SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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 JUNE 30, 2000
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
Telephone 315.474.1511
1-2987 NIAGARA MOHAWK POWER CORPORATION 15-0265555
(a New York corporation)
300 Erie Boulevard West
Syracuse, New York 13202
Telephone 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 July 31, 2000, were as follows:
Shares
Registrant Title Outstanding
-------------------------------- ----------------------------- ----------------
Niagara Mohawk Holdings, Inc. Common Stock, $0.01 par value 160,403,645
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 - "Holding Company Formation"). 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 June 30, 2000
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 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
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 the
Power Choice 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, amortization/
accretion of MRA/IPP buyout costs, deferral of MRA interest
rate savings, and extraordinary items. EBITDA may not be
comparable to similarly titled measures used by other companies.
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 - an 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 the Power Choice agreement
MW Megawatt: one million watts
NRC Nuclear Regulatory Commission
NYISO New York Independent System Operator
Power Choice 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 became effective September 1, 1998
PPA Power Purchase Agreement: long-term contracts under which a utility
is obligated to purchase electricity from an IPP at specified rates
Provider of The entity that will provide electric and gas commodity to its
last resort customers who are unable or unwilling to obtain an alternative
supplier
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"
SFAS Statement of Financial Accounting Standards No. 121
No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of"
Stranded Regulated utility costs that may become unrecoverable due to a
costs change in the regulatory environment
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
(in thousands of dollars)
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . . . $ 893,145 $ 786,509 $1,822,414 $1,651,187
Gas . . . . . . . . . . . . . . . . . . . . . . 151,838 127,804 416,177 382,211
Other . . . . . . . . . . . . . . . . . . . . . 511 8 1,488 57
-------------------- -------------- ----------- -----------
1,045,494 914,321 2,240,079 2,033,455
-------------------- -------------- ----------- -----------
OPERATING EXPENSES:
Electricity purchased . . . . . . . . . . . . . 407,582 219,787 782,637 395,079
Fuel for electric generation. . . . . . . . . . 15,644 47,010 28,974 104,104
Gas purchased . . . . . . . . . . . . . . . . . 79,994 56,526 236,980 171,784
Other operation and maintenance expenses. . . . 224,501 225,623 447,369 438,278
Amortization/accretion of MRA/IPP buyout costs. 93,978 90,948 187,636 181,261
Depreciation and amortization . . . . . . . . . 78,362 94,109 156,312 188,925
Other taxes (Note 1). . . . . . . . . . . . . . 70,442 99,165 138,774 221,022
-------------------- -------------- ----------- -----------
970,503 833,168 1,978,682 1,700,453
-------------------- -------------- ----------- -----------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . 74,991 81,153 261,397 333,002
Other income (deductions) . . . . . . . . . . . . . . 2,553 (2,011) (2,365) (3,414)
-------------------- -------------- ----------- -----------
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . 77,544 79,142 259,032 329,588
Interest charges. . . . . . . . . . . . . . . . . . . 109,565 129,960 220,897 260,235
Preferred dividend requirement of subsidiary. . . . . 7,904 9,024 15,808 18,048
-------------------- -------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . (39,925) (59,842) 22,327 51,305
Income taxes (Note 1) . . . . . . . . . . . . . . . . (21,116) (34,545) 26,662 25,770
-------------------- -------------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM . . . . . . . (18,809) (25,297) (4,335) 25,535
Extraordinary item - Loss from the extinguishment
of debt, net of income taxes of $489
and $5,789, respectively (Note 5). . . . . . . . . (909) (10,750) (909) (10,750)
-------------------- -------------- ----------- -----------
NET INCOME (LOSS) (NOTE 1). . . . . . . . . . . . . . $ (19,718) $ (36,047) $ (5,244) $ 14,785
==================== ============== =========== ===========
Average number of shares of common stock
outstanding (in thousands) . . . . . . . . . . . . 171,088 187,365 174,220 187,365
BASIC AND DILUTED EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK BEFORE EXTRAORDINARY ITEM. . . . . $ (0.11) $ (0.13) $ (0.02) $ 0.14
EXTRAORDINARY ITEM PER AVERAGE SHARE OF
COMMON STOCK . . . . . . . . . . . . . . . . . . . (0.01) (0.06) (0.01) (0.06)
-------------------- -------------- ----------- -----------
BASIC AND DILUTED EARNINGS (LOSS) PER AVERAGE
SHARE OF COMMON STOCK. . . . . . . . . . . . . . . $ (0.12) $ (0.19) $ (0.03) $ 0.08
==================== ============== =========== ===========
</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>
JUNE 30,
2000 December 31,
(UNAUDITED) 1999
----------- -------------
(in thousands of dollars)
<S> <C> <C>
UTILITY PLANT:
Electric plant. . . . . . . . . . . . . . . . . . $ 7,136,781 $ 7,221,762
Nuclear fuel. . . . . . . . . . . . . . . . . . . 647,557 630,321
Gas plant . . . . . . . . . . . . . . . . . . . . 1,289,098 1,263,168
Common plant. . . . . . . . . . . . . . . . . . . 373,946 364,718
Construction work-in-progress . . . . . . . . . . 294,335 312,322
----------- -------------
TOTAL UTILITY PLANT . . . . . . . . . 9,741,717 9,792,291
Less - Accumulated depreciation and amortization. 3,955,602 3,904,049
----------- -------------
NET UTILITY PLANT . . . . . . . . . . 5,786,115 5,888,242
----------- -------------
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . 456,801 484,735
----------- -------------
CURRENT ASSETS:
Cash, including temporary cash investments
of $152,064 and $90,029, respectively. . . . . 187,432 116,164
Account receivable (less allowance for doubtful
accounts of $63,400 and $61,400, respectively) 448,908 373,510
Materials and supplies, at average cost:
Oil for production of electricity. . . . . . . 3,257 9,263
Gas storage. . . . . . . . . . . . . . . . . . 38,040 39,166
Other. . . . . . . . . . . . . . . . . . . . . 87,314 90,605
Prepaid taxes . . . . . . . . . . . . . . . . . . 56,658 21,489
Other . . . . . . . . . . . . . . . . . . . . . . 37,233 24,042
----------- -------------
858,842 674,239
----------- -------------
REGULATORY ASSETS (NOTE 3):
MRA regulatory asset. . . . . . . . . . . . . . . 3,507,066 3,686,019
Swap contracts regulatory asset . . . . . . . . . 603,812 505,723
Regulatory tax asset. . . . . . . . . . . . . . . 483,546 483,546
IPP buyout costs. . . . . . . . . . . . . . . . . 248,470 260,873
Deferred environmental restoration costs (Note 2) 240,000 240,000
Deferred loss on sale of assets . . . . . . . . . 163,097 135,229
Postretirement benefits other than pensions . . . 47,056 48,937
Unamortized debt expense. . . . . . . . . . . . . 42,330 44,903
Other . . . . . . . . . . . . . . . . . . . . . . 112,966 112,556
----------- -------------
5,448,343 5,517,786
----------- -------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . 97,951 105,433
----------- -------------
$12,648,052 $ 12,670,435
=========== =============
</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>
JUNE 30,
2000 December 31,
(UNAUDITED) 1999
------------ --------------
<S> <C> <C>
(in thousands of dollars)
CAPITALIZATION (NOTE 1):
COMMON STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value; authorized 300,000,000 shares,
issued 187,364,863 shares; outstanding 164,399,547
and 177,364,863 shares, respectively . . . . . . . . . . . . $ 1,874 $ 1,874
Treasury stock, at cost, 22,965,316 and 10,000,000
shares, respectively . . . . . . . . . . . . . . . . . . . . (347,335) (157,167)
Capital stock premium and expense . . . . . . . . . . . . . . . 2,547,135 2,546,630
Accumulated other comprehensive income. . . . . . . . . . . . . (28,216) (26,200)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 605,708 610,952
------------ --------------
2,779,166 2,976,089
PREFERRED STOCK OF SUBSIDIARY:
Not subject to mandatory redemption . . . . . . . . . . . . . . 440,000 440,000
Subject to mandatory redemption . . . . . . . . . . . . . . . . 59,570 61,370
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,006,891 5,042,588
------------ --------------
TOTAL CAPITALIZATION . . . . . . . . . . . . . . . . . . 8,285,627 8,520,047
------------ --------------
CURRENT LIABILITIES:
Long-term debt due within one year . . . . . . . . . . . . . . . . . . 562,038 613,740
Sinking fund requirements on redeemable preferred
stock of subsidiary. . . . . . . . . . . . . . . . . . . . . . . . 7,620 7,620
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,769 288,223
Payable on outstanding bank checks . . . . . . . . . . . . . . . . . . 18,776 22,067
Customers' deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 17,619 15,255
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,340 1,408
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,409 67,593
Accrued vacation pay . . . . . . . . . . . . . . . . . . . . . . . . . 35,016 35,334
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,773 67,068
------------ --------------
1,158,360 1,118,308
------------ --------------
REGULATORY AND OTHER LIABILITIES (NOTE 3):
Accumulated deferred income taxes. . . . . . . . . . . . . . . . . . . 1,595,499 1,568,957
Liability for swap contracts . . . . . . . . . . . . . . . . . . . . . 759,373 663,718
Employee pension and other benefits. . . . . . . . . . . . . . . . . . 224,758 226,223
Unbilled gas revenues. . . . . . . . . . . . . . . . . . . . . . . . . 9,252 14,552
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,183 318,630
------------ --------------
2,964,065 2,792,080
------------ --------------
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 3):
Liability for environmental restoration. . . . . . . . . . . . . . . . 240,000 240,000
------------ --------------
$12,648,052 $ 12,670,435
============ ==============
</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>
SIX MONTHS ENDED JUNE 30,
2000 1999
------------ -----------
<S> <C> <C>
(in thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,244) $ 14,785
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 156,312 188,925
Amortization/accretion of MRA/IPP buyout costs . . . . . . . . . . . 187,636 181,261
Amortization of nuclear fuel . . . . . . . . . . . . . . . . . . . . 13,891 13,549
Extraordinary loss on extinguishment of debt, net of taxes . . . . . 887 2,294
Provision for deferred income taxes. . . . . . . . . . . . . . . . . 27,019 8,101
Net accounts receivable (net of changes in accounts receivable sold) (80,698) (115,686)
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . 5,488 44,815
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . (1,359) (21,230)
Accrued interest and taxes . . . . . . . . . . . . . . . . . . . . . 83,748 59,635
Changes in MRA and IPP buyout costs regulatory assets. . . . . . . . 17,165 (22,237)
Deferral of MRA interest rate savings. . . . . . . . . . . . . . . . 10,829 16,804
Refundable income taxes. . . . . . . . . . . . . . . . . . . . . . . - 130,411
Changes in other assets and liabilities. . . . . . . . . . . . . . . (16,712) (33,829)
------------ ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . 398,962 467,598
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction additions. . . . . . . . . . . . . . . . . . . . . . . . . . . (89,901) (110,839)
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,236) (23,572)
------------ ----------
Acquisition of utility plant . . . . . . . . . . . . . . . . . . . . . . (107,137) (134,411)
Materials and supplies related to construction. . . . . . . . . . . . . . . 444 8,213
Accounts payable and accrued expenses related to construction . . . . . . . (340) (5,307)
Proceeds from the sale of generation assets . . . . . . . . . . . . . . . . 47,500 355,000
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,380 28,217
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,009 4,932
------------ ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . . . (29,144) 256,644
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds held by trustee for refunding of debt . . . . . . . . . . . . . . . . - (158,805)
Reduction in preferred stock of subsidiary. . . . . . . . . . . . . . . . . (1,800) (1,800)
Reduction in long-term debt . . . . . . . . . . . . . . . . . . . . . . . . (307,291) (155,020)
Proceeds from long-term debt. . . . . . . . . . . . . . . . . . . . . . . . 200,000 -
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . (190,168) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 709 (4,721)
------------ ----------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . . . . . . (298,550) (320,346)
------------ ----------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,268 403,896
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . 116,164 172,998
------------ ----------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 187,432 $ 576,894
============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 164,805 $ 247,507
Income taxes paid (refunded) . . . . . . . . . . . . . . . . . . . . . . $ 112 $(126,584)
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
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.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------------- ------------- ----------- -----------
(in thousands of dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . . . $ 770,226 $ 747,886 $1,598,272 $1,597,632
Gas . . . . . . . . . . . . . . . . . . . . . . 136,978 122,575 382,825 368,850
907,204 870,461 1,981,097 1,966,482
-------------- ------------- ----------- -----------
OPERATING EXPENSES:
Electricity purchased . . . . . . . . . . . . . 286,192 183,359 566,082 344,324
Fuel for electric generation. . . . . . . . . . 15,644 47,010 28,974 104,104
Gas purchased . . . . . . . . . . . . . . . . . 65,533 51,414 203,965 158,760
Other operation and maintenance expenses. . . . 219,856 222,298 437,512 431,902
Amortization/accretion of MRA/IPP buyout costs. 93,978 90,948 187,636 181,261
Depreciation and amortization . . . . . . . . . 78,212 93,979 156,044 188,671
Other taxes (Note 1). . . . . . . . . . . . . . 70,257 98,989 138,252 220,711
-------------- ------------- ----------- -----------
829,672 787,997 1,718,465 1,629,733
-------------- ------------- ----------- -----------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . 77,532 82,464 262,632 336,749
Other deductions. . . . . . . . . . . . . . . . . . . (27) (4,068) (7,392) (7,907)
-------------- ------------- ----------- -----------
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . 77,505 78,396 255,240 328,842
Interest charges. . . . . . . . . . . . . . . . . . . 109,565 129,960 220,897 260,235
-------------- ------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . (32,060) (51,564) 34,343 68,607
Income taxes (NOTE 1) . . . . . . . . . . . . . . . . (20,283) (34,651) 25,287 25,664
-------------- ------------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM . . . . . . . (11,777) (16,913) 9,056 42,943
Extraordinary item - Loss from the extinguishment
of debt, net of income taxes of $489
and $5,789, respectively (Note 5). . . . . . . . . (909) (10,750) (909) (10,750)
-------------- ------------- ----------- -----------
NET INCOME (LOSS) (NOTE 1). . . . . . . . . . . . . . (12,686) (27,663) 8,147 32,193
Dividends on preferred stock. . . . . . . . . . . . . 7,904 9,024 15,808 18,048
-------------- ------------- ----------- -----------
BALANCE AVAILABLE FOR COMMON STOCK. . . . . . . . . . $ (20,590) $ (36,687) $ (7,661) $ 14,145
============== ============= =========== ===========
</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>
JUNE 30,
2000 December 31,
(UNAUDITED) 1999
------------ --------------
(in thousands of dollars)
<S> <C> <C>
UTILITY PLANT:
Electric plant. . . . . . . . . . . . . . . . . . $ 7,136,781 $ 7,221,762
Nuclear fuel. . . . . . . . . . . . . . . . . . . 647,557 630,321
Gas plant . . . . . . . . . . . . . . . . . . . . 1,289,098 1,263,168
Common plant. . . . . . . . . . . . . . . . . . . 373,946 364,718
Construction work-in-progress . . . . . . . . . . 294,335 312,322
----------- -------------
TOTAL UTILITY PLANT . . . . . . . . . 9,741,717 9,792,291
Less - Accumulated depreciation and amortization. 3,955,602 3,904,049
----------- -------------
NET UTILITY PLANT . . . . . . . . . . 5,786,115 5,888,242
----------- -------------
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . 367,791 349,718
----------- -------------
CURRENT ASSETS:
Cash, including temporary cash investments
of $60,993 and $58,276, respectively . . . . . 84,369 72,479
Account receivable (less allowance for doubtful
accounts of $61,200 and $59,400, respectively) 371,948 331,222
Materials and supplies, at average cost:
Oil for production of electricity. . . . . . . 3,257 9,263
Gas storage. . . . . . . . . . . . . . . . . . 37,064 38,252
Other. . . . . . . . . . . . . . . . . . . . . 87,314 90,605
Prepaid taxes . . . . . . . . . . . . . . . . . . 56,658 21,489
Other . . . . . . . . . . . . . . . . . . . . . . 26,624 22,668
----------- -------------
667,234 585,978
----------- -------------
REGULATORY ASSETS (NOTE 3):
MRA regulatory asset. . . . . . . . . . . . . . . 3,507,066 3,686,019
Swap contracts regulatory asset . . . . . . . . . 603,812 505,723
Regulatory tax asset. . . . . . . . . . . . . . . 483,546 483,546
IPP buyout costs. . . . . . . . . . . . . . . . . 248,470 260,873
Deferred environmental restoration costs (NOTE 2) 240,000 240,000
Deferred loss on sale of assets . . . . . . . . . 163,097 135,229
Postretirement benefits other than pensions . . . 47,056 48,937
Unamortized debt expense. . . . . . . . . . . . . 42,330 44,903
Other . . . . . . . . . . . . . . . . . . . . . . 112,966 112,556
----------- -------------
5,448,343 5,517,786
----------- -------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . 95,115 103,884
----------- -------------
$12,364,598 $ 12,445,608
=========== =============
</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>
JUNE 30,
2000 December 31,
(UNAUDITED) 1999
------------ ------------
(in thousands of dollars)
<S> <C> <C>
CAPITALIZATION:
COMMON STOCKHOLDERS' EQUITY:
Common stock - $1.00 par value; authorized 250,000,000 shares;
issued and outstanding 187,364,863 shares. . . . . . . . . . . $ 187,365 $ 187,365
Repurchase of Holdings' common stock, at cost. . . . . . . . . . . (347,335) (157,167)
Capital stock premium and expense. . . . . . . . . . . . . . . . . 2,361,644 2,361,139
Accumulated other comprehensive income . . . . . . . . . . . . . . (4,949) (5,153)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . 355,194 398,987
------------ --------------
2,551,919 2,785,171
------------ --------------
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 168,000 shares . . . . 15,000 16,800
and 186,000 shares, respectively
CUMULATIVE PREFERRED STOCK, AUTHORIZED 19,600,000 SHARES, $25 PAR VALUE:
Non-redeemable (optionally redeemable), issued 6,200,000 shares. . 230,000 230,000
Redeemable (mandatorily redeemable), issued 2,015,602 shares . . . 44,570 44,570
------------ --------------
499,570 501,370
------------ --------------
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,006,891 5,042,588
------------ --------------
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . . 8,058,380 8,329,129
------------ --------------
CURRENT LIABILITIES:
Long-term debt due within one year. . . . . . . . . . . . . . . . . . . . 562,038 613,740
Sinking fund requirements on redeemable preferred stock . . . . . . . . . 7,620 7,620
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,683 244,031
Payable on outstanding bank checks. . . . . . . . . . . . . . . . . . . . 18,776 22,067
Customers' deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,619 15,255
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,736 6,246
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,409 67,593
Accrued vacation pay. . . . . . . . . . . . . . . . . . . . . . . . . . . 35,016 35,334
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,880 66,160
------------ --------------
1,095,777 1,078,046
------------ --------------
REGULATORY AND OTHER LIABILITIES (NOTE 3):
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . . 1,601,873 1,575,335
Liability for swap contracts. . . . . . . . . . . . . . . . . . . . . . . 759,373 663,718
Employee pension and other benefits . . . . . . . . . . . . . . . . . . . 224,758 226,223
Unbilled gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 9,252 14,552
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,185 318,605
------------ --------------
2,970,441 2,798,433
------------ --------------
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 3):
Liability for environmental restoration . . . . . . . . . . . . . . . . . 240,000 240,000
------------ --------------
$12,364,598 $ 12,445,608
============ ==============
</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>
SIX MONTHS ENDED JUNE 30,
2000 1999
------------ ----------
(in thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,147 $ 32,193
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 156,044 188,671
Amortization/accretion of MRA/IPP buyout costs . . . . . . . . . . . 187,636 181,261
Amortization of nuclear fuel . . . . . . . . . . . . . . . . . . . . 13,891 13,549
Extraordinary loss on extinguishment of debt, net of taxes . . . . . 887 2,294
Provision for deferred income taxes. . . . . . . . . . . . . . . . . 27,015 8,099
Net accounts receivable (net of changes in accounts receivable sold) (46,026) (103,478)
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . 5,550 45,087
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . (19,674) (28,779)
Accrued interest and taxes . . . . . . . . . . . . . . . . . . . . . 84,306 56,272
Changes in MRA and IPP buyout regulatory assets. . . . . . . . . . . 17,165 (22,237)
Deferral of MRA interest rate savings. . . . . . . . . . . . . . . . 10,829 16,804
Refundable income taxes. . . . . . . . . . . . . . . . . . . . . . . - 130,411
Changes in other assets and liabilities. . . . . . . . . . . . . . . (6,148) (33,123)
------------ ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . 439,622 487,024
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction additions. . . . . . . . . . . . . . . . . . . . . . . . . . . (89,901) (110,839)
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,236) (23,572)
------------ ----------
Acquisition of utility plant . . . . . . . . . . . . . . . . . . . . . . (107,137) (134,411)
Materials and supplies related to construction. . . . . . . . . . . . . . . 444 8,213
Accounts payable and accrued expenses related to construction . . . . . . . (4,919) (7,195)
Proceeds from the sale of generation assets . . . . . . . . . . . . . . . . 47,500 355,000
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,627) 59,193
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,497 3,060
------------ ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . . . (77,242) 283,860
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds held by trustee for refunding of debt . . . . . . . . . . . . . . . . - (158,805)
Reductions in long-term debt. . . . . . . . . . . . . . . . . . . . . . . . (307,291) (155,020)
Proceeds from long-term debt. . . . . . . . . . . . . . . . . . . . . . . . 200,000 -
Reduction in preferred stock. . . . . . . . . . . . . . . . . . . . . . . . (1,800) (1,800)
Corporate restructuring to establish holding company. . . . . . . . . . . . - (89,618)
Preferred dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . (15,808) (18,048)
Common stock dividend paid to Holdings. . . . . . . . . . . . . . . . . . . (36,132) (30,000)
Repurchase of Holdings' common stock. . . . . . . . . . . . . . . . . . . . (190,168) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 709 (4,720)
------------ ----------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . . . . . . (350,490) (458,011)
------------ ----------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,890 312,873
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . 72,479 172,998
------------ ----------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,369 $ 485,871
============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 164,805 $ 247,507
Income taxes refunded. . . . . . . . . . . . . . . . . . . . . . . . . . $ (772) $(127,299)
</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.
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"). Holdings was incorporated on April
2, 1998 as a wholly-owned subsidiary of Niagara Mohawk. 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 continue as obligations of Niagara Mohawk. Upon
the share exchange on March 18, 1999, shares originally issued to Niagara
Mohawk were cancelled. The reorganization was accounted for at net book value.
SUBSIDIARIES: On March 31, 1999, Niagara Mohawk distributed its ownership in
the stock of Opinac North America, Inc. ("Opinac") as a dividend to Holdings,
which was accounted for using the net book value of Opinac. As a result, the
net assets and accumulated other comprehensive income of Opinac are no longer
included in Niagara Mohawk's consolidated balance sheet. The dividend
completed the holding company structure, with Holdings owning 100 percent of
the common 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 88 percent of the revenues of Holdings. Opinac and
its subsidiaries consist of an energy marketing company and have investments in
energy related services business, a developmental stage telecommunications
company (Telergy, Inc.), and a research and development company (EVonyx, Inc.)
that has developed and intends to commercialize new fuel cell and battery
technology.
