As filed with the Securities and Exchange Commission on February 10, 2000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8 - K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
DATE OF REPORT - FEBRUARY 10, 2000
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
<PAGE>
Item 5. Other Events
- ---------------------
(a) Registrant hereby files the following items which at present constitutes
Part II of its Form 10-K Annual Report for 1999. Part II consists of Form
10-K item numbers 5 through 9.
Glossary
Item 5 - Market for the Registrants' Common Equity and Related
Stockholders Matters
Item 6 - Selected Consolidated Financial Data
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Item 8 - Financial Statements and Supplementary Data
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Item 7. Financial Statements and Exhibits
- ------------------------------------------
(c) Exhibit 11 - Niagara Mohawk Holdings, Inc. and Subsidiary Companies -
Computation of Average Number of Shares of Common Stock
Outstanding
Exhibit 12a - Niagara Mohawk Holdings, Inc. and Subsidiary Companies -
Statement Showing Computations of Ratios of Earnings to
Fixed Charges
Exhibit 12b - Niagara Mohawk Power Corporation and Subsidiary Companies -
Statement Showing Computations of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends
Exhibit 23 - Consent of Independent Accountants
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
SIGNATURE
---------
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: February 10, 2000 By:/s/Steven W. Tasker
-----------------------------
Steven W. Tasker
Vice President-Controller and
Principal Accounting Officer,
in his respective capacities
as such
NIAGARA MOHAWK POWER CORPORATION
--------------------------------
(Registrant)
Date: February 10, 2000 By:/s/Steven W. Tasker
-----------------------------
Steven W. Tasker
Vice President-Controller and
Principal Accounting Officer,
in his respective capacities
as such
<PAGE>
EXHIBIT INDEX
-------------
Following is the index of Exhibits furnished in accordance with the provisions
of Item 601 of Regulation S-K, filed as part of this current report on Form
8-K.
Exhibit 11 - Niagara Mohawk Holdings, Inc. and Subsidiary Companies -
Computation of Average Number of Shares of Common Stock
Outstanding
Exhibit 12a - Niagara Mohawk Holdings, Inc. and Subsidiary Companies - Statement
Showing Computations of Ratios of Earnings to Fixed Charges
Exhibit 12b - Niagara Mohawk Power Corporation and Subsidiary Companies -
Statement Showing Computations of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends
Exhibit 23 - Consent of Independent Accountants
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
GLOSSARY OF TERMS
-----------------
TERM DEFINITION
- ---- ----------
AFC Allowance for Funds Used During Construction
CNG CNG Transmission Corporation, an interstate natural gas pipeline
regulated by FERC
CTC Competitive transition charges: a mechanism established in Niagara
Mohawk's PowerChoice agreement to recover stranded costs from
customers
DEC New York State Department of Environmental Conservation
DOE U.S. Department of Energy
Dth Dekatherm: one thousand cubic feet of gas with a heat content of
1,000 British Thermal Units per cubic foot
EBITDA A non-GAAP measure of cash flow which is calculated as: earnings
before interest charges, interest income, income taxes,
depreciation and amortization, amortization of nuclear fuel,
allowance for funds used during construction, MRA regulatory
asset amortization, and extraordinary items
FASB Financial Accounting Standards Board
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
KW Kilowatt: one thousand watts
KWh Kilowatt-hour: a unit of electrical energy equal to one kilowatt
of power supplied or taken from an electric circuit steadily for
one hour
MRA Master Restructuring Agreement - a Niagara Mohawk agreement,
including amendments thereto, which terminated, restated or
amended certain IPP Party power purchase agreements effective
June 30, 1998
MRA Recoverable costs to terminate, restate or amend IPP Party
regulatory contracts, which have been deferred and are being amortized and
asset recovered under Niagara Mohawk's PowerChoice agreement
MW Megawatt: one million watts
MWh Megawatt-hour: one thousand kilowatt-hours
Net Cash Reflects interest charges (net of allowance for funds used during
Interest construction) less the non-cash impact of the net amortization of
discount on long-term debt and interest accrued on the Nuclear
Waste Policy Act disposal liability less interest income
NRC U.S. Nuclear Regulatory Commission
NYISO New York Independent System Operator
NYPA New York Power Authority
NYPP New York Power Pool
NYSERDA New York State Energy Research and Development Authority
PowerChoice Niagara Mohawk's five-year electric rate agreement, which
incorporates the MRA, agreement 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 or 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
PURPA Public Utility Regulatory Policies Act of 1978, as amended. One of
five bills signed into law on November 8, 1978, as the National
Energy Act. It sets forth procedures and requirements applicable
to state utility commissions, electric and natural gas utilities
and certain federal regulatory agencies. A major aspect of this
law is the mandatory purchase obligation from qualifying
facilities
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. 101
No. 101 "Regulated Enterprises - Accounting for the Discontinuance of
Application of FASB Statement No. 71"
SFAS Statement of Financial Accounting Standards No. 106
No. 106 "Employers' Accounting for Postretirement Benefits Other
Than Pensions"
SFAS Statement of Financial Accounting Standards No. 109
No. 109 "Accounting for Income Taxes"
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 II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
HOLDING COMPANY FORMATION. On March 18, 1999, Niagara Mohawk Power Corporation
("Niagara Mohawk") was reorganized into a holding company structure in
accordance with its Agreement and Plan of Exchange between Niagara Mohawk and
Niagara Mohawk Holdings, Inc. ("Holdings"). Niagara Mohawk's outstanding
common stock was exchanged on a share-for-share basis for Holdings' common
stock. Niagara Mohawk's preferred stock and debt were not exchanged as part
of the share exchange and continue as shares and debt of Niagara Mohawk.
HOLDINGS COMMON STOCK. Holdings is authorized to issue 300 million shares of
common stock. Holdings' common stock (par value $0.01) and certain of Niagara
Mohawk's preferred series are listed on the New York Stock Exchange ("NYSE").
Holdings' common stock is also traded on the Boston, Cincinnati, Midwest,
Pacific and Philadelphia stock exchanges. Holdings' common stock options are
traded on the American Stock Exchange. The ticker symbol is "NMK."
Holdings' common stock has been traded on the NYSE since March 19, 1999. Prior
to that date, the market prices on the table below refer to Niagara Mohawk's
common stock.
<TABLE>
<CAPTION>
1999 1998
-------- ---------
HIGH LOW High Low
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
1st Quarter $16 7/16 $ 13 1/16 $13 9/16 $ 10 1/8
2nd Quarter 16 1/16 13 1/8 15 1/4 11
3rd Quarter 16 1/8 14 5/8 16 3/8 14 3/4
4th Quarter 16 3/16 13 13/16 16 1/2 13 15/16
</TABLE>
For a discussion regarding Holdings and Niagara Mohawk's common stock dividend,
see Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Position, Liquidity and Capital Resources -
Common Stock Dividend below.
The holders of Holdings' common stock are entitled to one vote per share and may
not cumulate their votes for the election of Directors. Upon any dissolution,
liquidation or winding up of Holdings' business, the holders of common stock are
entitled to receive a pro rata share of all of Holdings' assets remaining and
available for distribution after the full amounts to which holders (if any) of
Holdings' preferred stock are entitled have been satisfied.
After the closing of the MRA (see 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 - The MRA Agreement,
IPP Parties and their designees owned approximately 20.5 million shares of
Niagara Mohawk's common stock, representing approximately 11% of Niagara
Mohawk's voting securities. These shares were also exchanged on March 18,
1999 on a share-for-share basis of Holdings' common stock. Pursuant to the
MRA, any IPP Party that received 2% or more of the outstanding common stock
and any designee of IPP Parties that received more than 4.9% of the outstanding
common stock upon the consummation of the MRA, together with certain but not
all affiliates (collectively, "2% Shareholders"), entered into certain
shareholder agreements (the "Shareholders Agreements"). Pursuant to each
Shareholder Agreement, the 2% Shareholders agree that for five years from the
consummation of the MRA, they will not acquire more than an additional 5% of
the outstanding common stock (resulting in ownership in all cases of no more
than 9.9%) or take any actions to attempt to acquire control of Holdings,
other than certain permitted actions in response to unsolicited actions by
third parties. The 2% Shareholders generally vote their shares on a
"pass-through" basis, in the same proportion as all shares held by other
shareholders are voted, except that they may vote in their discretion (i)
for extraordinary transactions and (ii) for directors when there is a
pending proposal to acquire Holdings.
In 1999, the PSC approved Niagara Mohawk's petition to purchase up to $800
million of Holdings' common stock. Holdings and Niagara Mohawk's Board of
Directors have approved a program to repurchase 20 million shares through
December 31, 2001. See Part II, Item 8. - Financial Statements and
Supplementary Data, Note 4. - Capitalization, for a further discussion of
the shares repurchased.
