of energy. No actual energy will be delivered but a
quantity of energy, referred to as the call amount, is used to calculate the
payment. The call amount is capped each year and totals 1,300 GWh for the life
of the contract. The contract is a derivative instrument. Each month Niagara
Mohawk pays PSEG a fixed monthly charge plus the call amount times a contract
price. The contract price approximates the cost of fuel for the plant and will
fluctuate as fuel prices change. PSEG will pay Niagara Mohawk the same call
amount times the current market price for energy. This market price will be
determined by the NYISO. This exchange of payments is called a swap. Niagara
Mohawk has the sole option, within certain limits stated in the contract, to
decide what the call amount will be. This combination of a swap with one party
having an option is called a swaption. If the market price is expected to be
higher than the contract price Niagara Mohawk would likely exercise the option,
elect a call amount, and PSEG will make a swap payment to Niagara Mohawk. If
the market price is expected to be below the contract price Niagara Mohawk would
not likely choose to name a call amount. Regardless, Niagara Mohawk is required
to make the fixed monthly payment. For Niagara Mohawk this contract will serve
as a hedge against rising energy prices. Niagara Mohawk expects to account for
this contract as a hedge of future purchase commitments upon the closing of the
sale. The costs associated with the Albany contract are recoverable under
Niagara Mohawk's POWERCHOICE rates.
On June 24, 1999, Niagara Mohawk announced an agreement to sell its nuclear
assets to AmerGen Energy Company, LLC ("AmerGen"), a joint venture of PECO
Energy Company and British Energy, for approximately $135 million, which is
subject to price adjustments depending on the time of closing. New York State
Electric and Gas Corporation is also a party to the agreement and has agreed to
sell its 18% share of Unit 2 to AmerGen. As a condition of the transaction,
Niagara Mohawk will pre-fund its nuclear decommissioning trust funds at the
closing to a predetermined amount, which amount is contingent upon tax rulings.
The trust funds will be transferred to AmerGen at the closing and AmerGen will
assume full responsibility for the decommissioning of Unit 1 and its ownership
share of Unit 2. Niagara Mohawk estimates that it will be required to make
additional contributions to the decommissioning trust funds in the range of $80
to $120 million. Niagara Mohawk estimates its net loss (stranded costs) from
the nuclear sale to be in the range of $1,800 to $1,850 million. Niagara Mohawk
has petitioned the PSC for approval to defer this net loss for future recovery,
which approval is a condition of the closing of the sale of the nuclear assets.
Accordingly, Niagara Mohawk would record a regulatory asset for the amount of
the actual net loss upon the closing of the sale. The recording of the
regulatory asset is ultimately conditioned on an assessment by Niagara Mohawk
that the amounts are probable of future recovery in rates and that the rates
ultimately approved by the PSC can be charged to and collected from customers
without unanticipated reduction in demand.
The amount of the net loss on the sale of the nuclear assets is subject to
change as a result of closing price adjustments, transaction costs and the final
amount needed to pre-fund the decommissioning trust funds. The estimated range
of loss excludes any accounting requirements relating to the nuclear PPAs.
Niagara Mohawk has proposed to recover the regulatory asset, plus a return on
the unamortized balance over a period not to exceed 15 years beginning in 2000,
with a significant portion of the recovery likely to occur in years subsequent
to the MRA regulatory asset amortization. Niagara Mohawk's current rate
structure includes recovery and a return on the nuclear assets. Niagara Mohawk
proposes to recover a return on and a return of stranded nuclear costs within
the rate structures contained in its POWERCHOICE agreement. This sale is also
contingent upon approval by, among others, the PSC, NRC, IRS, and the SEC.
Niagara Mohawk originally requested PSC approval by December 1999 and has filed
an application with the NRC to transfer the licenses to AmerGen. The
Administrative Law Judge in the PSC proceeding has issued a hearing schedule
that makes it unlikely, under the terms of the sale agreement, that the sale
will close prior to the planned Unit 2 refueling and maintenance outage
scheduled to begin in March 2000. A delay in the sale through the planned
outage would result in an increase in the purchase price of Unit 2 as specified
in the agreement to reflect the estimated costs of the refueling and maintenance
outage. The sale price of Unit 1 decreases if the sale occurs after the Unit 2
refueling and maintenance outage. Until the sale is closed, Niagara Mohawk
generally bears the risks associated with unexpected costs of the refueling
outage at Unit 2 and any unscheduled outages at both units, including
investigations and unexpected maintenance and capital costs. The purchase
agreement terminates, if the sale has not occurred before September 1, 2000.
On October 27, 1999, the FERC approved the sale of the transmission
assets connected to the nuclear plants to AmerGen.
Along with the asset purchase agreement, Niagara Mohawk also signed PPAs with
AmerGen to purchase energy and capacity at negotiated prices. The negotiated
prices are expected to be, on average, above projected market prices during the
term of the PPAs. Niagara Mohawk pays only for delivered output from the units.
The terms of the PPAs are for five years from Unit 1 and three years from Unit
2. Upon the expiration of the PPA for Unit 2, Niagara Mohawk and AmerGen also
agreed to a financial sharing agreement whereby Niagara Mohawk will be entitled
to future payments from AmerGen over a ten-year period if electric energy market
prices exceed certain amounts during the ten year sharing period. Niagara
Mohawk has proposed to the PSC that any future payments received under the
financial sharing agreement will serve to reduce the unamortized regulatory
asset recorded as a result of the sale of the nuclear assets.
Upon closing of the sale of the nuclear assets, Niagara Mohawk will still be
liable for spent nuclear fuel disposal for its share of fuel burned prior to the
closing. See Niagara Mohawk's Form 10-K for fiscal year ended December 31,
1998, Part II, Item 8. Financial Statements and Supplementary Data, Note 3.
Nuclear Operations, "Nuclear Fuel Disposal Cost" for a discussion of the Nuclear
Waste Policy Act of 1982 and Niagara Mohawk's determination of liability. The
Nuclear Waste Act provided three payment options for liquidating the liability
for the disposal of nuclear fuel irradiated prior to 1983, and Niagara Mohawk
elected to delay payment, with interest, until the year in which it initially
plans to ship irradiated fuel to an approved DOE disposal facility. Through
September 30, 1999, Niagara Mohawk has recorded a liability of approximately
$124.5 million. This liability will remain with Niagara Mohawk until the DOE
provides disposal facilities. Niagara Mohawk also retains liability for changes
enacted prior to closing, if any, in the disposal fees already paid to the DOE
for fuel burned from 1983 through closing of the sale or in the pre-1983
liability. Niagara Mohawk is unable to predict the outcome of this matter.
While the PPAs for the generation asset sales, which were entered into as an
integral part of the generation sales, are above market, they are designed to
help Niagara Mohawk meet the objectives of rat reduction and price cap
commitments as well as meet expected demand as the "provider of last resort" as
outlined in the POWERCHOICE agreement. The PPAs that convert to either swap
agreements or swaptions act as hedges against rising power costs.
The Emerging Issues Task Force ("EITF") of the FASB reached a consensus on
Issue No. 97-4 "Deregulation of the Pricing of Electricity - Issues Related to
the Application of SFAS No. 71 and SFAS No. 101" in July 1997. EITF 97-4 does
not require a company to earn a return on regulatory assets that arise from a
deregulating transition plan in assessing the applicability of SFAS No. 71.
Niagara Mohawk believes that the regulated cash flows to be derived from prices
it will charge for electric service over the next ten years, including the
Competitive Transition Charge ("CTC"), assuming no unforeseen reduction in
demand or bypass of the CTC or exit fees, will be sufficient to recover the MRA
regulatory asset and to provide recovery of and a return on the remainder of its
assets, as appropriate. In the event Niagara Mohawk determines, as a result of
lower than expected revenues and/or higher than expected costs, that its net
regulatory assets are not probable of recovery, it can no longer apply the
principles of SFAS No. 71 and would be required to record an after-tax non-cash
charge against income for any remaining unamortized regulatory assets and
liabilities. If Niagara Mohawk could no longer apply SFAS No. 71, the resulting
charge would be material to Holdings and Niagara Mohawk's reported financial
condition and results of operations and adversely effect Niagara Mohawk's, and
therefore, Holdings' ability to pay dividends.
Under POWERCHOICE, Niagara Mohawk's remaining electric business (electric
transmission and distribution business) will continue to be rate-regulated on a
cost-of-service basis and, accordingly, Niagara Mohawk continues to apply SFAS
No. 71 to these businesses. Also, Niagara Mohawk's IPP contracts, including
those restructured under the MRA, as well as the PPAs entered into in connection
with the generation divestiture, will continue to be the obligations of the
regulated business.
NOTE 4. SEGMENT INFORMATION
Holdings is organized between regulated and unregulated activities. Within the
regulated business, Niagara Mohawk, which has 98% of total assets and 94 % of
total revenues, there are two principal business units: Energy Delivery and
Nuclear. As discussed above, Niagara Mohawk is in the process of selling its
fossil, hydro and nuclear assets. Although there are two identified business
units, financial performance and resource allocation are measured and managed at
the regulated business level.
Holdings and Niagara Mohawk use a shareholder value based management system. The
measure of shareholder value creation is Economic Value Added ("EVA"). EVA is
the financial measure used to evaluate projects, allocate resources and report
and provide performance incentives. Holdings' unregulated activities do not
meet the reporting thresholds of SFAS No. 131, but comprise a substantial
portion of "other" in the accompanying table.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
Total Economic Total Economic
(In thousands of dollars) Revenues Value Added Revenues Value Added
- - - ------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
1999
REGULATED . . . . . . . . $ 927,296 $ (199,733) $2,893,778 $ (541,240)
OTHER . . . . . . . . . . 107,016 (7,400) 174,515 (21,124)
ELIMINATIONS. . . . . . . (85) - (611) -
----------- ----------- ----------- -------------
TOTAL CONSOLIDATED. $1,034,227 $ (207,133) $3,067,682 $ (562,364)
========================= =========== =========== =========== =============
1998
Regulated . . . . . . . . $ 930,631 $ (180,137) $2,939,941 $ (497,296)
Other . . . . . . . . . . 50,254 (3,081) 150,892 (24,276)
Eliminations. . . . . . . (1,111) - (2,479) -
----------- ----------- ----------- -------------
Total Consolidated. $ 979,774 $ (183,218) $3,088,354 $ (521,572)
========================= =========== =========== =========== =============
</TABLE>
EVA is calculated as Net Operating Profit after Taxes less a charge for the use
of capital employed. The capital charge is determined by applying a rate
representing an estimate of investors' expected return given the risk of the
business and a targeted capital structure. The rate is not the same as the
embedded cost of capital, and in particular, does not reflect the return on
equity that may be established in a rate proceeding. Certain adjustments to
accounting data are made to more closely reflect operating or economic results.
For the three months and nine months ending September 30, 1999 and 1998, an
adjustment is made to include the recognition of the liability for remaining
future over-market contracts with IPPs and the corresponding recognition of
imputed interest on that liability. In addition, there was a significant
adjustment for the nine months ending September 30, 1998 to reflect the
re-capitalization for EVA purposes of the incremental operating expense
associated with the January 1998 ice storm.
EVA is further segmented between EVA from Operations and EVA related to the
IPPs. This distinction is used to allow management to focus on operating
performance separate from the consequences of the IPP contracts, the MRA
regulatory asset and finance decisions related to managing the capitalization
of Holdings.
A reconciliation of total segment EVA to total consolidated net income for the
three months and nine months ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(in thousands of dollars) 1999 1998 1999 1998
- - - ------------------------- --------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Economic Value Added:
Operations. . . . . . . . . . . . $ (83,197) $ (46,843) $(185,383) $(176,451)
IPP - Related . . . . . . . . . . (123,936) (136,375) (376,981) (345,121)
--------------------------------- -------------------------------
Total Economic Value Added. . . . . . (207,133) (183,218) (562,364) (521,572)
Charge for Use of Investor's Capital. 289,498 303,447 889,486 922,602
Adjustments for Significant Items . . (14,635) (14,867) (43,902) (326,589)
Interest Charges (net of taxes) . . . (77,392) (87,709) (249,299) (177,833)
Extraordinary Item (net of taxes) . . (13,054) - (23,804) -
Niagara Mohawk Preferred Dividends. . (8,991) (9,137) (27,039) (27,531)
--------------------------------- -------------------------------
Consolidated Net Income. . . . . . $ (31,707) $ 8,516 $ (16,922) $(130,923)
================================= ===============================
</TABLE>
NOTE 5. EXTRAORDINARY ITEM
During the nine months ended September 30, 1999, Holdings and Niagara Mohawk
recognized an extraordinary item for the early redemption of debt. The
following table shows the after tax effect and per share effect of redemption
premiums incurred, and the write-off of unamortized debt expense and issuance
costs associated with each of the series that was redeemed:
<TABLE>
<CAPTION>
Costs Income
Amount Month Incurred, Tax
Series Redeemed Redeemed net of tax Benefit
- - - ---------------------------- -------- -------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C>
First Mortgage Bonds . . . . $ 151,720 June $ 10,750 $ 5,790
First Mortgage Bonds . . . . 150,000 July 7,556 4,070
Senior Notes . . . . . . . . 500,000 September 5,459 2,940
Medium Term Notes. . . . . . 20,000 September 39 20
--------- --------
Total. . . . . . . . . $ 23,804 $ 12,820
========= ========
Per share effect, net of tax $ 0.13
=========
</TABLE>
<PAGE>
REVIEW BY INDEPENDENT ACCOUNTANTS
Holdings and Niagara Mohawk's independent accountants, PricewaterhouseCoopers
LLP, have made limited reviews (based on procedures adopted by the American
Institute of Certified Public Accountants) of the unaudited Consolidated Balance
Sheets of Niagara Mohawk Holdings, Inc. and its subsidiary companies, as of
September 30, 1999 and 1998, and the related unaudited Consolidated Statements
of Income for he three-month and nine-month periods ended September 30, 1999
and 1998 and of Cash Flows for the nine-month period ended September 30, 1999
and 1998 and the unaudited Consolidated Balance Sheets of Niagara Mohawk Power
Corporation and its subsidiary companies as of September 30, 1999 and 1998 and
the related unaudited Consolidated Statements of Income for the three-month and
nine-month periods ended September 30, 1999 and 1998 and of Cash Flows for the
nine-month period ended September 30, 1999 and 1998. The accountants' report
regarding their limited reviews of the Form 10-Q of Niagara Mohawk Holdings and
its subsidiaries, and Niagara Mohawk Power Corporation and its subsidiaries
appears on the next page. That report does not express an opinion on the
interim unaudited consolidated financial information. PricewaterhouseCoopers
LLP has not carried out any significant or additional audit tests beyond those
which would have been necessary if their report had not been included.