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 unless otherwise stated. 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 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 and notes thereto should be read in conjunction with the
audited financial statements included in Holdings and Niagara Mohawk's combined
1999 Annual Report on Form 10-K, and Holdings and Niagara Mohawk's 2000 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 six-month periods ended June 30, 2000
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 Power Choice on September 1, 1998, have depressed and will continue to
substantially depress earnings during the five-year term of Power Choice. The
ability of Niagara Mohawk to improve earnings in the period subsequent to Power
Choice will depend on the outcome of the regulatory process to set prices at
that time. The closing on the sale of the fossil and hydro generation assets
at various times during 1999 and 2000 has also affected the comparability of
the financial statements. See Note 3 for a further discussion of the sales.
The income statements and cash flow statements for Holdings and Niagara Mohawk
for the three months and six months ended June 30, 1999 reflect the
reclassification of the amortization and accretion associated with certain
costs incurred as part of the MRA and additional IPP contract buyouts from
"Other Operation and Maintenance Expenses" to "Amortization/Accretion of
MRA/IPP Buyout Costs." The following table outlines the components of the
line item "Amortization/Accretion of MRA/IPP Buyout Costs:"
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Amortization of MRA regulatory asset. $ 96,624 $ 96,624 $193,249 $193,249
Accretion to MRA regulatory asset
(Senior Discount Note). . . . . . (7,148) (6,577) (14,296) (13,154)
Other MRA related amortization. . . . (4,478) (1,988) (8,957) (3,977)
Amortization of other IPP buyout costs 8,980 2,889 17,640 5,143
----------- ----------- --------- ---------
$ 93,978 $ 90,948 $187,636 $181,261
=========== =========== ========= =========
</TABLE>
The income statements, balance sheet and cash flow statements for Holdings and
Niagara Mohawk reflect the accounting and ratemaking treatment proposed by the
PSC as a result of May 2000 New York State tax law changes, whereby the gross
receipts tax is being replaced by a state income tax retroactive to January 1,
2000. The PSC requires deferral and pass back of any net tax reduction savings
to the customers. Accordingly, Holdings and Niagara Mohawk have reduced
electric and gas revenues by $8.3 million and $2.0 million, respectively, for
the three months ended June 30, 2000, and $4.0 million and $1.2 million,
respectively, for the six months ended June 30, 2000 and recorded a
corresponding liability to customers of $5.2 million, which is reflected in the
"Other" current liabilities line item on the balance sheet for the six months
ended June 30, 2000.
The income statements also reflect the reclassification of $(2.3) million and
$12.1 million for the three months and six months ended June 30, 2000,
respectively, from the "Other taxes" line item to the "Income taxes" line item.
Niagara Mohawk provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." The impact of the application of SFAS No. 109,
for the six months ended June 30, 2000, resulted in an increase in deferred
income taxes of $6.4 million. The impact of applying a state income tax to
temporary differences, as required by SFAS 109, has not yet been determined.
Holdings and Niagara Mohawk believe the impact will be deferred and addressed in
future rate cases. Holdings and Niagara Mohawk are currently working with the
PSC and the New York State Department of Taxation and Finance to determine how
the New York State tax law changes will be fully implemented. The PSC is
expected to issue a generic order on this issue by the end of the year.
Holdings and Niagara Mohawk will reflect the appropriate accounting on these
state tax law changes upon the receipt of such order. Holdings and Niagara
Mohawk do not anticipate any earnings impact to result from the implementation
of the generic order.
The cash flow statements for Holdings and Niagara Mohawk reflect the
above-mentioned income statement and balance sheet changes.
The consolidated cash flow statements for Holdings and Niagara Mohawk have been
presented to reflect the closings of the sales of the fossil and hydro
generation assets, such that certain individual line items are net of the
effects of the sales.
ESTIMATES: In order to conform with GAAP, management is required to use
estimates in the preparation of Holdings and Niagara Mohawk's financial
statements. Actual results could differ from those estimates.
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 six months ended June 30, 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
Company: 2000 1999 2000 1999
------------------------ --------- ---------- ----- ------
(in millions of dollars)
<S> <C> <C> <C> <C>
Holdings. . . . . . . $ (21.6) $ (33.4) $(7.3) $13.5
Niagara Mohawk. . . . (12.8) (27.2) 8.4 28.8
</TABLE>
NEW ACCOUNTING STANDARDS: 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, including the new financial agreement entered
into as part of the recent sale of the Albany generation plant, as derivative
instruments and has recorded a liability at fair value under SFAS No. 80,
"Accounting for Futures Contracts." The swap contracts qualify as hedges of
future purchase commitments and may qualify as hedges under SFAS No. 133.
In June 2000, Niagara Mohawk began to hedge its exposure to fluctuations in
natural gas commodity prices with NYMEX gas futures contracts. Niagara Mohawk
has a risk management policy defining the limits within which hedging activities
are carried out. The objective of Niagara Mohawk's hedging program is to
mitigate the risk associated with the purchase and sale of natural gas. Niagara
Mohawk does not hold speculative positions in gas commodity futures for trading.
The method of accounting for gas futures is in accordance with SFAS No. 80
"Accounting for Futures Contracts" as a hedge of an anticipated transaction.
Under hedge accounting, gains or losses from the settlements of the futures
contracts are deferred until the hedged transactions occur. At that time, the
gains or losses and the cost of purchased gas are recognized in Gas Purchased in
the Consolidated Statements of Income. It is expected that the results of the
futures contracts will substantially offset the effects of price changes in gas.
If there is a loss of correlation between changes in the market value of the
futures contracts and gas commodity costs, we would cease to account for the
contracts as hedges and any gains or losses in the contracts value would be
recognized in the Statements of Income currently.
The FASB recently issued SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB Statement No.
133" which would limit the types and number of transactions to which the
accounting required by SFAS No. 133 would be applied. Holdings and Niagara
Mohawk continue to assess the applicability of this new standard to other
financial instruments.
HOLDINGS' COMMON STOCK: During 1999, the PSC approved Niagara Mohawk's
petition to purchase up to $800 million of Holdings' common stock. Holdings'
Board of Directors has approved a program to repurchase 40 million shares
through December 31, 2002. Niagara Mohawk purchased 10 million shares of
Holdings' common stock through December 31, 1999 for $157.2 million.
During 1999, Niagara Mohawk entered into an agreement with an agent to purchase
up to five million shares of Holdings' common stock. The agent purchased the
five million shares during 1999. Niagara Mohawk, which had the option to settle
in cash or shares, elected to settle in cash on June 21, 2000 for $79 million.
Niagara Mohawk purchased 734,000 additional shares for approximately $9.6
million during the first quarter of 2000 and purchased 7,231,316 additional
shares, excluding the 5 million noted above, for $101.6 million during the
second quarter of 2000. Niagara Mohawk has subsequently purchased 4,064,340
additional shares for approximately $58.5 million from July 1, 2000 through
August 11, 2000.
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 163 sites with which it may be associated,
including 82 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 and regulatory reviews 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.
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
$240 million, which is reflected in both Holdings and Niagara Mohawk's
Consolidated Balance Sheets at June 30, 2000 and December 31, 1999. The
potential high end of the range is presently estimated at approximately $480
million, including approximately $235 million in the unlikely event Niagara
Mohawk is required to assume 100 percent responsibility at non-owned sites. The
probabilistic method was used to determine the amount to be accrued for 23 of
Niagara Mohawk's largest 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 investigation, remediation and monitoring obligations to be recovered from
ratepayers. Power Choice and the gas rate settlements provide for the continued
application of deferral accounting for variations in spending from amounts
provided in rates. As a result, Niagara Mohawk does not believe that site
investigation and remediation costs will have a material adverse effect on its
results of operations or financial condition.
In November 1999, Niagara Mohawk submitted a revised feasibility study to the
DEC, which included the land-based portions of 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 and recommends a
selected remedial alternative. This range consists of a high end of $70
million, with an expected value calculation of $49 million, which is included
in the amounts accrued at June 30, 2000 and December 31, 1999. The DEC
approved this feasibility study in January 2000 and is expected to prepare and
issue a Proposed Remedial Action Plan ("PRAP") in the summer or fall of 2000.
The surface water-based portions of Niagara Mohawk's Harbor Point site are
subject to continuing feasibility study evaluations and review by the DEC.
The DEC has indicated that it plans to issue a PRAP on the Utica Harbor/Barge
Canal portion of the site in the fall of 2000. Niagara Mohawk currently
estimates the range of costs for remediation of the surface water bodies to
consist of a high end of $18 million, with an expected value of $11 million,
which is included in the amounts accrued at June 30, 2000 and December 31, 1999.
The ranges for the land-based and the surface water bodies portions represent
the total estimated costs to remediate the properties and does not consider
contributions from other PRPs, the amount of which Niagara Mohawk is unable
to estimate.
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. Niagara Mohawk is engaged in settlement
negotiations with the various parties and in the event the case does not
settle, Niagara Mohawk expects the matter will go to trial later in the year.
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 the Harbor Point and 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 $5.4 billion at June 30, 2000. These regulatory assets are
probable of recovery.
MRA REGULATORY ASSET: Under Power Choice, a regulatory asset was established
for the costs of the MRA and represents the costs to terminate, restate, or
amend IPP Party contracts. This regulatory asset is being amortized generally
over ten years, beginning September 1, 1998, pursuant to the Power Choice
agreement. Niagara Mohawk's rates under Power Choice have been designed to
permit recovery of the MRA regulatory asset. See Holdings and Niagara Mohawk's
combined Form 10-K for fiscal year ended December 31, 1999, Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Power Choice rate reductions and retail choice of electricity
supplier" and "the MRA agreement" for information on Power Choice and the MRA.
SWAP CONTRACT REGULATORY ASSET: The swap contract regulatory asset represents
the expected future recovery of the swap contract liabilities. The swap
contract liability is the difference between estimated future market prices and
the contract prices for the notional quantities of power in the restated PPA
contracts with the IPPs and in the financial swaps associated with the PPAs from
the sale of the Huntley and Dunkirk coal-fired and the Albany oil and gas-fired
generation plants. The portion of this regulatory asset associated with the
restated IPP contracts will be amortized over ten years ending in June 2008, in
accordance with the MRA and Power Choice, as notional quantities are settled.
The portion of this regulatory asset associated with the Huntley and Dunkirk
PPAs will be amortized over the remaining term of the swaps through June 2003.
During the second quarter of 2000, Niagara Mohawk completed the sale of its
Albany oil and gas-fired generation plant. Niagara Mohawk entered into a
financial swap as part of the sale. Approximately $21.4 million is included in
the swap contract regulatory asset at June 30, 2000 as part of this agreement.
The Albany contract expires on September 30, 2003, and the portion of the swap
contract regulatory asset associated with the agreement will be amortized over
the life of the contract as notional quantities are settled. See Holdings and
Niagara Mohawk's combined Form 10-K for fiscal year ended December 31, 1999,
Part II, Item 8. Financial Statements and Supplementary Data - Note 9. Fair
Value of Financial and Derivative Financial Instruments - "Swap Contracts" for a
further discussion of the terms of each of the financial agreements. The amount
of this regulatory asset will fluctuate as estimates of future market and
contract prices change over the terms of the contracts and will decline as the
remaining contract periods shorten.
DEFERRED LOSS ON THE SALE OF ASSETS: Power Choice requires Niagara Mohawk to
divest its portfolio of fossil and hydro generation assets. During 1999,
Niagara Mohawk completed the sale of its hydroelectric generation plants, its
coal-fired generation plants and its Oswego oil and gas-fired plant for $860
million. These assets had a combined net book value of approximately $957
million (including materials, supplies and fuel) at the time of their sale. In
addition, there were purchase price adjustments of approximately $27 million,
primarily due to a lower amount of fuel being delivered to the new owners of the
Oswego generation assets than originally anticipated and provided for in the
sales agreement.
On May 12, 2000, Niagara Mohawk completed the sale of its Albany oil and
gas-fired plant to PSEG Power LLC ("PSEG") for $47.5 million. The Albany plant
had a net book value of approximately $36.4 million (including materials,
supplies and fuel) at the time of the sale. Niagara Mohawk could also receive
up to an additional $11.5 million if PSEG chooses to pursue the redevelopment of
the Albany plant and the redevelopment is in service by July 1, 2003. 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 annual
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 should 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. The proceeds from
the sale of Albany do not include an amount for the redevelopment fee or the
post closing property tax adjustment.
On August 8, 2000, Niagara Mohawk announced that the Roseton Steam Station (of
which Niagara Mohawk owns 25 percent) would be sold to Dynegy Power Corporation
("Dynegy") of Houston, pursuant to which Niagara Mohawk will receive
approximately $80 million. Niagara Mohawk's share of the plant has a net book
value of approximately $36.9 million (which includes materials, supplies and
fuel) as of June 30, 2000. This sale supersedes a prior agreement between
Niagara Mohawk and Central Hudson Gas & Electric Corporation to transfer Niagara
Mohawk's interest in the Roseton Steam Station and does not include a PPA for
Niagara Mohawk.
The Power Choice agreement provides for deferral and future recovery of net
losses resulting from the sale of the fossil and hydro generation asset
portfolio. As of June 30, 2000, Niagara Mohawk has recorded a regulatory asset
of $163.1 million for the net loss on the sale of its coal-fired generation
plants, its hydro generation assets, and its oil and gas fired plants at Oswego
and Albany, which includes $3.7 million in employee-related severance costs.
The net loss is included in Niagara Mohawk's balance sheet as "Deferred Loss on
Sale of Assets." In accordance with Power Choice, Niagara Mohawk will not earn
a return on the deferred loss during the Power Choice period and would have to
request a return to be applicable after the expiration of Power Choice (August
31, 2003), subject to the approval of the PSC. The amount of this regulatory
asset is subject to change as a result of post closing adjustments on the sales,
transaction costs, subsequent costs associated with contract clauses, the
accounting treatment relating to the hydro PPAs, as discussed below, the amount
of severance and other costs, the outcome of the sale of the Roseton Steam
Station (described above), and PSC review of the amounts deferred. The PSC has
allowed Niagara Mohawk to offset the proceeds from the sale of the fossil and
hydro generation assets, by the amount which the actual amount incurred on the
hydro PPAs exceeds the forecasted amount reflected in Power Choice. On July 10,
2000, Niagara Mohawk filed a report with the PSC outlining the accounting of the
costs and proceeds from the sale of the generation assets sold through May 31,
2000. The amount recorded as a loss is subject to regulatory review. Niagara
Mohawk will begin recovery of the loss in 2003, over a period not to exceed the
average remaining life of the assets sold, estimated at 20 years. Niagara
Mohawk has recorded a non-cash incentive as provided for in Power Choice of
$15.0 million based on the asset sales of which $9.0 is reflected in income
in 1999 and $6.0 million is reflected in income in 2000. The incentive earned
is subject to regulatory review and is included in the other regulatory assets
on the Consolidated Balance Sheets. Niagara Mohawk will begin recovery of the
incentive in 2001, over a period not to exceed five years.
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. New York
State Electric and Gas Corporation ("NYSEG") was also a party to the agreement
and agreed to sell its 18 percent share of Unit 2 to AmerGen. The sale
agreement was subject to regulatory approval. See Holdings and Niagara Mohawk's
combined Form 10-K for fiscal year ended December 31, 1999, Part II, Item 8.
Financial Statements and Supplementary Data - Note 3. Nuclear Operations -
"Announced Sale" for a further discussion of the proposed sale.
On April 25, 2000, the PSC deemed Niagara Mohawk's and NYSEG's petitions with
respect to the AmerGen agreement to be withdrawn because the PSC expects a
competitive process to sell the nuclear assets to result in a substantially
higher value and lower stranded costs than the AmerGen agreement. See Holdings
and Niagara Mohawk's combined Form 10-Q for the quarterly period ending March
31, 2000, Part I, Item 1. Notes to Consolidated Financial Statements - Note 3.
Rate and Regulatory Issues and Contingencies - "Deferred Loss on the sale of
assets" for a further discussion of the PSC's April 25, 2000 Order. As a
result, on May 11, 2000, Niagara Mohawk, NYSEG and AmerGen terminated their
agreement in contemplation of such a competitive process and, Niagara Mohawk and
certain other co-owners announced they would auction Unit 1 and their share of
Unit 2. Niagara Mohawk cannot predict the outcome of this auction, but is
committed to pursue the sale of Unit 1 and Unit 2. Notwithstanding this
commitment, because Unit 2 has multiple owners and because any sale will be
subject to regulatory hurdles that must be overcome, including stranded cost
recovery, Niagara Mohawk does not believe that a sale is any more likely to
occur than other possible outcomes, including the possible continued operation
of the plants by Niagara Mohawk for the remainder of their useful lives.
In the event that the sale of the nuclear assets does not occur, Niagara Mohawk
will continue to recover the costs to run the nuclear generation plants in its
Power Choice rates. In addition, Niagara Mohawk would continue to participate
in the PSC regulatory proceeding regarding the future of nuclear assets in New
York State.
Because of the uncertainty as to whether the PSC will approve any sale of the
nuclear generating plants on terms acceptable to Niagara Mohawk, and the outcome
of other regulatory approvals, Niagara Mohawk has continued to utilize its best
estimate of cash flows based on a held-and-used (regulated) model for purposes
of assessing whether an asset impairment existed as of June 30, 2000. Under
this assumption the nuclear generating assets are not impaired.
If, and when, Niagara Mohawk concludes that its best estimate of future cash
flows is from the sale of the power plants, the impairment test will be
performed taking into consideration the expected cash flows from operations
until the sale, expected cash proceeds from the sale of the assets, less amounts
which may be required to pre-fund the nuclear decommissioning trust funds.
At June 30, 2000, the net book value of Niagara Mohawk's nuclear generation
assets (including materials, supplies and nuclear fuel) was approximately $1.7
billion, excluding the reserve for decommissioning. In addition, Niagara Mohawk
has other nuclear-related assets of approximately $0.5 billion. These assets
include the decommissioning trusts and regulatory assets, primarily related to
the flow-through to customers of prior income tax benefits.
SFAS NO. 71 AND OTHER ACCOUNTING MATTERS: The 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 affect Niagara Mohawk's, and
therefore Holdings' ability to pay dividends.
Under Power Choice, Niagara Mohawk's remaining electric business (electric
transmission, distribution and nuclear 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.
<PAGE>
NOTE 4. SEGMENT INFORMATION
Holdings is organized between regulated and unregulated activities. Within the
regulated business, Niagara Mohawk, which has 98 percent of total assets and 88
percent of total revenues, there are two principal business units: Energy
Delivery and Nuclear. As discussed in Note 3 above, Niagara Mohawk is pursuing
the sale of its nuclear assets and its 25 percent interest in the Roseton plant.
Although there are two identified business units, financial performance and
resource allocation are measured and managed at the regulated business level.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
Total Economic Total Economic
(In thousands of dollars) Revenues Value Added Revenues Value Added
------------------------- --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
2000
REGULATED . . . . . . . . $ 907,204 $ (157,315) $1,981,097 $ (283,467)
UNREGULATED . . . . . . . 138,310 (7,718) 259,002 (13,776)
ELIMINATIONS. . . . . . . (20) - (20) -
TOTAL CONSOLIDATED. $ 1,045,494 $ (165,033) $2,240,079 $ (297,243)
========================= =============== ================ =========== =============
1999
Regulated . . . . . . . . $ 870,461 $ (210,702) $1,966,482 $ (341,507)
Unregulated . . . . . . . 44,117 (5,846) 67,502 (13,724)
Eliminations. . . . . . . (257) - (529) -
Total Consolidated. $ 914,321 $ (216,548) $2,033,455 $ (355,231)
========================= =============== ================ =========== =============
</TABLE>
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.
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 six months ending June 30, 2000 and 1999, an adjustment
is made to include the recognition of the estimated net present value of
remaining future above-market contracts with IPPs, which is calculated annually,
and the corresponding recognition of imputed interest as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
(in thousands of dollars) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Estimated net present value of
the remaining future above
market contracts with the IPPs $ 1,383,600 $ 1,987,643 $ 1,383,600 $ 1,987,643
Corresponding recognition of
imputed interest $ 10,188 $ 14,634 $ 20,376 $ 29,268
</TABLE>
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 six months ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(in thousands of dollars) 2000 1999 2000 1999
------------------------------------- --------------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
Economic Value Added:
Operations. . . . . . . . . . . . $ (67,376) $ (90,965) $ (99,995) $(102,186)
IPP - Related . . . . . . . . . . (97,657) (125,583) (197,248) (253,045)
--------------- ------------- ---------- ----------
Total Economic Value Added. . . . . . (165,033) (216,548) (297,243) (355,231)
Charge for Use of Investor's Capital. 236,521 300,576 473,480 599,990
Adjustments for Significant Items . . (10,188) (14,634) (20,376) (29,268)
Interest Charges (net of taxes) . . . (72,205) (85,667) (144,388) (171,908)
Extraordinary Item (net of taxes) . . (909) (10,750) (909) (10,750)
Niagara Mohawk Preferred Dividends. . (7,904) (9,024) (15,808) (18,048)
Consolidated Net Income (Loss) . . $ (19,718) $ (36,047) $ (5,244 $ 14,785
=============== ============= ========== ==========
</TABLE>
EVA is a registered trademark of Stern Stewart & Co.
NOTE 5. EXTRAORDINARY ITEM
During the six months ended June 30, 2000 and 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 Costs Income
Month Amount Incurred, Tax Incurred, Tax
Series Redeemed Redeemed net of tax Benefit net of tax Benefit
-------------------- -------- ---------- ---------- ------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Senior Notes February $ 3,402 $ 14 $ 8 $ - $ -
Senior Bank Facility April 50,000 336 181 - -
First Mortgage Bonds May 41,585 559 300 - -
First Mortgage Bonds June 151,720 - - 10,750 5,789
---------- -------- ------- -------- -------
Total $ 909 $ 489 $10,750 $ 5,789
======== ======= ======= =======
Per share effect, net of tax $ 0.01 $ 0.06
======== =======
</TABLE>
<PAGE>
REVIEW BY INDEPENDENT ACCOUNTANTS
Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation's independent
accountants, PricewaterhouseCoopers LLP, have applied limited procedures in
accordance with professional standards for a review of the unaudited
Consolidated Balance Sheets of Niagara Mohawk Holdings, Inc. and its subsidiary
companies, as of June 30, 2000 and 1999, and the related unaudited Consolidated
Statements of Income for the three-month and six-month periods ended June 30,
2000 and 1999 and of Cash Flows for the six-month period ended June 30, 2000
and 1999, and the unaudited Consolidated Balance Sheets of Niagara Mohawk
Power Corporation and its subsidiary companies as of June 30, 2000 and 1999
and the related unaudited Consolidated Statements of Income for the three-month
and six-month periods ended June 30, 2000 and 1999 and of Cash Flows for the
six-month period ended June 30, 2000 and 1999. The report of
PricewaterhouseCoopers LLP dated August 14, 2000, regarding their limited
reviews of the financial statements of Niagara Mohawk Holdings and its
subsidiaries, and Niagara Mohawk Power Corporation and its subsidiaries
appears on the next page.
PricewaterhouseCoopers LLP's report does not express an opinion on the interim
unaudited consolidated financial information. Accordingly, the degree of
reliance on the report of PricewaterhouseCoopers LLP on such financial
information should be restricted in the light of the limited nature of the
review procedures applied. PricewaterhouseCoopers LLP has not carried out
any significant or additional audit test beyond those which would have been
necessary if their report had not been included. Accordingly,
PricewaterhouseCoopers LLP is not subject to the liability provisions of Section
11 of the Securities Act of 1933 for their report on the unaudited financial
information because 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.