As of January 1, 2000, there were approximately 53,600 holders of record of
common stock of Holdings and about 2,900 holders of record of Niagara Mohawk's
preferred stock. The chart below summarizes common stockholder ownership by
size of holding:
<TABLE>
<CAPTION>
Size of Holding Total Total
(Shares) Stockholders Shares Held
- ---------------- ------------ -----------
<S> <C> <C>
1 to 99. . . . . 27,710 699,760
100 to 999 . . . 23,736 5,634,474
1,000 or more. . 2,157 171,030,629
------------ -----------
53,603 177,364,863
============ ===========
</TABLE>
HOLDINGS PREFERRED STOCK. Holdings is authorized to issue 50 million shares of
preferred stock with a par value of $0.01. No preferred stock had been issued
as of December 31, 1999.
NIAGARA MOHAWK COMMON STOCK. Niagara Mohawk is authorized to issue 250 million
shares of common stock with a par value of $1.00. As of December 31, 1999,
Niagara Mohawk has 187,364,863 shares outstanding, which are all held by
Holdings and are not traded.
The indenture securing Niagara Mohawk's mortgage debt provides that retained
earnings shall be reserved and held unavailable for the payment of dividends on
common stock to the extent that expenditures for maintenance and repairs plus
provisions for depreciation do not exceed 2.25% of depreciable property as
defined therein. Such provisions have never resulted in a restriction of
Niagara Mohawk's retained earnings.
NIAGARA MOHAWK PREFERRED STOCK. The share exchange and the formation of the
holding company structure did not change the rights of holders of the
outstanding shares of Niagara Mohawk's preferred stock. Niagara Mohawk's
preferred stock continues to rank senior to Niagara Mohawk's common stock
(which are held by Holdings) as to dividends and as to distribution of Niagara
Mohawk's assets upon any liquidation.
Whenever dividends on Niagara Mohawk's preferred stock are in default in an
amount equivalent to four full quarterly dividends and thereafter until all
dividends thereon are paid or declared and set aside for payment, the holders
of such preferred stock can elect a majority of the Board of Directors of
Niagara Mohawk. Whenever dividends on any preference stock are in default
in an amount equivalent to six full quarterly dividends and thereafter until
all dividends thereon are paid or declared and set aside for payment, the
holders of such stock can elect two members to the Board of Directors of
Niagara Mohawk. No dividends on preferred stock are now in arrears and no
preference stock is now outstanding.
Niagara Mohawk paid preferred dividends on March 31, June 30, September 30,
and December 31. Niagara Mohawk estimates that none of the 1999 preferred
stock dividends will constitute a return of capital, and therefore, all of
such dividends are subject to federal tax as ordinary income.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial information of Holdings and
Niagara Mohawk for each of the five years during the period ended December 31,
1999, which has been derived from the audited financial statements of Holdings
and Niagara Mohawk, and should be read in connection therewith. As discussed
in Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations and Item 8. - Financial Statements and Supplementary Data
- - Notes to Consolidated Financial Statements, the following selected financial
data is not likely to be indicative of Holdings' or Niagara Mohawk's future
financial condition, results of operations or cash flows.
<TABLE>
<CAPTION>
HOLDINGS NIAGARA MOHAWK Holdings and Niagara Mohawk****
1999** 1999** 1998 1997 1996* 1995
----------- ---------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS: (000'S)
Operating revenues . . . . . . . . . . $4,084,186 $ 3,827,340 $ 3,826,373 $3,966,404 $3,990,653 $3,917,338
Net income (loss). . . . . . . . . . . (35,088) (2,062) (120,825) 183,335 110,390 248,036
- -------------------------------------- ----------- ------------- ------------ ----------- ----------- -----------
COMMON STOCK DATA:
Book value per share at year end . . . $ 16.78 *** $ 16.92 $ 18.89 $ 17.91 $ 17.42
Market price at year end. . . . . . . 13 15/16 *** 16 1/8 10 1/2 9 7/8 9 1/2
Ratio of market price to
book value at year end. . . . . . . 83.1% *** 95.3% 55.6% 55.1% 54.5%
Basic and diluted earnings (loss) per
average common share. . . . . . . . ($0.19) *** ($0.95) $ 1.01 $ 0.50 $ 1.44
Rate of return on common equity. . . . (1.1)% *** (5.3)% 5.5% 2.8% 8.4%
Dividends paid per common share. . . . - *** - - - $ 1.12
CAPITALIZATION: (000'S)
Common equity. . . . . . . . . . . . . $2,976,089 $ 2,785,171 $ 3,170,142 $2,727,527 $2,585,572 $2,513,952
Non-redeemable preferred stock . . . . 440,000 440,000 440,000 440,000 440,000 440,000
Mandatorily redeemable
preferred stock . . . . . . . . . . 61,370 61,370 68,990 76,610 86,730 96,850
Long-term debt . . . . . . . . . . . . 5,042,588 5,042,588 6,417,225 3,417,381 3,477,879 3,582,414
- -------------------------------------- ----------- ------------- ------------ ----------- ----------- -----------
Total . . . . . . . . . . . . . . 8,520,047 8,329,129 10,096,357 6,661,518 6,590,181 6,633,216
Long-term debt maturing
within one year . . . . . . . . . . 613,740 613,740 312,240 67,095 48,084 65,064
- -------------------------------------- ----------- ------------- ------------ ----------- ----------- -----------
Total . . . . . . . . . . . . . . $9,133,787 $ 8,942,869 $10,408,597 $6,728,613 $6,638,265 $6,698,280
- -------------------------------------- ----------- ------------- ------------ ----------- ----------- -----------
CAPITALIZATION RATIOS: (including
long-term debt maturing within
one year)
Common stock equity. . . . . . . . . . 32.6% 31.1% 30.5% 40.5% 39.0% 37.5%
Preferred stock. . . . . . . . . . . . 5.5 5.6 4.9 7.7 7.9 8.0
Long-term debt . . . . . . . . . . . . 61.9 63.3 64.6 51.8 53.1 54.5
</TABLE>
* Amounts include extraordinary item for the discontinuance of regulatory
accounting principles
** Amounts include extraordinary item for the early extinguishment of debt,
see Note 4. - Capitalization
*** Holdings owns all of Niagara Mohawk's shares of common stock
**** Prior year amounts are based upon Niagara Mohawk's amounts and do not
reflect the reclassifications for the holding company formation
<TABLE>
<CAPTION>
HOLDINGS NIAGARA MOHAWK Holdings and Niagara Mohawk****
1999** 1999** 1998 1997 1996* 1995
------------ ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RATIOS:
EBITDA, as defined (000's) . . . . . . . $ 1,259,500 $ 1,262,500 $ 990,500 $ 961,500 $ 957,500 $ 929,100
Net cash interest, as defined (000's). . $ 397,100 $ 404,700 $ 345,500 $ 226,900 $ 244,500 $ 260,500
Ratio of EBITDA to net cash
interest. . . . . . . . . . . . . . 3.2 3.1 2.9 4.2 3.9 3.6
Ratio of earnings to fixed charges . . . 0.95 1.01 0.57 2.02 1.57 2.29
Ratio of earnings to fixed charges
and preferred stock dividends . . . . N/A 0.94 0.52 1.67 1.31 1.90
Other ratios (% of operating revenues):
Fuel, electricity purchased
and gas purchased. . . . . . . . . 36.7% 33.0% 39.6% 44.4% 43.5% 40.3%
Other operation and maintenance
expenses . . . . . . . . . . . . . 22.3 23.2 24.5 21.1 23.3 20.9
Depreciation and amortization . . . . 8.5 9.0 9.3 8.6 8.3 8.1
Amortization of the MRA
regulatory asset . . . . . . . . . 9.5 10.1 3.4 - - -
Federal and foreign income taxes,
and other taxes. . . . . . . . . . 10.6 11.3 10.3 15.1 13.6 17.3
Operating income. . . . . . . . . . . 12.9 13.9 4.4 14.1 13.1 17.5
Balance available for common
stock. . . . . . . . . . . . . . . (0.9) *** (4.1) 3.7 1.8 5.3
MISCELLANEOUS: (000'S)
Gross additions to utility plant . . . . $ 298,081 $ 298,081 $ 392,200 $ 290,757 $ 352,049 $ 345,804
Total utility plant. . . . . . . . . . . 9,792,291 9,792,291 11,431,447 11,075,874 10,839,341 10,649,301
Accumulated depreciation
and amortization. . . . . . . . . . . 3,904,049 3,904,049 4,553,448 4,207,830 3,881,726 3,641,448
Total assets . . . . . . . . . . . . . . 12,670,435 12,445,608 13,861,187 9,584,141 9,427,635 9,477,869
</TABLE>
* Amounts include extraordinary item for the discontinuance of regulatory
accounting principles
** Amounts include extraordinary item for the early extinguishment of debt,
see Note 4. - Capitalization
*** Holdings owns all of Niagara Mohawk's shares of common stock
**** Prior year amounts are based upon Niagara Mohawk's amounts and do not
reflect the reclassifications for the holding company formation
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
Certain statements included in this Annual Report on Form 10-K are
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934 that involve risk and uncertainty, including the improvement in
Holdings and Niagara Mohawk's cash flow upon the implementation of the MRA and
PowerChoice, the timing and outcome of the future sale of Niagara Mohawk's
remaining fossil and nuclear generation assets, the planned repayment of debt,
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 PowerChoice and regulatory actions to continue
to support such an agreement. Actual future results and developments may differ
materially depending on a number of factors, including regulatory changes either
by the federal government or the PSC, uncertainties regarding the ultimate
impact on Holdings and Niagara Mohawk as the regulated electric and gas
industries are further deregulated and electricity and gas suppliers gain open
access to Niagara Mohawk's retail customers, challenges to PowerChoice under New
York laws, the timing and extent of changes in commodity prices and interest
rates, the effects of weather, the length and frequency of outages at Niagara
Mohawk's two nuclear plants, the results from Niagara Mohawk's ongoing sale of
its generation assets, the transition period to Niagara Mohawk's new customer
service system, the efforts made by Niagara Mohawk to collect from customers,
and the economic conditions of Niagara Mohawk's service territory.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON AND RESULTS
OF OPERATIONS
The electric utility industry in the United States has experienced a
deregulatory climate in recent years whereby federal and state regulatory
initiatives have sought to provide separation of the vertically integrated
energy generation, transmission and distribution functions and promote
competition and lower prices. This unbundling of services has led to some
restructuring throughout the industry. Niagara Mohawk's response to these
developments was to formulate a restructuring strategy and a multi-year rate
plan which enables it to exit the generation business, reduce the amount of
its over-market purchase power obligations, recover its stranded costs and
lower prices to customers. Implementation of this restructuring strategy
commenced in 1998 with the regulatory approval of the rate plan and the
consummation of the MRA, and 1999 was a year punctuated by the further
execution of the restructuring strategy. Key events were:
- - On March 18, 1999, Niagara Mohawk was reorganized into a holding company
structure providing Holdings and its subsidiaries with financial and
regulatory flexibility to compete more effectively in an increasingly
competitive energy industry.