Accordingly, such report is not a "report" or "part of the Registration
Statement" within the meaning of Sections 7 and 11 of the Securities Act of 1933
and the liability provisions of Section 11 of such Act do not apply.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Niagara Mohawk Holdings, Inc. and
Niagara Mohawk Power Corporation
300 Erie Boulevard West
Syracuse, NY 13202
We have reviewed the condensed consolidated balance sheets of Niagara Mohawk
Holdings, Inc. and its subsidiaries as of September 30, 1999 and 1998 (not
presented herein), and the related condensed consolidated statements of income
and of cash flows for the three-month and nine-month periods ended September
30, 1999 and 1998, and the condensed consolidated balance sheets of Niagara
Mohawk Power Corporation and its subsidiaries as of September 30, 1999 and 1998
(not presented herein), and the related condensed consolidated statements of
income and of cash flows for the three-month and nine-month periods ended
September 30, 1999 and 1998. These financial statements are the responsibility
of Niagara Mohawk Holdings, Inc.'s management and Niagara Mohawk Power
Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet of Niagara Mohawk Power Corporation as of
December 31, 1998, and the related consolidated statements of income and
retained earnings and cash flows for the year then ended (not presented
herein), and in our report dated January 28, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/PricewaterhouseCoopers LLP
- - - -----------------------------
PRICEWATERHOUSECOOPERS LLP
Syracuse, NY
November 10, 1999
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements included in this Quarterly Report on Form 10-Q are
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934 that involve risk and uncertainty, including the improvement in
Holdings and Niagara Mohawk's cash flow upon the implementation of the MRA and
POWERCHOICE, the timing and outcome of the future sale of Niagara Mohawk's
remaining fossil and nuclear generation assets, the planned repayment of debt,
and the outcome of Niagara Mohawk's transition to a new customer service system.
In addition, certain statements made related to the year 2000 readiness program
are also forward-looking (see "Year 2000 Readiness Disclosure"). These
forward-looking statements are based upon a number of assumptions, including
assumptions regarding the POWERCHOICE agreement and regulatory actions to
continue to support such an agreement. Actual future results and developments
may differ materially depending on a number of factors, including regulatory
changes either by the federal government or the PSC, uncertainties regarding the
ultimate impact on Holdings and Niagara Mohawk as the regulated electric and gas
industries are further deregulated and electricity and gas suppliers gain open
access to Niagara Mohawk's retail customers, challenges to the POWERCHOICE
agreement under New York laws, the timing and extent of changes in commodity
prices and interest rates, the effects of weather, the length and frequency of
outages at Niagara Mohawk's two nuclear plants, the results from Niagara
Mohawk's ongoing sale of its generation assets, the length of the transition
period to Niagara Mohawk's new customer service system and the economic
conditions of Niagara Mohawk's service territory.
POWERCHOICE AGREEMENT
(See Niagara Mohawk's Form 10-K for fiscal year ended December 31, 1998, Part
II, Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - "Master Restructuring Agreement and the POWERCHOICE
Agreement").
Niagara Mohawk's POWERCHOICE Agreement was approved by the PSC in a written
order issued March 20, 1998. Niagara Mohawk consummated its MRA Agreement with
certain IPP Parties on June 30, 1998 and implemented the rate reductions under
POWERCHOICE effective September 1, 1998 upon PSC approval of the rate tariff
schedules.
The POWERCHOICE agreement establishes a five-year rate plan that will reduce
class average residential and commercial prices by an aggregate of 3.2% over the
first three years, beginning September 1, 1998. On September 1, 1999, Niagara
Mohawk implemented its second phase of rate reductions as outlined in
POWERCHOICE. The reduction in prices includes certain savings that will result
from approved reductions of the GRT. Industrial customers are currently
receiving average reductions of 25% relative to 1995 tariffs; this decrease
includes discounts previously offered to some industrial customers through
optional and flexible rate programs.
Effective August 1, 1999, all of Niagara Mohawk's customers are able to choose
their electricity supplier. As of September 30, 1999, 646 (0.41 %) of Niagara
Mohawk's commercial and industrial customers or approximately 4.72% of eligible
load, and 508 (0.04%) residential customers or approximately .04% of eligible
load, have chosen an electricity supplier other than Niagara Mohawk. Niagara
Mohawk will continue to distribute electricity through its transmission and
distribution systems and will be obligated to be the provider of last resort for
those customers who do not exercise their right to choose a new electricity
supplier. However, Niagara Mohawk believes that the PSC will be instituting a
generic proceeding to explore issues, including the issues of selecting a
provider of last resort, based on comments made by the PSC at its May 1999
session. Niagara Mohawk is unable to predict the outcome or timing of such a
proceeding. However, Niagara Mohawk will continue to monitor the progress of
this issue to manage its load requirements.
GENERATION ASSET SALES
In its written Order dated May 6, 1998, the PSC approved Niagara Mohawk's plan
to divest all of its fossil and hydro generation assets, which is a key
component in its POWERCHOICE agreement to lower average electricity prices and
provide customer choice. On June 11, 1999, Niagara Mohawk completed the sale of
its two coal-fired generation plants to NRG Energy, Inc. for $355 million.
Subsequently, on July 29, 1999, Niagara Mohawk completed the sale of its
hydroelectric generation assets with Orion Power Holding, Inc. for $425 million.
On October 22, 1999, Niagara Mohawk also completed the sale of its oil and gas
fired generation plant in Oswego for $80 million. See Niagara Mohawk's Form
10-K for fiscal year ended December 31, 1998, Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
"Master Restructuring Agreement and the POWERCHOICE Agreement" and Holdings and
Niagara Mohawk's Form 10-Q for the quarter ended June 30, 1999, Part I, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - "POWERCHOICE Agreement" for discussion of such agreements and
associated power purchase agreements. On October 6, 1999, Niagara Mohawk
announced an agreement to sell its Albany oil and gas-fired generation plant to
PSEG for $47.5 million. Niagara Mohawk also announced that it would enter into
a PPA with PSEG upon the closing of the sale. The Albany plant has a net book
value of approximately $33.0 million as of September 30, 1999. Niagara Mohawk
could also receive up to an additional $11.5 million if PSEG chooses to pursue
the redevelopment of the Albany plant. The agreement with PSEG includes a "Post
Closing Property Tax Adjustment" to be settled on the first ten anniversaries of
the closing date. If actual property taxes exceed a predetermined amount,
Niagara Mohawk will pay PSEG. If the property taxes are lower, then PSEG will
pay Niagara Mohawk. The predetermined amount is based upon the taxes paid by
Niagara Mohawk at the time of the sale, which approximate $6.7 million. During
the ten years, the predetermined amount will be lowered by $0.5 million each
year. Niagara Mohawk is pursuing a reduction in the taxes paid on the facility.
Niagara Mohawk expects to complete the Albany sale transaction in the first
quarter of 2000. In May 1999, Niagara Mohawk entered into an agreement with
Central Hudson to sell its interest in the Roseton plant to Central Hudson at
approximately net book value by July 1, 2002, if the interest has not been
previously sold, subject to regulatory approval. At September 30, 1999, the net
book value of Niagara Mohawk's interest in the Roseton plant was approximately
$39 million. For a discussion on how Niagara Mohawk used the proceeds from the
sale of its two coal-fired generation plants and its hydro generation plants,
see "Liquidity and Capital Resources."
The sale of the fossil and hydro assets will serve to quantify any stranded
costs associated with Niagara Mohawk's fossil and hydro generation assets.
Niagara Mohawk will have a reasonable opportunity to recover these costs through
the CTC. The POWERCHOICE agreement provides for deferral and future recovery of
net losses, if any, resulting from the sale of the assets. As of September 30,
1999, Niagara Mohawk has recorded a regulatory liability of $115.1 million for
the net gain on the sale of its two coal-fired generation plants and its hydro
generation assets. The net gain is included in Niagara Mohawk's September 30,
1999 balance sheet as "Deferred Gain on the Sale of Assets." No carrying
charges are being recorded on this deferred liability. The amount of the
regulatory deferral is subject to change as a result of post closing adjustments
on the sales, transaction costs, the effects of curtailment accounting on
pension and other post employment retirement benefits, the incentive amount
awarded in POWERCHOICE, the accounting treatment relating to the hydro PPAs, and
the outcome and closing of the sale of the remaining fossil assets. Niagara
Mohawk has requested of the PSC that the net gain recorded as of September 30,
1999 be reduced to the extent that the actual amount incurred on the hydro PPAs
over the next few years exceeds the forecasted amount reflected in POWERCHOICE.
After all the fossil and hydro sales transactions have been completed, Niagara
Mohawk estimates it will have net loss (stranded costs) in the range of $100 to
$110 million, including an estimate of the hydro PPA. Niagara Mohawk is
required to submit to the PSC a final accounting of the costs and proceeds from
the sale of its assets during the first quarter of 2000. Niagara Mohawk will
be able to begin recovery of the losses and incentives starting in 2003.
Niagara Mohawk will also incur severance costs as a result of these sales.
Under POWERCHOICE, Niagara Mohawk is allowed to recover up to $10 million in
severance and other costs and as of September 30, 1999, has incurred
approximately $2.7 million in severance other costs. At this time, Niagara
Mohawk is unable to determine the total amount of severance and other costs it
will incur, since there are different options available to those employees who
decide not to transfer with the new owners. Of the 627 employees that could be
transferred to the new owners of Huntley, Dunkirk, Oswego, and the hydro assets,
465 employees elected to do so. The remaining eligible employees either retired
or remained employed at Niagara Mohawk.
After the sales are complete, Niagara Mohawk has agreed not to own any
non-nuclear generation assets in the state of New York, subject to certain
exceptions provided in the POWERCHOICE agreement
The POWERCHOICE agreement stipulated that absent a statewide solution, Niagara
Mohawk would file a detailed plan for analyzing other proposals regarding its
nuclear assets, including the feasibility of an auction, transfer and/or
divestiture of such facilities, within 24 months of POWERCHOICE. On June 24,
1999, Niagara Mohawk announced an agreement to sell its nuclear assets to
AmerGen Energy Company, LLC ("AmerGen") for approximately $135 million, which
price adjusts depending on the time of closing. New York State Electric and Gas
Corporation is also a party to the agreement and has agreed to sell its 18%
share of Unit 2 to AmerGen. As a condition of the transaction, Niagara Mohawk
will pre-fund its nuclear decommissioning trust funds at the closing to a
predetermined amount, which amount is contingent upon tax rulings. The trust
funds will be transferred to AmerGen at the closing, and AmerGen will assume
full responsibility for the decommissioning of Unit 1 and its ownership share of
Unit 2. Niagara Mohawk estimates that it will be required to make additional
contributions to the decommissioning trust funds in the range of $80 to $120
million. Niagara Mohawk estimates its net loss (stranded costs) from the
nuclear sale to be in the range of $1,800 to $1,850 million. Niagara Mohawk has
petitioned the PSC for approval to defer this net loss for future recovery,
which approval is a condition of closing the sale of the nuclear assets.
Accordingly, Niagara Mohawk would record a regulatory asset for the amount of
the actual net loss upon the closing of the sale. The recording of the
regulatory asset is ultimately conditioned on an assessment by Niagara Mohawk
that the amounts are probable of future recovery in rates and that the rates
ultimately approved by the PSC can be charged to and collected from customers
without unanticipated reduction in demand.
The amount of the net loss on the sale of the nuclear assets is subject to
change as a result of closing price adjustments, transaction costs and the final
amount needed to pre-fund the decommissioning trust funds. The estimated range
of loss excludes any accounting requirements relating to the nuclear PPAs.
Niagara Mohawk has proposed to recover the regulatory asset plus a return on the
unamortized balance over a period not to exceed 15 years, beginning in 2000,
with a significant portion of the recovery likely to occur in years subsequent
to the MRA regulatory asset amortization. Niagara Mohawk's current rate
structure includes recovery and a return on nuclear assets. Niagara Mohawk
proposes to recover a return on and a return of stranded nuclear costs within
the rate structures contained in its POWERCHOICE agreement. The sale is also
contingent upon approval by, among others, the PSC, NRC, IRS, and the SEC.