<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 June 30, 2000 and 1999 (not presented
herein), and the related condensed consolidated statements of income for the
three-month and six-month periods ended June 30, 2000 and 1999 and cash flows
for the six-month period ended June 30, 2000 and 1999, and the condensed
consolidated balance sheets of Niagara Mohawk Power Corporation and its
subsidiaries as of June 30, 2000 and 1999 (not presented herein), and the
related condensed consolidated statements of income for the three-month and
six-month periods ended June 30, 2000 and 1999 and of cash flows for the
six-month period ended June 30, 2000 and 1999. 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 sheets of Niagara Mohawk Holdings, Inc. and Niagara
Mohawk Power Corporation as of December 31, 1999, and the related consolidated
statements of income, and retained earnings, of cash flows and of comprehensive
income for the year then ended (not presented herein), and in our report dated
January 27, 2000, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheets as of December 31, 1999, is
fairly stated, in all material respects, in relation to the consolidated balance
sheets from which it has been derived.
/s/PricewaterhouseCoopers LLP
-----------------------------
PRICEWATERHOUSECOOPERS LLP
Syracuse, NY
August 14, 2000
<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
Power Choice, the timing and outcome of the proposed future sale of Niagara
Mohawk's nuclear generation assets and its 25 percent ownership in the Roseton
plant, the planned repayment of debt, the timing of the reversal of the
increased gas costs as a result of the gas costs adjustment mechanism, the
outcome of rate and reconciliation issues with the NYISO, the effects of Niagara
Mohawk's transition to a new customer service system, and the collection of
accounts receivable and the corresponding bad debt expense. These
forward-looking statements are based upon a number of assumptions, including
assumptions regarding the Power Choice 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, the supply and demand of both gas
and electricity, operations at the NYISO, challenges to the Power Choice
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 proposed sale of its nuclear assets and its 25 percent interest in
Roseton, including efforts made by Niagara Mohawk to collect from customers, and
the economic conditions of Niagara Mohawk's service territory.
RESTRUCTURING OF THE REGULATED ELECTRIC UTILITY BUSINESS
POWER CHOICE: The PSC approved Niagara Mohawk's Power Choice agreement on March
20, 1998 and the rate plan was implemented beginning September 1, 1998. The
Power Choice agreement outlined Niagara Mohawk's future structure in the
regulated electric business.
The Power Choice agreement established a five-year rate plan that reduces class
average residential and commercial prices by an aggregate of 3.2 percent over
the first three years, beginning September 1, 1998. On September 1, 1999,
Niagara Mohawk implemented its second phase of rate reductions and will
implement its third phase of rate reductions on September 1, 2000. The
reduction in prices includes certain savings that result from approved
reductions of the GRT. Recent New York State tax law changes that further
reduce the GRT rate for some customers and eliminates the GRT for others, are
not reflected in the price reductions. The tax law changes are discussed below
and in Item 1. Notes to the Consolidated Financial Statements, Note 1. Summary
of Significant Accounting Policies, "Basis of Presentation." Industrial
customers are currently receiving average reductions of 25 percent relative to
1995 tariffs; this decrease includes discounts currently offered to some
industrial customers through optional and flexible rate programs. As part of
Power Choice, Niagara Mohawk has retained the flexibility to address specific
competitive challenges for energy intensive customers through individual rate
negotiations.
Effective August 1, 1999, all of Niagara Mohawk's customers were able to choose
their electricity supplier. As of June 30, 2000, 8,124 (5.19 percent) of
Niagara Mohawk's commercial and industrial customers or approximately 20.51
percent of eligible load, and 31,527 (2.25 percent) residential customers or
approximately 2.60 percent 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 for all customers,
regardless of supplier, and will be provider of last resort for those customers
who are unable or unwilling to obtain an alternative electricity supplier. If a
customer chooses an alternative supplier, Niagara Mohawk, as allowed under Power
Choice, will continue to charge the customer for delivery of the energy and for
a non-bypassable CTC charge. Niagara Mohawk also agreed to give a credit to the
customer as an incentive to switch to an alternative energy supplier. There is
a cap of $30 million on the amount of credits Niagara Mohawk is required to give
during Power Choice with a deferral permitted for 50 percent of the credit.
Approximately $13 million of credits has been incurred to date and $11 million
has been committed to customers already taking power from an energy supplier
during the third year of Power Choice (September 1, 2000 through August 31,
2001). On March 21, 2000, the PSC issued an order instituting a "Proceeding on
Motion of the Commission Regarding Provider of Last Resort Responsibilities, the
Role of Utilities in Competitive Energy Markets, and Fostering the Development
of Retail Competitive Opportunities." Niagara Mohawk will actively participate
in this proceeding, which will consider the future state of the gas and electric
industries in New York State and the role of the regulated utilities.
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 Power Choice agreement to lower average
electricity prices and provide customer choice. During 1999, Niagara Mohawk
completed the sale of its coal-fired generation plants, its hydro assets and its
oil and gas-fired plant at Oswego. See Holdings and Niagara Mohawk's combined
Form 10-K for fiscal year ended December 31, 1999, Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"PowerChoice and the Restructuring of the Regulated Electric Utility Business -
Generation Asset Sales" for discussion of the sales completed during 1999. On
May 12, 2000, Niagara Mohawk completed the sale of its oil and gas-fired plant
at Albany. On August 8, 2000, Niagara Mohawk announced that the Roseton Steam
Station (of which Niagara Mohawk owns 25 percent) would be sold to Dynegy,
pursuant to which Niagara Mohawk will receive approximately $80 million. This
sale does not include a PPA for Niagara Mohawk. See Item 1. Financial
Statements - Note 3. - Rate and Regulatory Issues and Contingencies for a
discussion of the Albany sale, the sale of the Roseton Plant, and the regulatory
treatment of the fossil and hydro generation asset sales.
In connection with the sale of the Albany plant, Niagara Mohawk entered into a
contract with the new owner that is intended to compensate PSEG in the near term
for the costs of running the plant. The contract is a financial agreement with
an exchange of payments that are based on the market price of energy and expires
on September 30, 2003. No actual energy will be delivered to Niagara Mohawk,
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 and was recorded
as a financial swap at the time of the sale. Each month, Niagara Mohawk will
pay 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. Niagara Mohawk has the sole option, within certain
limits stated in the contract, to decide what the call amount will be. 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, in
which case Niagara Mohawk would only be required to make the fixed monthly
payment. For Niagara Mohawk, this contract will serve as a hedge against rising
energy prices. Niagara Mohawk accounts for this contract as a hedge of future
purchase commitments. The costs associated with the Albany contract are
recoverable under Niagara Mohawk's Power Choice rates, although Niagara Mohawk
bears the risk of changes in the cost of fuel from inception of the contract
through August 31, 2001, the end of the Power Choice fixed price period.
The Power Choice 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 Power Choice. On June 24,
1999, Niagara Mohawk announced an agreement to sell its nuclear generation
assets to AmerGen. NYSEG was also a party to the agreement and agreed to sell
its share of Unit 2 to AmerGen. On April 25, 2000, the PSC deemed Niagara
Mohawk and NYSEG's petitions with respect to the AmerGen agreement to be
withdrawn because the PSC expects a competitive process to sell the nuclear
assets to result in a substantially higher value and lower stranded costs than
the AmerGen agreement. As a result, on May 11, 2000, Niagara Mohawk, NYSEG and
AmerGen terminated their agreement in contemplation of such a competitive
process and, Niagara Mohawk and certain other co-owners announced they would
auction Unit 1 and their share of Unit 2. Niagara Mohawk cannot predict the
outcome of this process, but is committed to pursue the sale of Unit 1 and Unit
2. Notwithstanding this commitment, because Unit 2 has multiple owners and
because any sale will be subject to regulatory hurdles that must be overcome,
including stranded cost recovery, Niagara Mohawk does not believe that a sale is
any more likely to occur than other possible outcomes, including the possible
continued operation of the plants by Niagara Mohawk for the remainder of their
useful lives.
STRANDED COST RECOVERY: In approving Power Choice, the PSC authorized changes
to Niagara Mohawk's Retail Tariff providing for the recovery of stranded costs
in the case of municipalization regardless of whether the new municipal utility
requires transmission service from Niagara Mohawk. The calculation of stranded
costs is governed by this Retail Tariff, which became effective on April 6,
1998. A number of communities served by Niagara Mohawk are considering
municipalization and have requested an estimate of their stranded cost
obligation.
The village of Lakewood ("Lakewood") is considering municipalization. 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.
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.
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 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 was filed on November 10, 1999
and a hearing for the purpose of cross-examination of all testimony was held on
December 1 and 2, 1999. The recommended decision of the Administrative Law
Judge ("ALJ") was issued on February 23, 2000 and supported an exit fee of
approximately $14.9 million. At its session on July 19, 2000, the PSC indicated
its intent to adopt the ALJ's recommendations with slight modifications.
Niagara Mohawk is awaiting issuance of the PSC's written order to determine
what recommendations have been adopted. The parties to the case entered into
a number of stipulations prior to the litigation phase that subjects the exit
fee calculation to a true up based on the resolution of certain issues
presented in other proceedings or forums. These include stipulations which
call for ultimate determinations outside this case of the amortization period
for regulatory assets, and return on Niagara Mohawk's regulatory assets for
nuclear stranded costs, the MRA and loss on the sale of the fossil and hydro
generation assets. 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 operations and financial position, the outcome of
this matter will likely define the methodology to determine exit fees. There
have been other challenges to the determination and recovery of stranded costs
through the application of CTCs and exit fees as follows:
In early October 1998, the Alliance for Municipal Power ("AMP"), a group of 21
towns and villages in St. Lawrence and Franklin Counties pursuing
municipalization, and Alfred P. Coppola ("Coppola"), a Councilman from the city
of Buffalo, commenced a proceeding in Albany County Supreme Court that
challenged the PSC's decision to approve Power Choice and the PSC's decision
that denied the petitions of Alliance for Municipal Power and Coppola for
rehearing before the Commission. On March 11, 1999, the Albany County Supreme
Court dismissed in its entirety the petition of Coppola and also dismissed AMP's
petition to the extent that it challenged the determination and recovery of
stranded costs through the application of CTCs and exit fees. However, the
Court did order the PSC to respond to AMP's claim that the PSC failed to act on
discovery requests seeking information about exit fees.
At the PSC's request, Niagara Mohawk has provided AMP with an updated exit fee
estimate of $150 million (PSC method) to $272 million (FERC method). The range
is dependent on whether the formula prescribed by the PSC in Power Choice or the
method defined by FERC is used. During the first quarter of 1999, AMP filed a
motion to re-argue with the Supreme Court and has also filed a notice of appeal
from the decision of the lower court. On June 29, 1999, the Albany County
Supreme Court denied AMP's motion to re-argue and renew the case. AMP failed to
perfect on a timely basis, which failure may be excused by the court for good
reason. On June 23, 1999, a representative of the AMP Communities submitted a
letter to the PSC requesting that the alternative dispute resolution procedures
of Niagara Mohawk's Power Choice Settlement be invoked to resolve the issue of
the AMP Communities' obligations under the exit fee provisions of Niagara
Mohawk's Retail Tariff. By letter dated August 10, 1999, the PSC directed
Niagara Mohawk to meet with representatives of the AMP Communities and an
administrative law judge employed by the PSC. Since that date, representatives
of Niagara Mohawk and the AMP Communities have met on several occasions to
exchange information and views on this subject, but no agreement has yet been
reached. Niagara Mohawk is unable to predict what future actions, if any AMP
will take with respect to this matter. If these 21 communities withdrew from
Niagara Mohawk's system, Niagara Mohawk would experience a potential revenue
loss of approximately 2 percent per year. In addition, the impact on Niagara
Mohawk's electric margin is considered to be immaterial. However, suspension of
Power Choice or renegotiation of its material terms could have a material
adverse effect on Holdings and Niagara Mohawk's results of operations, financial
condition, and future cash flows.
In a petition for expedited declaratory ruling filed with the FERC on June 24,
1999, the Griffiss Local Development Corporation ("GLDC") and the Oneida County
Industrial Development Agency ("Oneida IDA") sought an order declaring that
purchases of electricity from Niagara Mohawk by the Air Force Base Conversion
Agency and/or by GLDC itself for use at the former Griffiss Air Force Base ("the
Base") were wholesale sales subject to the jurisdiction of the FERC rather than
retail sales subject to the jurisdiction of the PSC. In addition, GLDC and
Oneida IDA also sought an order from the FERC asserting exclusive jurisdiction
over any stranded cost obligation resulting from the change from retail to
wholesale rates and a determination that Niagara Mohawk was not entitled to any
stranded costs as a result of that change. Niagara Mohawk intervened in this
proceeding and opposed all relief requested by GLDC. The FERC has not yet acted
on this Petition.
On July 19, 1999, GLDC and Oneida IDA filed an application with the PSC for a
certificate of public convenience and necessity allowing them to furnish
electric service to retail customers located on the Base, subject to
light-handed regulation by the PSC. On October 1, 1999, Niagara Mohawk
intervened in this PSC proceeding and stated that it was opposed to the issuance
of the approvals requested by GLDC and Oneida IDA unless they agreed to pay an
exit fee, which Niagara Mohawk estimated at $12 million. GLDC filed responsive
testimony and calculated an exit fee of $180,000, and the PSC outlined an exit
fee of approximately $7 million in its testimony. A substantial portion of the
difference between the Niagara Mohawk estimate and the PSC estimate related to
future anticipated load to be served by GLDC. GLDC and Oneida IDA refused to
agree to these terms, and the PSC set that case for hearing before one of its
administrative law judges.
Shortly before that hearing was scheduled to commence, Niagara Mohawk entered
into a settlement agreement with GLDC and Oneida IDA that provides GLDC with
discounted electric rates for a five year period, which would be consistent with
established discounted rates under Power Choice. This Settlement is contingent
on GLDC's receipt of an allocation of Power For Jobs credits by the Economic
Development Power Allocation Board and approval by the PSC, which has not yet
been obtained. Upon approval of this settlement by the PSC, GLDC and Oneida IDA
have agreed to withdraw their petition for an expedited declaratory ruling filed
with the FERC and to refrain from challenging the rates established in the
settlement for service during its five year term in any forum, including the
FERC and PSC.
Niagara Mohawk has also prepared exit fee stranded cost estimates for several
other municipalities and customers. Niagara Mohawk is unable to predict whether
these other municipalities or customers will pursue a withdrawal from Niagara
Mohawk's system or the amount of stranded costs it may receive as a result of
any withdrawals.
GAS RATE AND RESTRUCTURING SETTLEMENT AGREEMENT
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. On July 19, 2000, the
PSC approved the agreement that had been negotiated between Niagara Mohawk and
the PSC Staff and became effective on August 1, 2000. The agreement includes
the following:
- A freeze on Niagara Mohawk's delivery rates for a three-year, ten-month
period, beginning November 1, 1999. This will align the expiration of the
gas rate agreement with the expiration of the Power Choice agreement.
- Commodity costs will continue to be passed through to customers.
- Niagara Mohawk will recover all potential stranded pipeline capacity costs
that result from customer switching through the use of the contingency
reserve account, which was established by the previous gas settlement
agreement.
- Niagara Mohawk would give each customer who migrates to another gas
supplier a merchant function backout credit, which reflects services
Niagara Mohawk is no longer providing to that customer. Any stranded
transition costs related to migration will be recoverable through the
contingency reserve account.
- A rate of return on common equity ("ROE") cap over the settlement period
of 10 percent with a 50/50 sharing of excess earnings above the cap if
Niagara Mohawk does not achieve any of the incentive linked with customer
awareness and understanding of migration levels. Niagara Mohawk will be
able to increase its earned ROE (up to 12 percent) without any sharing by
achieving the incentive linked to customer awareness and understanding
and the incentive linked to migration levels.
JANUARY 1998 ICE STORM
In January 1998, a major ice storm and flooding caused extensive damage in a
large area of Northern New York. Niagara Mohawk's regulated electric
transmission and distribution facilities in an area of approximately 7,000
square miles were damaged, interrupting service to approximately 120,000
customers. Niagara Mohawk had to rebuild much of its transmission and
distribution system to restore power in the area. The total estimated cost of
the restoration and rebuild efforts was approximately $140.5 million. Niagara
Mohawk expensed $72.9 million (of which $62.1 million was considered
incremental) and capitalized $67.6 million of costs as utility plant in 1998.
In July 2000, Niagara Mohawk received $20.1 million from the New York State
Disaster Relief Program towards the restoration costs, which was recorded in
income in July 2000. While Niagara Mohawk pursued disaster relief for over
two years, there was little historical precedence to indicate it would be
successful. It was not until July 2000 that all federal and state approvals
were granted.
FINANCIAL POSITION
Holdings and Niagara Mohawk's capital structure at June 30, 2000 and December
31, 1999, was as follows:
<TABLE>
<CAPTION>
JUNE 30, December 31,
% 2000 1999
------------------------------ -------- ------------
<S> <C> <C>
HOLDINGS:
Long-term debt . . . . . . . . 62.9 61.9
Preferred stock of subsidiary. 5.7 5.5
Common equity. . . . . . . . . 31.4 32.6
NIAGARA MOHAWK:
Long-term debt . . . . . . . . 64.6 63.3
Preferred stock. . . . . . . . 5.8 5.6
Common equity. . . . . . . . . 29.6 31.1
</TABLE>
The closing of the MRA significantly increased the leverage of Niagara Mohawk
and Holdings. However, the increased operating cash flow resulting from the MRA
and Power Choice, including the proceeds from the sale of the fossil and hydro
generation assets, will allow both entities to reduce the leverage in the
capital structure. Book value of Holdings' common stock was $16.90 per share at
June 30, 2000, as compared to $16.78 at December 31, 1999.
EBITDA for the 12 months ended June 30, 2000, was $1,170.2 million for Holdings.
EBITDA has declined approximately $119.2 million as compared to the same period
in 1999, primarily as a result of lower net income. (Note: EBITDA for the 12
months ended June 30, 1999, has been restated to reflect a change in the EBITDA
calculation methodology using the method defined below. The amount of the
change was $(7.2) million). EBITDA represents earnings before interest charges,
interest income, income taxes, depreciation and amortization, amortization of
nuclear fuel, allowance for funds used during construction,
amortization/accretion of MRA/IPP buyout costs, deferral of MRA interest rate
savings, 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 no 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. EBITDA may not
be comparable to similarly titled measures used by other companies. Following
is a reconciliation of EBITDA to Holdings' net income:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
(in thousands of dollars) JUNE 30,
2000 1999
---------------- --------------
<S> <C> <C>
EBITDA . . . . . . . . . . . . . $ 1,170,197 $ 1,289,376
Interest income. . . . . . . . . 22,919 14,756
Extraordinary item . . . . . . . (13,966) (10,750)
Income taxes . . . . . . . . . . (22,697) (13,378)
Preferred dividend requirement
of subsidiary . . . . . . . . (34,568) (36,209)
Interest charges . . . . . . . . (445,902) (525,962)
Depreciation and amortization. . (312,860) (368,834)
Nuclear fuel amortization. . . . (28,627) (31,372)
Amortization/accretion of
MRA/IPP buyout costs. . . . . (369,749) (300,670)
Allowance for funds used during
construction. . . . . . . . . 2,859 6,740
Deferral of MRA interest rate
savings . . . . . . . . . . . (22,723) (26,853)
---------------- --------------
NET INCOME . . . . . . . . . . . $ (55,117) $ (3,156)
================ ==============
</TABLE>
During 1999, the PSC approved Niagara Mohawk's petition to purchase up to $800
million of Holdings' common stock. Holdings' Board of Directors has approved a
program to repurchase 40 million shares through December 31, 2002. Niagara
Mohawk purchased 10 million shares of Holdings' common stock through December
31, 1999 for $157.2 million.
During 1999, Niagara Mohawk entered into an agreement with an agent to purchase
up to five million shares of Holdings' common stock. The agent purchased the
five million shares during 1999. Niagara Mohawk, which had the option to settle
in cash or shares, elected to settle in cash on June 21, 2000 for $79 million.
Niagara Mohawk purchased 734,000 additional shares for approximately $9.6
million during the first quarter of 2000 and purchased 7,231,316 additional
shares, excluding the 5 million noted above, for $101.6 million during the
second quarter of 2000. Niagara Mohawk has subsequently purchased 4,064,340
additional shares for approximately $58.5 million from July 1, 2000 through
August 11, 2000.
LIQUIDITY AND CAPITAL RESOURCES
(See Holdings and Niagara Mohawk's combined Form 10-K for fiscal year ended
December 31, 1999, Part II, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation - "Financial Position, Liquidity
and Capital Resources").
On June 1, 2000, Niagara Mohawk obtained a new senior bank facility agreement
that replaced the prior senior bank facility, which was scheduled to expire on
that date. The new senior bank facility continues to provide Niagara Mohawk
with $804 million of credit consisting of a one-year $280 million revolving
credit facility with a one-year term loan option, a five-year $100 million
revolving credit facility, and $424 million for letters of credit with a
three-year term. The letter of credit facility provides credit support for
Niagara Mohawk's adjustable rate pollution control revenue bonds issued through
the New York State Energy Research and Development Authority ("NYSERDA"). As of
June 30, 2000, Niagara Mohawk has not drawn down on the revolving credit
facility. During the second quarter of 2000, Niagara Mohawk repaid the $105
million outstanding on its previous senior bank facility.
Opinac has a $50 million bank facility secured by certain assets of Opinac. The
facility provides for letters of credit and a $10 million line of credit. The
facility expires September 30, 2000 and as of June 30, 2000, supports
approximately $21.6 million in letters of credit. Opinac is working to extend
the facility beyond September 30, 2000.
Niagara Mohawk has the ability to issue first mortgage bonds to the extent that
there have been maturities since June 30, 1998. Through June 30, 2000, Niagara
Mohawk had $210 million in such first mortgage bond maturities.
Niagara Mohawk is obligated to use 85 percent of the proceeds of the sale of its
generation assets t reduce debt outstanding. To date, Niagara Mohawk has
received approximately $907.6 million for the completed fossil and hydro
generation assets sales and has used the required amount of the proceeds to
reduce its debt. See Item 1. Notes to Consolidated Financial Statements - Note
3. - Rate and Regulatory Issues and Contingencies - Deferred loss on the sale of
assets, for a further discussion of the Albany sale.
Niagara Mohawk has established a single-purpose, financing subsidiary, NM
Receivables ("NMR"), whose business consists of the purchase and resale of an
undivided interest in a designated pool of Niagara Mohawk customer receivables,
including accrued unbilled revenues. From the fourth quarter of 1999 through
April 2000, NMR was not in compliance with a certain statistical ratio relating
to the pool of receivables sold. The purchaser granted waivers for this period.
NMR was in compliance with the ratio for the months of May and June 2000. The
amount of receivables sold at June 30, 2000 was $165.1 million. See Holdings
and Niagara Mohawk's combined Form 10-K for fiscal year ended December 31, 1999,
Part II, Item 8. Financial Statements and Supplementary Data, Note 8. -
Commitments and Contingencies, for a further discussion of this customer
receivables program.
Holdings and Niagara Mohawk's NET CASH PROVIDED BY INVESTING ACTIVITIES
decreased $285.8 and $361.1 million, respectively in the six months ended June
30, 2000 as compared to the same period in 1999. These decreases are primarily
due to Niagara Mohawk completing the sale of the Huntley and Dunkirk coal-fired
generation plants during the first six months of 1999.
Niagara Mohawk's NET CASH USED IN FINANCING ACTIVITIES decreased $107.5 million
as compared to the same period in 1999, primarily due to the issuance of $200
million in Senior Notes in 2000, as Niagara Mohawk continued its program to
reduce debt and repurchase Holdings' common stock. In addition, the decrease is
due to the corporate restructuring which involved the transfer of Opinac's cash
balance of $89.6 million to Holdings in 1999.