- - On June 11, 1999, Niagara Mohawk completed the sale transactions of its two
coal-fired generation plants; on July 29, 1999, Niagara Mohawk completed the
sale of its hydroelectric generation plants; and on October 22, 1999, Niagara
Mohawk completed the sale of its oil and gas-fired plant at Oswego. In
addition, on October 6, 1999, Niagara Mohawk announced an agreement to sell
its oil and gas-fired generation plant at Albany.
- - On June 24, 1999, Niagara Mohawk announced an agreement to sell its nuclear
generation assets to AmerGen Energy Company, LLC ("AmerGen"). However, on
December 21, 1999, Rochester Gas & Electric Corporation ("RG&E") notified
Niagara Mohawk of its intent to exercise its rights to purchase the nuclear
generation assets. The PSC Staff has informed Niagara Mohawk that they
believed that the terms of the proposed sale are not consistent with the
public interest standard in the Public Service Law, but discussions with
AmerGen and other interest parties would continue.
- - Niagara Mohawk redeemed approximately $1.1 billion in debt.
- - In the fourth quarter, Niagara Mohawk commenced a multi-year program to
repurchase shares of Holdings' common stock. The repurchases are aimed at
managing Holdings' capital structure to competitive norms within the
utility industry.
- - The PSC established a formal proceeding on the methodology to determine
exit fees.
- - Niagara Mohawk implemented a new customer service system, which continues to
experience transition issues in customer satisfaction, incremental costs and
PSC scrutiny.
POWERCHOICE AND THE RESTRUCTURING OF THE REGULATED ELECTRIC UTILITY BUSINESS
- ----------------------------------------------------------------------------
The PSC approved the PowerChoice agreement on March 20, 1998 and the rate plan
was implemented beginning September 1, 1998. The PowerChoice agreement outlined
Niagara Mohawk's future structure in the regulated electric business. During
1999 and 1998, Niagara Mohawk has worked toward the implementation of all phases
of PowerChoice and has implemented other federal and state orders that promote
deregulation as described below:
POWERCHOICE RATE REDUCTIONS AND RETAIL CHOICE OF ELECTRICITY SUPPLIER. The
PowerChoice agreement established a five-year electric rate plan that reduces
class average residential and commercial prices by an aggregate of 3.2% over
the first three years, beginning September 1, 1998. On September 1, 1999,
Niagara Mohawk implemented its second phase of rate reductions. The reduction
in prices includes certain savings that result from approved reductions of the
GRT. Industrial customers are currently receiving average reductions of 25%
relative to 1995 tariffs; this decrease includes discounts previously offered
to some industrial customers through optional and flexible rate programs. As
part of PowerChoice, 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 December 31, 1999, 6,658 (4.25%) of Niagara
Mohawk's commercial and industrial customers or approximately 14.56% of eligible
load, and 4,325 (0.31%) residential customers or approximately 0.36% of eligible
load, have chosen an electricity supplier other than Niagara Mohawk. See "FERC
Order 888 - Open Access" below for a discussion of open transmission access as
a result of the formation of the NYISO. 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 do not exercise their right to choose a new electricity supplier.
If a customer chooses an alternative supplier, Niagara Mohawk, as allowed under
PowerChoice, will continue to charge the customer for delivery of the energy and
for a non-bypassable CTC charge. Niagara Mohawk will also give a credit to the
customer for any services provided by the alternative energy supplier that were
provided by Niagara Mohawk in the past.
During the term of the PowerChoice agreement, Niagara Mohawk is permitted to
defer certain incremental costs associated primarily with environmental
remediation, nuclear decommissioning and related costs, and changes in laws,
regulations, rules and orders. In the fourth and fifth years of the rate plan,
Niagara Mohawk can request an annual increase in prices subject to a cap of 1%
of the all-in price, excluding commodity costs (e.g., transmission,
distribution, nuclear, and forecasted CTC). In addition to the price cap, the
PowerChoice agreement provides for the recovery of deferrals established in
years one through four and the generation sale incentive. See Part II, Item 8.
Financial Statements and Supplementary Data - Note 2. Rate and Regulatory Issues
and Contingencies - Deferred Loss on the Sale of Assets, for a discussion of the
generation sale incentive. The aggregate of the price cap increase and recovery
of deferrals is subject to an overall limitation of general inflation. Any
remaining unamortized deferrals at the end of year five will be recovered over
a period not to exceed five years beginning in year six.
Beginning in year four of PowerChoice, Niagara Mohawk can continue to recover
the cost variations in the indexed swap contracts entered into as part of the
MRA, resulting from the indexing provisions of these contracts. As these
indexed swap contracts and other contracts expire, the fluctuations in market
price of unhedged energy will be billed to customers through a commodity
adjustment clause in the CTC. Niagara Mohawk may need to reassess its hedging
strategy if the PSC renders a decision regarding provider of last resort.
The PowerChoice agreement further provides that Niagara Mohawk shall have a
reasonable opportunity to recover its stranded costs, including those associated
with the MRA and the contracts entered into as part of the MRA, through a CTC
and, under certain circumstances, through exit fees or in rates for back up
service. See "FERC Order 888 - Stranded Cost Recovery in the Case of
Municipalization" for a further discussion of stranded costs and exit fees.
Niagara Mohawk's rates under PowerChoice are designed to permit recovery of the
MRA regulatory asset and to permit recovery of, and a return on, the remainder
of its assets, as appropriate.
GENERATION ASSET SALES. Niagara Mohawk has completed the sale of its two
coal-fired generation plants, its 72 hydro generation plants, and its oil and
gas-fired generation plant at Oswego. Niagara Mohawk has also announced an
agreement to sell its Albany oil and gas-fired generation plant. Niagara Mohawk
expects to complete the Albany sales transaction in the first quarter of 2000.
In May 1999, Niagara Mohawk entered into an agreement with Central Hudson Gas &
Electric Corporation ("Central Hudson"), subject to regulatory approval, to sell
its interest in the Roseton plant to Central Hudson, at approximately net book
value by no later than January 1, 2003. For a further discussion of these
sales, see Part II, Item 8. - Financial Statements and Supplementary Data, Note
2. - Rate and Regulatory Issues and Contingencies. For a discussion on how
Niagara Mohawk used the proceeds from the sale of its generation assets, see
"Liquidity and Capital Resources."
Niagara Mohawk signed agreements with the buyers of the plants for energy and
capacity at negotiated prices, which are above market, based on current energy
price forecasts. While the PPAs with the buyers of the formerly owned fossil
and hydro assets, which were entered into as an integral part of the sales, are
above market, they are designed to help Niagara Mohawk meet rate reduction and
price cap commitments as well as expected demand as the provider of last resort.
The PPAs that convert to either swap agreements or swaptions (swap agreement
with a call option) act as hedges against a substantial rise in power costs.
See Part II, Item 8. - Financial Statements and Supplementary Data - Note 2. -
Rate and Regulatory Issues and Contingencies, Note 8. - Commitments and
Contingencies, and Note 9. - Fair Value of Financial and Derivative Financial
Instruments, for a further discussion of the terms of these agreements.
Niagara Mohawk expects to incur a net loss, mainly attributable to the Oswego
oil and gas-fired plant, on the sale of the fossil and hydro generation assets
of approximately $150 million. The PowerChoice agreement provides for deferral
and future recovery of the net losses resulting from the sale of the assets.