Niagara Mohawk originally requested PSC approval by December 1999 and has filed
an application with the NRC to transfer the license to AmerGen. The
Administrative Law Judge in the proceeding has issued a hearing schedule that
makes it unlikely, under the terms of the sale agreement, that the sale will
close prior to the planned Unit 2 refueling and maintenance outage scheduled to
begin in March 2000. A delay in the sale through the planned outage would
result in an increase in the purchase price of Unit 2 as specified in the
agreement to reflect the estimated costs of the refueling and maintenance
outage. The sale price of Unit 1 decreases if the sale occurs after the Unit 2
refueling and maintenance outage. Until the sale is closed, Niagara Mohawk
generally bears the risks associated with unexpected costs of the refueling
outage at Unit 2 and any unscheduled outages at both units, including
investigations and unexpected maintenance and capital costs. The purchase
agreement terminates if the sale has not occurred before September 1, 2000.
On October 27, 1999, the FERC approved the sale of the transmission assets
connected to the nuclear plants to AmerGen.
Along with the asset purchase agreement, Niagara Mohawk also signed PPAs with
AmerGen for energy and capacity at negotiated prices, which are above market,
based on current energy price forecasts. The terms of the PPAs are for five
years from Unit 1 and three years from Unit 2. Upon the expiration of the PPA
for Unit 2, Niagara Mohawk and AmerGen also agreed to a financial sharing
agreement whereby Niagara Mohawk will be entitled to payments from AmerGen over
a ten year period if electric energy market prices exceed certain amounts during
the ten year sharing period. Niagara Mohawk has proposed to the PSC that any
future payments received under the financial sharing agreement will serve to
reduce the unamortized regulatory asset recorded as a result of the sale of the
nuclear assets.
While the PPAs for the generation asset sales, which entered into as an
integral part of the generation sales, are above market, they are designed to
help Niagara Mohawk meet the objectives of rate reduction and price cap
commitments as well as meet expected demand as the "provider of last resort" as
outlined in the POWERCHOICE agreement. The PPAs that convert to either swap
agreements or swaptions act as hedges against rising power costs.
Upon closing of the sale of the nuclear assets, Niagara Mohawk will still be
liable for spent nuclear fuel disposal for its share of fuel burned prior to the
closing. See Niagara Mohawk's Form 10-K for fiscal year ended December 31,
1998, Part II, Item 8. Financial Statements and Supplementary Data, Note 3.
Nuclear Operations, "Nuclear Fuel Disposal Cost" for a discussion of the Nuclear
Waste Policy Act of 1982 and Niagara Mohawk's determination of liability. The
Nuclear Waste Act provided three payment options for liquidating the liability
for the disposal of nuclear fuel irradiated prior to 1983, and Niagara Mohawk
elected to delay payment, with interest, until the year in which it initially
plans to ship irradiated fuel to an approved DOE disposal facility. Through
September 30, 1999, Niagara Mohawk has recorded a liability of approximately
$124.5 million. This liability will remain with Niagara Mohawk until the DOE
provides disposal facilities. Niagara Mohawk also retains liability for changes
enacted prior to closing, if any, in the disposal fees already paid to the DOE
for fuel burned from 1983 through closing of the sale or in the pre-1983
liability. Niagara Mohawk is unable to predict the outcome of this matter.
NUCLEAR OPERATIONS
On September 24, 1999, Niagara Mohawk announced that it had begun a
comprehensive program to enhance the operating performance of its two nuclear
plants, Unit 1 and Unit 2. Recent internal and external performance reviews,
including a review by the NRC, outline the need for operational improvements.
Niagara Mohawk intends to increase management observation and monitoring of
control room activities and increase oversight by plant mangers of maintenance
and surveillance activities to ensure integration of all site work. In
addition, the NRC will continue to monitor and assess activities at the two
plants. Niagara Mohawk expects to spend approximately $0.4 million in expense
during the remainder of 1999 for this performance improvement program and has
budgeted an additional $9.4 million in expense and $7.9 million for capital
improvements for the 12 months ending December 31, 2000. The amounts spent
during 2000 could be less, depending on the timing of the sale of the Unit 1 and
Unit 2.
STRANDED COST RECOVERY IN THE CASE OF MUNICIPALIZATION
(VILLAGE OF LAKEWOOD)
(See Niagara Mohawk's Form 10-K for fiscal year ended December 31, 1998, Part
II, Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - "FERC Rulemaking on Open Access and Stranded Cost
Recovery").
In April 1996, the FERC issued Order 888, which stated that it would provide for
the recovery of prudent and verifiable wholesale stranded costs where the
wholesale customer was able to obtain alternative power supplies as a result of
Order 888's open access mandate. Order 888 left to the states the issue of
retail stranded cost recovery.
In November 1997, FERC issued Order 888-B. This Order clarified that the FERC
recognizes the existence of concurrent state jurisdiction over stranded costs
arising from municipalization. The FERC acknowledged in Order 888-B that the
states may be first to address the issue of retail-turned-wholesale stranded
costs, and stated that it will give the states substantial deference where they
have done so.
The Village of Lakewood ("Lakewood') is considering municipalization and
requested an estimate of their stranded cost obligation. In August 1997,
Niagara Mohawk provided Lakewood with an estimate of its stranded cost
obligation in response to a formal request under FERC Order 888. In June 1998,
Lakewood filed a petition with FERC seeking a determination that it would not be
responsible for any of Niagara Mohawk's stranded costs if it created a new
municipal electric system. Niagara Mohawk responded in opposition to this
petition. On October 1, 1998, FERC set a hearing with a FERC Administrative Law
Judge in the matter of Lakewood's stranded cost obligation to Niagara Mohawk
under Order 888.
The PSC and Niagara Mohawk requested rehearing of the FERC's October 1, 1998
order setting a hearing. Both parties pointed out that the PSC has a process in
place to adjudicate Lakewood's liability for stranded costs under Niagara
Mohawk's Retail Tariff in the event of municipalization, and suggested that it
would be inefficient and contrary to Order No. 888-B for the FERC to hold
hearings on Lakewood's stranded cost obligation under Order 888 until Lakewood's
stranded cost obligation under the Retail Tariff has been established by the
PSC. Niagara Mohawk also sought clarification that Order 888 does not preempt
the PSC's jurisdiction to authorize the recovery of stranded costs under the
exit fee provisions of its Retail Tariff.
On December 11, 1998 the FERC issued an order granting Niagara Mohawk's request
for clarification that Order 888 does not preempt the exit fee provision of the
Retail Tariff and directing that the Lakewood case be held in abeyance pending
the resolution of Lakewood's stranded cost obligation under Niagara Mohawk's
Retail Tariff. On January 7, 1999, the PSC directed Niagara Mohawk to provide
Lakewood an estimate of Lakewood's stranded cost obligation under the exit fee
provisions of Niagara Mohawk's Retail Tariff. On February 18, 1999, Niagara
Mohawk provided Lakewood with an estimate of these exit fees of $14.98 million.
During 1999, the PSC established a formal proceeding in this matter. Niagara
Mohawk filed its direct case on September 3, 1999, which supported a revised
estimate of exit fees of $18.0 million. Lakewood filed its direct case on
October 18, 1999, which supported an exit fee of approximately $5 million. The
PSC staff filed their direct case on October 25, 1999, which supported an exit
fee of $15.6 to $16.7 million. Rebuttal testimony is due on November 10, 1999
and the PSC has scheduled a hearing for the purpose of cross-examination of all
testimony to begin on December 1, 1999. Niagara Mohawk expects the PSC to
render a decision during the first quarter of 2000. Niagara Mohawk is unable to
predict the outcome of this matter.
While the municipalization of Lakewood would not have a material impact on
Niagara Mohawk's results of operation and financial position, the outcome of
this matter will likely define the methodology to determine exit fees. For a
further discussion of Niagara Mohawk's stranded cost recovery in the case of
municipalization, see Niagara Mohawk's Form 10-K for fiscal year ended December
31, 1998, Part II, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - "FERC Rulemaking on Open Access and
Stranded Cost Recovery."
FERC RULEMAKING ON OPEN ACCESS
(See Niagara Mohawk's Form 10-K for fiscal year ended December 31, 1998, Part
II, Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - "FERC Rulemaking on Open Access and Stranded Cost
Recovery").
In April 1996, the FERC issued Order 888. Order 888 promotes competition by
requiring that public utilities owning, operating, or controlling interstate
transmission facilities file tariffs which offer others the same transmission
services they provide for themselves, under comparable terms and conditions.
In addition, FERC Order 888, required the NYPP to file reformed power pooling
agreements that establish open, non-discriminatory membership provisions and
modify any provisions that are unduly discriminatory or preferential.
On June 24, 1998, FERC gave the NYPP Member Systems conditional approval to form
the NYISO and since that time, several filings and settlements have been made.
On January 27, 1999, FERC conditionally approved the NYISO tariff subject to
certain modifications and on April 30, 1999, the Member Systems made a
Compliance Filing to address the modifications FERC required to be made to the
NYISO tariff. On July 2, 1999, the Member Systems filed a multi-party
settlement agreement, which addressed FERC's remaining concerns relative to
NYISO governance. In addition, market trials began in January 1999 and continue
to progress in preparation for the NYISO start up.
On July 28, 1999, FERC accepted the NYISO's revised tariff and market rules,
finding that the tariffs and agreements covering such issues as reliability
policies, firm and network transmission service, and transmission congestion
management and charges are acceptable with some modifications. The Member
Systems have addressed these remaining items and the NYISO has announced that
it plans to start up on November 18, 1999. Niagara Mohawk views this progress
as an important step toward a more competitive market for electricity in New
York State, consistent with its POWERCHOICE restructuring agreement.
As part of the agreement with the NYISO, Niagara Mohawk will be required to sell
to the NYISO all of its transmission capacity, except such capacity
grandfathered under prior transmission contracts, every six months. In turn,
Niagara Mohawk will purchase any additional transmission capacity needs through
the competitive bid process of the NYISO. Approximately $70 million, or three
quarters of Niagara Mohawk's annual transmission revenues are derived from the
grandfathered transmission contracts with generators. At this time, Niagara
Mohawk cannot determine the impact of the transition to the NYISO on its
transmission revenues due to the unknown market rates and capacity needs.
GAS MULTI-YEAR RATE AND RESTRUCTURING PROPOSAL
Niagara Mohawk filed a three-year gas rate and restructuring proposal on March
11, 1999 in anticipation of the expiration of its 1996 three-year gas rate
settlement agreement, which expired on November 1, 1999. Niagara Mohawk has
been negotiating with the PSC and other parties, but has not reach a final
agreement. However, Niagara Mohawk and the PSC Staff have settled on an interim
arrangement that: freezes delivery rates at current levels, subject to refund if
the permanent rates are lower and allows the pass through of lowered pipeline
costs. In addition, the interim arrangement minimizes Niagara Mohawk's exposure
to stranded costs through April 2000 (the winter heating season). Niagara
Mohawk is continuing to work with the PSC and other interested parties to reach
a final settlement, but it cannot predict the timing or outcome of such a
settlement.
YEAR 2000 READINESS DISCLOSURE
As the year 2000 approaches, Niagara Mohawk, along with other companies, could
experience potentially serious operational problems, since many computer
programs that were developed in the past may not properly recognize calendar
dates beginning with year 2000. Further, there are embedded chips contained
within generation, transmission, distribution, gas, and other equipment that may
be date sensitive. In circumstances where an embedded chip fails to recognize
the correct date, electric, gas and business operations could be adversely
affected.
PLAN: Niagara Mohawk formed a year 2000 project management office and year
2000 project managers were appointed within each business group. A year 2000
program vice-president and an executive level steering committee were put in
place to oversee all aspects of the program. In addition to Niagara Mohawk
personnel, Niagara Mohawk retained the services of leading computer service and
consulting firms specializing in computer systems and embedded components, which
are involved in various phases of the project. Also, Niagara Mohawk is working
closely with industry groups such as the Electric Power Research Institute
("EPRI"), North American Electric Reliability Council ("NERC"), Nuclear Energy
Institute, Nuclear Utilities Software Management Group, and other utilities. In
addition, the PSC required New York utilities have mission critical year 2000
work, including a contingency plan, completed by July 1, 1999, and the NRC
required Niagara Mohawk to certify that its two nuclear plants will be year 2000
ready by July 1, 1999. A plan was developed that established phases of the work
to be done. The phases are:
- - - - an inventory of all systems and equipment (including a physical walkdown
of all of Niagara Mohawk's substations),
- - - - an assessment of all systems and equipment and definition of next steps,
- - - - remediation,
- - - - testing and validation,
- - - - acceptance and deployment,
- - - - independent validation, and
- - - - contingency planning.
As part of the assessment phase, all the systems and equipment were prioritized
into four categories based upon their functional need and importance. The
priorities are:
As part of the assessment phase, all the systems and equipment were prioritized
into four categories based upon their functional need and importance. The
priorities are:
- - - - Priority 1 - Any failure or regulatory breach that can cause an
interruption to the generation or delivery of electric or gas energy to
customers, or can jeopardize the safety of any employee, customer, or the
general public (e.g. the Energy Management System that controls the flow
of electricity and communicates information between the control center and
substations).