RESULTS OF OPERATIONS
The following discussion presents the material changes in results of operations
for the three months and six months ended June 30, 2000 in comparison to the
same periods in 1999. 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 six-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 termination, restatement or amendment of
IPP contracts pursuant to the MRA and the implementation of Power Choice. With
the consummation of the MRA and the implementation of Power Choice effective
September 1, 1998, Holdings and Niagara Mohawk expect reported earnings for the
five years subsequent to the implementation of Power Choice 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.
References to regulated activities are with respect to Niagara Mohawk, the
regulated subsidiary of Holdings. References to unregulated activities are with
respect to Opinac North America ("ONA"), the unregulated subsidiary of Holdings.
CUSTOMER SERVICE SYSTEM
-----------------------
In mid-February 1999, Niagara Mohawk implemented a new Customer Service System
("CSS"). The CSS replaced 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 provided the
retail access and unbundled bill functionality required under Power Choice and
also addressed Year 2000 compliance. These capabilities could not be developed
in the previous systems. While CSS performs bill calculations for residential
and commercial customers, legacy systems continue to calculate bills for most
industrial customers.
Niagara Mohawk, like other companies that have implemented similar CSS projects,
has experienced a transition period, characterized by significantly higher
customer call volumes and complaints, billing and data accumulation issues, and
other problems that impact productivity and costs. Billing and data
accumulation issues included bill format errors, billing delays as edit and
validation checks rejected bills, instances where bills could not be generated
by CSS, and inappropriate late payment charges. The transition was also
complicated by changes in the information and choices provided to customers
pursuant to Power Choice. Niagara Mohawk took steps prior to and during the
transition period to prioritize and respond to problems quickly. Although the
more significant billing and data accumulation issues concerning customers have
been addressed, resolution of the remaining transition issues will continue in
2000. These issues focus on enhancements and improvements to CSS, for example,
improving front-end edit checks to reduce rejected bills and changing bill
formats to improve customer understanding.
The CSS transition period has presented several financial exposures.
Outstanding accounts receivables have increased, and Niagara Mohawk's bad debt
expense for 1999 was $64.0 million as compared to $31.7 million in 1998, with
the increase in 1999 primarily attributable to the added exposure to collection
risk. Bad debt expense for the first six months of 2000 was $28.4 million,
compared to $27.5 million in the comparable period in 1999. Niagara Mohawk is
taking aggressive action to reduce its outstanding accounts receivable balance,
so that the reserve for bad debts can be returned to a level appropriate in the
normal course of business. These actions include increasing the outbound
telephone calls to high-risk customers and increasing the number of field
collectors. However, the actions available to Niagara Mohawk are more limited
during the heating season (beginning November 1 through April 15), as a result
of regulatory restrictions on disconnection of heat-related service during cold
weather.
The PSC has been evaluating the development and implementation costs of the CSS
project, as well as Niagara Mohawk's response to the transition problems
incurred during implementation. The PSC issued an order in January 2000
directing that certain billing related problems identified by the PSC Staff be
corrected, with emphasis on estimated bills, by March 31, 2000. Niagara Mohawk
has addressed the PSC Staff's concerns regarding estimated bills by adding 45
new meter reader positions to increase the number of customers whose meters are
read monthly from approximately 800,000 meters to 1.6 million meters. Further
enhancements to CSS were designed to improve the quality of estimates and the
ability to provide customers greater information about the preparation of an
estimate. Other concerns raised by the PSC Staff in the order were addressed
in a response filed by Niagara Mohawk in early February and further updated in
a report on May 1, 2000. In the May 1, 2000 report, Niagara Mohawk identified
that customer complaints regarding billing issues has significantly decreased
in the first quarter of 2000 as compared to 1999. The PSC has required Niagara
Mohawk to issue a final report outlining the results achieved from the
enhancements made by November 1, 2000. Niagara Mohawk cannot predict the
outcome or financial consequences, if any, of the continuing PSC inquiry, but
believes it has met the requirements set forth by the PSC to resolve the
issues that generated much of the call volumes and customer complaints.
THREE MONTHS ENDED JUNE 30, 2000 VERSUS THREE MONTHS ENDED JUNE 30, 1999
------------------------------------------------------------------------
Holdings:
---------
Holdings experienced a loss during the second quarter of 2000 of $19.7 million
or 12 cents per share, as compared with a loss of $36.0 million or 19 cents per
share for the second quarter of 1999. Losses in both periods include an
extraordinary item to reflect the cost of early retirement of debt, which
amounted to $0.9 million or 1 cent per share in 2000 and $10.8 million or 6
cents per share in 1999. The second quarter loss of 2000 as compared with the
second quarter loss from 1999, has been impacted by the following items:
- Earnings were positively impacted by lower interest expense of
approximately $20.4 million or 8 cents per share due to the repayment of
debt.
- Earnings were negatively impacted by NYISO ancillary charges of
approximately $4.6 million (net of those charges passed on to market based
rate customers and net of other credits and deferrals) or 3 cents per share.
- Earnings were reduced by approximately $3.0 million or 2 cents per share
as a result of the second phase of electricity price reductions implemented
September 1, 1999 as part of the Power Choice agreement.
Niagara Mohawk:
---------------
Niagara Mohawk had a net loss of $12.7 million in the second quarter of 2000.
The preferred dividend requirement reduced the balance available for common
stock to a greater loss of $20.6 million. This loss as compared to the same
period in 1999 is explained above in the discussion of Holdings' loss for the
same period.
REVENUES AND SALES/DELIVERIES
-----------------------------
Of the $106.6 million increase in Holdings electric revenues, $22.3 million
relates to Niagara Mohawk regulated revenues and $84.3 million relates to ONA
unregulated revenues.
REGULATED ELECTRIC REVENUES increased $22.3 million or 3.0 percent from the
second quarter of 1999. The increase is primarily due to the increase in
transmission revenues as a result of revenue from congestion contracts
implemented as part of the formation of the NYISO.
REGULATED ELECTRIC SALES/DELIVERIES to ultimate consumers were approximately
8.3 billion KWh in the second quarter of 2000, a 2.1 percent decrease from
1999, primarily as a result of milder weather. In addition, regulated retail
sales in the second quarter of 1999 included the one-time impact of billing
customers on a monthly basis rather than bi-monthly.
UNREGULATED ELECTRIC REVENUES increased $84.3 million or 218.3 percent from the
second quarter of 1999 primarily as a result of Niagara Mohawk Energy, Inc.
("Niagara Mohawk Energy") having increased activity in the competitive energy
market. Niagara Mohawk Energy is a wholly owned subsidiary of ONA.
UNREGULATED ELECTRIC SALES were 4.9 billion KWh or a 294.1 percent increase
from the second quarter of 1999 primarily as a result of an increase in retail
sales and sale to other marketers.
Of the $24.0 million increase in Holdings gas revenues, $14.4 million relates to
Niagara Mohawk regulated revenues and $9.6 million relates to ONA unregulated
revenues.
REGULATED GAS REVENUES increased $14.4 million or 11.8 percent in the second
quarter of 2000 from the comparable period in 1999, primarily as a result of
increased sales to ultimate consumers.
REGULATED GAS SALES to ultimate consumers were 14.6 million Dth or a 15.1
percent increase from the second quarter of 1999. This increase is largely due
to cooler than normal weather.
UNREGULATED GAS SALES increased 2.0 million Dth or 105.8 percent in the second
quarter of 2000 from the comparable period in 1999, primarily as a result of an
increase in retail sales and sales to other gas marketers. As a result of the
increase in sales, UNREGULATED GAS REVENUES increased $9.6 million or 184.2
percent in the second quarter of 2000 from the comparable period in 1999.
OPERATING EXPENSES
------------------
Holdings' FUEL FOR ELECTRIC GENERATION and ELECTRICITY PURCHASED, which
increased $156.4 million, is explained by Niagara Mohawk's activity, as well as
an increase in unregulated supply costs of $85.0 million or 233.2 percent in the
second quarter of 2000, primarily due to higher sales.
Niagara Mohawk's ELECTRICITY PURCHASED increased $102.8 million or 56.1 percent
in the second quarter of 2000, primarily to compensate for the sale of Niagara
Mohawk's generation assets. Niagara Mohawk now purchases more of its remaining
load requirements through the NYISO or other parties. Although the prices
Niagara Mohawk must pay for electricity are higher than the fuel costs incurred
when the assets were owned, Niagara Mohawk now avoids the cost of ownership,
such as operating and maintenance, property taxes and depreciation. These
variances are discussed below. See Holdings and Niagara Mohawk's combined Form
10-K for the fiscal year ended December 31, 1999, Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation - "Power
Choice and the Restructuring of the Regulated Electric Utility Business - FERC
Order 888" for a further discussion on the implementation of the NYISO. NYISO
procedures require it to perform a Load Serving Entity Balancing Study on a
monthly basis. The NYISO is currently behind schedule in performing these
studies and Niagara Mohawk anticipates some refunds due to over billing on
electricity purchases. However, Niagara Mohawk cannot estimate at this time
what, if any, portion may be refunded and accordingly has not recorded any
potential recoveries.
Niagara Mohawk's FUEL FOR ELECTRIC GENERATION decreased $31.3 million or 66.6
percent as compared to the second quarter in 1999, primarily as a result of the
sale of its fossil generation plants.
Holdings' GAS PURCHASED expense reflects an increase in Niagara Mohawk's gas
purchased expense of $14.1 million discussed below, as well as an increase of
$9.3 million in the second quarter of 2000 primarily as a result of higher
unregulated gas sales.
Niagara Mohawk's GAS PURCHASED expense increased $14.1 million in the second
quarter of 2000. This was a result of a 3.0 million increase in Dth purchased
and withdrawn from storage for ultimate consumers sales ($8.5 million), a $2.1
million increase in purchased gas costs and certain other items recognized and
recovered through the regulated gas commodity cost adjustment clause, and a 1.2
percent increase in the average cost per Dth purchased ($4.6 million). These
increases were offset by a $1.1 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. Niagara Mohawk's net cost per Dth sold, as charged to expense,
excluding spot market purchases, increased to $4.31 in 2000 from $4.26 in 1999.
OTHER OPERATION AND MAINTENANCE EXPENSE for both Holdings and Niagara Mohawk
have decreased in the second quarter 2000 as compared to 1999 primarily due to
lower fossil and hydro maintenance costs of $11.3 million due to the sale of
the fossil and hydro generation plants during 1999 and 2000. This was partially
offset by higher financing costs on the sale of accounts receivable of $3.2
million, and higher overtime and wage increases.
The decrease in DEPRECIATION AND AMORTIZATION of $15.8 million for both Holdings
and Niagara Mohawk is primarily due to the sale of Niagara Mohawk's fossil and
hydro generation plants during 1999 and 2000, which reduced depreciation and
amortization by $13.4 million.
The decrease in OTHER TAXES for both Holdings and Niagara Mohawk of $28.7
million in the second quarter of 2000 as compared to the second quarter of 1999
is partly due to lower real estate taxes of $17.9 million resulting from the
sale of Niagara Mohawk's fossil and hydro generation plants. Other taxes are
also lower due to lower GRT rates and an increase in GRT credits received due to
an increase in the customers in Niagara Mohawk's service territory that
participate in New York State's Power for Jobs program. In addition, other
taxes decreased as a result of the state tax law changes as further explained in
Item 1. Notes to the Consolidated Financial Statements, Note 1. Summary of
Significant Accounting Policies, "Basis of Presentation."
Holdings and Niagara Mohawk's OTHER INCOME increased in the second quarter of
2000 as compared to 1999, primarily due to the recording of the auction
incentive associated with the sale of the Albany generation plant, as provided
for in Power Choice, of approximately $6 million.
Holdings and Niagara Mohawk's INTEREST CHARGES decreased by $20.4 million mainly
due to the repayment of approximately $1.1 billion in debt during 1999.
The increase in Holdings and Niagara Mohawk's INCOME TAXES of approximately
$13.4 million is primarily due to a higher percentage allocation of federal
income taxes to the second quarter of 2000 as compared to the same period in
1999, and investment tax credits recognized. Included in the second quarter
1999 results is approximately $8.5 million of previously deferred investment
tax credits associated with the sale Niagara Mohawk's two coal-fired generation
plants, while only $0.8 million previously deferred investment tax credits
associated with the sale of the Albany oil and gas-fired generation plant is
included in second quarter 2000 results. Niagara Mohawk believes this
accounting to be consistent with applicable tax laws. The effective tax rate
will differ from the statutory rate primarily due to the flow-through of certain
tax benefits or liabilities as required by the PSC. As pre-tax income changes,
the percentage relationship of the flow-through items to pre-tax income will
also change. This increase was partially offset by a state income tax benefit
of approximately $2.5 million which is explained in more detail in Item 1.
Notes to the Consolidated Financial Statements, Note 1. Summary of Significant
Accounting Policies, "Basis of Presentation."
SIX MONTHS ENDED JUNE 30, 2000 VERSUS SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------------------
Holdings:
---------
Holdings experienced a loss during the first six months of 2000 of $5.2 million
or 3 cents per share, as compared with earnings of $14.8 million or 8 cents per
share for the first six months of 1999. Earnings for both six-month periods
include extraordinary charges related to the early repayment of debt, which
amounted to $0.9 million or 1 cent per share in 2000 and $10.8 million or 6
cents per share in 1999. The 2000 loss as compared with the earnings from 1999
has been negatively impacted by the following items:
- Higher costs of regulated gas purchased of approximately $41.3 million or 15
cents per share due to higher gas prices and higher purchased gas costs and
certain other items recognized and recovered through the regulated gas cost
adjustment mechanism. The higher gas purchased costs reflect in part, timing
differences that should reverse over the year as discussed further below.
- Higher nuclear operating costs of approximately $5.9 million or 2 cents
per share through June 30, 2000, primarily as a result of the regulatory
treatment of maintenance and refueling outages and the maintenance and
refueling outage at Unit 2 during early 2000.
- Implementation of Niagara Mohawk's second phase of rate reductions in
September 1, 1999 under Power Choice, which reduced regulated electric
revenues by $12.6 million or 5 cents per share.
- NYISO ancillary charges of approximately $18.0 million (net of those
charges passed on to market based rate customers and net of other credits
and deferrals) or 7 cents per share.
- Higher NYISO energy costs of $11.0 million or 4 cents per share that were
billed at higher rates than anticipated. See below for a further discussion
of Niagara Mohawk's electric purchased power costs.
Earnings for the first six months were positively impacted by lower interest
expense of approximately $25.6 million or 15 cents per share due to the early
repayment of debt.
Niagara Mohawk:
---------------
Niagara Mohawk had earnings of $8.1 million in the first six months of 2000.
The preferred dividend requirement reduced the balance available for common
stock to a loss of $7.7 million. This loss as compared to the same period in
1999 is explained above in the discussion of Holdings' loss for the same
period.
REVENUES AND SALES/DELIVERIES
-----------------------------
SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
ELECTRIC REVENUE (THOUSANDS) SALES/DELIVERIES (GWH)
-------------------------------------- ------------------------------
% %
2000 1999 Change 2000 1999 Change
-------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
REGULATED:
Residential. . . . . . . . . . . . $ 614,124 $ 647,277 (5.1) 5,114 5,288 (3.3)
Commercial . . . . . . . . . . . . 506,004 587,900 (13.9) 4,926 5,882 (16.3)
Industrial . . . . . . . . . . . . 222,400 226,676 (1.9) 2,968 3,279 (9.5)
Industrial - Special . . . . . . . 31,055 32,618 (4.8) 2,122 2,242 (5.4)
Other. . . . . . . . . . . . . . . 20,613 21,960 (6.1) 87 87 0.0
------------- ------------- ------- ------- ------ -------
Regulated Sales to
Ultimate Consumers. . . . . . 1,394,196 1,516,431 (8.1) 15,217 16,778 (9.3)
Distribution of Energy . . . . . . 86,965 28,733 202.7 1,896 816 132.4
------------- ------------- ------- ------- ------ -------
Regulated Sales and Deliveries
to Ultimate Consumers . . . . 1,481,161 1,545,164 (4.1) 17,113 17,594 (2.7)
Other Electric Systems . . . . . . 41,771 22,872 82.6 856 922 (7.2)
Transmission of Energy . . . . . . 67,915 47,576 42.8 - - -
Miscellaneous. . . . . . . . . . . 11,389 (17,980) (163.3) - - -
Reclassification of
GRT revenues (Note 1) . . . . . . (3,964) - - - - -
------------- ------------- ------- ------- ------ -------
Total Regulated Sales and Deliveries. $ 1,598,272 $ 1,597,632 0.0 17,969 18,516 (3.0)
============= ============= ======= ======= ====== ========
UNREGULATED:
Wholesale & Retail Sales . . . . . $ 224,142 $ 53,555 318.5 7,413 1,832 304.6
============= ============= ======= ======= ====== ========
</TABLE>
Of the $171.2 million increase in Holdings electric revenues, $0.6 million
relates to Niagara Mohawk regulated revenues and $170.6 million relates to ONA
unregulated revenues.
REGULATED ELECTRIC REVENUES for the first six months of 2000 remained the same
as compared to the same period last year. Sales for resale increased $18.9
million, miscellaneous revenues increased $29.4 million (including unbilled
revenues) and transmission revenues increased $20.3 million. This increase was
offset by a decrease in retail revenues of $64.0 million due to milder weather
and lower prices. Transmission revenues increased as a result of increased
revenues from transmission congestion contracts implemented as part of the
NYISO. The decrease in regulated electric sales to ultimate consumers and the
increase in distribution of energy reflects the growing number of customers that
purchase electricity from other suppliers.
REGULATED ELECTRIC SALES/DELIVERIES to ultimate consumers were approximately
17.1 billion KWh in the first six months of 2000, a 2.7 percent decrease from
1999. This decrease is primarily due to milder weather.
UNREGULATED ELECTRIC REVENUES increased $170.6 million or 318.5 percent from
the first six months of 1999 primarily as a result of Niagara Mohawk Energy
having increased activity in the competitive energy market.
UNREGULATED ELECTRIC SALES were 7.4 billion KWh or a 304.6 percent increase from
the second quarter of 1999 primarily as a result of an increase in retail sales
and sale to other marketers.
SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
GAS REVENUE (THOUSANDS) SALES/DELIVERIES (THOUSANDS OF DTH)
------------------------------------ -----------------------------------
% %
2000 1999 Change 2000 1999 Change
------------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C>
REGULATED:
Residential. . . . . . . $ 269,353 $ 253,095 6.4 37,943 37,786 0.4
Commercial . . . . . . . 76,108 73,240 3.9 11,324 12,135 (6.7)
Industrial . . . . . . . 1,577 1,544 2.1 290 316 (8.2)
------------ ----------- ------ -------- -------- ------
Regulated Total to
Ultimate Consumers . 347,038 327,879 5.8 49,557 50,237 (1.4)
Transportation of
Customer-Owned Gas. . 36,146 30,318 19.2 74,273 68,632 8.2
Spot Market Sales. . . . 1,604 1,373 16.8 592 698 (15.2)
Miscellaneous. . . . . . (732) 9,280 (107.9) 5 6 (16.7)
Reclassification of
GRT revenues (Note 1) (1,231) - - - - -
------------ ----------- ------- -------- -------- ------
Total Regulated . . . . . . $ 382,825 $ 368,850 3.8 124,427 119,573 4.1
============ =========== ======= ======== ======== ======
UNREGULATED:
Wholesale & Retail . . . $ 33,352 $ 13,361 149.6 9,916 4,826 105.5
============ =========== ======= ======== ======== ======
</TABLE>
Of the $34.0 million increase in Holdings gas revenues, $14.0 million relates
to Niagara Mohawk regulated revenues and $20.0 million relates to ONA
unregulated revenues.
REGULATED GAS REVENUES increased $14.0 million or 3.8 percent in the first six
months of 2000 from the comparable period in 1999. This increase is primarily
due to an increase in residential sales and higher gas prices that are passed
through to customers.
REGULATED GAS SALES to ultimate consumers were 49.6 million Dth or a 1.4 percent
decrease from the first six months of 1999. This decrease is partially a result
of warmer weather in the first quarter of 2000 as compared to the same period in
1999. In addition, the decrease is also due to the conversion of customers in
the first quarter of 1999 from a bi-monthly billing to a monthly billing
schedule as part of the conversion to the new CSS system.
UNREGULATED GAS SALES increased 5.1 million Dth or 105.5 percent in the first
six months of 2000 from the comparable period in 1999, primarily as a result of
an increase in retail sales and sales to other gas marketers. As a result of
the increase in sales, UNREGULATED GAS REVENUES increased $20.0 million or 149.6
percent in the first six months of 2000 from the comparable period in 1999.
OPERATING EXPENSES
------------------
Holdings' FUEL FOR ELECTRIC GENERATION and ELECTRICITY PURCHASED, which
increased $312.4 million, is explained by Niagara Mohawk's activity, as well as
an increase in unregulated electric supply costs of $165.8 million or 326.7
percent in the first 6 months of 2000, primarily due to higher sales.
SIX MONTHS ENDED JUNE 30,
(NIAGARA MOHAWK ONLY)
<TABLE>
<CAPTION>
GWH COST (MILLIONS) CENTS/KWH
---------------------------- ---------------------------- -----------
2000 1999 % Chg 2000 1999 % Chg 2000 1999
---- ---- ------ ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REGULATED FUEL FOR ELECTRIC GENERATION:
Coal. . . . . . . . . . . . . . . . . - 2,989 (100.0) $ - $ 44.5 (100.0) - 1.5
Oil . . . . . . . . . . . . . . . . . 213 1,089 (80.4) 10.0 31.6 (68.4) 4.7 2.9
Natural Gas . . . . . . . . . . . . . 45 268 (83.2) 1.8 8.3 (78.3) 4.0 3.1
Nuclear . . . . . . . . . . . . . . . 3,777 3,470 8.8 17.2 16.7 3.0 0.5 0.5
Hydro . . . . . . . . . . . . . . . . - 1,303 (100.0) - - - - -
------- ------- ------- ------- ------ --------- ---- ----
4,035 9,119 (55.8) 29.0 101.1 (71.3) 0.7 1.1
Deferral. . . . . . . . . . . . . . . - - - - 3.0 (100.0) - -
------- ------- ------- ------- ------ --------- ---- ----
Total electric generation. . . . 4,035 9,119 (55.8) 29.0 104.1 (72.1) 0.7 1.1
------- ------- ------- ------- ------ --------- ---- ----
REGULATED ELECTRICITY PURCHASED:
IPPs:
Capacity. . . . . . . . . . . . - - - 7.8 7.3 6.8 - -
Energy and taxes. . . . . . . . 2,679 3,862 (30.6) 163.4 195.1 (16.2) 6.1 5.1
------- ------- ------- ------- ------ --------- ---- ----
Total IPP purchases. . . . . 2,679 3,862 (30.6) 171.2 202.4 (15.4) 6.4 5.2
------- ------- ------- ------- ------ --------- ---- ----
Fossil/Hydro PPAs:
Capacity. . . . . . . . . . . . - - - 21.6 3.5 517.1 - -
Energy and taxes. . . . . . . . 2,699 297 808.8 50.6 4.7 976.6 1.9 1.6
------- ------- ------- ------- ------ --------- ---- ----
Total Fossil/Hydro purchases 2,699 297 808.8 72.2 8.2 780.5 2.7 2.8
------- ------- ------- ------- ------ --------- ---- ----
NYISO purchases. . . . . . . . . . 4,698 - 100.0 181.8 - 100.0 3.9 -
NYISO ancillary charges. . . . . . - - - 58.2 - 100.0 - -
Other purchases. . . . . . . . . . 4,321 5,184 (16.6) 27.5 89.9 (69.4) 0.6 1.7
Swap payments. . . . . . . . . . . - - - 69.9 43.3 61.4 - -
------- ------- ------- ------- ------ --------- ---- ----
Sub-total regulated purchases . 14,397 9,343 54.1 580.8 343.8 68.9 4.0 3.7
------- ------- ------- ------- ------ --------- ---- ----
Deferral . . . . . . . . . . . . . - - - (14.7) 0.5 (3,040.0) - -
------- ------- ------- ------- ------ --------- ---- ----
Total regulated purchases. . . . 14,397 9,343 54.1 566.1 344.3 64.4 3.9 3.7
------- ------- ------- ------- ------ --------- ---- ----
Total generated and purchased. . . . . . 18,432 18,462 (0.2) 595.1 448.4 32.7 3.2 2.4
====== ======= ======= ======= ====== ========= ===== ====
</TABLE>
Niagara Mohawk's ELECTRICITY PURCHASED increased $221.8 million or 64.4 percent
in the first six months of 2000, primarily to compensate for the sale of Niagara
Mohawk's fossil and hydro generation assets. Niagara Mohawk now purchases more
of its remaining load requirement through the NYISO or other parties. Although
the prices Niagara Mohawk must pay for electricity are higher than the fuel
costs incurred when the assets were owned, Niagara Mohawk avoids operating costs
from running these plants, including labor, fuel, real estate taxes and
depreciation. The decrease in IPP purchases is primarily due to the additional
IPP contract buyouts made in 1999 and 2000. The amortization of the buyout
costs is included on the "Amortization/accretion of the MRA/IPP buyout costs"
line item of the Consolidated Statements of Income. The reductions in IPP
purchases were offset in part by an increase in hydro IPP purchases due to an
increase in water flow compared to a drier season in 1999. These IPP hydro
purchases have a higher cost per Kwh than market based prices. Niagara Mohawk
is required to purchase 100 percent of the output of these plants, in accordance
with the hydro IPP contracts. Included in other purchases for the six months
ended June 30, 1999 are purchases from the New York Power Pool ("NYPP"), the
predecessor of the NYISO. The decrease in other purchase for the six months
ended June 30, 2000 is primarily due to the elimination of NYPP. The change in
the deferral for electricity purchased is due to the regulatory treatment of the
hydro PPA as discussed above in Part 1, Item 1. Notes to the Consolidated
Financial Statements, Note 3. Rate and Regulatory Issues and Contingencies,
"Deferred loss on the sale of assets."