For a further discussion of the loss incurred on these sales, the regulatory
treatment of such loss, and the factors that may cause the amount of loss to
change, see Part II, Item 8. Financial Statements and Supplementary Data, Note
2. - Rate and Regulatory Issues and Contingencies.
After the fossil and hydro sales are completed, Niagara Mohawk has agreed not
to own any non-nuclear generation assets in the state of New York, subject to
certain exceptions provided in the PowerChoice agreement.
The PowerChoice agreement stipulated that absent a statewide solution, Niagara
Mohawk would file a detailed plan for analyzing other proposals regarding its
nuclear assets, including the feasibility of an auction, transfer and/or
divestiture of such facilities, within 24 months of PowerChoice. On June 24,
1999, Niagara Mohawk announced an agreement to sell its nuclear generation
assets to AmerGen. The sale to AmerGen was subject to a previously existing
agreement among the five co-owners of Unit 2 that gives the co-owners the right
to match a third-party purchase offer. On December 21, 1999, RG&E, a 14%
co-owner of Unit 2, submitted a notice stating it would match the AmerGen offer.
On January 26, 2000, the PSC Staff had informed the ALJ and all parties,
including Niagara Mohawk, that they believed the terms of the proposed nuclear
sale were not in the public interest. The PSC Staff is continuing its
discussions with AmerGen, as well as exploring other options, including
giving other interested parties the opportunity to put forth competing
proposals. Niagara Mohawk cannot predict the outcome of this proceeding, but
is committed to pursue the sale of Unit 1 and Unit 2. For a further
discussion regarding the details of the sale agreement, the status of the sale,
the proposed regulatory and accounting treatment of the announced sale, the
PPAs signed as part of the agreement, and the treatment under PowerChoice in
the event a sale does not occur, see Part II, Item 8. - Financial Statements
and Supplementary Data, Note 2. - Rate and Regulatory Issues and Contingencies,
Note 3. - Nuclear Operations and Note 9. - Commitments and Contingencies.
THE MRA AGREEMENT. As a result of various federal and state requirements,
Niagara Mohawk was required to enter into contracts to purchase electricity from
IPPs in quantities in excess of its own demand and at prices in excess of those
available to it. In mid-1996, Niagara Mohawk began comprehensive negotiations
to terminate, amend or restate a substantial portion of above-market PPAs in an
effort to mitigate the escalating cost of these PPAs as well as to prepare
Niagara Mohawk for a more competitive environment. These negotiations led to
the MRA and the PowerChoice agreement.
The MRA was consummated on June 30, 1998 with 14 IPPs. The MRA allowed Niagara
Mohawk to terminate, estate or amend 27 PPAs which represented approximately
three-quarters of its over-market purchased power obligations. Niagara Mohawk
terminated 18 PPAs for 1,092 MW of electric generating capacity, restated 8 PPAs
representing 535 MW of capacity and amended 1 PPA representing 42 MW of
capacity. Niagara Mohawk paid the IPP Parties an aggregate of $3.934 billion in
cash, of which $3.212 billion was obtained through a public market offering of
senior unsecured debt, $303.7 million from the public sale of 22.4 million
shares of common stock, and the remainder from cash on hand. In addition,
Niagara Mohawk issued 20.5 million shares of common stock to the IPP Parties.
PowerChoice provided that the MRA and the contracts executed as part of the MRA
were prudent and accordingly, PSC approval of PowerChoice allowed Niagara Mohawk
to record a regulatory asset for the costs of the MRA, which is being amortized
over a period generally not to exceed ten years. Niagara Mohawk's rates under
PowerChoice were designed to permit recovery of the MRA regulatory asset. In
approving PowerChoice, the PSC limited the estimated value of the MRA regulatory
asset that could be recovered, which resulted in a charge to the second quarter
of 1998 earnings of $263.2 million upon the closing of the MRA. The PowerChoice
agreement, while having the effect of substantially depressing earnings during
its five-year term, substantially improves operating cash flow. The ability of
Niagara Mohawk to improve earnings in the period subsequent to PowerChoice will
depend on the outcome of the regulatory process to set prices at that time.
The MRA has the effect of reducing Niagara Mohawk's IPP payments by more than
$500 million annually as compared to leaving the pre-existing contracts in
place, net of purchases of power at market price. The resulting improvement in
cash flow and the proceeds from the sale of the generation assets have allowed
Niagara Mohawk to repay debt and repurchase Holdings' common stock.
Under the terms of the MRA, Niagara Mohawk has no continuing obligation to
purchase energy from the terminated IPP Parties. The restated contracts with
eight PPAs reflect economic terms and conditions that are more favorable to
Niagara Mohawk than the previous PPAs. See Part II, Item 7A. - Quantitative
and Qualitative Disclosures About Market Risk, and Part II, Item 8. - Financial
Statements and Supplementary Data, Note 8. - Commitments and Contingencies and
Note 9 - Fair Value of Financial and Derivative Financial Instruments, for a
further discussion regarding the remaining payments to the IPP Parties for the
purchase of electric power and the payments made under the swap agreements.
Niagara Mohawk is actively pursuing other opportunities to reduce its payments
to IPPs that were not party to the MRA. Niagara Mohawk is permitted to defer
and amortize the cost of any additional IPP contract buyouts. In 1999, there
have been four IPP contracts for approximately 127 MW terminated for a total
consideration (cash and/or notes) of $229.2 million. Niagara Mohawk estimates
that it will have reduced IPP payments by approximately $60 million annually,
net of purchases of power at market price as a result of these contract buyouts.
Deferred costs associated with IPP buyouts must generally be amortized over
five years, unless PSC approval is obtained for a different amortization
period. Niagara Mohawk retains the annual net savings from the buyouts during
the remaining term of PowerChoice to offset the amortization expense. Niagara
Mohawk is negotiating buyouts and amendments of other IPP contracts, but is
unable to determine the timing and outcome of these negotiations.
FORMATION OF A HOLDING COMPANY STRUCTURE. Niagara Mohawk was reorganized into
a holding company structure in accordance with its Agreement and Plan of
Exchange with Niagara Mohawk Holdings, Inc. on March 18, 1999. The outstanding
shares of Niagara Mohawk's common stock, $1.00 par value, were exchanged on a
share-for-share basis for Holdings' common stock, par value of $0.01. Niagara
Mohawk then became a subsidiary of Holdings. Niagara Mohawk's preferred stock
and debt were not exchanged and remained securities of Niagara Mohawk. The
holding company structure was completed March 31, 1999 with the Niagara Mohawk
dividend transfer of Opinac North America Inc. ("Opinac") to Holdings.
The holding company structure provides Holdings and its subsidiaries with the
financial and regulatory flexibility to compete more effectively in an
increasingly competitive energy industry by providing a structure that can
accommodate both regulated and unregulated lines of businesses (energy related
services and telecommunications). The holding company structure permits
Holdings to participate in unregulated business opportunities as the industry
evolves. The PowerChoice agreement provides for affiliate rules to be abided
by Holdings and its affiliated companies, including the allocation of costs
for providing goods and services.
FERC ORDER 888. In April 1996, FERC issued Order 888, which promotes
competition by requiring that public utilities owning, operating, or controlling
interstate transmission facilities file tariffs which offer others the same
transmission services they provide for themselves, under comparable terms and
conditions. FERC Order 888 required the NYPP to file reformed power pooling
agreements that establish open, non-discriminatory membership provisions and
modify any provisions that are unduly discriminatory or preferential. In
addition, the FERC Order also provides for the recovery of prudent and
verifiable stranded costs where the wholesale customer was able to obtain
alternative power supplies as a result of Order 888's open access mandate.
As a result of Order 888, there have been several developments during the past
few years as follows:
- - OPEN ACCESS
-----------
The NYISO commenced formal operations on December 1, 1999. Niagara Mohawk
views this progress as an important step toward a more competitive market for
wholesale electricity supply service in New York State, consistent with its
PowerChoice restructuring agreement.
Twice annually, Niagara Mohawk will be required to sell to the NYISO all of
its transmission capacity, except such transmission capacity grandfathered
under pre-existing Transmission Service Agreement ("TSAs"), for a subsequent
six month period. In turn, Niagara Mohawk will purchase any additional
transmission capacity it needs through the competitive bid process of the
NYISO. Approximately $70 - $75 million, or three-quarters of Niagara
Mohawk's annual transmission revenues, are derived from the grandfathered
TSAs. These grandfathered TSAs have various expiration dates, with the more
significant TSAs not expiring until 2013 and beyond. Niagara Mohawk expects
that total transmission revenues will decline from $100 million in 1999 to
$75 million in 2000, which is due to the transition from Niagara Mohawk's
transmission tariffs to the NYISO tariffs. Niagara Mohawk cannot determine
the long-term impact of the NYISO on its transmission revenues due to lack
of market experience in pricing and capacity needs.