- - - - Priority 2 - Any failure that can cause an interruption to customer
service or breach of significant regulatory contractual or financial
commitment (e.g. meter reading equipment).
- - - - Priority 3 - Any failure that can inconvenience a business partner or
significantly impact a Niagara Mohawk business group productivity (e.g.
electronic payments to vendors).
- - - - Priority 4 - Any failure that can adversely impact a Niagara Mohawk work
group or personal productivity or other business processes
(e.g. applications used on a desktop computer used to accomplish day-to-day
productivity activities).
Although Niagara Mohawk identified seven different phases of the project, in
some cases the phases were done concurrently. For example, individual computers
were completely tested and redeployed while others were being remediated.
Information obtained within the phases was reviewed by a subject matter expert
panel consisting of employees and consultants. Additional testing was performed
based on the importance of the component and a recommendation of the panel.
Complete integration and interface testing was performed on components and
systems whenever possible.
Niagara Mohawk's primary focus has been on priorities 1 and 2 because of the
direct impact on customers. Although Niagara Mohawk's plan addressed completion
of all priority items prior to July 1, 1999, there are a few minor exceptions.
These are scheduled to be completed prior to January 1, 2000.
Niagara Mohawk's progress with its year 2000 issues for mission critical items
are as follows:
PHASE STATUS
--------------------- --------
Inventory Complete
Assessment Complete
Remediation Complete
Testing Complete
Acceptance Complete
Validation Complete
Contingency Planning Ongoing
Niagara Mohawk has completed the majority of its year 2000 readiness project
and has also met the readiness goals established by the PSC and NRC. The
contingency planning phase is also complete with respect to developing
contingency plans. However, Niagara Mohawk will use the time remaining in 1999
to review the work already completed and to test its contingency plans through
further testing, training and employee drills.
Niagara Mohawk has also successfully completed year 2000 readiness tests at its
generation plants (including the plants that were sold, because Niagara Mohawk
will continue to receive power from these plants under PPAs subsequent to their
sale and transfer).
RISKS: Like any organization, Niagara Mohawk is dependent upon many third
parties, including suppliers of energy and materials (e.g. independent power
producers), service providers, transporters, and the government. These third
parties provide services vital to Niagara Mohawk and year 2000 problems at these
companies could adversely affect electric and gas operations. One such example
is that Niagara Mohawk expects that by the year 2000, it will be purchasing the
majority of its electric generation needs. If any of these suppliers has a year
2000 failure, it could interrupt energy supply to Niagara Mohawk's customers.
Another example of such a vital third party is telephone companies. If the
telephone companies have year 2000 failures, this could in turn affect Niagara
Mohawk's customer response capabilities and its ability to operate and maintain
the transmission and distribution system that carries electricity to businesses
and customer homes. To address these third party issues, Niagara Mohawk
requested certificates of compliance from third parties and followed up with the
third parties as appropriate. Niagara Mohawk intends to continue following up
with significant third parties during the remainder of 1999 to verify the
accuracy of responses and the status of their year 2000 readiness. However,
Niagara Mohawk may not be able to verify accuracy in all cases. With respect to
generation suppliers, Niagara Mohawk has had a higher level of contact and
believes there will be an adequate amount of supply available. The inability of
suppliers to complete their year 2000 readiness process could materially
adversely impact Niagara Mohawk.
Niagara Mohawk is connected to an electric grid that links utilities throughout
the United States and Canada. This interconnection is essential to the
reliability and operational integrity of the connected utilities. If one of the
electric utilities in the grid has a failure, it could cause power fluctuations
and possible interruption of others in the grid. As a result, even if Niagara
Mohawk did an effective job of becoming compliant, it could still have customer
interruptions. Niagara Mohawk is working closely with NYPP and its successor
the NYISO, NERC, other utilities, EPRI, and other industry groups to address the
issue of grid reliability.
Niagara Mohawk's gas distribution system also has the potential to be adversely
impacted by year 2000 noncompliance either by third parties or if its program
fails to identify and remediate all problem areas. From the third party natural
gas production and transmission facilities, to Niagara Mohawk's distribution
pipeline system, and ultimately, to the customer, there are computer systems and
equipment with date sensitive processing. If, despite Niagara Mohawk's and
third partys' best efforts, a year 2000 failure occurs, the flow of gas to the
customer could be jeopardized.
As an example, Niagara Mohawk is connected directly to three major transmission
pipelines, and has an indirect connection with a fourth. If these pipelines are
unable to provide full gas delivery, Niagara Mohawk would implement standing
emergency procedures that could interrupt customers. To avoid such an event,
Niagara Mohawk is working with the pipelines and state agencies to reduce the
probability of any customer interruptions due to year 2000 problems.
The failure to correct for year 2000 problems, either by Niagara Mohawk or
third parties, could result in significant disruptions of Niagara Mohawk
operations. While massive disruptions due to year 2000 failures are believed to
be unlikely by both the electric and gas industries and by Niagara Mohawk, they
cannot be ruled out. Localized disruptions, similar to storm damage related
disruptions, caused by unforeseen failures, either within Niagara Mohawk or by a
critical third party, such as voice or data links, are believed to be the most
reasonably likely worst case scenario for Niagara Mohawk based upon current
knowledge regarding its condition of readiness and the state of readiness of
third parties. Niagara Mohawk's business systems may also be affected by a year
2000 related failure that could temporarily interrupt the ability to communicate
with customers, collect revenue, or complete cash transactions. In addition, no
assurances can be given that the systems of vendors, interconnected utilities,
power producers and customers will not result in year 2000 problems. Since the
expected impact of these scenarios on Niagara Mohawk's operations, cash flow and
financial position cannot be determined, there is no assurance that they would
not be material. However, Niagara Mohawk's contingency plans are designed to
address these potential failure and mitigate their long-term effect.
CONTINGENCY PLANS: Niagara Mohawk's year 2000 schedules includes the
development and implementation of contingency plans in the event of year 2000
failures, both within Niagara Mohawk and by third parties. Niagara Mohawk's
Emergency Planning manager is responsible for overseeing and assisting the
business groups in the creation of their contingency plans. The contingency
plans vary by business group and by the various priority levels for different
systems and equipment. A schedule was created to track progress of these plans.
Niagara Mohawk's contingency plans have been developed to deal with problems
such as the loss of telecommunications or the shut down of a power plant. The
plans provide for more than 400 separate contingencies. Niagara Mohawk's
contingency plans include staffing of critical substations and availability of
backup communication systems believed to be immune from year 2000 impact.
Additional staffing will be provided as needed at other Niagara Mohawk owned
generation, transmission, and distribution control points for both gas and
electric infrastructure. Other contingency plans and drills include the start
up of a generation plant assuming loss of power at the plant.
The NYPP has arranged to have access to 25% more "reserve" electricity than it
normally needs on a typical New Year's Eve. This reserve will be available to
Niagara Mohawk if necessary. In addition Niagara Mohawk will have available an
estimated 20-day supply of natural gas in nearby storage facilities on December
31, 1999. These natural gas storage facilities are located close to the New
York State border, such that natural gas can be withdrawn and sent to customers
within Niagara Mohawk's natural gas service territory.
On April 9, 1999, Niagara Mohawk, along with approximately 200 other electric
utilities across the United States, participated in a drill coordinated by NERC.
NERC has reported that overall, the drill was a successful exercise of backup
voice systems and manual procedures needed to operate the electric power grids
of the United States and Canada in the unlikely event of a loss of
communications due to year 2000 failures. Niagara Mohawk participated in NERC's
drill on September 8 and 9, 1999 along with over 500 electric utilities across
the United States and Canada. The goal of the drill was to provide the bulk
electric power systems of North America an opportunity to rehearse under
simulated conditions, key portions of their administrative, operating,
communications and contingency response plans. NERC and Niagara Mohawk noted no
significant problems throughout the drill.
COSTS: During the third quarter of 1999, Niagara Mohawk reduced its estimate
of total program costs, since it has not found as many non-compliant components
as had originally been anticipated. This finding is consistent with what other
companies have experienced in the electric and gas utility industry. Niagara
Mohawk estimates that total program costs through 2000 will approximate $30.5
million, of which approximately $21.7 million will be expensed and $8.8 million
will be capitalized. Total program costs incurred through September 30, 1999
are $21.2 million of which $14.7 million was expensed and $6.5 million was
capitalized. Program costs incurred during the nine months ended September 30,
1999 were $9.6 million, of which $6.7 million was expensed and $2.9 million was
capitalized. Niagara Mohawk expects to fund the total program costs through
operating cash flows. For a discussion of the costs of large computer projects
that Niagara Mohawk recently implemented and were year 2000 compliant, see
Niagara Mohawk's Form 10-K for the fiscal year ended December 31, 1998, Part II,
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - "Year 2000 Readiness Disclosure."
Certain statements included in this discussion regarding year 2000 compliance
are forward-looking statements as defined in Section 21E of the Securities
Exchange Act of 1934. These statements include management's best estimates for
completion dates for the various phases and priorities, testing to be performed,
costs to be spent for compliance, and the risks associated with non-compliance
either by Niagara Mohawk or third parties. These forward-looking statements are
subject to various factors, which may materially affect Niagara Mohawk's efforts
with yea 2000 compliance. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, which could cause a change in the estimated
completion date of a particular phase, the ability to locate and correct all
relevant software and embedded components, the compliance of critical vendors,
as well as neighboring utilities, and similar uncertainties. Niagara Mohawk's
assessments of the effects of year 2000 on Niagara Mohawk are based, in part,
upon information received from third parties and other utilities, and Niagara
Mohawk's reasonable reliance on that information. Therefore, the risk that
inaccurate information is supplied by third parties and other utilities upon
which Niagara Mohawk reasonably relied must be considered as a risk factor that
might affect Niagara Mohawk's year 2000 efforts. Niagara Mohawk is attempting
to reduce the risks by utilizing an organized approach, extensive testing and
contingency planning, and allowance of ample contingency time to address issues
identified by tests.
FINANCIAL POSITION
Holdings and Niagara Mohawk's capital structure at September 30, 1999 and
December 31, 1998, was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
HOLDINGS:
Long-term debt. . . . . . . . 60.7% 64.6%
Preferred stock of subsidiary 5.4 4.9
Common equity . . . . . . . . 33.9 30.5
NIAGARA MOHAWK:
Long-term debt. . . . . . . . 62.0 64.6
Preferred stock . . . . . . . 5.5 4.9
Common equity . . . . . . . . 32.5 30.5
</TABLE>
The culmination of the MRA significantly increased the leverage of Niagara
Mohawk and Holdings. Through the anticipated increased operating cash flow
resulting from the MRA and POWERCHOICE agreement, including the proceeds from
the sale of the fossil and hydro generation assets, and the planned rapid
repayment of debt, should reduce the leverage in the capital structure of both
entities. Book value of Holdings' common stock was $16.83 per share at
September 30, 1999, as compared to $16.92 at December 31, 1998.
EBITDA for the 12 months ended September 30, 1999 was approximately $1.3 billion
for Holdings, an increase of approximately $0.4 billion compared to the 12
months ended September 30, 1998. This increase is generated almost entirely by
Niagara Mohawk. The improvement in EBITDA is derived primarily from the impacts
of the MRA and POWERCHOICE. The generation sales, especially nuclear, will
slightly lower EBITDA primarily as a result of the PPAs that Niagara Mohawk
entered into with the new owners of the generation assets. EBITDA represents
earnings before interest charges, interest income, income taxes, depreciation
and amortization, amortization of nuclear fuel, allowance for funds used during
construction, MRA regulatory asset amortization, and extraordinary items.
EBITDA is a non-GAAP measure of cash flows and is presented to provide
additional information about Holdings and Niagara Mohawk's ability to meet its
future requirements for debt service. EBITDA should not be considered an
alternative to net income as an indicator of operating performance or as an
alternative to cash flows, as presented on the Consolidated Statement of Cash
Flows, as a measure of liquidity.
Niagara Mohawk has been reviewing its capital structure in light of its
scheduled debt reduction program, its divestiture of its electric generation and
the changing industry. As a result, Niagara Mohawk filed two petitions with the
PSC on July 1, 1999. The PSC approved the petitions on September 22, 1999 as
follows:
- - - - REFINANCE PREFERRED STOCK - The PSC approved Niagara Mohawk's petition to
issue up to $350 million in preferred stock through December 31, 2000.
Niagara Mohawk intends to use the proceeds to redeem certain series of its
outstanding preferred stock to take advantage of lower dividend rates.
- - - - PURCHASE COMMON STOCK - The PSC approved Niagara Mohawk's petition to
purchase up to $800 million of Holdings' common stock. Niagara Mohawk
estimates, depending on market conditions, that it may purchase up to 40
million shares of Holdings' common stock over a six year period extending
through 2005, of which Holdings' Board of Directors has approved a program
to repurchase 20 million shares through December 31, 2001.
In the third quarter of 1999, Niagara Mohawk entered into two agreements
which expire in less than one year, whereby two agents would purchase up to
9 million shares of Holdings' common stock on Niagara Mohawk's behalf.