See Holdings and Niagara Mohawk's combined Form 10-K for the fiscal year
ended December 31, 1999, Part II, Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operation - "Power Choice and the
Restructuring of the Regulated Electric Utility Business - FERC Order 888"
for a further discussion on the implementation of the NYISO. Included in
the NYISO ancillary charges is an operating reserve charge. This charge is
based upon market prices, which significantly increased during the month of
February 2000. Approximately one-half of the operating reserve charges have
been reimbursed under the Huntley and Dunkirk financial swaps or passed on to
customers that are charged a market price for commodity. During the first
quarter, Niagara Mohawk, among others, petitioned the FERC to revise the
calculation of this charge and requested a refund on the over charge. The
NYISO temporarily set a price cap on the charge, which went into effect in
March 2000. On May 31, 2000, the FERC denied the portion of the petition
regarding the refund on the over charge. Niagara Mohawk has appealed the
decision but cannot predict the outcome of the appeal. Niagara Mohawk also
believes that it was over billed for a portion of its energy purchases and
believes it may receive a refund for a portion of these charges when the
NYISO performs its Load Serving Entity Balancing Study as required. The
NYISO is currently behind schedule in performing these studies and Niagara
Mohawk anticipates some refunds due to over billing on electricity purchases.
However, Niagara Mohawk cannot estimate at this time what, if any, portion
may be refunded.
Niagara Mohawk has entered into financial agreements, with IPP Parties in
connection with the MRA and with buyers of its previously owned coal and oil/gas
fired facilities. The swap payments included in the above table are measured as
the difference between the specified contract price and the market price of
electricity, relative to notional quantity of electricity. See Holdings and
Niagara Mohawk's combined Form 10-K for the fiscal year ended December 31, 1999,
Part II, Item 7A.Quantitative and Qualitative Disclosures About Market Risk -
"Commodity Price Risk" and also Note 9. Fair Value of Financial and Derivative
Financial Instruments - "Swap Contracts." The IPP Indexed swaps and the Albany
swap contract prices are indexed monthly to changes in the price of gas (the
primary fuel of these facilities). The IPP Indexed swaps began indexing changes
in gas prices on July 1, 2000, after two years of fixed prices. The indexing
increased the contract prices for July by 38 percent, or $6.8 million higher
than previously forecast. Under Power Choice, Niagara Mohawk bears the risk of
changes in the indexed contract prices until August 31, 2001. Thereafter,
changes in prices will be borne by customers.
Beginning August 11, 2000, Niagara Mohawk entered into NYMEX gas futures
contracts to hedge the September 2000 through March 2001 escalation in the
natural gas price component for two of the eight IPP indexed swap contracts.
The average price of gas in the futures contracts is $4.38 per Dth. These 2
IPP swap contracts represent 25 percent of the notional quantities addressed
by the 8 IPP Indexed Swap Contracts. Niagara Mohawk is investigating other
opportunities to mitigate future gas price risk associated with these
contracts, which may include purchasing additional NYMEX futures.
The method of accounting for gas futures is in accordance with SFAS No. 80
"Accounting for Futures Contracts" as a hedge of an anticipated transaction.
Under hedge accounting, gains or losses from the settlements of the futures
contracts are deferred until the hedged transactions occur. At that time, the
gains or losses and the payments under the indexed swap contracts are recognized
in power purchases in the Consolidated Statements of Income.
The transactions being hedged are increases in the commodity cost of natural gas
used as a component of the indexing of the IPP swap contract prices. The extent
to which the cost of gas impacts the IPP swap contract prices varies by
contract, but on average represents 60 percent to 70 percent of the indexed
contract prices.
If there is a loss of correlation between changes in the market value of the
futures contracts and the commodity cost of gas, we would cease to account for
the contracts as hedges and any gains or losses in the contracts value would be
recognized in the Statements of Income currently.
These gas futures contracts qualify for hedge accounting because they are
designated as hedges at their inception, and price movements in the futures
contracts are expected to correlate with changes in the commodity price of
natural gas. This commodity price change is expected to correlate with changes
in the indexed contract prices. The results of the futures contracts should
substantially offset the effects that gas price changes have on the indexed
contract prices.
As a result of Niagara Mohawk's sale of its fossil generation assets, FUEL FOR
ELECTRIC GENERATION decreased $75.1 million as compared to the first six months
in 1999. Niagara Mohawk's nuclear generation increased as compared with the
first six months of 1999, primarily due to the extended outages at Unit 1 and
Unit 2 during the first six months of 1999. In accordance with Power Choice,
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.
Niagara Mohawk's GAS PURCHASED expense increased $45.2 million in the first 6
months of 2000. This was a result of a $19.3 million increase in purchased gas
costs and certain other items recognized and recovered through the regulated gas
commodity cost adjustment clause, a 14.9 percent increase in the average cost
per Dth purchased ($22.0 million), a 1.2 million increase in Dth purchased and
withdrawn from storage for ultimate consumers sales ($3.7 million), and a $0.2
million increase 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. Niagara Mohawk's net cost
per Dth sold, as charged to expense, excluding spot market purchases, increased
to $3.54 in 2000 from $3.08 in 1999.
The increase in the purchased gas costs and certain other items recognized and
recovered through the regulated gas cost adjustment mechanism was primarily due
to a change in the regulatory treatment for these costs in accordance with
Niagara Mohawk's temporary gas rate agreement that has been in place since the
expiration of the 1996 rate agreement on November 1, 1999. The result of this
change in recovery method will cause Niagara Mohawk to experience a lower gas
margin during high volume periods, such as in the winter months, and a higher
gas margin during low volume periods, such as in the summer months. Although
the negative six month 2000 earnings impact from this timing difference is
expected to reverse during the year, annual gas margins for 2000 are expected to
be lower because certain cost saving incentives earned in 1999 are no longer
available under the gas rate agreement.
Holdings' GAS PURCHASED expense reflects Niagara Mohawk's activity, as well as
an increase of $20.0 million in the first 6 months of 2000 primarily as a result
of higher unregulated sales.
OTHER OPERATION AND MAINTENANCE EXPENSE for both Holdings and Niagara Mohawk
increased for the first six months of 2000 as compared to the same period in
1999 as a result of higher financing costs on the sale of accounts receivable
of $9.0 million, a $5.4 million increase in nuclear costs incurred primarily
for the scheduled refueling and maintenance outage at Unit 2, partially offset
by lower fossil and hydro maintenance costs due to the sale of the fossil and
hydro generation plants during 1999 and 2000.
DEPRECIATION AND AMORTIZATION EXPENSE for both Holdings and Niagara Mohawk have
decreased $32.6 million for the first 6 months of 2000 as a result of Niagara
Mohawk's sale of its fossil and hydro generation assets during 1999 and 2000,
which decreased depreciation and amortization expense by $28.2 million.
The decrease in OTHER TAXES of $82 million for both Holdings and Niagara Mohawk
for the first 6 months of 2000 as compared to the same period in 1999 is partly
due to lower real estate taxes of $35.8 million resulting from the sale of
Niagara Mohawk's fossil and hydro generation plants. Other taxes are also lower
due to lower GRT rates and an increase in GRT credits received due to an
increase in the customers in Niagara Mohawk's service territory that participate
in New York State's Power for Jobs program. In addition, other taxes decreased
as a result of the state tax law changes as further explained in Item 1. Notes
to the Consolidated Financial Statements, Note 1. Summary of Significant
Accounting Policies, "Basis of Presentation."
Holdings and Niagara Mohawk's INTEREST CHARGES decreased by $39.3 million mainly
due to the repayment of approximately $1.1 billion in debt during 1999.
Holdings and Niagara Mohawk's INCOME TAXES were about the same for the six
months ended 2000 and 1999. As further explained in Item 1. Notes to the
Consolidated Financial Statements, Note 1. Summary of Significant Accounting
Policies, "Basis of Presentation," about $12 million of state income taxes are
included in the "income taxes" line item for the 6 months ended June 30, 2000
reflecting the change in the New York State income tax law. There were no state
income taxes applicable to Niagara Mohawk in 1999. Holdings and Niagara
Mohawk's federal income taxes were lower by approximately $12 million primarily
due to lower book taxable income in the first 6 months of 2000 as compared to
1999. Included in earnings for the first 6 months of 1999 is approximately $8.5
million of previously deferred investment tax credits associated with the sale
of Niagara Mohawk's two coal-fired generation plants, while only $0.8 million
previously deferred investment tax credits associated with the sale of the
Albany oil and gas-fired generation plant is included in the results for the
first 6 months of 2000. Niagara Mohawk believes this accounting to be
consistent with applicable tax laws. The effective tax rate will differ from
the statutory rates primarily due to the flow-through of certain federal tax
benefits or liabilities as required by the PSC. As pre-tax income changes, the
percentage relationship of the flow-through items to pre-tax income will also
change.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no material changes in Holdings or Niagara Mohawk's market risk or
market risk strategies during the six months ended June 30, 2000. For a
Based upon forecasts of gas commodity prices, Niagara Mohawk may experience
increases in the cost of gas purchased for resale to customers and in payments
under the IPP indexed swap contracts; the mitigation of these risks is discussed
below. For a detailed discussion of market risk, see Holdings and Niagara
Mohawk's combined Form 10-K for fiscal period ended December 31, 1999, Part II,
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
GAS FUTURES CONTRACTS - GAS FOR RESALE TO CUSTOMERS
---------------------------------------------------
In June of 2000, Niagara Mohawk began to hedge its exposure to fluctuations in
natural gas commodity prices with New York Mercantile Exchange ("NYMEX") gas
futures contracts. Niagara Mohawk has a risk management policy defining the
limits within which hedging activities are carried out. The objective of
Niagara Mohawk's hedging program is to manage gas price changes through the use
of financial instruments to reduce price volatility. Niagara Mohawk does not
hold speculative positions in gas commodity futures for trading. The method of
accounting for gas futures is in accordance with SFAS No. 80 "Accounting for
Futures Contracts" as a hedge of an anticipated transaction.
Under hedge accounting, gains or losses from the settlements of the futures
contracts are deferred until the hedged transactions occur. At that time, the
gains or losses and the cost of purchased gas are recognized in Gas Purchased
in the Consolidated Statements of Income.
The item to be hedged, purchased natural gas, exposes Niagara Mohawk to
commodity price volatility. Even though Niagara Mohawk's exposure to gas
commodity price fluctuations is limited by a regulatory ruling that transfers
the commodity price risk to the customer for prudently incurred commodity
costs, Niagara Mohawk uses gas futures as hedges to effectively and prudently
manage those costs.
These gas futures contracts qualify for hedge accounting because they are
designated as hedges at their inception, and price movements in the futures
contracts are highly correlated with changes in the price of the natural gas.
The effect of settlement of the contracts should effectively offset the effects
of price changes in gas.
The anticipated transactions being hedged are the purchases of natural gas for
resale to customers for the winter heating season of November 2000 through March
2001. Based on similar purchases in the past, the quantity of gas hedged by the
futures contracts should represent approximately ten percent of the gas
purchased during this time frame.
If there is a loss of correlation between changes in the market value of the
futures contracts and gas commodity costs, we would cease to account for the
contracts as hedges and any gains or losses in the contracts value would be
recognized in the Statements of Income currently. However, Niagara Mohawk
believes that prudently incurred costs are recoverable from customers, and
any gain or loss would be deferred for pass back or recovery.
GAS FUTURES CONTRACTS - INDEXED SWAP CONTRACTS
----------------------------------------------
Beginning August 11, 2000, Niagara Mohawk entered into NYMEX gas futures
contracts to hedge the September 2000 through March 2001 escalation in the
natural gas price component for two of the eight IPP indexed swap contracts.
The average price of gas in the futures contracts is $4.38 per Dth. These 2
IPP swap contracts represent 25 percent of the notional quantities addressed
by the 8 IPP Indexed Swap Contracts. Niagara Mohawk is investigating other
opportunities to mitigate future gas price risk associated with these
contracts, which may include purchasing additional NYMEX futures.
The method of accounting for gas futures is in accordance with SFAS No. 80
"Accounting for Futures Contracts" as a hedge of an anticipated transaction.
Under hedge accounting, gains or losses from the settlements of the futures
contracts are deferred until the hedged transactions occur. At that time, the
gains or losses and the payments under the indexed swap contracts are recognized
in power purchases in the Consolidated Statements of Income.
The transactions being hedged are increases in the commodity cost of natural gas
used as a component of the indexing of the IPP swap contract prices. The extent
to which the cost of gas impacts the IPP swap contract prices varies by
contract, but on average represents 60 percent to 70 percent of the indexed
contract prices.
If there is a loss of correlation between changes in the market value of the
futures contracts and the commodity cost of gas, we would cease to account for
the contracts as hedges and any gains or losses in the contracts value would be
recognized in the Statements of Income currently.
These gas futures contracts qualify for hedge accounting because they are
designated as hedges at their inception, and price movements in the futures
contracts are expected to correlate with changes in the commodity price of
natural gas. This commodity price change is expected to correlate with changes
in the indexed contract prices. The results of the futures contracts should
substantially offset the effects that gas price changes have on the indexed
contract prices.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
PART II
-------
ITEM 1. LEGAL PROCEEDINGS
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 New York State 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. Discovery proceedings are in progress with respect to the two causes
of action.
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 were unsuccessful, and Niagara Mohawk
informed FERC that its participation in the mediation efforts was concluded.
On January 14, 1997, the FERC ALJ 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.
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.
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. On November 23, 1999, FERC
issued a comprehensive order rejecting Fourth Branch's unilateral offer of
settlement, dismissing Fourth Branch's complaint of anti-competitive conduct
against Niagara Mohawk and determining that there has been an implied surrender
by Fourth Branch and Niagara Mohawk of the FERC license for the Mechanicville
Project. On December 23, 1999, Fourth Branch filed a petition for rehearing of
the Commission's decision. On March 16, 2000, FERC denied the petition for
rehearing. On April 21, 2000, Fourth Branch filed an appeal of FERC's decision
to the United States Court of Appeals in Washington D.C.
Niagara Mohawk is unable to predict the ultimate disposition of the lawsuit and
FERC case referred to above. However, Niagara Mohawk believes it has
meritorious defenses and intends to defend them vigorously. No provision for
liability, if any, that may result from this lawsuit has been made in Niagara
Mohawk's financial statements.
DEC AIR POLLUTION NOTICE OF VIOLATION
-------------------------------------
On May 25, 2000, the New York State Department of Environmental Conservation
issued an air pollution notice of violation to Niagara Mohawk Power Corporation
("Niagara Mohawk") regarding the operation of its two formerly owned coal-fired
generation plants (Huntley and Dunkirk). The notice of violation was also
issued to NRG Energy, Inc., the current owner and operator of both plants. The
notice alleges violations of the federal Clean Air Act and the New York State
Environmental Conservation Law resulting from the alleged failure of the
companies to obtain permits for plant modifications and the alleged failure to
install air pollution control equipment. Niagara Mohawk is unable to predict
whether or not the results of this enforcement action will have an adverse
material effect on its financial position and results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Holdings' annual meeting on May 16, 2000,
(1) The Election of Directors was as follows:
Shares Withheld
Shares Voted For Authority
---------------- ---------
Lawrence Burkhardt, III 150,215,579 5,017,375
John H. Dalton 151,152,106 4,080,848
William J. Donlon 150,094,358 5,138,596
Stephen B. Schwartz 151,092,677 4,140,277
(2) A shareholder proposal relating to Holdings' endorsement of the
Coalition for Environmentally Responsible Economies Principles as part of
its commitment to be publicly accountable for its environmental impact was
rejected by a vote of 24,551,217 for, 106,956,237 against, 5,696,004
abstentions, and 18,029,496 broker non-votes.
ITEM 5. OTHER INFORMATION
On July 18, 2000, U.S. Senator Charles Schumer (D-NY) and Senator Phil Gramm
(R-TX) introduced federal legislation to restructure the electric industry, such
that utilities in states that have not enacted electric restructuring
legislation by July 1, 2000 would be prohibited from collecting more than 50
percent of the utility's estimated stranded costs. Since New York State has not
enacted restructuring legislation, the Schumer bill would force the PSC to redo
the individual restructuring plans already approved by the PSC. The stranded
cost recovery language could significantly reduce the stranded cost recovery
currently permitted under Niagara Mohawk's Power Choice agreement. Additionally
the bill would repeal the Public Utility Regulatory Policies Act ("PURPA") and
the Public Utility Holding Company Act ("PUHCA"). Most PURPA contracts would be
grandfathered, except certain above market contracts that cover purchases made
five years after enactment of the bill.
PSC Chairman Maureen O. Helmer issued a statement on the same day opposing
Senator Schumer's proposed electric industry restructuring bill, noting that New
York is one of the two states leading the nation in establishing an effective
framework for customer choice in a competitive electric industry.
The Company is unable to predict the outcome of this bill, however such
legislation could have a material adverse effect on its results of operations
and financial condition.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 3 - By-Laws of Holdings, as amended June 13, 2000.
Exhibit 10 - Amendment to the Long Term Incentive Plan dated April 27,
2000.
Exhibit 11 - Computation of the Average Number of Shares of Common Stock
Outstanding for the Three Months and Six Months Ended June 30, 2000
and 1999.
Exhibit 12a - Statement Showing Computation of Ratio of Earnings to Fixed
Charges for the Twelve Months Ended June 30, 2000 for Niagara Mohawk
Holdings, Inc.
Exhibit 12b - 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 June 30, 2000 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 agreement comprising the $804 million senior debt
facility that Niagara Mohawk completed with a bank group on June 1, 2000. 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 - May 12, 2000
Items reported:
(1) Item 5. Other Events
(a) Niagara Mohawk filed a press release regarding the termination of its
June 24, 2000 agreement with AmerGen Energy Co.
(b) Niagara Mohawk issued a press release relating to the closing on the
sale of its Albany oil and gas-fired generation station.
(c) Niagara Mohawk closed on the issuance of $200 million senior notes on
May 12, 2000.
(2) Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
Exhibit 99-1 - Press release of Niagara Mohawk issued on May 12, 2000,
relating to the termination of the agreement with AmerGen Energy Co.
Exhibit 99-2 - Press release of Niagara Mohawk issued on May 12, 2000,
relating to the closing on the sale of its Albany oil and gas-fired
generation station.
Form 8-K Reporting Date - May 25, 2000
Items reported:
(1) Item 5. Other Events
(a) On May 25, 2000, the New York State Department of Environmental
Conservation issued an air pollution notice of violation to Niagara Mohawk
regarding the operation of its two formerly owned coal-fired generation
plants (Huntley and Dunkirk).
(b) Niagara Mohawk issued a press release regarding an announcement to
auction their ownership interest in Unit 1 and Unit 2.
(2) Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
Exhibit 99 - Press release of Niagara Mohawk issued on June 1, 2000,
regarding an announcement to auction Niagara Mohawk's ownership interest
in Unit 1 and Unit 2.
Form 8-K Reporting Date - July 28, 2000
Items reported:
(1) Item 5. Other Events
Holdings filed a press release relating to its second quarter earnings for
2000.
(2) Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
Exhibit 99 - Press release of Holdings issued July 28, 2000, relating to
its second quarter earnings.
NIAGARA MOHAWK POWER CORPORATION
--------------------------------
Form 8-K Reporting Date - May 9, 2000
Items reported:
(1) Item 5. Other Events
On May 9, 2000, Niagara Mohawk entered into an underwriting agreement related to
the offering and sale of $200 million aggregate principal amount of 8-7/8
percent Senior Notes due 2007. The offering and sale of the Notes was
consummated on May 12, 2000.
(2) Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
(a) Exhibit 1.1 - Underwriting Agreement dated May 9, 2000
(b) Exhibit 1.2 - Indenture dated as of May 12, 2000
(c) Exhibit 1.3 - First supplemental Indenture dated as of May 12, 2000
(d) Exhibit 1.4 - The Global Note
Form 8-K Reporting Date - May 12, 2000
Items reported:
(1) Item 5. Other Events
(a) Niagara Mohawk filed a press release regarding the termination of its
June 24, 2000 agreement with AmerGen Energy Co.
(b) Niagara Mohawk issued a press release relating to the closing on the
sale of its Albany oil and gas-fired generation station.
(c) Niagara Mohawk closed on the issuance of $200 million senior notes on
May 12, 2000.
(2) Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
Exhibit 99-1 - Press release of Niagara Mohawk issued on May 12, 2000,
relating to the termination of the agreement with AmerGen Energy Co.
Exhibit 99-2 - Press release of Niagara Mohawk issued on May 12, 2000,
relating to the closing on the sale of its Albany oil and gas-fired
generation station.
Form 8-K Reporting Date - May 25, 2000
Items reported:
(1) Item 5. Other Events
(a) On May 25, 2000, the New York State Department of Environmental
Conservation issued an air pollution notice of violation to Niagara Mohawk
regarding the operation of its two formerly owned coal-fired generation
plants (Huntley and Dunkirk).
(b) Niagara Mohawk issued a press release regarding an announcement to
auction their ownership interest in Unit 1 and Unit 2.
(2) Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
Exhibit 99 - Press release of Niagara Mohawk issued on June 1, 2000,
regarding an announcement to auction Niagara Mohawk's ownership interest
in Unit 1 and Unit 2.
Form 8-K Reporting Date - July 28, 2000
Items reported:
(1) Item 5. Other Events
Holdings filed a press release relating to its second quarter earnings for
2000.
(2) Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
Exhibit 99 - Press release of Holdings issued July 28, 2000, relating to
its second quarter earnings.