- - STRANDED COST RECOVERY IN THE CASE OF MUNICIPALIZATION
------------------------------------------------------
Order 888 stated that it would provide for the recovery of prudent and
verifiable wholesale stranded costs where the wholesale customer was able to
obtain alternative power supplies as a result of Order 888's open access
mandate. Order 888 left to the states the issue of retail stranded cost
recovery. Where newly created municipal electric utilities required
transmission service from the displaced utility, the FERC stated that it
would entertain requests for stranded cost recovery since such
municipalization is made possible by open access. The FERC also reserved
the right to consider stranded costs on a case-by-case basis if it appeared
that open access was being used to circumvent stranded cost review by any
regulatory agency.
In November 1997, FERC issued Order 888-B. This Order clarified that the
FERC recognizes the existence of concurrent state jurisdiction over stranded
costs arising from municipalization. The FERC acknowledged in Order 888-B
that the states may be first to address the issue of retail-turned-wholesale
stranded costs, and stated that it will give the states substantial deference
where they have done so.
In approving PowerChoice, 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 $18.0 million. Lakewood filed its direct case on
October 18, 1999, which supported an exit fee of approximately $5 million.
The PSC Staff filed their direct case on October 25, 1999, which supported an
exit fee of $15.6 to $16.7 million. Rebuttal testimony 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. Niagara Mohawk expects the PSC to render
a decision by the second quarter of 2000. Niagara Mohawk is unable to
predict the outcome of this matter.
While the municipalization of Lakewood would not have a material impact on
Niagara Mohawk's results of operation and financial position, the outcome of
this matter will likely define the methodology to determine exit fees. 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 PowerChoice and the PSC's decision
that denied the petitions of Alliance for Municipal Power and Coppola for
rehearing before the Commission. The proceeding sought to vacate the
decision of the PSC approving PowerChoice provisions relating to the
determination and recovery of strandable costs through the application of
a competitive transition charge and exit fees. The PSC has made a motion to
dismiss the proceeding in this matter. 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.
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 PowerChoice 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, its appeal, which failure may
be excused by the court for good reason. 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 two percent per
year. In addition, the impact on Niagara Mohawk's electric margin is
considered to be immaterial. However, suspension of PowerChoice 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.
Niagara Mohawk has also prepared exit fee stranded cost estimates for several
other municipalities and customers, including the city of Buffalo. 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.
FERC ORDER 2000. In December 1999, FERC issued Order 2000, which requires all
public utilities that own, operate or control interstate electric transmission
to file a proposal for a Regional Transmission Organization ("RTO") by October
15, 2000. Alternatively, FERC Order 2000 requires such utilities to provide a
description of any efforts made by the utility to participate in an RTO, the
reasons for not participating and any obstacles to participation, and any plans
for further work toward participation. RTOs are required to be operational by
December 15, 2001. Niagara Mohawk is currently evaluating FERC Order 2000
and believes that the current NYISO structures provides for much of the FERC
mandate under Order 2000. However, at this time, it is difficult to determine
how the NYISO may be impacted by an RTO and what financial consequences, if
any, may result from the formation of an RTO.
OTHER REGULATORY RESTRUCTURING PROCEEDINGS. The PSC continues to assess other
functions in the regulated electric and gas business to lower consumer rates and
increase customer choice. The PSC is considering opening competition to such
functions as metering, billing, collections and customer service. On January
13, 1999, the PSC adopted a set of Uniform Business Practices for Retail Access
designed to streamline and make more uniform the manner in which the local
utilities interact with natural gas and electricity marketers, energy services
companies and customers who purchase energy in New York State's evolving
competitive market.
During the latter part of 1999, the PSC required the New York State utilities
to file tariffs providing a backout credit against utility prices to large
electric customers (greater that 50KW) choosing to have their meter services
performed by someone other than their local utility. The backout credit is an
estimate of costs the utilities incur to provide meter services to these
customers. The PSC has stated a preference for using long run avoided costs to
establish backout credits, and in the absence of long run avoided cost
estimates, the use of embedded, or fully allocable costs of the avoided
activities. Embedded costs may exceed the costs the utility could actually
avoid when not providing a service to customers that have chosen an alternative,
creating stranded costs. The PSC has postponed the implementation of these
rates until March 29, 2000. Due to the limited scope of the PSC's order on
metering, the impact on Niagara Mohawk's results of operations should be
minimal. The exposure could grow, however, if the scope of the metering
proposal is expanded, or other services are required to be opened to
competition using embedded cost as a backout credit.
Niagara Mohawk will continue to participate with the PSC and other parties as
New York State moves forward with a competitive utility industry, but it cannot
predict the outcome of the results and the impact on its PowerChoice agreement.
OTHER FEDERAL AND STATE REGULATORY INITIATIVES
- ----------------------------------------------
GAS MULTI-YEAR RATE AND RESTRUCTURING PROPOSAL. Niagara Mohawk filed a
three-year gas rate and restructuring proposal on March 11, 1999, in
anticipation of the expiration of its 1996 three-year gas rate settlement
agreement, which expired on November 1, 1999. Niagara Mohawk is currently
negotiating with the PSC and other parties, but has not reached a final
agreement. However, on October 15, 1999, and January 12, 2000, the PSC
approved an interim arrangement that freezes delivery rates at current levels,
subject to refund if the permanent rates are lower and allows the pass through
to customers the benefits of lowered pipeline costs. In addition, the interim
arrangement minimizes Niagara Mohawk's exposure to stranded costs. The interim
agreement also included provisions for the implementation of both unbundled gas
rates and a return to a full gas cost collection mechanism (gas adjustment
clause "GAC") effective November 1, 1999. In addition, Niagara Mohawk is
allowed to recover all commodity costs along with fixed capacity costs for
capacity actually used to serve customers. It also provides that, pending
resolution of the issue in that case, costs for capacity upstream of CNG that
are not actually required for sales customer demands or offset by assignment
and secondary market release (stranded capacity costs) are not recoverable
beginning November 1, 1999. However, the potential for stranded costs are not
considered material to Niagara Mohawk's results of operations or financial
condition. The exposure may increase in the future as additional customers
select alternative suppliers. Niagara Mohawk is continuing to work with the
PSC and other interested parties to reach a final settlement, but it cannot
predict the timing or outcome of such a settlement.
FUTURE OF THE NATURAL GAS INDUSTRY. In November 1998, the PSC issued its Policy
Statement concerning the Future of the Natural Gas Industry in New York State
and Order Terminating Capacity Assignment ("PSC Policy Statement"). The PSC
envisions a transitional time frame of three to seven years for local gas
distribution companies ("LDC") to exit the business of purchasing natural gas
(the "merchant" function). The PSC established a process comprising three basic
elements, to be pursued in parallel in the exiting of the merchant function:
1. Addressing the issues involved in the exiting of the merchant function on
a utility-by-utility basis as part of the LDCs individual rate plans;
2. Collaboration among staff, LDCs, marketers, pipelines and other
stakeholders of generic issues such as operational and reliability issues,
protocols and information systems requiring a status report by April 1,
1999; and
3. Coordination of issues faced by electric utilities, including provider of
last resort issues and a plan to allow competition in other areas, such as
metering, billing and information services.
In December 1998, Niagara Mohawk notified the PSC that its specific operational
and reliability requirements continue to warrant certain mandatory capacity
assignment and inclusion of capacity costs in transportation rates after April
1, 1999. Niagara Mohawk will continue to assign CNG capacity until a final
determination is reached in the current rate and restructuring case. The PSC
noted in its PSC Policy Statement that it will provide LDCs with a reasonable
opportunity to recover these strandable costs if they can demonstrate compliance
with the PSC's directives to minimize such costs.
As a result of the collaborative process established in the PSC Policy
Statement, on August 19, 1999, the PSC issued an order requiring that marketers
serving firm customers have firm, primary delivery point capacity for the five
winter months of November through March, but allowed an alternative for
marketers, only for the 1999 - 2000 heating season, to have firm secondary
delivery point capacity and to pay the LDC a standby charge to provide backup
service. LDCs that implemented this Order would be presumed to have met the
PSC's directive to minimize their stranded costs.
Niagara Mohawk believes that it has taken numerous actions to reduce its
capacity obligations and its potential stranded costs, but is unable to predict
the outcome of this matter. Niagara Mohawk has addressed the issues from the
PSC Policy Statement in its three-year gas rate and restructuring proposal filed
on March 11, 1999 and as noted above, Niagara Mohawk is currently working with
the PSC and other interested parties to reach a final settlement. For a
discussion of Niagara Mohawk's long term supply, transportation and storage
commitments, see Part II, Item 8. - Financial Statements and Supplementary Data,
Note 8. - Commitments and Contingencies.
NRC AND NUCLEAR OPERATING MATTERS. On September 24, 1999, Niagara Mohawk
announced that it had begun a comprehensive program to enhance the operating
performance of Unit 1 and Unit 2. Previous internal and external performance
reviews, including a review by the NRC, outlined the need for operational
improvements. Niagara Mohawk has implemented a phased improvement program
designed to strengthen organizational capability to improve more rapidly and
address challenges more effectively. Niagara Mohawk also established a
contractual partnership with PECO Energy, a partner in AmerGen, to provide
additional management and expertise. Niagara Mohawk incurred approximately
$1.0 million in expense during 1999 for this performance improvement program
and has budgeted an additional $5.9 million in expense and $2.8 million for
capital improvements for the six months ending June 30, 2000. Any delay in the
timing or outcome of the nuclear asset sale will affect the cost of the
improvement program.