At any time prior to the expiration of these agreements, Niagara Mohawk can
repurchase the common stock from the agents and is required to reimburse
these agents (in stock and/or cash) for the costs they incurred to buy the
stock plus a carrying charge. The two agents have incurred a total of
approximately $140.3 million or $15.60 per share to purchase the 9 million
shares. In addition, Niagara Mohawk intends to purchase additional shares
on the open market. As of October 31, 1999, Niagara Mohawk has not
repurchased the 9 million shares from the agents but has purchased 80,000
shares on the open market. However, Niagara Mohawk has placed approximately
$9.4 million on deposit as collateral for the purchases, in accordance with
the provisions of one of the agreements. The shares repurchased by the
agents, but not yet paid for by Niagara Mohawk, remain in the number of
shares outstanding in computing earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
(See Niagara Mohawk's Form 10-K for fiscal year ended December 31, 1998, Part
II, Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - "Financial Position, Liquidity and Capital Resources").
Niagara Mohawk is obligated to use 85 percent of the proceeds of the sale of
its generation assets to reduce debt outstanding, as outlined in its Senior Note
indenture. To date, Niagara Mohawk has received $860 million on the sale of its
two coal-fired generation plants, its hydroelectric generation plants, and its
oil and gas-fired plant in Oswego. In addition, in June 1999, Niagara Mohawk
announced an agreement to sell its nuclear assets to AmerGen for $135 million,
which is subject to price adjustments depending on the timing of the closing.
Niagara Mohawk has also announced on October 6, 1999 an agreement to sell its
oil and gas-fired plant at Albany for $47.5 million. In addition, Niagara
Mohawk could also receive up to an additional $11.5 million if PSEG chooses to
pursue the redevelopment of the Albany plant. For a further discussion of the
terms and adjustments to the generation assets sales agreements, see "Generation
Assets Sales" above. With Niagara Mohawk's stronger operating cash flows and
proceeds from sales of its coal, hydro, and its oil and gas facilities,
approximately $1.1 billion of debt has been retired in 1999 consistent with debt
reduction goals. Niagara Mohawk has taken the following actions in 1999:
- - - - On June 14, 1999, Niagara Mohawk repurchased and subsequently redeemed
$151.7 million of First Mortgage Bonds with varying interest rates and
maturities. Niagara Mohawk incurred approximately $16.5 million related to
the early redemption of these bonds, including a premium of $13.0 million
for early redemption and unamortized debt expense and debt issuance costs of
$3.5 million. These expenses were reflected as an extraordinary item during
the second quarter of 1999.
- - - - Niagara Mohawk redeemed its 9.5% series of First Mortgage Bonds totaling
$150 million on July 14, 1999. Niagara Mohawk expensed during the third
quarter of 1999 approximately $11.6 million related to the early
redemption of these bonds, including a premium of $8.8 million for early
redemption and unamortized debt expense and debt issuance costs of $2.8
million. These expenses have been reflected as an extraordinary item during
the third quarter of 1999.
- - - - On July 1, 1999, Niagara Mohawk also made a scheduled payment to retire
upon maturity its 6-1/2% Senior Notes of $300 million.
- - - - On September 8, 1999, Niagara Mohawk called $500 million of its Senior
Notes. The $500 million was redeemed on a pro rata basis between several
series of its Senior Notes in accordance with the debt provisions. Niagara
Mohawk redeemed the notes at a cash redemption price equal to 100 percent of
the principal plus accrued interest. Niagara Mohawk charged to expense
approximately $8.4 million for unamortized debt expense and debt issuance
costs associated with these Senior Notes. These expenses have been recorded
as an extraordinary item during the third quarter of 1999.
- - - - On September 8, 1999, Niagara Mohawk called its Medium Term Notes totaling
$20 million. Niagara Mohawk redeemed these notes at a cash redemption price
of 100 percent of the principal plus accrued interest. The amount of
unamortized debt expense recorded as an extraordinary item was negligible.
As of September 30, 1999, Niagara Mohawk has $275 million of borrowing
capability under the senior bank facility. Also, Niagara Mohawk has the ability
to issue first mortgage bonds to the extent that there have been maturities
since June 30, 1998. The senior bank facility term expires on June 1, 2000. As
a result, the amount outstanding on this facility at September 30, 1999, $105
million, has been recorded as a current liability on both Holdings and Niagara
Mohawk's balance sheets. In addition, Holdings unregulated subsidiaries have an
agreement with banks for letters of credit totaling up to $25 million.
NET CASH FROM OPERATING ACTIVITIES increased $3,884.7 million for Holdings and
$3,887.4 million for Niagara Mohawk in the nine months ended September 30, 1999
as compared to the same period in 1998, primarily because the 1998 operating
cash included the payments to the settling IPPs to consummate the MRA. 1999
operating cash flow also improved due to Niagara Mohawk's receipt of federal
income tax refunds in January 1999 totaling approximately $135 million and as
expected, operating cash flow improved due to the impacts of the MRA and
POWERCHOICE. (See Niagara Mohawk's Form 10-K for the fiscal year ended December
31, 1998, Part II, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - "Financial Position, Liquidity and Capital
Resources"). Offsetting these improvements in the nine months was a reduction
in the amount of accounts receivable sold through cash management.
Holdings and Niagara Mohawk's NET CASH FROM INVESTING ACTIVITIES increased
$864.7 and $971.4 million, respectively in the nine months ended September 30,
1999 as compared to the same period in 1998. These increases are primarily due
to the cash received from the sale of the Huntley and Dunkirk coal-fired
generation assets and the hydro generation assets.
Holdings and Niagara Mohawk's NET CASH FROM FINANCING ACTIVITIES decreased
$4,665.2 and $4,818.1 million, respectively due to the early repayment of debt,
and the dividend and related cash transfer of Opinac to Holdings on March 31,
1999. Financing activities during the first nine months of 1998 were positively
impacted by the issuance of the Senior Notes to finance the MRA.
RESULTS OF OPERATIONS
The following discussion presents the material changes in results of operations
for the three months and nine months ended September 30, 1999 in comparison to
the same periods in 1998. The results of operations reflect the seasonal nature
of the business, with peak electric loads in summer and winter periods. Gas
sales peak principally in the winter. The earnings for the three-month and
nine-month periods should not be taken as an indication of earnings for all or
any part of the balance of the year. Furthermore, future results of operations
will be different from the past in view of the June 30, 1998 termination,
restatement or amendment of IPP contracts, the implementation of POWERCHOICE and
the sale of the fossil and hydro generation assets. With the consummation of
the MRA and the implementation of POWERCHOICE effective September 1, 1998,
Holdings and Niagara Mohawk expect reported earnings for the five years under
POWERCHOICE to be substantially depressed as a result of the regulatory
treatment of the MRA regulatory asset. This discussion should also be read in
conjunction with other financial and statistical information appearing elsewhere
in this report.
In mid-February 1999, Niagara Mohawk implemented a new Customer Service System
("CSS"). The CSS replaces existing order, billing, collection and other
infrastructural systems and is designed to provide real-time information as well
as a more flexible and streamlined billing system. The new CSS also provides
retail access and unbundled bill functionality required under POWERCHOICE and
addresses Year 2000 compliance. These capabilities could not be developed in
the existing systems.
Niagara Mohawk, like other companies that have implemented similar CSS projects,
has experienced transition periods, characterized by significantly higher
customer call volumes and complaints, billing and data accumulation and
reporting issues, and other problems that impact productivity and costs. In
implementing a system as complex as CSS, Niagara Mohawk anticipated that the
transition would also be complicated by changes in the information and choices
provided to customers pursuant to POWERCHOICE. Niagara Mohawk has taken steps
prior to and during the transition period to prioritize and respond to problems.
Although the length and degree of the transition period cannot presently be
predicted, Niagara Mohawk is aware that transition periods at other companies
have been six months or longer.
On May 19, 1999, Niagara Mohawk filed a report with the PSC and the New York
State Consumer Protection Board detailing steps taken by Niagara Mohawk in
response to problems with the CSS system. The report outlined how Niagara
Mohawk intends to rectify the problems encountered. Niagara Mohawk has
subsequently provided the PSC with three additional status reports outlining
results and actions taken to resolve problems, and noting reductions in customer
call volumes and complaints, and improved bill quality.
The CSS transition period presents several financial exposures. Although there
are known billing issues, Niagara Mohawk believes that overall recorded revenues
fairly reflect the revenues of Niagara Mohawk over this period. Outstanding
accounts receivables have increased Niagara Mohawk's bad debt expense through
September 30, 1999 was $41.4 million as compared to $28.5 million through
September 30, 1998, with the increase attributable to the increased exposure to
collection risk. Niagara Mohawk is taking aggressive action to reduce its
outstanding accounts receivable balance relating to this transition period, so
that the reserve for bad debts can be returned to a level appropriate in the
normal course of business. However, the actions available to Niagara Mohawk
become more limited during the heating season (beginning November 1, 1999),
since under the law, it cannot disconnect service to residential customers.
The PSC has sent a letter to Niagara Mohawk outlining its intent to assess the
development and implementation of the CSS project. Preliminary discussions were
held with the PSC on September 22, 1999, but Niagara Mohawk is unable to predict
the outcome of a PSC investigation. Further, POWERCHOICE provides for penalties
in the event certain customer related performance metrics are not met. The
maximum penalty for PSC complaints and residential customer satisfaction is $4.4
million per year. Niagara Mohawk met the performance metric relating to
customer complaints and did not incur any penalties associated with that metric
for the 12 months ended September 1, 1999. However, Niagara Mohawk accrued a
penalty for the performance metric associated with the customer satisfaction
index. This penalty amounted to $0.4 million for the 12 months ended September
1, 1999.
Niagara Mohawk continues to assess the increased costs it will incur to
complete the transition to CSS. Costs incurred prior to implementation of CSS
in February 1999 were generally capitalized. Niagara Mohawk expected to incur
costs chargeable to expense in 1999 for maintenance of CSS. Incurred costs
were also expected to be higher in the first several years subsequent to
implementation as knowledge and experience is transferred from the vendor to
Niagara Mohawk. While implementation requirements are diminishing, Niagara
Mohawk may face additional costs if the PSC seeks other retail access-related
initiatives that would require modifications to CSS. Niagara Mohawk cannot
predict the costs of these potential changes. Niagara Mohawk is also
experiencing higher costs in 1999 as a result of implementing retail access for
all customers. All of these costs, generally vendor, labor and phone charges,
are likely to continue into 2000 until customers become more familiar with
the transition to CSS, including retail access. Based on the actual and
anticipated scope of effort to be completed in 1999, total CSS-related charges
to expense, exclusive of bad debts, are estimated to be $37.8 million, of which
approximately $27.4 million relates to expected maintenance and knowledge
transfer activities. Niagara Mohawk had expected to spend $11.2 million during
1999 for maintenance and knowledge transfer activities.
THREE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
1998
- - - ---
Holdings:
- - - ---------
Holdings experienced a loss during the third quarter of 1999 of $31.7 million or
17 cents per share, as compared with Niagara Mohawk earnings of $8.5 million or
5 cents per share for the third quarter of 1998. Third quarter 1999 results
reflect the impact from Niagara Mohawk's amortization of the MRA regulatory
asset which had a non-cash earnings impact of $41.9 million or 22 cents per
share as compared to the same period in 1998. Third quarter 1999 results were
also impacted by Niagara Mohawk's early redemption of First Mortgage Bonds,
Senior Notes and Medium Term Notes, which reduced earnings by $13.1 million or 7
cents per share and is reflected as an extraordinary item. Third quarter 1998
results were negatively impacted by a significant windstorm in September 1998
with costs of $9.0 million or 5 cents per share.
Niagara Mohawk:
- - - ---------------
Niagara Mohawk also incurred a loss during the third quarter of 1999. This
loss as compared to the same period in 1998 is explained above in the discussion
of Holdings' loss for the same period.
REVENUES
- - - --------
REGULATED ELECTRIC REVENUES decreased $6.0 million or 0.7% from the third
quarter of 1998. The decrease is primarily due to the lower residential and
commercial rates as a result of POWERCHOICE. Sales to other electric systems
were also lower in the third quarter of 1999 primarily due to lower sales to one
utility. These decreases were partially offset by an increase in miscellaneous
revenues during the third quarter of 1999 primarily due to an increase in
transmission revenue. In accordance with POWERCHOICE, Niagara Mohawk recognizes
changes in unbilled revenues in its results of operations. There were no
significant unanticipated sales variances during the quarter.
UNREGULATED ELECTRIC REVENUES increased $50.1 million or 116.7% from the third
quarter of 1998 primarily as a result of Niagara Mohawk Energy, Inc.'s ("Niagara
Mohawk Energy") increased wholesale and retail activity.
REGULATED GAS REVENUES increased $2.7 million or 3.8% in the third quarter of
1999 from the comparable period in 1998, as a result of an increase in
residential sales and revenue. The increase in regulated gas revenues is also
due to revenue earned from revenue sharing mechanisms allowed in Niagara
Mohawk's gas rates as a result of lowering the cost of gas purchases. See
Niagara Mohawk's Form 10-K for the fiscal year ended December 31, 1998, Part II,
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - "Other Federal and State Regulatory Initiatives - Multi-Year Gas
Rate Settlement Agreement," for an explanation of Niagara Mohawk's rate
agreement and revenue sharing mechanisms.
UNREGULATED GAS REVENUES increased $3.1 million or 49.7% in the third quarter of
1999 from the comparable period in 1998, primarily as a result of Niagara Mohawk
Energy increased wholesale activity.