<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: August 14, 2000 By: /s/Steven W. Tasker
-----------------------------
Steven W. Tasker
Vice President-Controller and
Principal Accounting Officer
NIAGARA MOHAWK POWER CORPORATION
(Registrant)
Date: August 14, 2000 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
------ -----------
3 By-Laws of Holdings, as amended June 13, 2000.
10 Amendment to the Long Term Incentive Plan dated April 27, 2000.
11 NIAGARA MOHAWK HOLDINGS, INC.
Computation of the Average Number of Shares of Common Stock
Outstanding for the Three Months and Six Months Ended June 30,
2000 and 1999.
12a NIAGARA MOHAWK HOLDINGS, INC.
Statement Showing Computation of Ratio of Earnings to Fixed
Charges for the Twelve Months Ended June 30, 2000.
12b NIAGARA MOHAWK POWER CORPORATION
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 June 30, 2000.
15 Accountants' Acknowledgement Letter.
27a NIAGARA MOHAWK HOLDINGS, INC.
Financial Data Schedule.
27b NIAGARA MOHAWK POWER CORPORATION
Financial Data Schedule.
<PAGE>
EXHIBIT 3
BY-LAWS
NIAGARA MOHAWK HOLDINGS, INC.
ADOPTED APRIL 7, 1998
(As Amended June 13, 2000)
BY-LAWS
NIAGARA MOHAWK HOLDINGS, INC.
ADOPTED APRIL 7, 1998
(As Amended June 13, 2000)
<TABLE><CAPTION>
*Index
Page Page
<S> <C> <C> <C>
Action by the Board 9,14 Notice of Meetings 1,9,14
Amendments 17 Number of Directors 8
Annual Meeting 1,9 Officers 12
Board of Directors 8 Organization 7
Board Meetings 9 Other Matters 14
Certificates 13 Place of Meetings 1
Committees 11 Power of Board 8
Compensation 10 Powers and Duties 8,12
Conduct of Meeting 7 Proxies 4
Confidentiality 7 Qualification 3,8
Corporate Records 14 Quorum 3,9
Corporate Seal 14 Record Date 4
Election 8 Removal 10,12
Executive Committee 11 Resignation 10,12
Fiscal Year 14 Shareholders 1
Forms of Share Certificates 13 Shareholder Proposals 5
Indemnification 15 Special Meetings 1,9
Inspectors 2 Term of Office 8,12
Interest of Directors and Transfers of Shares 13
Officers in Transactions 14 Vacancies 8,12
List of Shareholders at Meetings 3 Vote or Consent of Shareholders 4
Lost Share Certificates 13 Voting 3,4,15
Waiver of Notice 2,10,14
</table?
*This index does not constitute part of the By-Laws
or have any bearing upon the interpretation of their
terms and provisions.
BY-LAWS
OF
NIAGARA MOHAWK HOLDINGS, INC.
ARTICLE I.
Shareholders
Section 1.1. Annual Meeting. A meeting of shareholders
shall be held annually for the election of directors at such
date and time as may be designated by the Board of Directors
from time to time. Any other proper business may be
transacted at the annual meeting.
Section 1.2. Special Meetings. Special meetings of the
shareholders may be called by the Chairman of the Board or by
the Board of Directors pursuant to resolution adopted by a
majority of the total number of directors which the
Corporation would have if there were no vacancies, the
Chairman of the Board or the President, to be held at such
date and time as may be stated in the notice of the meeting.
At any special meeting only such business may be transacted
which is related to the purpose or purposes set forth in the
notice of such special meeting given pursuant to Section 1.4
of these By-Laws.
Section 1.3. Place of Meetings. Meetings of shareholders
shall be held at such place, within or without the State of
New York, as may be fixed by the Board of Directors. If no
place is so fixed, such meetings shall be held at the prin-
cipal office of the Corporation in the State of New York.
Section 1.4. Notice of Meetings. Written notice of each
meeting of shareholders shall be given stating the place, date
and hour of the meeting. Notice of a special meeting of
shareholders shall indicate that it is being issued by or at
the direction of the person or persons calling the meeting and
shall state the purpose or purposes for which the meeting is
called. If, at any meeting of shareholders, action is
proposed to be taken which would, if taken, entitle objecting
shareholders to receive payment for their shares, the notice
of such meeting shall include a statement of that purpose and
to that effect and shall be accompanied by a copy of Section
623 of the New York Business Corporation Law as then in effect
or an outline of its material terms. A copy of the notice of
each meeting of shareholders shall be given, personally or by
first class mail, not fewer than ten nor more than sixty days
before the date of the meeting, or shall be given by third
class mail not less than twenty-four nor more than sixty days
before the date of the meeting, to each shareholder entitled
to vote at such meeting. If mailed, such notice shall be
deemed given when deposited in the United States mail, with
postage thereon prepaid, directed to the shareholder at his or
her address as it appears on the record of shareholders, or,
if he or she shall have filed with the Secretary of the
Corporation a written request that notices to him or her be
mailed to some other address, then directed to him or her at
such other address. When a meeting of shareholders is
adjourned to another time or place, it shall not be necessary
to give any notice of the adjourned meeting if the time and
place to which the meeting is adjourned are announced at the
meeting at which the adjournment is taken, and at the
adjourned meeting any business may be transacted that might
have been transacted on the original date of the meeting.
However, if after the adjournment the Board of Directors fixes
a new record date for the adjourned meeting, a notice of the
adjourned meeting shall be given to each shareholder of record
on the new record date entitled to notice under this Section
1.4.
Section 1.5. Waiver of Notice. Notice of meeting need not be
given to any shareholder who submits a signed waiver of
notice, in person or by proxy, whether before or after the
meeting. The attendance of any shareholder at a meeting, in
person or by proxy, without protesting prior to the conclusion
of the meeting the lack of notice of such meeting, shall
constitute a waiver of notice by him or her.
Section 1.6. Inspectors. Voting at meetings of shareholders
shall be conducted by inspectors. The Board of Directors, in
advance of any shareholders' meeting, shall appoint one or
more inspectors to act at the meeting or any adjournment
thereof. In case any person appointed fails to appear or act,
the vacancy may be filled by appointment made by the Board in
advance of the meeting or at the meeting by the person
presiding thereat. Each inspector, before entering upon the
discharge of his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector at such meeting
with strict impartiality and according to the best of his or
her ability. The inspectors shall determine the number of
shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum and the
validity and effect of proxies, and shall receive votes,
ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count
and tabulate all votes, ballots or consents, determine the
result, and do such acts as are proper to conduct the election
or vote with fairness to all shareholders. On request of the
person presiding at the meeting or any shareholder entitled to
vote thereat, the inspectors shall make a report in writing of
any challenge, question or matter determined by them and
execute a certificate of any fact found by them.
Section 1.7. List of Shareholders at Meetings. A list of
shareholders as of the record date, certified by the Secretary
or any Assistant Secretary or by a transfer agent, shall be
produced at any meeting of shareholders upon the request
thereat or prior thereto of any shareholder. If the right to
vote at any meeting is challenged, the inspectors, or person
presiding thereat, shall require such list of shareholders to
be produced as evidence of the right of the persons challenged
to vote at such meeting, and all persons who appear from such
list to be shareholders entitled to vote thereat may vote at
such meeting.
Section 1.8. Qualification of Voters. Every shareholder of
record shall be entitled at every meeting of shareholders to
one vote for every share standing in his or her name on the
record of shareholders, unless otherwise provided in the
Certificate of Incorporation. If the Certificate of
Incorporation provides for more or less than one vote for any
share on any matter, every reference in these By-Laws to a
majority or other proportion of shares shall be construed to
refer to such majority or other proportion of the votes of
such shares. Treasury shares as of the record date and shares
held as of the record date by another domestic or foreign
corporation of any type or kind, if a majority of the shares
entitled to vote in the election of directors of such other
corporation is held as of the record date by the Corporation,
shall not be shares entitled to vote or to be counted in
determining the total number of outstanding shares. Shares
held by an administrator, executor, guardian, conservator,
committee or other fiduciary, except a trustee, may be voted
by him or her or it, either in person or by proxy, without
transfer of such shares into his or her or its name. Shares
held by a trustee may be voted by him or her or it, either in
person or by proxy, only after the shares have been
transferred into his or her or its name as trustee or into the
name of his or her or its nominee. Shares standing in the
name of another domestic or foreign corporation of any type or
kind may be voted by such officer, agent or proxy as the By-
Laws of such corporation may provide, or, in the absence of
such provision, as the board of directors of such corporation
may determine. A shareholder shall not sell his or her vote
or issue a proxy to vote to any person for any sum of money or
anything of value except as permitted by law.
Section 1.9. Quorum of Shareholders. The holders of a
majority of the votes of shares entitled to vote thereat shall
constitute a quorum at a meeting of shareholders for the
transaction of any business, provided that when a specified
item of business is required to be voted on by a class or
series, voting as a class, the holders of a majority of the
votes of shares of such class or series shall constitute a
quorum for the transaction of such specified item of business.
When a quorum is once present to organize a meeting, it is not
broken by the subsequent withdrawal of any shareholders. The
shareholders present in person or by proxy and entitled to
vote may, by a majority of the votes cast, adjourn the meeting
despite the absence of a quorum.
Section 1.10. Proxies. Every shareholder entitled to vote at
a meeting of shareholders or to express consent or dissent
without a meeting may authorize another person or persons to
act for him or her by proxy. No proxy shall be valid after
the expiration of eleven months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be
revocable at the pleasure of the shareholder executing it,
except as otherwise provided by law. The authority of the
holder of a proxy to act shall not be revoked by the
incompetence or death of the shareholder who executed the
proxy unless, before the authority is exercised, written
notice of an adjudication of such incompetence or of such
death is received by the Secretary or any Assistant Secretary.
A shareholder may authorize another person or persons to act
for the shareholder as proxy by transmitting or authorizing
the transmission of a telegram, cablegram or other means of
electronic transmission to the person who will be the holder
of the proxy or to a proxy solicitation firm, proxy support
service organization or like agent duly authorized by the
person who will be the holder of the proxy to receive such
transmission, provided that any such telegram, cablegram or
other means of electronic transmission must either set forth
or be submitted with information from which it can be
reasonably determined that the telegram, cablegram or other
electronic transmission was authorized by the shareholder.
Section 1.11. Vote or Consent of Shareholders. Directors
shall, except as otherwise required by law or by the
Certificate of Incorporation, be elected by a plurality of the
votes cast at a meeting of shareholders by the holders of
shares entitled to vote in the election. Whenever any
corporate action, other than the election of directors, is to
be taken by vote of the shareholders, it shall, except as
otherwise required by law or by the Certificate of
Incorporation, be authorized by a majority of the votes cast
at a meeting of shareholders by the holders of shares entitled
to vote thereon. Whenever shareholders are required or
permitted to take any action by vote, such action may be taken
without a meeting on written consent, setting forth the action
so taken, signed by the holders of all outstanding shares
entitled to vote thereon. Written consent thus given by the
holders of all outstanding shares entitled to vote shall have
the same effect as a unanimous vote of shareholders.
Section 1.12. Fixing Record Date. For the purpose of
determining the shareholders entitled to notice of or to vote
at any meeting of shareholders or any adjournment thereof, or
to express consent to or dissent from any proposal without a
meeting, or for the purpose of determining shareholders
entitled to receive payment of any dividend or the allotment
of any rights, or for the purpose of any other action, the
Board of Directors may fix, in advance, a date as the record
date for any such determination of shareholders. Such date
shall not be more than sixty nor less than ten days before the
date of such meeting, nor more than sixty days prior to any
other action. If no record date is fixed: (1) the record
date for the determination of shareholders entitled to notice
of or to vote at a meeting of shareholders shall be at the
close of business on the day next preceding the day on which
notice is given, or, if no notice is given, the day on which
the meeting is held; and (2) the record date for determining
shareholders for any other purpose shall be at the close of
business on the day on which the resolution of the Board of
Directors relating thereto is adopted. When a determination of
shareholders of record entitled to notice of or to vote at any
meeting of shareholders has been made as provided in this
Section, such determination shall apply to any adjournment
thereof, unless the Board of Directors fixes a new record date
for the adjourned meeting.
Section 1.13. Advance Notice of Shareholder Proposals. The
matters to be considered and brought before any annual or
special meeting of shareholders of the Corporation shall be
limited to only such matters, including the nomination and
election of directors, as shall be brought properly before
such meeting in compliance with the procedures set forth in
this Section 1.13.
For any matter to be properly before any annual meeting of
shareholders, the matter must be (i) specified in the notice
of annual meeting given by or at the direction of the Board of
Directors, (ii) otherwise brought before the annual meeting by
or at the direction of the Board of Directors or (iii) brought
before the annual meeting in the manner specified in this
Section 1.13 by a shareholder of record. In addition to any
other requirements under applicable law and the Certificate of
Incorporation and By-Laws of the Corporation, persons
nominated by shareholders for election as directors of the
Corporation and any other proposals by shareholders shall be
properly brought before the meeting only if notice of any such
matter to be presented by a shareholder at such meeting of
shareholders (the "Shareholder Notice") shall be delivered to
the Secretary of the Corporation at the principal executive
office of the Corporation not less than ninety nor more than
one hundred and twenty days prior to the first anniversary
date of the annual meeting for the preceding year; provided,
however, if and only if the annual meeting is not scheduled to
be held within a period that commences thirty days before such
anniversary date and ends thirty days after such anniversary
date (an annual meeting date outside such period being
referred to herein as an "Other Meeting Date"), such
Shareholder Notice shall be given in the manner provided
herein by the later of the close of business on (i) the date
ninety days prior to such Other Meeting Date or (ii) the tenth
day following the date such Other Annual Meeting Date is first
publicly announced or disclosed; and provided further that for
the first annual meeting after the Corporation becomes the
holding company of Niagara Mohawk Power Corporation, the
applicable deadlines shall be those that would have applied to
Niagara Mohawk Power Corporation. Any shareholder desiring to
nominate any person or persons (as the case may be) for
election as a director or directors of the Corporation shall
deliver, as part of such Shareholder Notice, a statement in
writing setting forth the name of the person or persons to be
nominated, the number and class of all shares of each class of
stock of the Corporation owned of record and beneficially by
each such person, as reported to such shareholder by such
nominee(s), the information regarding each such person
required by paragraphs (a), (e) and (f) of Item 401 of
Regulation S-K adopted by the Securities and Exchange
Commission (or the corresponding provisions of any regulation
subsequently adopted by the Securities and Exchange Commission
applicable to the Corporation), each such person's signed
consent to serve as a director of the Corporation if elected,
such shareholder's name and address and the number and class
of all shares of each class of stock of the Corporation owned
of record and beneficially by such shareholder. Any
shareholder who gives a Shareholder Notice of any matter
proposed to be brought before the meeting (not involving
nominees for director) shall deliver, as part of such
Shareholder Notice, the text of the proposal to be presented
and a brief written statement of the reasons why such
shareholder favors the proposal and setting forth such
shareholder's name and address, the number and class of all
shares of each class of stock of the Corporation owned of
record and beneficially by such shareholder and, if
applicable, any material interest of such shareholder in the
matter proposed (other than as a shareholder). As used
herein, shares "beneficially owned" shall mean all shares
which such person is deemed to beneficially own pursuant to
Rules 13d-3 and 13d-5 under the Securities Exchange Act of
1934 (the "Exchange Act").
Notwithstanding anything in this Section 1.13 to the contrary,
in the event that the number of directors to be elected to the
Board of Directors of the Corporation is increased and either
all of the nominees for director or the size of the increased
Board of Directors is not publicly announced or disclosed by
the Corporation at least one hundred days prior to the first
anniversary of the preceding year's annual meeting, a
Shareholder Notice shall also be considered timely hereunder,
but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the
Secretary of the Corporation at the principal executive office
of the Corporation not later than the close of business on the
tenth day following the first date all of such nominees or the
size of the increased Board of Directors shall have been
publicly announced or disclosed.
Only such matters shall be properly brought before a special
meeting of shareholders as shall have been brought before the
meeting pursuant to the Corporation's notice of meeting. In
the event the Corporation calls a special meeting of
shareholders for the purpose of electing one or more directors
to the Board of Directors, any shareholder may nominate a
person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of
meeting, if the Shareholder Notice required by Section 1.13
hereof shall be delivered to the Secretary of the Corporation
at the principal executive office of the Corporation not later
than the close of business on the tenth day following the day
on which the date of the special meeting and of the nominees
proposed by the Board of Directors to be elected at such
meeting is publicly announced or disclosed.
For purposes of this Section 1.13, a matter shall be deemed to
have been "publicly announced or disclosed" if such matter is
disclosed in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service
or in a document publicly filed by the Corporation with the
Securities and Exchange Commission.
In no event shall the adjournment of an annual meeting, or any
announcement thereof, commence a new period for the giving of
notice as provided in this Section 1.13. This Section 1.13
shall not apply to (i) shareholders proposals made pursuant to
Rule 14a-8 under the Exchange Act or (ii) the election of
directors selected by or pursuant to the provisions of Article
IV of the Certificate of Incorporation relating to the rights
of the holders of any class or series of stock of the
Corporation having a preference over the Common Stock as to
dividends or upon liquidation to elect directors under
specified circumstances.
The person presiding at any meeting of shareholders, in
addition to making any other determinations that may be
appropriate to the conduct of the meeting, shall have the
power and duty to determine whether notice of nominees and
other matters proposed to be brought before a meeting has been
duly given in the manner provided in this Section 1.13 and, if
not so given, shall direct and declare at the meeting that
such nominees and other matters shall not be considered.
Section 1.14. Organization. Meetings of shareholders shall
be presided over by the Chairman of the Board, if any, or in
the absence of the Chairman of the Board by the President, or
in the absence of the President by a Vice President, or in the
absence of the foregoing persons by a chairman designated by
the Board of Directors, or in the absence of such designation
by a chairman chosen at the meeting. The Secretary, or in the
absence of the Secretary an Assistant Secretary, shall act as
secretary of the meeting, but in the absence of the Secretary
and any Assistant Secretary the chairman of the meeting may
appoint any person to act as secretary of the meeting. The
order of business at each such meeting shall be as determined
by the chairman of the meeting. The chairman of the meeting
shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts and things
as are necessary or desirable for the proper conduct of the
meeting, including, without limitation, the establishment of
procedures for the maintenance of order and safety,
limitations on the time allotted to questions or comments on
the affairs of the Corporation, restrictions on entry to such
meeting after the time prescribed for the commencement thereof
and the opening and closing of the voting polls.
Section 1.15. Confidentiality. Whenever an action shall
require the vote of shareholders, the tabulations that
identify the particular vote of a shareholder on all proxies,
consents, authorizations and ballots shall be kept
confidential, except as disclosure may be required (i) by
applicable law, (ii) in pursuit or defense of legal
proceedings, (iii) to resolve a bona fide dispute as to the
authenticity of one or more proxies, consents, authorizations
or ballots or as to the accuracy of any tabulation of such
proxies, consents, authorizations or ballots, (iv) if an
individual shareholder requests that his or her vote and
identity be forwarded to the Corporation, or (v) in the event
of a proxy or consent solicitation in opposition to the
solicitation of the Board of Directors of the Corporation; and
the receipt and tabulation of such votes will be by an
independent third party not affiliated with the Corporation.
Comments written on proxies, consents, authorizations and
ballots, will be transcribed and provided to the secretary of
the Corporation without reference to the vote of the
shareholder, except where such shareholder has requested that
the nature of their vote be forwarded to the Corporation.
ARTICLE II.
Board of Directors
Section 2.1. Power of Board and Qualification of Directors.
The business of the Corporation shall be managed under the
direction of the Board of Directors. Each director shall be
at least eighteen years of age. No person who has reached age
70 by January 1 in the year such director would otherwise
stand for election shall, following their initial election,
stand for reelection as a director.
Section 2.2. Number of Directors. The number of directors
constituting the entire Board of Directors shall be the
number, not less than three, fixed from time to time by a
majority of the total number of directors which the
Corporation would have, prior to any increase or decrease, if
there were no vacancies, provided that no decrease shall
shorten the term of any incumbent director.
Section 2.3. Election, Terms and Vacancies. The Board of
Directors shall be divided into three classes designated Class
I, Class II and Class III. Such classes shall be as nearly
equal in number as the then total number of directors
constituting the entire Board permits. At the first annual
meeting of shareholders, or any special meeting in lieu
thereof, Class I, Class II and Class III directors shall be
elected for terms expiring at the next succeeding annual
meeting, the second succeeding annual meeting and the third
succeeding annual meeting, respectively, and until their
respective successors are elected and qualified. At each
annual meeting of shareholders after such first annual (or
special) meeting shareholders, the directors chosen to succeed
those in the class whose terms then expire shall be elected by
shareholders for terms expiring at the third succeeding annual
meeting after election, or for such lesser term for which one
or more may be nominated in a particular case in order to
assure that the number of directors in each class shall be
appropriately constituted and until their respective
successors are elected and qualified. Newly created
directorships or any decrease in directorships resulting from
increases or decreases in the number of directors shall be so
apportioned among the classes of directors as to make all the
classes as nearly equal in number as possible. Vacancies on
the Board of Directors at any time for any reason except the
removal of directors without cause may be filled by a majority
of the directors then in office, although less than a quorum.
If the number of directors is increased by the Board of
Directors and any newly created directorships are filled by
the Board, there shall, to the extent required by New York
law, be no classification of the additional directors until
the next annual meeting of shareholders.
Notwithstanding the foregoing, whenever the holders of any one
or more classes or series of Preferred Stock, now or hereafter
authorized, shall have the right, voting separately or by
class or series, to elect directors at an annual or special
meeting of shareholders, the election, term of office, filling
of vacancies and other features of such directorships shall be
governed by any provisions of the Certificate of Incorporation
applicable thereto, and such directors so elected shall not be
divided into one or more classes pursuant to this Section 2.3
unless expressly provided by such provisions.
Section 2.4. Quorum of Directors and Action by the Board.
Unless a greater proportion is required by law or by the
Certificate of Incorporation, one third of the entire Board of
Directors shall constitute a quorum for the transaction of
business or of any specified item of business. Except where
otherwise provided by law or in the Certificate of
Incorporation or these By-Laws, the vote of a majority of the
directors present at a meeting at the time of such vote, if a
quorum is then present, shall be the act of the Board. Any
action required or permitted to be taken by the Board of
Directors may be taken without a meeting if all members of the
Board consent in writing to the adoption of a resolution
authorizing the action. The resolution and the written
consents by the members of the Board shall be filed with the
minutes of the proceedings of the Board. Except as otherwise
provided by law, all corporate action to be taken by the Board
of Directors shall be taken at a meeting of the Board or by
unanimous written consent. Any one or more members of the
Board of Directors may participate in a meeting of the Board
by means of a conference telephone or similar communications
equipment allowing all persons participating in the meeting to
hear each other at the same time, and participation by such
means shall constitute presence in person at such meeting.
Section 2.5. Meetings of the Board. An annual meeting of the
Board of Directors shall be held in each year as soon as
practicable after the annual meeting of shareholders. Regular
meetings of the Board shall be held at such times as may be
fixed by the Board. Special meetings of the Board may be held
at any time whenever called by the Chairman of the Board, if
any, the President or any two directors. Meetings of the
Board of Directors shall be held at such places within or
without the State of New York as may be fixed by the Board for
annual and regular meetings and in the notice of meeting for
special meetings. If no place is so fixed, meetings of the
Board shall be held at the principal office of the
Corporation. No notice need be given of annual or regular
meetings of the Board of Directors. Notice of each special
meeting of the Board shall be given to each director either by
mail not later than the third business day prior to the
meeting or by telegram, by facsimile transmission, by written
message or orally to the director not later than noon, New
York time, on the day prior to the meeting. Notices shall be
deemed to have been given by mail when deposited in the United
States mail, by telegram at the time of filing, by facsimile
transmission upon confirmation of receipt, and by messenger at
the time of delivery by the messenger. Notices by mail,
telegram, facsimile transmission or messenger shall be sent to
each director at the address or facsimile number designated by
him or her for that purpose, or, if none has been so
designated, at his or her last known residence or business
address. Notice of a meeting of the Board of Directors need
not be given to any director who submits a signed waiver of
notice whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its
commencement, the lack of notice to him or her. A notice or
waiver of notice need not specify the purpose of any meeting
of the Board of Directors. A majority of the directors
present, whether or not a quorum is present, may adjourn any
meeting to another time and place. Notice of any adjournment
of a meeting to another time or place shall be given in the
manner described above to the directors who were not present
at the time of the adjournment and, unless such time and place
are announced at the meeting, to the other directors.