Niagara Mohawk also experienced several outages with its two nuclear plants,
including the scheduled refueling outage, during 1999. The following summarizes
the two most significant of the outages:
- - UNIT 1: Unit 1 had a scheduled refueling and maintenance outage that
began on April 11, 1999. During the core shroud reinspection, indications of
crack growth on vertical welds were found. The growth rate identified was
consistent with findings noted in earlier inspections at Unit 1. After
careful examination and analysis, Niagara Mohawk decided to install a repair
modification on two of the shroud's vertical welds. A damaged tie rod,
previously installed to address horizontal shroud cracks, was also identified.
As a result, all four tie rods were repaired to correct a design deficiency.
The plant returned to service on June 16, 1999. The incremental costs
associated with the refueling and maintenance outage at Unit 1 was $10.8
million, including $6.3 million of replacement power costs.
- - UNIT 2: On June 24, 1999, Unit 2 automatically shut down due to a
malfunction in a device that controls water flow level to the reactor vessel.
Unit 2 returned to full power on July 26, 1999. The incremental costs
associated with the outage at Unit 2 were $11.4 million, including $10.6
million of replacement power costs.
PSC STAFF'S TENTATIVE CONCLUSIONS ON THE FUTURE OF NUCLEAR GENERATION. On
August 27, 1997, the PSC requested comments on its staff's tentative conclusions
that beyond the transition period (the period covered by the various New York
utility restructuring agreements, including PowerChoice), nuclear generation
should operate on a competitive basis.
In October 1997, the majority of utilities with interests in nuclear power
plants, including Niagara Mohawk, requested that the PSC reconsider its staff's
nuclear proposal, and the utilities recommended that a more formal process be
developed to address issues relating to competition, sale of nuclear plants,
responsibility for decommissioning, disposal of spent fuel, safety, and
environmental benefits of fuel diversity.
On March 20, 1998, the PSC issued an opinion and order instituting a further
inquiry into the matters addressed in the PSC Staff's tentative conclusions
regarding the treatment of nuclear generation in the future. The Order
concluded that the proposals contained in the Staff Report required more
extensive examination, and directed that the examination begin with a
collaborative process and move to litigation on particular issues if necessary.
A collaborative proceeding commenced on January 20, 1999.
The matters addressed in the inquiry include:
- - Market treatment for nuclear power
- - The feasibility of mandated divestiture and its likely consequences
- - Decommissioning issues
- - Effects of PSC Staff's proposal on municipalities
The proceeding has been delayed due to the PSC Staff's attention devoted to the
sale of Unit 1 and Unit 2.
As noted above, Niagara Mohawk has announced an agreement to sell its nuclear
generation assets, but is unable to determine the outcome of such a sale. See
Part II, Item 8. - Financial Statements and Supplementary Data, Note 2. - Rate
and Regulatory Issues and Contingencies and Note 3. - Nuclear Operations, for a
further discussion of the agreement.
At December 31, 1999, the net book value of Niagara Mohawk's nuclear generation
assets (including materials, supplies and nuclear fuel) was approximately $1.6
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.
YEAR 2000 READINESS DISCLOSURE
------------------------------
Niagara Mohawk has not experienced any significant problems related to the year
2000-date rollover. In general, however, all problems related to the year
2000-date rollover may not yet have become apparent. There are other critical
dates, such as leap year, that could cause similar computer problems. While
Niagara Mohawk believes its efforts to date have successfully addressed the
problems, there can be no assurance until the passage of time, that no further
problems will occur, including with respect to Niagara Mohawk's third party
business partners.
Niagara Mohawk incurred total year 2000 readiness project costs of $26.0 million
through December 31, 1999 of which $16.3 million was expensed and $9.7 million
was capitalized. Niagara Mohawk estimates that program costs for 2000 will
approximate $4.5 million, of which approximately $3.9 million will be expensed
and $0.6 million will be capitalized.
RESULTS OF OPERATIONS
---------------------
This results of operations section includes the results of both Holdings and
Niagara Mohawk. Holdings' prior period results are the same as Niagara Mohawk's
results, except for the treatment of preferred stock dividends paid by Niagara
Mohawk and the manner in which unregulated business activities are consolidated
in the financial statements. See Part II, Item 8. - Financial Statements and
Supplementary Data, Note 1. - Summary of Significant Accounting Policies, for a
further discussion of the formation of the holding company structure during
1999.
Holdings:
- ---------
Holdings experienced a loss in 1999 of $35.1 million or 19 cents per share, as
compared to a loss of $157.4 million or 95 cents per share in 1998 and earnings
of $145.9 million or $1.01 per share in 1997.
Earnings for 1999 reflect the impact of Niagara Mohawk's lower purchased power
costs, partially offset by increased interest charges, resulting in improved
earnings by $108.0 million or 58 cents per share. However, the amortization of
the MRA regulatory asset had a non-cash adverse earnings impact of $167.5
million or 90 cents per share. Earnings for 1999 were also negatively impacted
by Niagara Mohawk's early redemption of First Mortgage Bonds, Senior Notes and
Medium Term Notes, which required a charge to earnings of $23.8 million or 13
cents per share and is reflected as an extraordinary item. See Part II, Item 8.
- - Financial Statements and Supplementary Data, Note 4. - Capitalization, for a
further discussion of the extraordinary item. As discussed in more detail
below, Niagara Mohawk implemented a Customer Service System in February 1999.
Niagara Mohawk incurred higher than anticipated expenses of $23.8 million or 13
cents per share to address implementation problems, and experienced a higher
level of bad debt expense of $21.0 million or 11 cents per share that is at
least partially attributable to system implementation. The repurchase of
Holdings' common stock has not had a significant impact on earnings per share
for the year ended December 31, 1999, since earnings per share is based upon the
weighted average shares outstanding. However, the effect on earnings per share
in the future should increase.
Results for 1998 were negatively impacted by a non-cash write-off of $171.1
million or $1.03 per share associated with the portion of the MRA regulatory
asset disallowed in rates by the PSC and by the regulatory treatment of the MRA
regulatory asset. The January 1998 ice storm and the September 1998 windstorm
also negatively impacted 1998 earnings by $50.6 million, or 30 cents per share,
which reflected Niagara Mohawk's estimate of incremental, non-capitalized costs
to restore power and rebuild its electric system. In addition, per share
results for the year ended December 31, 1998, were diluted by the issuance of
42.9 million shares of common stock in connection with the MRA.
Niagara Mohawk:
- ---------------
Niagara Mohawk had a net loss of $2.1 million after the extraordinary item. The
preferred dividend requirements reduced the balance available for common stock
to a greater loss of $38.9 million. This loss as compared to 1998 and 1997 is
explained above in the discussion of Holdings' loss for the same period.
The following discussion and analysis highlights items that significantly
affected Holdings and Niagara Mohawk's operations during the three-year period
ended December 31, 1999. This discussion and analysis is not likely to be
indicative of future operations or earnings, particularly in view of the
consummation of the MRA and implementation of PowerChoice, including the sale of
Niagara Mohawk's generation assets. It should also be read in conjunction with
Item 8. - Financial Statements and Supplementary Data, and other financial and
statistical information appearing elsewhere in this report.
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 also provides retail access and unbundled bill functionality
required under PowerChoice and addresses Year 2000 compliance. These
capabilities could not be developed in the previous systems.
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. The
transition was also complicated by changes in the information and choices
provided to customers pursuant to PowerChoice. Niagara Mohawk has taken steps
prior to and during the transition period to prioritize and respond to problems.
Although the more significant billing and data accumulation issues concerning
customers have been addressed, resolution of the remaining transition issues
will continue into 2000.
The CSS transition period presents 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.
Niagara Mohawk is taking aggressive action to reduce its outstanding accounts
receivable balance relating to this transition period, so that the reserve for
bad debts can be returned to a level appropriate in the normal course of
business. However, the actions available to Niagara Mohawk are more limited
during the heating season (beginning November 1, 1999 through April 15, 2000),
since under the law, it cannot disconnect service to residential customers
unless a 72-hour notice is given to the residential customer.
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 remaining billing related problems be corrected, with emphasis on
estimated bills, by March 31, 2000. Niagara Mohawk cannot predict the outcome
or financial consequences, if any, of the PSC's inquiry.
Niagara Mohawk has incurred increased costs to complete the transition to CSS.
Costs incurred prior to implementation of CSS in February 1999 were generally
capitalized. Niagara Mohawk has capitalized $56 million through December 31,
1999, for the entire CSS project. Niagara Mohawk expected to incur costs
chargeable to expense in 1999 for maintenance of CSS. Incurred costs are also
expected to be higher in the first several years subsequent to implementation as
knowledge and experience is transferred from the vendor to Niagara Mohawk.