OPERATING EXPENSES
-----------------
Niagara Mohawk's total ELECTRICITY PURCHASED decreased $8.6 million or 3.6% in
the third quarter of 1999. This decrease is primarily due to a decrease of
$101.3 million in costs deferred and recovered through the fuel adjustment
clause. The decrease of $101.3 million includes $79 million in costs related
to net reductions in payments to the IPP Parties in July and August 1998, the
benefits of which were deferred for future rate making decision. The fuel
adjustment clause was eliminated under POWERCHOICE. The decrease is offset by
purchases, aggregating $59.7 million under PPAs from Niagara Mohawk's previously
owned coal and hydro generation plants and a net increase in purchases from
other utilities and IPPs of $33 million.
Niagara Mohawk's FUEL FOR ELECTRIC GENERATION decreased $26.9 million or 33.6%
as compared to the third quarter in 1998, primarily as a result of the sale of
its two coal-fired generation plants. In accordance with POWERCHOICE, the
electric fuel adjustment clause was discontinued effective September 1, 1998.
Holdings' FUEL FOR ELECTRIC GENERATION and ELECTRICITY PURCHASED is explained by
Niagara Mohawk's activity, as well as an increase in unregulated supply costs of
$48.9 million or 125.1% in the third quarter of 1999 to meet higher sales
requirements.
Niagara Mohawk's GAS PURCHASED expense decreased $0.1 million in the third
quarter of 1999. This was a result of a $4.1 million decrease in purchased gas
costs and certain other items recognized and recovered through the regulated gas
commodity cost adjustment clause and a $3.4 million decrease in spot market
sales (sales for resale), which are generally from higher priced gas, and
therefore, yield margins that are substantially lower than traditional sales to
ultimate customers. These costs were offset by an increase 0.8 million increase
in Dth purchased and withdrawn from storage for ultimate consumer sales ($5.1
million) and a 3.1% increase in the average cost per Dth purchased ($2.3
million).
Holdings' GAS PURCHASED expense reflects Niagara Mohawk's activity, as well as
an increase of $3.0 million in the third quarter of 1999 primarily as a result
of higher unregulated sales.
DEPRECIATION AND AMORTIZATION expense has decreased by approximately $9.1
million for both Holdings and Niagara Mohawk as compared to the third quarter of
1998 as a result of the sale of Niagara Mohawk's two coal-fired generation
plants and its hydro generation plants, which has had the effect of decreasing
depreciation and amortization expense by approximately $10 million. However,
the decrease is partially offset as a result of placing in service several
computer system projects with depreciable lives that are significantly shorter
than typical transmission and distribution assets.
OTHER TAXES for both Holdings and Niagara Mohawk have decreased as compared to
the third quarter of 1998 primarily as a result of a reduction in the New York
State GRT tax rate beginning in October 1998, as well as a reduction in property
taxes of approximately $7.8 million in connection with the sale of Niagara
Mohawk's coal-fired and hydro generation plants.
In approving POWERCHOICE, the PSC ordered that any savings from any reduction
in the interest associated with the debt issued in connection with the MRA
financing as compared to assumptions underlying Niagara Mohawk's POWERCHOICE
filing be deferred for future disposition. Holdings and Niagara Mohawk's OTHER
INCOME decreased primarily due to the recording of approximately $44.6 million
in 1998 on the deferral of MRA financing costs and the recording of a regulatory
liability relating to the MRA debt interest rate savings liability of $4.1
million as compared to the same period in 1998. These decreases were partially
offset by the recording of the approximately $8.0 million incentive earned in
1999 on the sale of the fossil and hydro generation assets.
Holdings and Niagara Mohawk's INTEREST CHARGES have decreased due to the
redemption of Niagara Mohawk's Senior Notes and First Mortgage Bonds. For a
more detailed discussion of the debt retired during the third quarter of 1999,
see the "Financial Position" section above.
The decrease in Holdings and Niagara Mohawk's FEDERAL AND FOREIGN INCOME TAXES
is due to lower third quarter book taxable income.
NINE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1998
- - - --------------------------------------------------------------------------------
Holdings:
- - - ---------
Holdings experienced a loss for the first nine months of 1999 of $16.9 million
or 9 cents per share, as compared with a Niagara Mohawk loss of $130.9 million
or 82 cents per share for the first nine months of 1998. Earnings for the
first nine months of 1999 reflect the impact from Niagara Mohawk's MRA and
POWERCHOICE, which have resulted in lower aggregate fuel and purchased
electricity costs, partly offset by increased interest costs, resulting in
improved earnings by $129.6 million or 69 cents per share. However, the
amortization of the MRA regulatory asset had a non-cash earnings impact of
$167.5 million or 89 cents per share. Earnings for the first nine months of
1999 were also impacted by Niagara Mohawk's early redemption of First Mortgage
Bonds, Senior Notes and Medium Term Notes, which required a charge to earnings
of $23.8 million or 13 cents per share that is reflected as an extraordinary
item (See Part I, Item 1. Notes to Consolidated Financial Statements, Note 5).
Earnings for the first nine months of 1998 reflect the incremental costs of the
1998 ice storm and the 1998 wind storm, which reduced earnings by $80.2 million
or 33 cents per share and a non-cash write-off of $263.2 million, or $1.18 per
share associated with the portion of the MRA costs disallowed in rates by the
PSC. The comparison of earnings per share is also affected by the issuance of
approximately 43 million shares to the IPP Parties on June 30, 1998.
Niagara Mohawk:
- - - ---------------
Niagara Mohawk experienced a loss of $18.3 million for the first nine months of
1999. The variations in earnings as compared to the same period in 1998 are
noted above in the discussion of Holdings' earnings for the same period.
REVENUES AND SALES
- - - ------------------
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
ELECTRIC REVENUE (THOUSANDS) SALES (GWH)
------------------------------------- ------------------------------
% %
1999 1998 Change 1999 1998 Change
------------ ------------ -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
REGULATED:
Residential. . . . . . $ 962,525 $ 919,117 4.7 7,864 7,358 6.9
Commercial . . . . . . 911,264 941,355 (3.2) 9,146 8,824 3.6
Industrial . . . . . . 361,446 370,172 (2.4) 5,114 5,186 (1.4)
Industrial - Special . 48,938 47,583 2.8 3,386 3,378 0.2
Other. . . . . . . . . 36,612 40,811 (10.3) 136 172 (20.9)
------------ ------------ -------- ------- ------- -------
Regulated Total to
Ultimate Consumers. . 2,320,785 2,319,038 0.1 25,646 24,918 2.9
Other Electric Systems 33,673 82,643 (59.3) 1,227 3,082 (60.2)
Distribution of Energy 36,875 23,913 54.2 - -
Miscellaneous. . . . . 59,887 80,454 (25.6) - -
------------ ------------ -------- ------- ------- -------
Total Regulated . . . . . 2,451,220 2,506,048 (2.2) 26,873 28,000 (4.0)
UNREGULATED:
Wholesale & Retail . . 146,523 118,482 23.7 4,074 4,096 (0.5)
------------ ------------ -------- ------- ------- ------
TOTAL . . . . . . . . . . $ 2,597,743 $ 2,624,530 (1.0) 30,947 32,096 (3.6)
============ ============ ======== ======= ======= ======
</TABLE>
REGULATED ELECTRIC REVENUES decreased $54.8 million or 2.2% from the first nine
months of 1998. The new CSS system has converted all customers previously
billed on a bi-monthly basis to a monthly basis, which has resulted in an
increase in billed revenue and sales (GWh), with corresponding decreases in
accrued unbilled revenues. In accordance with POWERCHOICE, Niagara Mohawk
recognizes changes in accrued unbilled electric revenues in its results of
operations, whereas, in the first eight months of 1998, the effects of the
changes in accrued unbilled revenues were deferred. As a result, miscellaneous
revenues, which include the unbilled revenues, have decreased by approximately
$20.6 million. Commercial and industrial revenues have decreased in the first
nine months of 1999 as compared to 1998 due to lower POWERCHOICE rates and
commercial and industrial customers switching energy providers as a result of
open access. When customers choose an alternative supplier of energy, Niagara
Mohawk continues to collect delivery charges and the CTC, which are reflected in
the table above as "Distribution of Energy." The GWh that are delivered to the
customers who have chosen an alternative supplier are not included in the sales
amounts in the above table. In circumstances where Niagara Mohawk sells energy
to energy service companies for resale, those revenues are included in "Other
Electric Systems." Therefore, overall electric revenues were not materially
impacted by open access. Sales to other electric systems were also lower in the
first nine months of 1999 primarily due to reduced sales to one utility. There
were no significant unanticipated sales variances during the first nine months
of 1999.
UNREGULATED ELECTRIC REVENUES increased $28.0 million or 23.7% from the first
nine months of 1998 primarily as a result of Niagara Mohawk Energy increased
retail activities.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
GAS REVENUE (THOUSANDS) SALES (THOUSANDS OF DTH)
----------------------------------- -----------------------------
% %
1999 1998 Change 1999 1998 Change
---------- --------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
REGULATED:
Residential . . . . . $ 298,115 $ 291,794 2.2 40,883 36,828 11.0
Commercial. . . . . . 82,426 87,063 (5.3) 13,059 13,443 (2.9)
Industrial. . . . . . 1,951 2,838 (31.3) 449 589 (23.8)
---------- --------- ------- ------- -------- -------
Regulated Total to
Ultimate Consumers . 382,492 381,695 0.2 54,391 50,860 6.9
Transportation of
Customer-Owned Gas 42,007 40,519 3.7 101,918 101,987 (0.1)
Spot Market Sales . . 3,054 7,888 (61.3) 1,350 4,104 (67.1)
Miscellaneous . . . . 15,005 3,791 295.8 8 12 (33.3)
---------- --------- ------- ------- -------- -------
Total Regulated. . . . . 442,558 433,893 2.0 157,667 156,963 0.4
UNREGULATED:
Wholesale & Retail. . 22,662 29,567 (23.4) 8,127 11,550 (29.6)
---------- --------- ------- ------- -------- -------
TOTAL. . . . . . . . . . $ 465,220 $ 463,460 0.4 165,794 168,513 (1.6)
========== ========= ======= ======= ======== =======
</TABLE>
REGULATED GAS REVENUES increased $8.7 million or 2.0% in the first nine months
of 1999 from the comparable period in 1998, primarily as a result of an increase
in sales to residential customers, resulting from colder weather during first
quarter of 1999. Although residential sales increased, the cost of gas supplied
decreased. Since the cost of gas delivered is a pass-through to customers, gas
revenues will fluctuate as gas commodity costs fluctuate. Revenues and sales
also increased as a result of beginning to bill customers on a monthly basis
rather than a bi-monthly basis. Most customers that were billed on a bi-monthly
basis were residential. Pursuant to the gas settlement changes, in accrued
unbilled gas revenues are deferred. Miscellaneous gas revenues increased due to
revenue earned from revenue sharing mechanisms allowed in Niagara Mohawk's gas
rates as a result of lowering the cost of gas purchases. See Niagara Mohawk's
Form 10-K for the fiscal year ended December 31, 1998, Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Other Federal and State Regulatory Initiatives - Multi-Year Gas
Rate Settlement Agreement," for an explanation of Niagara Mohawk's rate
agreement and revenue sharing mechanisms.
UNREGULATED GAS REVENUES decreased $6.9 million or 23.4% in the first nine
months of 1999 from the comparable period in 1998, primarily as a result of
Niagara Mohawk Energy having reduced trading activity.