Section 2.6. Resignation. Any director of the Corporation
may resign at any time by giving written notice to the Board
of Directors or to the Chairman of the Board, if any, or the
President or the Secretary of the Corporation. Such
resignation shall take effect at the time specified therein,
and unless otherwise specified therein no acceptance of such
resignation shall be necessary to make it effective.
Section 2.7. Removal of Directors. Directors may be removed
for cause by a vote of shareholders entitled to vote thereon.
Directors shall not be removed without cause by shareholders,
except in the case of a director elected by the holders of any
class or series of Preferred Stock, now or hereafter
authorized, voting as a class or series, when so entitled by
the provisions of the Certificate of Incorporation applicable
thereto.
Section 2.8. Compensation of Directors. The Board of
Directors shall have authority to fix the compensation of
directors for services in any capacity, which shall be a
charge to be paid by the Corporation. The Board of Directors
may elect or appoint members of the Board as officers, members
of committees, or agents of the Corporation, may assign duties
to be performed and may fix the amount of the respective
salaries, fees or other compensation therefor, and the amount
so fixed shall be a charge to be paid by the Corporation. In
addition to any other compensation provided pursuant to these
By-Laws, each director shall be entitled to receive a fee, in
amount as fixed from time to time by resolution of the Board
of Directors, for attendance at any meeting of the Board, or
of any committee of the Board, together with his expenses of
attendance, if any.
ARTICLE III.
Executive and Other Committees
Section 3.1. Executive and Other Committees of Directors.
The Board of Directors, by resolution adopted by a majority of
the entire Board, shall designate from among its members an
Executive Committee and an Audit Committee and may designate
such other committees, each consisting of one or more
directors, and each of which, to the extent provided in the
resolution, shall have all the authority of the Board, except
that no such committee shall have authority as to (1) the
submission to shareholders of any action that needs
shareholders' approval; (2) the filling of vacancies in the
Board or in any committee thereof; (3) the fixing of
compensation of the directors for serving on the Board or on
any committee thereof; (4) the amendment or repeal of the By-
Laws, or the adoption of new By-Laws; or (5) the amendment or
repeal of any resolution of the Board which, by its terms,
shall not be so amendable or repealable. The Board of
Directors may designate one or more directors as alternate
members of any such committee, who may replace any absent
member or members at any meeting of such committee. Unless
the Board of Directors otherwise provides, each committee
designated by the Board may adopt, amend and repeal rules for
the conduct of its business. In the absence of a provision by
the Board or a provision in the rules of such committee to the
contrary, a majority of the entire authorized number of
members of such committee shall constitute a quorum for the
transaction of business, the vote of a majority of the members
present at a meeting at the time of such vote if a quorum is
then present or the unanimous written consent of all members
thereof shall be the act of such committee, any one or more
members of such committee may participate in a meeting of such
committee by means of a conference telephone or similar
communications equipment allowing all persons participating in
the meeting to hear each other at the same time and
participation by such means shall constitute presence in
person at such meeting, and in other respects each committee
shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of
these By-Laws. Each such committee shall serve at the pleasure
of the Board of Directors.
ARTICLE IV.
Officers
Section 4.1. Officers. As soon as practicable after the
annual meeting of shareholders in each year, the Board of
Directors shall elect or appoint a Chief Executive Officer,
President, a Chief Financial Officer, a Secretary and a
Treasurer, and it may, if it so determines, elect or appoint
from among its members a Chairman of the Board and one or more
Vice-Chairmen of the Board. The Board may also elect or
appoint one or more Controllers, Vice-Presidents, Assistant
Vice-Presidents, Assistant Secretaries and Assistant
Treasurers and may give any of them such further designations
or alternate titles as it considers desirable. Any two or
more offices may be held by the same person.
Section 4.2. Term of Office; Resignation; Removal; Vacancies.
Except as otherwise provided in the resolution of the Board of
Directors electing or appointing any officer, all officers
shall be elected or appointed to hold office until the meeting
of the Board of Directors following the next succeeding annual
meeting of shareholders. Each officer shall hold office for
the term for which he or she is elected or appointed, and
until his or her successor has been elected or appointed and
qualified. Any officer may resign at any time by giving
written notice to the Board or to the Chairman of the Board,
if any, or the President or the Secretary of the Corporation.
Such resignation shall take effect at the time specified
therein, and unless otherwise specified therein no acceptance
of such resignation shall be necessary to make it effective.
Any officer may be removed by the Board, with or without
cause, at any time. Removal of an officer without cause shall
be without prejudice to his contract rights, if any, with the
Corporation, but the election or appointment of an officer
shall not of itself create contract rights. Any vacancy
occurring in any office of the Corporation by death,
resignation, removal or otherwise may be filled for the
unexpired portion of the term by the Board.
Section 4.3. Powers and Duties. The officers of the
Corporation shall have such authority and perform such duties
in the management of the Corporation as may be prescribed by
the Board of Directors and, to the extent not so prescribed,
as generally pertain to their respective offices, subject to
the control of the Board. Securities of other corporations
held by the Corporation may be voted by any officer designated
by the Board and, in the absence of any such designation, by
the Chief Executive Officer, the Chief Financial Officer, the
President, any Vice-President, the Secretary or the Treasurer.
The Board may require any officer, agent or employee to give
security for the faithful performance of his duties.
ARTICLE V.
Forms of Certificates and Loss
and Transfer of Shares
Section 5.1. Forms of Share Certificates. The shares of the
Corporation shall be represented by certificates, in such
forms as the Board of Directors may prescribe, signed by the
Chairman of the Board or the President or a Vice-President and
the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be sealed with the seal of the
Corporation or a facsimile thereof. The signatures of the
officers upon a certificate may be facsimiles if the
certificate is countersigned by a transfer agent or registered
by a registrar other than the Corporation itself or its
employee or if the shares are listed on a national securities
exchange. In case any officer who has signed or whose
facsimile signature has been placed upon a certificate shall
have ceased to be such officer before such certificate is
issued, it may be issued by the Corporation with the same
effect as if he or she were such officer at the date of issue.
If the Corporation is authorized to issue shares of more than
one class, each certificate representing shares issued by the
Corporation shall set forth upon the face or back of the
certificate, or shall state that the Corporation will furnish
to any shareholder upon request and without charge, a full
statement of the designation, relative rights, preferences and
limitations of the shares of each class authorized to be
issued and the designation, relative rights, preferences and
limitations of each series of any class of preferred shares
authorized to be issued in series so far as the same have been
fixed and the authority of the Board of Directors to designate
and fix the relative rights, preferences and limitations of
other series. Each certificate representing shares shall
state upon the face thereof (1) that the Corporation is formed
under the laws of the State of New York; (2) the name of the
person or persons to whom issued; and (3) the number and class
of shares, and the designation of the series, if any, which
such certificate represents.
Section 5.2. Transfers of Shares. Shares of the Corporation
shall be transferable on the record of shareholders upon
presentation to the Corporation or a transfer agent of a
certificate or certificates representing the shares requested
to be transferred, with proper endorsement on the certificate
or on a separate accompanying document, together with such
evidence of the payment of transfer taxes and compliance with
other provisions of law as the Corporation or its transfer
agent may require.
Section 5.3. Lost, Stolen or Destroyed Share Certificates.
The Corporation may issue a new certificate for shares in
place of any certificate theretofore issued by it, alleged to
have been lost or destroyed, and the Corporation may require
the owner of the lost or destroyed certificate, or such
owner's legal representative, to give the Corporation a bond
sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss or destruction of
any such certificate or the issuance of any such new
certificate.
ARTICLE VI.
Other Matters
Section 6.1. Corporate Seal. The Board of Directors
may adopt a corporate seal, alter such seal at pleasure, and
authorize it to be used by causing it or a facsimile to be
affixed or impressed or reproduced in any other manner.
Section 6.2. Fiscal Year. The fiscal year of the Corporation
shall be fixed by the Board of Directors.
Section 6.3. When Notice or Lapse of Time Unnecessary.
Whenever for any reason the Corporation or the Board of
Directors or any committee thereof is authorized to take any
action after notice to any person or persons or after the
lapse of a prescribed period of time, such action may be taken
without notice and without the lapse of such period of time if
at any time before or after such action is completed the
person or persons entitled to such notice or entitled to
participate in the action to be taken or, in the case of a
shareholder, his or her attorney-in-fact, submit a signed
waiver of notice of such requirements.
Section 6.4. Books to be Kept. The Corporation shall keep
(a) correct and complete books and records of account, (b)
minutes of the proceedings of the shareholders, Board of
Directors and each committee and (c) a current list of the
directors and officers and their residence addresses; and the
Corporation shall also keep at its office located in the
County of Onondaga in the State of New York or at the office
of its transfer agent or registrar in the State of New York,
if any, a record containing the names and addresses of all
shareholders, the number and class of shares held by each and
the dates when they respectively became the owners of record
thereof. Any of the foregoing books, minutes or records may
be in written form or in any other form capable of being
converted into written form within a reasonable time.
Section 6.5. Interest of Directors and Officers in
Transactions.
In the absence of fraud, no contract or other transaction
between the Corporation and one or more of its directors, or
between the Corporation and any other Corporation, firm,
association or other entity in which one or more of its
directors are directors or officers, or have a substantial
financial interest, shall be either void or voidable,
irrespective of whether such interested director or directors
are present at the meeting of the Board of Directors, or of a
committee thereof, which approves such contract or transaction
and irrespective of whether his, her or their votes are
counted for such purpose:
(1) If the material facts as to such director's interest
in such contract or transaction and as to any such common
directorship, officership or financial interest are disclosed
in good faith or known to the Board of Directors, or a
committee thereof, and the Board or committee approves such
contract or transaction by a vote sufficient for such purpose
without counting the vote of such interested director or, if
the votes of the disinterested directors are insufficient to
constitute an act of the Board under Section 2.4 of these By-
Laws, by unanimous vote of the disinterested directors; or
(2) If the material facts as to such director's interest
in such contract or transaction and as to any such common
directorship, officership or financial interest are disclosed
in good faith or known to the shareholders entitled to vote
thereon, and such contract or transaction is approved by vote
of such shareholders.
If a contract or other transaction between the Corporation and
one or more of its directors, or between the Corporation and
any other corporation, firm, association or other entity in
which one or more of its directors are directors or officers
or have a substantial financial interest, is not so approved,
the Corporation may avoid the contract or transaction unless
the party or parties thereto shall establish affirmatively
that the contract or transaction was fair and reasonable as to
the Corporation at the time it was approved by the Board, a
committee or the shareholders. Notwithstanding the foregoing,
no loan, except advances in connection with indemnification,
shall be made by the Corporation to any director unless it is
authorized by vote of the shareholders. For this purpose,
shares of the director who would be the borrower shall not be
shares entitled to vote.
Section 6.6. Indemnification of Directors and Officers. (a)
For purposes of this Section 6.6 of these By-Laws: service
"at the request of the Corporation" shall include service as
a director, officer, or employee of the Corporation which
imposes duties on, or involves services by, such director,
officer, or employee with respect to an employee benefit plan,
its participants, or beneficiaries; any excise taxes assessed
on a person with respect to an employee benefit plan shall be
deemed to be indemnifiable expenses; action taken or omitted
by a person with respect to an employee benefit plan, which
such person reasonably believes to be in the interest of the
participants and beneficiaries of such plan, shall be deemed
to be action not opposed to the best interests of the
Corporation; and "Continuing Director" means (i) any person
who was a member of the Board of Directors on June 13, 2000,
and (ii) any person who subsequently becomes a member of the
Board of Directors, if such person's nomination for election
is recommended by a majority of the Continuing Directors.
(b) Indemnification: The Corporation shall fully
indemnify, to the extent not expressly prohibited by law, each
person involved in, or made or threatened to be made a party
to, any action, claim or proceeding, whether civil or
criminal, including any investigative, administrative,
legislative, or other proceeding, and including an action by
or in the right of the Corporation or any other corporation,
or any partnership, joint venture, trust, employee benefit
plan, or other enterprise, and including appeals therein (any
such action or proceeding being hereinafter referred to as a
"Matter"), by reason of the fact that such person, such
person's testator or intestate (i) is or was a director or
officer of the Corporation, or (ii) is or was serving, at the
request of the Corporation, as a director, officer, or in any
other capacity, any other corporation, or any partnership,
joint venture, trust, employee benefit plan, or other
enterprise, against any and all judgments, fines, penalties,
amounts paid in settlement, and expenses, including attorneys'
fees actually and reasonably incurred as a result of or in
connection with any Matter, except as provided in the next
paragraph.
No indemnification shall be made to or on behalf of any such
person if a judgment or other final adjudication adverse to
such person establishes that such person's acts were committed
in bad faith or were the result of active and deliberate
dishonesty and were material to the cause of action so
adjudicated, or that such person personally gained in fact a
financial profit or other advantage to which such person was
not legally entitled. In addition, no indemnification shall
be made with respect to any Matter initiated by any such
person against the Corporation, or a director or officer of
the Corporation, other than to enforce the terms of this
Section 6.6, unless such Matter was authorized by a majority
of the Continuing Directors. Further, no indemnification shall
be made with respect to any settlement or compromise of any
Matter unless and until the Corporation has consented to such
settlement or compromise.
In making any determination regarding any person's entitlement
to indemnification hereunder, it shall be presumed that such
person is entitled to indemnification, and the Corporation
shall have the burden of proving the contrary.
(c) Advancement of Expenses: Except in the case of a
Matter against a director, officer, or other person,
specifically approved by a majority of the Continuing
Directors, the Corporation shall, subject to subsection 6.6(b)
above, pay expenses actually and reasonably incurred by or on
behalf of such a person in connection with any Matter in
advance of the final disposition of such Matter. Such
payments shall be made promptly upon receipt by the
Corporation, from time to time, of a written demand of such
person for such advancement, together with an undertaking by
or on behalf of such person to repay any expenses so advanced
to the extent that the person receiving the advancement is
ultimately found not be entitled to indemnification for part
or all of such expenses.
(d) Rights Not Exclusive: The rights to
indemnification and advancement of expenses granted by or
pursuant to this Section 6.6: (i) shall not limit or exclude,
but shall be in addition to, any other rights which may be
granted by or pursuant to any statute, resolution, or
agreement, (ii) shall be deemed to constitute contractual
obligations of the Corporation to any director, officer, or
other person who serves in a capacity referred to herein at
any time while this Section 6.6 is in effect, (iii) are
intended to be retroactive and shall be available with respect
to events occurring prior to the adoption of this Section 6.6,
and (iv) shall continue to exist after the repeal or
modification hereof with respect to events occurring prior
thereto. It is the intent of this Section 6.6 to require the
Corporation to indemnify the persons referred to herein for
the aforementioned judgments, fines, penalties, amounts paid
in settlement, and expenses, including attorneys' fees in each
and every circumstance in which such indemnification could
lawfully be permitted by express provisions of By-Laws, and
the indemnification required by this Section 6.6 shall not be
limited by the absence of an express recital of such
circumstances.
(e) Authorization of Contracts: The Corporation
may, with the approval of the Board of Directors, enter into
an agreement with any person who is, or is about to become, a
director or officer of the Corporation, or who is serving, or
is about to serve, at the request of the Corporation, as a
director, officer, or in any other capacity, any other
corporation, or any partnership, joint venture, trust,
employee benefit plan, or other enterprise, which agreement
may provide for indemnification of such person and advancement
of expenses to such person upon terms, and to the extent, not
prohibited by law. The failure to enter into any such
agreement shall not affect or limit the rights of any such
person under this Section 6.6.
(f) Severability: If any provision of this Section
6.6 is determined at any time to be unenforceable in any
respect, the other provisions shall not in any way be affected
or impaired thereby.
Section 6.7. Amendments. Except as otherwise provided in the
Certificate of Incorporation in respect of any class or series
of Preferred Stock, now or hereafter authorized, the By-Laws
of the Corporation may be amended or repealed, or new By-Laws
may be adopted, either (a) by a vote of shareholders entitled
to vote at any annual or special meeting of shareholders, or
(b) by a vote of the majority of the entire Board of Directors
at any regular or special meeting of directors; provided,
however, that any amendment or repeal of, or the adoption of
any new By-Law or provision inconsistent with, Article I
(Sections 1.2, 1.13 or 1.14), Article II (Sections 2.2, 2.3,
or 2.7) or Article VI (Sections 6.6 or 6.7) of these By-Laws,
if by action of such shareholders, shall be only upon the
affirmative vote of not less than two-thirds of the shares
entitled to vote thereon at such annual or special meeting of
shareholders at which any such action is proposed and, if by
action of the Board of Directors, shall be only upon the
approval of not less than two-thirds of the entire Board of
Directors at any regular or special meeting of directors.
1
28
EXHIBIT 10
NIAGARA MOHAWK POWER CORPORATION
LONG TERM INCENTIVE PLAN
Article 1. Establishment, Purpose and Duration
1.1 Establishment of the Plan. Niagara Mohawk
Power Corporation, a New York corporation
(hereinafter referred to as the "Company"), hereby
establishes an incentive compensation plan to be
known as the "Niagara Mohawk Power Corporation
Long Term Incentive Plan" (hereinafter referred to
as the "Plan"), as set forth in this document. The
Plan permits the grant of SAR's, Stock Units and
Dividend Equivalents, as defined herein.
The Plan became effective as of September 25, 1996
(the "Effective Date"). This amendment and
reinstatement of the Plan shall become effective
as of June 10, 1997 and shall remain in effect as
provided in Section 1.3 herein.
1.2 Purpose of the Plan. The purpose of the
Plan is to promote the success and enhance the
value of the Company through the retention and
continued motivation of Participants, focusing
their efforts toward the execution of business
strategies directed toward improving financial
returns to shareholders.
1.3 Duration of the Plan. The Plan shall
commence on the Effective Date, as described in
Section 1.1 herein, and shall remain in effect,
subject to the right of the Board of Directors to
terminate the Plan at any time pursuant to Article
14 herein, until September 24, 2006. The
applicable terms of the Plan and any terms and
conditions applicable to SARs or Stock Units,
including any deferral elections, granted prior to
such date shall survive the termination of the
Plan.
Article 2. Definitions
Whenever used in the Plan, the following terms
shall have the meanings set forth below and, when
such meaning is intended, the initial letter of
the word is capitalized:
2.1 "Award" means, individually or
collectively, a grant under the Plan of SARs or
Stock Units.
2.2 "Award Agreement" means an agreement
entered into by each Participant and the Company,
setting forth the terms and provisions applicable
to an Award granted to a Participant under the
Plan.
2.3 "Base Value" of an SAR shall have the
meaning set forth in Section 6.2 herein.
2.4 "Board" or "Board of Directors" means
the Board of Directors of the Company .
2.5 "Cause" means: (i) a material default
or other material breach by a Participant of his
obligations under any Employment Agreement he may
have with the Company, (ii) failure by a
Participant diligently and competently to perform
his duties under any Employment Agreement he may
have with the Company, or otherwise, or (iii)
misconduct, dishonesty, insubordination or other
act by a Participant detrimental to the good will
of the Company or damaging the Company's
relationships with its customers, suppliers or
employees. "Cause" shall be determined in good
faith by the Committee.
2.6 "Change in Control" of the Company
shall be deemed to have occurred as of the first
day that any one or more of the following
conditions shall have been satisfied:
(1) The acquisition by any Person of
beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20%
or more of either (i) the then outstanding Shares
of the Company or (ii) the combined voting power
of the then outstanding voting securities of the
Company entitled to vote generally in the election
of directors (the "Outstanding Company Voting
Securities"); provided, however, that the
following acquisitions shall not constitute a
Change of Control: (i) any acquisition directly
from the Company (excluding an acquisition by
virtue of the exercise of a conversion privilege),
(ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the
Company or any corporation controlled by the
Company or (iv) any acquisition by any
corporation pursuant to a reorganization, merger
or consolidation, if, following such
reorganization, merger or consolidation, the
conditions described in clauses (i), (ii) and
(iii) of subparagraph (3) below are satisfied; or
(2) Individuals who, as of the date
hereof, constitute the Board of Directors (the
"Incumbent Board") cease for any reason to
constitute at least a majority of the Board;
provided, however, that any individual becoming a
director subsequent to the date hereof whose
election, or nomination for election by the
Company's shareholders, was approved by a vote of
at least a majority of the directors then
comprising the Incumbent Board shall be considered
as though such individual were a member of the
Incumbent Board, but excluding, for this purpose,
any such individual whose initial assumption of
office occurs as a result of either an actual or
threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(3) Approval by the shareholders of the
Company of a reorganization, merger or
consolidation, in each case, unless, following
such reorganization, merger or consolidation,
(i) more than 75 % of, respectively, the then
outstanding shares of common stock of the
corporation resulting from such reorganization,
merger or consolidation and the combined voting
power of the then outstanding voting securities of
such corporation entitled to vote generally in the
election of directors are then beneficially owned,
directly or indirectly, by all or substantially
all of the individuals and entities who were the
beneficial owners, respectively, of the
Outstanding Shares and Outstanding Company Voting
Securities immediately prior to such
reorganization, merger or consolidation, in
substantially the same proportions as their
ownership immediately prior to such
reorganization, merger or consolidation, of the
Outstanding Shares and Outstanding Company Voting
Securities, as the case may be, (ii) no Person
(excluding the Company, any employee benefit plan
(or related trust) of the Company or such
corporation resulting from such reorganization,
merger or consolidation and any Person
beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly
or indirectly, 20% or more of the Outstanding
Shares or Outstanding Voting Securities, as the
case may be) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then
outstanding shares of common stock of the
corporation resulting from such reorganization,
merger or consolidation or the combined voting
power of the then outstanding voting securities of
such corporation entitled to vote generally in the
election of directors and (iii) at least a
majority of the members of the board of directors
of the corporation resulting from such
reorganization, merger or consolidation were
members of the Incumbent Board at the time of the
execution of the initial agreement providing for
such reorganization, merger or consolidation; or
(4) Approval by the shareholders of the
Company of (i) a complete liquidation or
dissolution of the Company or (ii) the sale or
other disposition of all or substantially all of
the assets of the Company, other than to a
corporation, with respect to which following such
sale or other disposition, (A) more than 75% of,
respectively, the then outstanding shares of
common stock of such corporation and the combined
voting power of the then outstanding voting
securities of such corporation entitled to vote
generally in the election of directors is then
beneficially owned, directly or indirectly, by all
or substantially all of the individuals and
entities who were the beneficial owners,
respectively, of the Outstanding Shares and
Outstanding Company Voting Securities immediately
prior to such sale or other disposition in
substantially the same proportion as their
ownership immediately prior to such sale or other
disposition of the Outstanding Shares and
Outstanding Company Voting Securities, as the case
may be, (B) no Person (excluding the Company and
any employee benefit plan (or related trust) of
the Company or such corporation and any Person
beneficially owning, immediately prior to such
sale or other disposition, directly or indirectly,
20% or more of the Outstanding Shares or
Outstanding Company Voting Securities, as the case
may be) beneficially owns, directly or indirectly,
20% or more of, respectively, the then outstanding
shares of common stock of such corporation and the
combined voting power of the then outstanding
voting securities of such corporation entitled to
vote generally in the election of directors and
(C) at least a majority of the members of the
board of directors of such corporation were
members of the Incumbent Board at the time of the
execution of the initial agreement or action of
the Board providing for such sale or other
disposition of assets of the Company;
provided, however, that the implementation of the
corporate restructuring contemplated by the
Company's PowerChoice proposal filed with the New
York Public Service Commission on October 6, 1995,
or any substantially similar corporate
restructuring (as determined by the Committee)
shall not be deemed to be a "Change in Control".