While implementation requirements are diminishing, Niagara Mohawk may face
additional costs if the PSC seeks other retail access-related initiatives that
would require modifications to CSS. Niagara Mohawk cannot predict the costs of
these potential changes. Niagara Mohawk also experienced higher costs in 1999
as a result of implementing retail access for all customers. Niagara Mohawk
incurred $36.6 million in 1999 for total CSS-related charges to expense,
exclusive of bad debts. Niagara Mohawk had expected to spend $11.2 million
during 1999 for maintenance and knowledge transfer activities. Niagara Mohawk
expects to incur additional costs in 2000, as remaining issues are addressed and
enhancements are made. These amounts are expected to be substantially less than
1999 spending.
REVENUES AND SALES
------------------
REGULATED ELECTRIC REVENUES for 1999 were $3,248 million, and were $3,261
million and $3,309 million in 1998 and 1997, respectively.
Regulated electric revenues for 1999 decreased $13.4 million or 0.4% as compared
to 1998. The new CSS system has converted all customers previously billed on a
bi-monthly basis to a monthly basis, which has resulted in an increase in billed
revenue and sales (GWh), with corresponding decreases in accrued unbilled
revenues. In accordance with PowerChoice, Niagara Mohawk recognizes changes in
accrued unbilled electric revenues in its results of operations, whereas, in the
first eight months of 1998, the effects of the changes in accrued unbilled
revenues were deferred. As a result, miscellaneous revenues, which include the
unbilled revenues, have decreased by approximately $13.3 million. Commercial
revenues have decreased in 1999 due to lower rates under the PowerChoice
agreement and due to commercial customers switching energy providers as a result
of open access. When customers choose an alternative supplier of energy,
Niagara Mohawk continues to collect delivery charges and the CTC, which are
reflected as "Distribution of Energy." The GWh that are delivered to the
customers who have chosen an alternative supplier are not included in Niagara
Mohawk's sales amounts. In circumstances where Niagara Mohawk sells energy to
energy service companies for resale, those revenues are included in "Other
Electric Systems." Overall electric revenues were not materially impacted by
open access. Sales to other electric systems were also lower in 1999 primarily
due to lower sales to one utility. Under PowerChoice, revenues may decline
further as customers choose alternative suppliers and Niagara Mohawk no longer
sells energy to energy service companies. However, Niagara Mohawk expects to
incur less purchased power expense, and will be able to recover its stranded
costs through the CTC. See Item 8. - Financial Statements and Supplementary
Data - Electric Statistics, for a summary of electric revenue and sales data for
the years 1997 through 1999.
The $48.3 million or 1.5% decrease in 1998 regulated electric revenues was
primarily due to a decrease in volume and mix of sales of $72.3 million along
with rate reductions under PowerChoice. The decrease was partially offset by
increases in sales of energy to other electric systems and revenue from the
distribution of energy.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM PRIOR YEAR
(In millions of dollars)
REGULATED ELECTRIC REVENUES 1999 1998 Total
- ------------------------------- --------- ------- -------
<S> <C> <C> <C>
Fuel adjustment clause revenues $ (33.5) $ (4.7) $(38.2)
Changes in volume and mix of
sales to ultimate consumers. 101.6 (72.3) 29.3
Sales to other electric systems (46.9) 11.0 (35.9)
Unbilled revenues . . . . . . . (43.3) (2.3) (45.6)
Distribution of energy. . . . . 25.3 30.2 55.5
PowerChoice rates . . . . . . . (16.6) (10.2) (26.8)
--------- ------- -------
$ (13.4) $(48.3) $(61.7)
========= ======= =======
</TABLE>
REGULATED ELECTRIC KILOWATT-HOUR SALES were 35.4 billion in 1999, 36.4 billion
in 1998 and 37.1 billion in 1997. While sales may continue to decline in 2000
and beyond as customers select alternative energy suppliers, Niagara Mohawk
expects deliveries to remain stable.
Regulated electric sales for 1999 decreased 1.0 billion KWh or 2.8% as compared
to 1998. The decrease is primarily due to a decrease in sales to other electric
systems of 1.9 billion KWh or 53.4% as compared to 1998. Sales to other
electric systems were lower in 1999 primarily due to reduced sales to one
utility. Regulated electric sales were also affected by customers selecting
alternative suppliers and billing customers that had been previously billed
bi-monthly on a monthly basis.
The 1998 decrease of 0.7 billion KWh, or 1.9% as compared to 1997, is related
primarily to a 4.5% decrease in sales to other electric systems. Sales to
ultimate consumers also decreased in 1998 primarily due to warmer weather during
the winter months.
UNREGULATED ELECTRIC REVENUES for 1999 were $217.1 million and were $129.4
million and $86.2 million in 1998 and 1997, respectively.
UNREGULATED ELECTRIC SALES for 1999 were 6.4 billion KWh and were 4.6 billion
KWh and 3.3 billion KWh in 1998 and 1997, respectively.
The unregulated electric revenues and sales are generated entirely from Niagara
Mohawk Energy, Inc. (Niagara Mohawk Energy"). The revenue and sales include
wholesale and retail transactions and reflect Niagara Mohawk Energy's increasing
activity in the competitive energy market.
Detail of the changes in electric revenues and KWh sales by customer group are
highlighted in the table below:
<TABLE>
<CAPTION>
1999
% OF
HOLDINGS' % Increase (decrease) from prior year
ELECTRIC 1999 1998
CLASS OF SERVICE REVENUES REVENUES SALES Revenues Sales
- --------------------------------- --------- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
REGULATED:
Residential 36.1 4.0 6.1 (2.1) (2.6)
Commercial 34.4 (2.3) 2.4 (1.1) 0.1
Industrial 14.0 0.8 2.1 (9.5) (4.8)
Industrial - Special 1.9 2.0 (1.4) 3.3 1.4
Other 1.4 (8.8) (17.0) 1.1 2.6
------ ------ ------ -------- -----
Total to ultimate consumers 87.8 0.7 2.7 (2.8) (1.6)
Other electric systems 1.4 (49.5) (53.4) 13.1 (4.5)
Distribution of energy 1.6 82.3 - 5,565.0 -
Miscellaneous 2.9 (11.6) - (2.6) -
------ ------ ------ -------- -----
Total regulated 93.7 (0.4) (2.8) (1.5) (1.9)
UNREGULATED:
Wholesale and retail 6.3 67.9 39.0 50.1 40.3
------ ------ ------ -------- -----
Total 100.0 2.2 1.9 (0.2) 1.5
</TABLE>
REGULATED GAS REVENUES increased $14.4 million or 2.5% in 1999 primarily as a
result of an increase in residential sales and revenue. The increase in
residential revenues is partly the result of beginning to bill customers on a
monthly basis rather than a bi-monthly basis. Most customers that were billed
on a bi-monthly basis were residential customers. Pursuant to the gas
settlement, change in accrued unbilled revenue are deferred. The increase in
regulated gas revenues is also due to revenue earned from revenue sharing
mechanisms allowed in Niagara Mohawk's gas rates as a result of lowering the
non-commodity cost of gas.
Regulated gas revenues decreased in 1998 by $91.7 million or 14.0% primarily due
to decreased sales to ultimate customers as a result of the migration of
commercial sales customers to the transportation class and due to warmer weather
in the winter months. Regulated gas revenues in 1998 were also negatively
impacted by the regulated gas commodity cost adjustment clause ("CCAC").
Rates for transported gas (excluding aggregation services) yield lower margins
than gas sold directly by Niagara Mohawk. Therefore, sales of gas
transportation services have not had a proportionate impact on earnings,
particularly in instances where customers that took direct service from Niagara
Mohawk move to a transportation-only class. In addition, changes in CCAC
revenues are generally margin-neutral.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM PRIOR YEAR
(In millions of dollars)
REGULATED GAS REVENUES 1999 1998 Total
- ------------------------------------ --------- ------- -------
<S> <C> <C> <C>
Transportation of customer-owned gas $ 3.9 $ (1.6) $ 2.3
CCAC revenues. . . . . . . . . . . . (8.2) (38.5) (46.7)
Revenue sharing mechanisms . . . . . 9.1 3.4 12.5
Spot market sales. . . . . . . . . . (4.5) 2.4 (2.1)
Changes in volume and mix of sales
to ultimate consumers . . . . . . 14.1 (57.4) (43.3)
--------- ------- -------
$ 14.4 $(91.7) $(77.3)
========= ======= =======
</TABLE>
REGULATED GAS SALES in 1999, excluding transportation of customer-owned gas and
spot market sales, were 68.6 million Dth, a 5.5% increase from 1998. The
increase in the regulated gas sales is primarily attributable to colder weather
in the first quarter of 1999, as well as the shift to monthly billing described
above, which increased residential sales. Regulated revenues were also
positively impacted by an increase in transportation volumes of 9.4 million Dth
or 7.3% to customers purchasing gas directly from producers. The increases were
partially offset by decreased spot market sales (sales for resale), which are
generally from higher priced gas available to Niagara Mohawk and, therefore,
yield margins that are substantially lower than traditional sales to ultimate
customers.