OPERATING EXPENSES
- - - ------------------
NINE MONTHS ENDED SEPTEMBER 30,
(NIAGARA MOHAWK ONLY)
<TABLE>
<CAPTION>
COST (MILLIONS) GWH CENTS/KWH
----------------------- ------------------------ ------------
1999 1998 % Chg 1999 1998 % Chg 1999 1998
---- ---- ----- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REGULATED FUEL FOR ELECTRIC GENERATION:
Coal . . . . . . . . . . . . . . . . $ 44.8 $ 87.8 (49.0) 2,989 5,873 (49.1) 1.5 1.5
Oil. . . . . . . . . . . . . . . . . 63.2 47.5 33.1 1,997 1,338 49.3 3.2 3.6
Natural Gas. . . . . . . . . . . . . 20.3 15.5 31.0 656 554 18.4 3.1 2.8
Nuclear. . . . . . . . . . . . . . . 25.9 27.1 (4.4) 5,321 5,639 (5.6) 0.5 0.5
Hydro. . . . . . . . . . . . . . . . - - - 1,396 2,200 (36.5) - -
--------- -------- ------- ------ ------ ------ --- ---
Sub-total electric generation . 154.2 177.9 (13.3) 12,359 15,604 (20.8) 1.2 1.1
Deferral . . . . . . . . . . . . . . 3.0 0.5 500.0
--------- -------- ------- ------ ------ ------ --- ---
Total electric generation . . . 157.2 178.4 (11.9) 12,359 15,604 (20.8) 1.3 1.1
--------- -------- ------- ------ ------ ------ --- ---
ELECTRICITY PURCHASED:
REGULATED:
IPPs:
Capacity . . . . . . . . . . . $ 9.8 $ 126.0 (92.2)
Energy and taxes . . . . . . . 255.7 535.8 (52.3) 5,256 8,014 (34.4) 4.9 6.7
Swap payments. . . . . . . . . 70.3 19.0 270.0
--------- -------- ------- ------ ------ ------ --- ---
Total IPP purchases . . . 335.8 680.8 (50.7) 5,256 8,014 (34.4) 6.4 8.5
Fossil/Hydro TPAs . . . . . . . . 70.0 - - 2,094 - - 3.3 -
Other purchases . . . . . . . . . 170.7 91.8 85.9 8,320 6,464 28.7 2.1 1.4
--------- -------- ------- ------ ------ ------ --- ---
Sub-total regulated purchases. 576.5 772.6 (25.4) 15,670 14,478 8.2 3.7 5.3
Deferral. . . . . . . . . . . . . (0.7) 94.1 (100.7)
--------- -------- ------- ------ ------ ------ --- ---
Total regulated purchases . . . 575.8 866.7 (33.6) 15,670 14,478 8.2 3.7 6.0
--------- -------- ------- ------ ------ ------ --- ---
Total . . . . . . . . $ 733.0 $1,045.1 (29.9) 28,029 30,082 (6.8) 2.6 3.5
========= ======== ======= ====== ====== ====== === ===
</TABLE>
Niagara Mohawk's ELECTRICITY PURCHASED decreased $290.9 million or 33.6% in the
first nine months of 1999, as a result of reduced purchases and payments to
IPPs. The decrease in IPP purchases is primarily the result of the MRA. The
decrease is partially offset by purchases under PPAs from Niagara Mohawk's
previously owned coal and hydro generation plants. Niagara Mohawk has also had
an increase in electricity purchases from other utilities to meet remaining load
requirements. In addition, Niagara Mohawk's 1998 purchased electricity costs
reflect $79 million in costs related to net reductions in payments to the IPP
Parties in July and August 1998, the benefits of which were deferred for future
rate making decisions. The IPP costs will be further reduced as Niagara Mohawk
negotiates settlements with other IPPs during 1999. However, purchased power
costs will trend upward in the future as Niagara Mohawk's generation asset sales
are completed and supply from owned generation is replaced by purchased power.
Niagara Mohawk's FUEL FOR ELECTRIC GENERATION decreased $21.2 million as
compared to the first nine months in 1998 primarily due to the sale of the two
coal-fired generation plants. The decrease in fuel costs was partially offset
by an increase in the generation in the remaining fossil generation plants, and
an increase in the fuel cost adjustment. In accordance with POWERCHOICE, the
electric fuel adjustment clause was discontinued. However, during the first
quarter of 1999, Niagara Mohawk recorded a $3.0 million liability to customers
resulting from PSC audit adjustments of prior years fuel costs.
Holdings' FUEL FOR ELECTRIC GENERATION and ELECTRICITY PURCHASED is explained by
Niagara Mohawk's activity, as well as an increase in unregulated supply costs of
$13.3 million or 10.6% in the first nine months of 1999, primarily due increased
sales requirements.
Niagara Mohawk's GAS PURCHASED expense decreased $17.9 million in the first
nine months of 1999. This was a result of a $18.3 million decrease in purchased
gas costs and certain other items recognized and recovered through the regulated
gas commodity cost adjustment clause, a 7.8 % decrease in the average cost per
Dth purchased ($15.7 million), and a $4.8 million decrease in spot market sales
(sales for resale), which are generally from higher priced gas, and therefore,
yield margins that are substantially lower than traditional sales to ultimate
customers. These decreases were offset by a 5.5 million increase in Dth
purchased and withdrawn from storage for ultimate consumers sales ($20.9
million). Niagara Mohawk's net cost per Dth sold, as charged to expense during
the first nine months, excluding spot market purchases, decreased to $3.79 in
1999 from $4.45 in 1998.
Holdings' GAS PURCHASED expense reflects Niagara Mohawk's activity, as well as a
decrease of $7.4 million in the first nine months of 1999 primarily as a result
of lower unregulated sales.
OTHER OPERATION AND MAINTENANCE EXPENSES for the first nine months of 1999 of
both Holdings and Niagara Mohawk have decreased primarily as a result of the
1998 ice storm charges incurred during the first quarter of 1998 and the charges
incurred during the third quarter of 1998 from the September 1998 wind storm.
DEPRECIATION AND AMORTIZATION EXPENSE for both Holdings and Niagara Mohawk have
increased for the first nine months of 1999 as a result of placing in service
several computer system projects with depreciable lives that are significantly
shorter than typical transmission and distribution assets. This increase is
partially offset by the sale of Niagara Mohawk's two coal-fired generation
plants and its hydro generation plants, which has had the effect of decreasing
depreciation expense by approximately $11 million during the first nine months
of 1999.
OTHER TAXES for both Holdings and Niagara Mohawk have decreased as compared to
the first nine months of 1998 primarily as a result of a reduction in the New
York State GRT tax rate beginning in October 1998, as well as a reduction in
property taxes of approximately $10.9 million in connection with the sale of
Niagara Mohawk's coal-fired and hydro generation plants.
In approving POWERCHOICE, the PSC ordered that any savings from any reduction
in the interest associated with the debt issued in connection with the MRA
financing as compared to assumptions underlying Niagara Mohawk's POWERCHOICE
filing be deferred for future disposition. Holdings and Niagara Mohawk's OTHER
INCOME decreased in part due to the recording of a regulatory liability relating
to the MRA debt interest rate savings liability of $20.2 million as compared to
the same period in 1998. The decrease in other income is also due to the
recording of approximately $44.6 million in 1998 on the deferral of MRA
financing costs. These decreases were partially offset by the recording of the
approximately $8.0 million incentive earned in 1999 on the sale of the fossil
and hydro generation assets.
Holdings and Niagara Mohawk's INTEREST CHARGES increased mainly due to the debt
incurred as part of the MRA.
The increase in Holdings and Niagara Mohawk's FEDERAL AND FOREIGN INCOME TAXES
is primarily due to higher book taxable income in the first nine months of 1999
as compared to 1998. Included in earnings for the first nine months of 1999 is
approximately $9.2 million of previously deferred income tax credits associated
with the two coal-fired generation plants and the hydro generation plants which
were sold. Niagara Mohawk believes this accounting is consistent with
applicable tax laws.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During June 1999, Niagara Mohawk completed the sale of its Huntley and Dunkirk
coal-fired generation plants. A part of the sales agreement, Niagara Mohawk
entered into two PPAs with NRG, which convert to financial swaps. As of
September 30, 1999, Niagara Mohawk has recorded an $82.6 million swap contract
liability for the present value difference between the contract energy prices
and projected market prices and has recorded a corresponding swap contract
regulatory asset. The discount rate used was 8.7%. The amount of the recorded
liability and regulatory asset is sensitive to changes in discount rate and
anticipated future market prices. However, these changes will not impact the
future cash flow of Niagara Mohawk when considering the all-in price of the
notional quantities of energy. See Item 1. Financial Statements, Note 3. Rate
and Regulatory Issues and Contingencies for a discussion regarding the terms of
these PPAs.
In connection with the pending sale of the Albany plant, Niagara Mohawk has
entered into a contract with the new owner that is intended to compensate PSEG
for the costs of running the plant. This contract expires on September 30,
2003. The agreement starts out as a contract to buy power and capacity but
converts to a financial agreement when the NYISO begins. Since the NYISO should
be in operation before the sale agreement is completed, the physical delivery
portion of the contract will probably not occur.
The Albany contract converts to an exchange of payments that are based on
the market price of energy. No actual energy will be delivered but a
quantity of energy, referred to as the call amount, is used to calculate the
payment. The call amount is capped each year and totals 1,300 GWh for the life
of the contract. The contract is a derivative instrument. Each month Niagara
Mohawk pays PSEG a fixed monthly charge plus the call amount times a contract
price. The contract price approximates the cost of fuel for the plant and will
fluctuate as fuel prices change. PSEG will pay Niagara Mohawk the same call
amount times the current market price for energy. This market price will be
determined by the NYISO. This exchange of payments is called a swap. Niagara
Mohawk has the sole option, within certain limits stated in the contract, to
decide what the call amount will be. This combination of a swap with one party
having an option is called a swaption. If the market price is expected to be
higher than the contract price Niagara Mohawk would likely exercise the option,
elect a call amount, and PSEG will make a swap payment to Niagara Mohawk. If
the market price is expected to be below the contract price Niagara Mohawk
would not likely choose to name a call amount. Regardless, Niagara Mohawk
is required to make the fixed monthly payment. For Niagara Mohawk this contract
will serve as a hedge against rising energy prices. Niagara Mohawk expects to
account for this contract as a hedge of future purchase commitments upon the
closing of the sale. The costs associated with the Albany contract are
recoverable under Niagara Mohawk's POWERCHOICE rates.
In the third quarter of 1999, Niagara Mohawk entered into two agreements
expiring in less than one year, where two agents would purchase up to 9 million
shares of Holdings' common stock on Niagara Mohawk's behalf. Niagara Mohawk can
settle the agreements by either repurchasing the common stock from the agents in
cash at the agent's acquisition price plus a carrying charge or reimbursing the
agents through an exchange of stock. The two agents have incurred a total of
approximately $140.3 million or $15.60 per share to purchase the 9 million
shares. If Niagara Mohawk settles the agreements in stock and the settlement
share price is below the acquisition price paid by the agents the transaction
would have a dilutive effect on the share value. It is, however, Niagara
Mohawk's intent to settle these agreements in cash.
There were no material changes in Holdings market risk or market risk strategies
during the nine months ended September 30, 1999. For a detailed discussion of
market risk, see Niagara Mohawk's Form 10-K for fiscal period ended December 31,
1998, Part II, Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
PART II
-------
ITEM 1. LEGAL ROCEEDINGS
Inter-Power Litigation
- - - ----------------------
In March 1993, Inter-Power of New York, Inc. ("Inter-Power") filed a complaint
against Niagara Mohawk and certain of its officers and employees in the NYS
Supreme Court. Inter-Power alleged, among other matters, fraud, negligent
misrepresentation and breach of contract in connection with Niagara Mohawk's
alleged termination of a PPA in January 1993. The plaintiff sought enforcement
of the original contract or compensatory and punitive damages in an aggregate
amount that would not exceed $1 billion, excluding pre-judgment interest.
In early 1994, the NYS Supreme Court dismissed two of the plaintiff's claims;
this dismissal was upheld by the Appellate Division, Third Department of the NYS
Supreme Court. Subsequently, the NYS Supreme Court granted Niagara Mohawk's
motion for summary judgment on the remaining causes of action in Inter-Power's
complaint. In August 1994, Inter-Power appealed this decision and on July 27,
1995, the Appellate Division, Third Department affirmed the granting of summary
judgment as to all counts, except for one dealing with an alleged breach of the
PPA relating to Niagara Mohawk's having declared the agreement null and void on
the grounds that Inter-Power had failed to provide it with information regarding
its fuel supply in a timely fashion. This one breach of contract claim was
remanded to the NYS Supreme Court for further consideration. In January 1998,
the NYS Supreme Court granted Niagara Mohawk's motion for summary judgment on
the sole remaining claim in this lawsuit and dismissed this lawsuit in its
entirety. In January 1998, Inter-Power filed a notice of appeal and perfected
the appeal in October 1998. The appeal was argued before the Appellate
Division, Third Department, on January 15, 1999. On March 18, 1999, the
Appellate Division, Third Department affirmed the dismissal of the last
remaining cause of action. On April 30, 1999, Inter-Power filed with the Court
of Appeals a motion seeking leave of court to file an appeal in this matter and
on May 10, 1999, Niagara Mohawk filed its response. On July 1, 1999, the Court
of Appeals denied Inter-Power's motion. Inter-Power's time to appeal this
decision has expired.
Fourth Branch Litigation
-----------------------
In November 1993, Fourth Branch Associates Mechanicville ("Fourth Branch") filed
an action against Niagara Mohawk and several of its officers and employees in
the NYS Supreme Court, seeking compensatory damages of $50 million, punitive
damages of $100 million and injunctive and other related relief. The lawsuit
grows out of Niagara Mohawk's termination of a contract for Fourth Branch to
operate and maintain a hydroelectric plant Niagara Mohawk owned in the Town of
Halfmoon, New York. Fourth Branch's complaint also alleges claims based on the
inability of Fourth Branch and Niagara Mohawk to agree on terms for the purchase
of power from a new facility that Fourth Branch hoped to construct at the
Mechanicville site. In January 1994, Niagara Mohawk filed a motion to dismiss
Fourth Branch's complaint. By order dated November 7, 1995, the Court granted
Niagara Mohawk's motion to dismiss the complaint in its entirety. Fourth Branch
filed an appeal from the Court's order. On January 30, 1997, the Appellate
Division modified the November 7, 1995 court decision by reversing the dismissal
of the fourth and fifth causes of action set forth in Fourth Branch's complaint.
Niagara Mohawk and Fourth Branch had also entered into negotiations under a
FERC mediation process. As a result of these negotiations, Niagara Mohawk had
proposed to sell the hydroelectric plant to Fourth Branch for an amount which
would not be material. In addition, the proposal included a provision that
would require the discontinuance of all litigation between the parties.
Attempts to implement this proposal have been unsuccessful, and Niagara Mohawk
informed FERC that its participation in the mediation efforts was concluded.