2.7 "Code" means the Internal Revenue
Code of 1986, as amended from time to time.
2.8 "Committee" means the committee, as
specified in Article 3, appointed by the Board to
administer the Plan with respect to grants of
Awards.
2.9 "Company" means Niagara Mohawk
Power Corporation, a New York corporation, or
any successor thereto as provided in Article 16
herein.
2.10 "Director" means any individual who
is a member of the Board of Directors of the
Company.
2.11 "Disability" shall have the meaning
ascribed to such term under Section 22(e)(3) of
the Code.
2.12 "Dividend Equivalent" means, with
respect to Shares underlying a Stock Unit, an
amount equal to all cash and stock dividends
declared on an equal number of outstanding Shares
on all common stock dividend payment dates
occurring during the Vesting Period.
2.13 "Eligible Employee" means an
Employee who is eligible to participate in the
Plan, as set forth in Section 5.1 herein.
2.14 "Employee" means any full-time
employee of the Company, who is not covered by any
collective bargaining agreement to which the
Company is a party. Directors who are not
otherwise employed by the Company shall not be
considered Employees under the Plan. For purposes
of the Plan, transfer of employment of a
Participant from the Company to any one of its
Subsidiaries shall not be deemed a termination of
employment.
2.15 "Exchange Act" means the Securities
Exchange Act of 1934, as amended from time to
time, or any successor act thereto.
2.16 "Exercise Period" means the period
during which an SAR is exercisable, as set forth
in the related Award Agreement.
2.17 "Fair Market Value" means the
average of the daily opening and closing sale
prices as reported in the consolidated transaction
reporting system.
2.18 "Participant" means an Employee of
the Company who has outstanding an Award granted
under the Plan.
2.19 "Person" shall have the meaning
ascribed to such term in Section 3(a)(9) of the
Exchange Act, as used in Sections 13(d) and 14(d)
thereof, including usage in the definition of a
"group" in Section 13(d) thereof.
2.20 "Retirement" means (i) ascribed to
such term in the tax-qualified defined benefit
pension plan maintained by the Company for the
benefit of some or all of its non-represented
employees and (ii) retirement from the Company or
its subsidiaries with the approval of the
Committee.
2.21 "Shares" means the shares of common
stock of the Company, par value $1.
2.22 "Stock Appreciation Right" or "SAR"
means a right, designated as an SAR, to receive a
payment on the day the right is exercised,
pursuant to the terms of Article 6 herein. Each
SAR shall be denominated in terms of one Share.
2.23 "Stock Unit" means a right,
designated as a Stock Unit, to receive a payment
as soon as practicable following the last day of a
Vesting Period, pursuant to the terms of Article 7
herein. Each Stock Unit shall be denominated in
terms of one Share.
2.24 "Subsidiary" means any corporation
that is a "subsidiary corporation" of the Company
as that term is defined in Section 424(f) of the
Code.
2.25 "Valuation Period" means the 12
trading day period ending on and including the
relevant date.
2.26 "Vesting Period" means the period
during which Stock Units are not yet payable, as
set forth in the related Award Agreement.
Article 3. Administration
3.1 The Committee. The Plan shall be
administered by the Compensation and Succession
Committee of the Board, or by any other Committee
appointed by the Board consisting of not less than
two (2) non-employee Directors. The members of
the Committee shall be appointed from time to time
by, and shall serve at the discretion of, the
Board of Directors.
3.2 Authority of the Committee. The
Committee shall have full power except as limited
by law, the Articles of Incorporation and the
Bylaws of the Company, subject to such other
restricting limitations or directions as may be
imposed by the Board and subject to the provisions
herein, to determine the size and types of Awards;
to determine the terms and conditions of such
Awards in a manner consistent with the Plan; to
construe and interpret the Plan and any agreement
or instrument entered into under the Plan; to
establish, amend or waive rules and regulations
for the Plan's administration; and (subject to the
provisions of Article 14 herein) to amend the
terms and conditions of any outstanding Award.
Further, the Committee shall make all other
determinations that may be necessary or advisable
for the administration of the Plan. As permitted
by law, the Committee may delegate its authorities
as identified hereunder.
3.3 Decisions Binding. All
determinations and decisions made by the Committee
pursuant to the provisions of the Plan and all
related orders or resolutions of the Board shall
be final, conclusive and binding on all persons,
including the Company, its shareholders,
Employees, Participants and their estates and
beneficiaries .
3.4 Costs. The Company shall pay all
costs of administration of the Plan.
Article 4. Adjustments in Authorized Shares
In the event of any merger, reorganization
consolidation, recapitalization, separation,
liquidation, stock dividend, split-up, share
combination or other change in the corporate
structure of the Company affecting the Shares,
such adjustment shall be made in the number of
SARs and Stock Units that may be granted under the
Plan, and in the number and/or price of
outstanding Awards granted under the Plan, as may
be determined to be appropriate and equitable by
the Committee, in its sole discretion, to prevent
dilution or enlargement of rights; provided,
however, that the number of SARs and Stock Units
subject to an Award shall always be a whole
number.
Article 5. Eligibility and Participation
5.1 Eligibility. Persons eligible to
participate in the Plan include all key Employees
of the Company, as determined by the Committee.
5.2 Actual Participation. Subject to the
provisions of the Plan, the Committee may, from
time to time, select from all eligible Employees
those to whom Awards shall be granted and shall
determine the nature and amount of each Award.
Article 6. Stock Appreciation Rights
6.1 Grant of SARs. Subject to the terms
and conditions of the Plan, SARs may be granted to
Eligible Employees at any time and from time to
time, as shall be determined by the Committee.
The Committee shall have complete discretion in
determining the number of SARs granted to each
Participant (subject to Article 4 herein) and,
consistent with the provisions of the Plan, in
determining the terms and conditions pertaining to
such SARs.
6.2 Base Value. The Base Value of an SAR
shall equal the Fair Market Value of a Share
determined for the 12 trading day period
immediately preceding the date of the grant, or
for such other period as the Compensation
Committee, in its sole discretion, shall determine
at the time of grant.
6.3 Exercise and Payment of SARs. A
Participant may exercise an SAR at any time during
the Exercise Period. SARs shall be exercised by
the delivery of a written notice of exercise to
the Company, setting forth the number of SARs
being exercised. Upon exercise of an SAR, a
Participant shall be entitled to receive payment
in cash from the Company in an amount equal to the
product of:
(a) the excess of (i) the Fair Market
Value of a Share on the date of exercise over (ii)
the Base Value of the SAR, multiplied by
(b) the number of Shares with respect to
which the SAR is exercised.
6.4 SAR Award Agreement. Each SAR grant
shall be evidenced by an Award Agreement that
shall specify the number of SARs granted, the Base
Value, the Exercise Period, the expiration date
and such other provisions as the Committee shall
determine.
6.5 Lapse of SARs. Subject to the
provisions of Article 9, an SAR will lapse upon
the earlier of (i) fifteen (l5) years from the
date of grant and (ii) the expiration of the
Exercise Period as set forth in the grant.
Article 7. Stock Units
7.1 Grant of Stock Units. Subject to the
terms and conditions of the Plan, Stock Units may
be granted to Eligible Employees at any time and
from time to time, as shall be determined by the
Committee.
The Committee shall have complete discretion in
determining the number of Stock Units granted to
each Participant (subject to Article 4 herein)
and, consistent with the provisions of the Plan,
in determining the terms and conditions pertaining
to such Stock Units.
7.2 Vesting of Stock Units. The Vesting
Period of Stock Units granted under the Plan shall
be determined by the Committee, in its sole
discretion, as set forth in the related Award
Agreement .
7.3 Payment of Stock Units. After the
applicable Vesting Period has ended, the holder of
Stock Units shall be entitled to receive, for each
Stock Unit held, payment in cash from the Company
in an amount equal to the Fair Market Value of one
Share determined as of the Valuation Period ending
on the last day of the Vesting Period. Payment
shall be made as soon as practicable following the
last day of the Vesting Period.
7.4 Stock Unit Award Agreement. Each
Stock Unit grant shall be evidenced by an Award
Agreement that shall specify the number of Stock
Units granted, the Vesting Period and such other
provisions as the Committee shall determine.
Article 8. Dividend Equivalents
Simultaneously with the grant of Stock Units, the
Participant shall be granted Dividend Equivalents,
to be credited to a bookkeeping entry account, on
each common stock dividend payment date with
respect to the Shares subject to such Award. In
the case of cash dividends, the number of Dividend
Equivalents credited on each common stock dividend
payment date shall equal the number of Shares
(including fractional Shares) that could be
purchased on the dividend payment date, based on
the average of the opening and closing sale price,
as reported in the consolidated transaction
reporting system on that date, with cash dividends
that would have been paid on Awards of Stock Units
and on Dividend Equivalents previously credited to
such bookkeeping entry account, if such Stock
Units or Dividend Equivalents were Shares. In the
case of stock dividends, the number of Dividend
Equivalents credited on each stock dividend
payment date shall be equal to the number of
Shares (including fractional Shares) that would
have been issued as a stock dividend in respect of
the Participant's Stock Units and on Dividend
Equivalents previously credited to such
bookkeeping entry account, if such Stock Units or
Dividend Equivalents were Shares.
Participants shall receive cash payment from the
Company of the Fair Market Value of the Dividend
Equivalents, if and when they receive payment of
the related Stock Units, the Fair Market Value of
such Dividend Equivalents to be determined in the
same manner as for the related Stock Units.
The Committee may, in its discretion, establish
such rules and procedures governing the crediting
of Dividend Equivalents, including timing and
payment contingencies that apply to the Dividend
Equivalents, as the Committee deems necessary or
appropriate in order to comply with applicable
law.
Article 9. Termination of Employment;
Transferability
9.1 Disability; Involuntary Termination.
In the event the employment of a Participant is
terminated by reason of Disability or
involuntarily by the Company (other than for
Cause):
(i) during a Vesting Period for Stock
Units, the Participant shall receive a full payout
of the Stock Units and related Dividend
Equivalents, as and when provided in Section 7.3
herein;
(ii) before the Exercise Period commences
for SARs subject to an Award, such SARs may be
exercised in full at any time during the one year
period commencing on the day the Exercise Period
begins; and
(iii) during the Exercise Period for SARs,
but before exercise, such SARs may be exercised in
full at any time during the one year period after
such termination, but in no event after the
Exercise Period for such SARs has expired.
9.2 Death. In the event the employment
of a Participant is terminated by reason of death:
(i) during the Vesting Period for Stock
Units, the Participant's beneficiary or estate
shall receive a full payout of the Stock Units and
related Dividend Equivalents. The payout shall be
made promptly based on the Fair Market Value of a
Share on the date of death; and
(ii) before the Exercise Period commences
for SARs subject to an Award or during the
Exercise Period, but before exercise, the
Participant's beneficiary or estate shall receive
a full payout of all SARs subject to an Award, to
the extent the Fair Market Value of a Share
exceeds the Base Value of the SAR on the date of
death.
9.3 Corporate Restructuring. In the
event (i) the corporate restructuring as
contemplated by the Company's PowerChoice proposal
filed with the New York Public Service Commission
on October 6, 1995, or any substantially similar
corporate restructuring (determined by the
Committee), is implemented and (ii) the employment
of a Participant with the Company is terminated
(other than for Cause), then with respect to
Awards granted prior to implementation of the
restructuring,
(i) during a Vesting Period for Stock
Units, the Participant shall receive a full payout
of Stock Units and related Dividend Equivalents,
as and when provided in Section 7.3 herein;
(ii) before the Exercise Period commences
for SARs subject to an Award, such SARs may be
exercised in full at any time during the one year
period commencing on the day the Exercise Period
begins; and
(iii) during the Exercise Period for SARs,
but before exercise, such SARs may be exercised in
full at any time during the one year period after
such termination, but in no event after the
Exercise Period for such SARs has expired.
9.4 Retirement. In the event the
employment of a Participant is terminated by
reason of Retirement:
(i) during a Vesting Period for Stock
Units, the Participant shall receive a prorated
payout of the Stock Units and related Dividend
Equivalents. The prorated payout shall be
determined by the Committee, shall be based upon
the length of time that the Participant held the
Stock Units during the Vesting Period and shall be
made as and when provided in Section 7.3 herein;
(ii) before the Exercise Period commences
for SARs subject to an Award, the number of SARs
subject to an Award shall be prorated by the
Committee, based upon the length of time that the
Participant held the SARs before Retirement; after
the Exercise Period commences, the prorated SARs
may be exercised at any time in full or in part
from time to time during the Exercise Period, and
(iii) during the Exercise Period for SARs,
but before exercise, such SARs may be exercised at
any time in full or in part from time to time
during the Exercise Period.
Other than as set forth in Article 13, in the
event that a Participant's employment terminates
for any reason other than as set forth in Sections
9.l, 9.2, 9.3 and 9.4, above, all Stock Units,
SARs and Dividend Equivalents shall be forfeited
by the Participant to the Company .
9.5 Nontransferability of Awards.
Notwithstanding the foregoing, the Committee may
in its discretion authorize a participant to
transfer all or a portion of any award to the
participant's family members on such terms
prescribed by the Committee. No Award granted
under the Plan may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and
distribution. Further, all Awards granted to a
Participant under the Plan shall be
exercisable/payable during his or her lifetime
only by or to such Participant or his or her legal
representative.
9.6 Right of Committee. Subject to the
provisions of Section 14.2 herein, all provisions
in this Article 9 are subject to the Committee's
right, at any time, to make such other
determinations as it may choose, in its sole
discretion. Furthermore, should more than one
section of Article 9 and/or Article 13 apply to a
situation, the Committee shall have the right, in
its sole discretion, to determine which section
and/or article to apply.
Article 10. Beneficiary Designation
Each Participant under the Plan may, from time to
time, name any beneficiary or beneficiaries (who
may be named contingently or successively) to whom
any benefit under the Plan is to be paid in case
of his death before he receives any or all of such
benefit. Each such designation shall revoke all
prior designations by the same Participant, shall
be in a form prescribed by the Committee, and will
be effective only when filed by the Participant in
writing with the Committee during the
Participant's lifetime. In the absence of any such
designation , benefits remaining unpaid at the
Participant's death shall be paid to the
Participant's estate.
The spouse of a married Participant domiciled in a
community property jurisdiction shall join in any
designation of beneficiary or beneficiaries other
than the spouse.
Article 11. Deferrals
The Committee may permit a Participant to defer
such Participant's receipt of the payment of cash
that would otherwise be due to such Participant.
If any such deferral election is permitted, the
Committee shall, in its sole discretion, establish
such rules and procedures as it deems necessary or
desirable for such payment deferrals.
Article 12. Rights of Employees
12.1 Employment. Nothing in the Plan
shall interfere with or limit in any way the right
of the Company to terminate any Participant's
employment at any time, for any reason or no
reason, in the Company's sole discretion, nor
confer upon any Participant any right to continue
in the employ of the Company.
12.2 Participation. No Employee shall
have the right to be selected to receive an Award
under the Plan, or, having been so selected, to be
selected to receive a future Award.
Article 13. Change in Control
Upon the occurrence of a Change in Control, as
defined herein, unless otherwise specifically
prohibited by the terms of Article 17 herein:
(a) If the Change in Control results in
cash payment for the outstanding Shares and such
Shares cease to be readily tradeable on a national
securities exchange which is registered under
Section 6 of the Exchange Act or on NASDAQ, then
any and all SARs granted hereunder shall be deemed
to have been exercised on the date such Change in
Control occurs;
(b) If the Change in Control does not
result in a cash payment for the outstanding
Shares or such Shares continue to be readily
tradeable on a national securities exchange which
is registered under Section 6 of the Exchange Act
or on NASDAQ, then any and all SARs granted
hereunder shall be fully and immediately
exercisable and may be exercised at any time in
full or in part from time to time until the end of
the Exercise period. In such event, if the Shares
are converted into the common stock of the Person
referred to in subsection (1) of Section 2.6, the
corporation resulting from the reorganization,
merger or consolidation referred to in subsection
(3) of Section 2.6 (the "Resulting Corporation")
or the ultimate parent corporation that directly
or indirectly has beneficial ownership of 100% of
the voting securities of such Person or the
Resulting Corporation (the "Ultimate Parent"),
then (i) payments for SARS shall be based on the
value of the common stock of such Person,
Resulting Corporation or Ultimate Parent and (ii)
the Base Value and number of SARs shall be
appropriately adjusted to reflect the per Share
consideration received by the holders of the
Shares.
(c) Any Vesting Period with respect to
Stock Units shall be deemed to have expired, and
there shall be paid out in cash to Participants
within thirty (30) days following the effective
date of the Change in Control the cash payment due
with respect to such Stock Units and related
Dividend Equivalents, with a Valuation Period
ending on the effective date of the Change in
Control.
Article 14. Amendment, Modification and
Termination
14.1 Amendment. Modification and
Termination. The Board may, at any time and from
time to time, alter, amend, suspend or terminate
the Plan in whole or in part.
14.2 Awards Previously Granted. No
termination, amendment or modification of the Plan
shall adversely affect in any material way any
Award previously granted under the Plan, without
the written consent of the Participant holding
such Award, unless such termination, modification
or amendment is required by applicable law.
Article 15. Tax Withholding
The Company shall have the power and the right to
deduct or withhold, or require a Participant to
remit to the Company, an amount sufficient to
satisfy Federal, state and local taxes (including
the Participant's FICA obligation) required by law
to be withheld with respect to any taxable event
arising out of or as a result of an Award made
under the Plan.
Article 16. Successors
All obligations of the Company under the Plan,
with respect to Awards granted hereunder shall be
binding on any successor to the Company, whether
the existence of such successor is the result of a
direct or indirect purchase, merger, consolidation
or otherwise, of all or substantially all of the
business and/or assets of the Company.
Article 17. Legal Construction
17.1 Gender and Number. Except where
otherwise indicated by the context, any masculine
term used herein also shall include the feminine,
the plural shall include the singular and the
singular shall include the plural.
17.2 Severability. In the event any
provision of the Plan shall be held illegal or
invalid for any reason, the illegality or
invalidity shall not affect the remaining parts of
the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision
had not been included.
17.3 Requirements of Law. The granting
of Awards under the Plan shall be subject to all
applicable laws, rules and regulations, and to
such approvals by any governmental agencies or
national securities exchanges as may be required.
17.4 Governing Law. To the extent not
preempted by Federal law, the Plan, and all
agreements hereunder, shall be construed in
accordance with, and governed by, the laws of the
State of New York, without regard to conflicts of
law provisions.
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 Six Months Ended June 30, 2000
</TABLE>
<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 June 30:
------------------------------------
APRIL 1 - JUNE 30, 2000. . . . . . . 176,630,863 91 16,073,408,533
SHARES REPURCHASED BY
NIAGARA MOHAWK. . . . . . . . . . 12,231,316 (a) 504,367,232
------------ ---------------
164,399,547 15,569,041,301 171,088,366
============ =============== ============
April 1 - June 30, 1999. . . . . . . 187,364,863 91 17,050,202,533 187,364,863
============ =============== ============
For the Six Months Ended June 30:
--------------------------------
JANUARY 1 - JUNE 30, 2000. . . . . . 177,364,863 182 32,280,405,066
SHARES REPURCHASED BY
NIAGARA MOHAWK. . . . . . . . . . 12,965,316 (a) 572,335,232
------------ ---------------
164,399,547 31,708,069,834 174,220,164
============ =============== ============
January 1 - March 18, 1999 . . . . . 187,364,863 77 14,427,094,451
March 18 - June 30, 1999 (b) . . . . 187,364,863 104 19,485,945,752
------------ ---------------
187,364,863 33,913,040,203 187,364,863
============ =============== ============
</TABLE>
(a) Number of days outstanding not shown as shares represent an accumulation
of purchases of Holdings' common stock by Niagara Mohawk during 2000.
Share days for the shares repurchased are based on the total number of
days each share was repurchased during 2000.
(b) On March 18, 1999, the common stock of Niagara Mohawk was exchanged on a
share-for-share basis with Holdings.
Note: Earnings per share calculated on both a primary and fully diluted
basis are the same due to the effects of rounding.
<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 June 30, 2000
(in thousands of dollars)
A. Net Income (Loss) $ (55,117)
B. Taxes Based on Income or Profits (c) 15,178
------------
C. Earnings, Before Income Taxes (39,939)
D. Fixed Charges (a) 509,464
------------
E. Earnings Before Income Taxes and Fixed Charges $ 469,525
============
F. Ratio of Earnings to Fixed Charges (E/D) 0.92 (b)
============
(a) Includes a portion of rentals deemed representative of the interest
factor of $24,635 and earnings required to cover subsidiary preferred
stock dividends of $34,568.
(b) Fixed charges exceed earnings before income taxes and fixed charges by
$39.9 million.
(c) See Part 1, Item 1. Notes to the Consolidated Financial Statements, Note
1. Summary of Significant Accounting Policies, " Basis of Presentation" for
a discussion of the reclassification of New York State income taxes.
<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 June 30, 2000
(in thousands of dollars)
A. Net Income (Loss) . . . . . . . . . . . . . . . $ (26,107)
B. Taxes Based on Income or Profits (d). . . . . . 10,987
----------------
C. Earnings, Before Income Taxes . . . . . . . . . (15,120)
D. Fixed Charges (a). . . . . . . . . . . . . . . 474,896
----------------
E. Earnings Before Income Taxes and Fixed Charges. $ 459,776
================
Preferred Dividend Factor:
H. Preferred Dividend Requirements . . . . . . . . $ 34,568
I. Ratio of Pre-tax Income to Net Income (C / A) . NOT APPLICABLE
----------------
J. Preferred Dividend Factor (H x I) . . . . . . . 34,568
K. Fixed Charges as Above (D). . . . . . . . . . . 474,896
----------------
L. Fixed Charges and Preferred Dividends Combined. $ 509,464
================
M. Ratio of Earnings to Fixed Charges (E / D). . . 0.97 (b)
================
N. Ratio of Earnings to Fixed Charges and
Preferred Dividends Combined (E / L) . . . . 0.90 (c)
================
(a) Includes a portion of rentals deemed representative of the interest
factor of $24,635.
(b) Fixed charges exceed earnings before income taxes and fixed charges by
$15.1 million.
(c) Fixed charges and preferred dividends combined, exceed earnings before
income taxes and fixed charges by $49.7 million.
(d) See Part 1, Item 1. Notes to the Consolidated Financial Statements, Note
1. Summary of Significant Accounting Policies, " Basis of Presentation"
for a discussion of the reclassification of New York State income taxes.
<PAGE>
EXHIBIT 15
August 14, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that our report dated August 14, 2000 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 six-month periods ended June 30,
2000 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 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 Registration Statements on Form S-3 (Nos. 33-50703, 33-54827,
33-55546, and 333-33826) and in the Registration Statement on Form S-4
(No.333-49769).
/s/PricewaterhouseCoopers LLP
-----------------------------
PRICEWATERHOUSECOOPERS LLP
1
42