On January 14, 1997, the FERC Administrative Law Judge issued a report to FERC
recommending that the mediation proceeding be terminated, leaving outstanding a
Fourth Branch complaint to FERC that alleges anti-competitive conduct by Niagara
Mohawk. Niagara Mohawk has made a motion to dismiss Fourth Branch's antitrust
complaint before the FERC, which motion was opposed by Fourth Branch. A
decision from FERC on this matter is pending.
During July 1998, Fourth Branch commenced a condemnation proceeding in Federal
District Court to obtain title to the project property and also has made a
unilateral offer of settlement before FERC. Niagara Mohawk served an answer
with various affirmative defenses. On July 30, 1998, Fourth Branch moved for
Summary Judgment. Niagara Mohawk opposed Fourth Branch's motion and cross-moved
for summary judgment in favor of Niagara Mohawk. The Court granted Niagara
Mohawk's motion for summary judgment on September 1, 1999. Subsequently, on
September 10, 1999, Fourth Branch filed an amended unilateral offer of
settlement with FERC. On September 30, 1999, Niagara Mohawk filed its response
and objection to the amended offer of settlement.
Niagara Mohawk is unable to predict the ultimate disposition of the lawsuit
referred to above. However, Niagara Mohawk believes it has meritorious defenses
and intends to defend this lawsuit vigorously. No provision for liability, if
any, that may result from this lawsuit has been made in Niagara Mohawk's
financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11 - Computation of the Average Number of Shares of Common Stock
Outstanding for the Three Months and Nine Months Ended September 30, 1999
and 1998.
Exhibit 12a - Statement Showing Computations of Ratio of Earnings to Fixed
Charges for the Twelve Months Ended September 30, 1999 for Niagara Mohawk
Holdings, Inc.
Exhibit 12b - Statement Showing Computations of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends for the Twelve Months Ended September 30, 1999 for Niagara
Mohawk Power Corporation.
Exhibit 15 - Accountants' Acknowledgement Letter
Exhibit 27a - Financial Data Schedule for Niagara Mohawk Holdings, Inc.
Exhibit 27b - Financial Data Schedule for Niagara Mohawk Power Corporation
In accordance with Paragraph 4(iii) of Item 601(b) of Regulation S-K,
Niagara Mohawk agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of the agreements comprising the $804
million senior debt facility that Niagara Mohawk completed with a bank
group during March 1996 and subsequently amended (effective June 30, 1998).
The total amount of long-term debt authorized under such agreement does
not exceed ten percent of the total consolidated assets of Niagara Mohawk
and its subsidiaries.
(b) Reports on Form 8-K:
NIAGARA MOHAWK HOLDINGS, INC.
-----------------------------
Form 8-K Reporting Date - September 30, 1999
Items Reported:
(1) Item 5. Other Events.
(a) The registrant filed a letter from the NRC regarding Mid-cycle
Plant Performance Review - Nine Mile Point Nuclear Station.
(b) The registrant filed a press release announcing an agreement
to sell Niagara Mohawk's Albany oil and gas-fired generation
station.
(2) Item 7. Financial Statements and Exhibits.
Exhibits required to be filed by Item 601 of Regulation S-K.
Form 8-K Reporting Date - October 29, 1999
Items Reported:
(1) Item 5. Other Events.
Registrant filed press release regarding 1999-third quarter earnings.
(2) Item 7. Financial Statements and Exhibits.
Exhibits required to be filed by Item 601 of Regulation S-K.
NIAGARA MOHAWK POWER CORPORATION
--------------------------------
Form 8-K Reporting Date - September 30, 1999
Items Reported:
(1) Item 5. Other Events.
(a) The registrant filed a letter from the NRC regarding
Mid-cycle Plant Performance Review - Nine Mile Point
Nuclear Station.
(b) The registrant filed its press release announcing an
agreement to sell its Albany oil and gas-fired generation
station.
(2) Item 7. Financial Statements and Exhibits.
Exhibits required to be filed by Item 601 of Regulation S-K.
Form 8-K Reporting Date - October 29, 1999
Items Reported:
(1) Item 5. Other Events.
Registrant filed press release regarding 1999-third quarter
earnings of Holdings.
(2) Item 7. Financial Statements and Exhibits.
Exhibits required to be filed by Item 601 of Regulation S-K.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
NIAGARA MOHAWK HOLDINGS, INC.
(Registrant)
Date: November 10, 1999 By /s/Steven W. Tasker
-----------------------------
Steven W. Tasker
Vice President-Controller and
Principal Accounting Officer
NIAGARA MOHAWK POWER CORPORATION
(Registrant)
Date: November 10, 1999 By /s/Steven W. Tasker
-----------------------------
Steven W. Tasker
Vice President-Controller and
Principal Accounting Officer
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
EXHIBIT INDEX
Exhibit
Number Description
- - - ------- -----------
11 NIAGARA MOHAWK HOLDINGS, INC.
Computation of the Average Number of Shares
of Common Stock Outstanding for the Three
Months and Nine Months Ended September 30, 1999
and 1998
12a NIAGARA MOHAWK HOLDINGS, INC.
Statement Showing Computations of Ratio of
Earnings to Fixed Charges for the Twelve Months
Ended September 30, 1999
12b NIAGARA MOHAWK POWER CORPORATION
Statement Showing Computations of Ratio of
Earnings to Fixed Charges and Ratio of
Earnings to Fixed Charges and Preferred Stock
Dividends for the Twelve Months Ended
September 30, 1999
15 Accountants' Acknowledgement Letter
27a NIAGARA MOHAWK HOLDINGS, INC.
Financial Data Schedule
27b NIAGARA MOHAWK POWER CORPORATION
Financial Data Schedule
<PAGE>
EXHIBIT 11
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
Computation of the Average Number of Shares of Common Stock Outstanding
For the Three Months and Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
(4)
Average Number of
Shares Outstanding
As Shown on the
Consolidated
(1) (2) (3) Statement of
Shares of Number of Share Income
Common Days Days (3 divided by number
Stock Outstanding (2 x 1) of Days in Period)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Three Months Ended September 30:
----------------------------------------
JULY 1 - SEPTEMBER 30, 1999. . . . . . . 187,364,863 92 17,237,567,396 187,364,863
============ =============== ============
July 1 - September 30, 1998. . . . . . . 187,364,863 92 17,237,567,396 187,364,863
============ =============== ============
For the Nine Months Ended September 30:
----------------------------------------
MARCH 18 - SEPTEMBER 30, 1999. . . . . . 187,364,863 197 36,910,878,011 187,364,863
============ =============== ============
January 1 - September 30, 1998 . . . . . 144,419,351 273 39,426,482,823
Shares issued in accordance
with the MRA Agreement -
June 30 . . . . . . . . . . . . . . . 42,945,512 93 3,993,932,616
------------ ---------------
187,364,863 43,420,415,439 159,049,141
============ =============== ============
</TABLE>
Note 1: On March 18, 1999, the common stock of Niagara Mohawk was exchanged
on a share-for-share basis with Holdings. The number of shares of
common stock outstanding for the three months and nine months ended
September 30, 1998 is Niagara Mohawk's.
Note 2: Earnings per share calculated on both a primary and fully
diluted basis are the same due to the effects of rounding.
Note 3: See Part I, Item 2. Management's Discussion and Analysis of
Financial Condition, "Financial Position" for a discussion of
Niagara Mohawk's plan to repurchase Holdings' common stock.
<PAGE>
EXHIBIT 12A
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
Statement Showing Computation of Ratio of Earnings to Fixed Charges
for the Twelve Months Ended September 30, 1999
(in thousands of dollars)
<TABLE>
<CAPTION>
<S> <C>
A. Net Income (Loss) . . . . . . . . . . . . . . . $(43,379)
B. Taxes Based on Income or Profits. . . . . . . . (5,641)
---------
C. Earnings, Before Income Taxes . . . . . . . . . (49,020)
D. Fixed Charges (a) . . . . . . . . . . . . . . . 580,192
---------
E. Earnings Before Income Taxes and Fixed Charges. $531,172
=========
F. Ratio of Earnings to Fixed Charges (E/D) . . . 0.92
=========
</TABLE>
(a) Includes a portion of rentals deemed representative of the interest
factor ($25,679) and earnings required to cover subsidiary preferred
stock dividends ($36,063).
<PAGE>
EXHIBIT 12B
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
Statement Showing Computation of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
for the Twelve Months Ended September 30, 1999
(in thousands of dollars)
<TABLE>
<CAPTION>
<S> <C>
A. Net Income (Loss) . . . . . . . . . . . . . . . $ (8,683)
B. Taxes Based on Income or Profits. . . . . . . . (6,874)
----------------
C. Earnings, Before Income Taxes . . . . . . . . . (15,557)
D. Fixed Charges (a). . . . . . . . . . . . . . . 544,129
----------------
E. Earnings Before Income Taxes and Fixed Charges. $ 528,572
================
Preferred Dividend Factor:
H. Preferred Dividend Requirements . . . . . . . . $ 36,063
I. Ratio of Pre-tax Income to Net Income (C / A) . NOT APPLICABLE
----------------
J. Preferred Dividend Factor (H x I) . . . . . . . 36,063
K. Fixed Charges as Above (D). . . . . . . . . . . 544,129
----------------
L. Fixed Charges and Preferred Dividends Combined. $ 580,192
================
M. Ratio of Earnings to Fixed Charges (E / D). . . 0.97
================
N. Ratio of Earnings to Fixed Charges and
Preferred Dividends Combined (E / L) . . . . 0.91
================
</TABLE>
(a) Includes a portion of rentals deemed representative of the
interest factor ($25,679)
<PAGE>
EXHIBIT 15
November 10, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that our report dated November 10, 1999 on our review of interim
financial information of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power
Corporation as of and for the three-month and nine-month periods ended September
30, 1999 and included in Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power
Corporation quarterly report on Form 10-Q for the quarter then ended is
incorporated by reference in Niagara Mohawk Holdings, Inc. Registration
Statement on Form S-8 (No. 333-13781) and in the Prospectus constituting part
of the Registration Statement on Form S-3 (No. 333-55923); and incorporated by
reference in Niagara Mohawk Power Corporation Registration Statements on Form
S-8 (Nos. 33-36189 and 33-42771) and in the Prospectus constituting part of
the Registration Statements on Form S-3 (Nos. 33-50703, 33-51073, 33-54827,
and 33-55546) and in the Prospectus/Proxy Statement constituting part of the
Registration Statement on Form S-4 (No. 333-49769).
Yours very truly,
/s/PricewaterhouseCoopers LLP
- - - -----------------------------
PRICEWATERHOUSECOOPERS LLP
1
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME, AND
CONSOLIDATED STATEMENT OF CASH FLOWS OF NIAGARA MOHAWK HOLDINGS, INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001079182
<NAME> Niagara Mohawk Holdings, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 6182099
<OTHER-PROPERTY-AND-INVEST> 466687
<TOTAL-CURRENT-ASSETS> 870912
<TOTAL-DEFERRED-CHARGES> 5324583
<OTHER-ASSETS> 106895
<TOTAL-ASSETS> 12951176
<COMMON> 1874
<CAPITAL-SURPLUS-PAID-IN> 2521541
<RETAINED-EARNINGS> 629118
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3152533
61370
440000
<LONG-TERM-DEBT-NET> 5382844
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 273621
7620
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3633188
<TOT-CAPITALIZATION-AND-LIAB> 12951176
<GROSS-OPERATING-REVENUE> 3067682
<INCOME-TAX-EXPENSE> 23570
<OTHER-OPERATING-EXPENSES> 2636360
<TOTAL-OPERATING-EXPENSES> 2636360
<OPERATING-INCOME-LOSS> 431322
<OTHER-INCOME-NET> 4065
<INCOME-BEFORE-INTEREST-EXPEN> 435387
<TOTAL-INTEREST-EXPENSE> 377896
<NET-INCOME> (16922)
27039
<EARNINGS-AVAILABLE-FOR-COMM> (16922)
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 587311
<EPS-BASIC> (.09)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME, AND
CONSOLIDATED STATEMENT OF CASH FLOWS OF NIAGARA MOHAWK POWER CORPORATION
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000071932
<NAME> Niagara Mohawk Power Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 6182099
<OTHER-PROPERTY-AND-INVEST> 334967
<TOTAL-CURRENT-ASSETS> 786701
<TOTAL-DEFERRED-CHARGES> 5324583
<OTHER-ASSETS> 106635
<TOTAL-ASSETS> 12734985
<COMMON> 187365
<CAPITAL-SURPLUS-PAID-IN> 2358647
<RETAINED-EARNINGS> 419567
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2965579
61370
440000
<LONG-TERM-DEBT-NET> 5382844
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 273621
7620
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3603951
<TOT-CAPITALIZATION-AND-LIAB> 12734985
<GROSS-OPERATING-REVENUE> 2893778
<INCOME-TAX-EXPENSE> 22337
<OTHER-OPERATING-EXPENSES> 2458024
<TOTAL-OPERATING-EXPENSES> 2458024
<OPERATING-INCOME-LOSS> 435754
<OTHER-INCOME-NET> (2967)
<INCOME-BEFORE-INTEREST-EXPEN> 432787
<TOTAL-INTEREST-EXPENSE> 377896
<NET-INCOME> 8750
27039
<EARNINGS-AVAILABLE-FOR-COMM> (18289)
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 617514
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