Regulated gas sales in 1998, excluding transportation of customer-owned gas and
spot market sales, were 65.0 million Dth and a 17.3% decrease from 1997. The
decrease in 1998 was in all ultimate consumer classes, primarily due to the
warmer weather. Regulated gas revenues were also negatively impacted by a
decrease in transportation volumes of 24.9 million Dth or 16.3% to customers
purchasing gas directly from producers mainly as a result of the termination and
restatement of the PPAs as part of the MRA. The decreases were partially offset
by increased spot market sales (sales for resale), which are generally from
higher priced gas available to Niagara Mohawk and, therefore, yield margins that
are substantially lower than traditional sales to ultimate customers.
UNREGULATED GAS REVENUES for 1999 were $31.6 million and were $36.0 million and
$24.3 million in 1998 and 1997, respectively.
UNREGULATED GAS SALES for 1999 were 11.0 million Dth and were 13.9 million Dth
and 6.8 million Dth in 1998 and 1997, respectively.
The unregulated gas revenues and sales are generated entirely from Niagara
Mohawk Energy. Unregulated gas revenues and sales declined in 1999 due to
reduced opportunities in the wholesale market, which were only partially offset
by increases in the retail market.
Changes in gas revenues and Dth sales by customer group are detailed in the
table below:
<TABLE>
<CAPTION>
1999
% OF
HOLDINGS' % Increase (decrease) from prior year
GAS 1999 1998
CLASS OF SERVICE REVENUES REVENUES SALES Revenues Sales
- --------------------------------------- -------- -------- ------ --------- ------
<S> <C> <C> <C> <C> <C>
REGULATED:
Residential 63.8 3.2 9.3 (13.3) (14.4)
Commercial 17.6 (2.6) (3.0) (25.4) (22.9)
Industrial 0.4 (35.3) (39.8) (44.8) (45.5)
------ ------ ------ ------ ------
Total to ultimate consumers 81.8 1.6 5.5 (16.7) (17.3)
Other gas systems - (17.4) (41.2) (46.9) (39.3)
Transportation of customer-owned gas 9.5 7.3 7.3 (2.8) (16.3)
Spot market sales 0.7 (51.1) (59.3) 37.9 83.6
Miscellaneous 2.8 69.1 - 155.7 -
------ ------ ------ ------ ------
Total regulated 94.8 2.5 5.2 (14.0) (15.6)
UNREGULATED:
Wholesale and retail 5.2 (12.2) (20.5) 48.5 105.0
------ ------ ------ ------ ------
Total 100.0 1.7 3.5 (11.7) (12.2)
</TABLE>
OPERATING EXPENSES
------------------
Niagara Mohawk has taken two significant actions during the last two years that
impact the components of its cost structure. In 1998, the MRA began to have the
effect of lowering purchased power costs from IPPs by more than $500 million
annually, net of purchases of power at market prices, while creating a
regulatory asset that increases amortization expense by approximately $386.5
million per year and increasing interest expense due to the debt incurred to
finance the MRA ($3.45 billion). In 1999, Niagara Mohawk sold its hydro and
most of its fossil assets, which reduced costs of ownership such as fuel,
operating costs, property taxes and depreciation. However, Niagara Mohawk
entered into purchase power contracts with the buyers of the formerly owned
fossil and hydro assets, which were entered into as an integral part of the
fossil/hydro sales, that increased its electricity purchased power costs by
$125.4 million through December 31, 1999. However, this increase was partially
offset by lower fuel costs, which resulted in a net reduction in margin of
approximately $84 million. These purchase power contracts mainly expire in
2003. The proceeds from the sale of assets, combined with the improved cash
flow resulting from the MRA, enabled Niagara Mohawk to reduce debt by over $1.1
billion in 1999, which will reduce interest expense in the future.
Niagara Mohawk's FUEL FOR ELECTRIC GENERATION decreased $50.3 million or 21% in
1999 primarily due to the sale of the two coal-fired generation plants in June
1999 and the sale of the oil and gas-fired generation plant at Oswego in October
1999. Generation from Niagara Mohawk's two nuclear plants was reduced due to
the two significant outages. See "NRC and Nuclear Operating Matters" above for
a discussion of these outages. The decrease in fuel costs was partially offset
by an increase in the generation at the remaining fossil generation plants. In
accordance with PowerChoice, the electric fuel adjustment clause was
discontinued. The fuel adjustment clause provided an adjustment to the
customer's bill if the cost of fuel varied from a specified unit cost. In 1999,
Niagara Mohawk recorded a $3.0 million liability to customers resulting from PSC
audit adjustments of prior years fuel costs. Niagara Mohawk's fuel for electric
generation will continue to decrease in 2000 as the remaining generation assets
are sold.
Niagara Mohawk's ELECTRICITY PURCHASED decreased $195 million or 19.5% in 1999,
as a result of reduced purchases and payments to IPPs. The decrease in IPP
purchases is primarily the result of the MRA, which became effective June 30,
1998, and has had the impact of lowering Niagara Mohawk's average unit cost of
purchased power. The decrease is partially offset by purchases under PPAs from
Niagara Mohawk's previously owned fossil and hydro generation plants. Niagara
Mohawk also increased its electricity purchases from other utilities and the
NYISO in 1999 to meet its remaining load requirements. Niagara Mohawk
anticipates that purchases from other utilities will decrease in the future and
that these purchases will be made through the NYISO at market prices. Future
IPP costs will be further reduced as Niagara Mohawk continues to negotiate
settlements with other IPPs. However, purchased power costs will trend upward
in the future as Niagara Mohawk's generation asset sales are completed and
supply from owned generation is replaced by purchased power. See Part II, Item
8. - Financial Statements and Supplementary Data - Note 8. - Commitments and
Contingencies, for a discussion of the PPAs that Niagara Mohawk is committed to
at December 31, 999.
Regulated electric fuel and purchased power costs decreased in 1998 by 12.3% or
$173.6 million. The decrease is mainly the result of decreased purchases from
the IPPs of $321.9 million. Of this amount, $80 million relates to net
reductions in purchases from IPP Parties for the period between the closing of
the MRA to the PowerChoice implementation date, which were deferred for future
rate making disposition because the time lag between these events was not
contemplated in the PowerChoice agreement. The decrease in IPP purchases is
primarily the result of the MRA agreement. (See "The MRA Agreement" above).
Other purchased power costs decreased $8.2 million. As a result, Niagara
Mohawk's load requirements were met to a greater extent from internal sources,
which resulted in an increase in fuel costs of $58.9 million as compared to
1997.
<TABLE>
<CAPTION>
Regulated Electric Fuel and Purchased Power Costs
(in millions of dollars) % Change from prior year
1999 1998 1997 1999 TO 1998 1998 to 1997
GWH COST Gwh Cost Gwh Cost GWH COST Gwh Cost
- -------------------------------------- -------------- --------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FUEL FOR ELECTRIC GENERATION:
Coal. . . . . . . . . . . . . . . . 2,989 $ 44.9 7,988 $ 118.7 7,459 $ 106.4 (62.6) (62.2) 7.1 11.6
Oil . . . . . . . . . . . . . . . . 2,282 74.3 1,669 57.1 701 32.2 36.7 30.1 138.1 77.3
Natural Gas . . . . . . . . . . . . 946 30.6 843 23.3 394 8.6 12.2 31.3 114.0 170.9
Nuclear . . . . . . . . . . . . . . 7,166 36.9 7,842 40.0 6,339 33.0 (8.6) (7.8) 23.7 21.2
Hydro . . . . . . . . . . . . . . . 1,396 - 2,694 - 2,905 - (48.2) - (7.3) -
------ ------ ------ -------- ------ --------- ------ ------ ------ -------
Sub-total electric generation. . 14,779 186.7 21,036 239.1 17,798 180.2 (29.7) (21.9) 18.2 32.7
Deferral. . . . . . . . . . . . . . - 3.0 - 0.9 - (0.7) - 233.3 - (228.6)
------ ------ ------ -------- ------ --------- ------ ------ ------ -------
Total electric generation. . . . 14,779 189.7 21,036 240.0 17,798 179.5 (29.7) (21.0) 18.2 33.7
------ ------ ------ -------- ------ --------- ------ ------ ------ -------
ELECTRICITY PURCHASED:
IPPs:
Capacity . . . . . . . . . . . . - 13.8 - 127.9 - 220.8 - (89.2) - (42.1)
Energy and taxes . . . . . . . . 6,768 324.9 9,668 605.5 13,520 885.7 (30.0) (46.3) (28.5) (31.6)
Swap payments. . . . . . . . . . - 96.5 - 51.2 - - - 88.5 - 100.0
------ ------ ------ -------- ------ --------- ------ ------ ------ -------
Total IPP purchases . . . . . 6,768 435.2 9,668 784.6 13,520 1,106.5 (30.0) (44.5) (28.5) (29.1)
------ ------ ------ -------- ------ --------- ------ ------ ------ -------
Fossil/Hydro PPAs:
Capacity . . . . . . . . . . . . - 42.8 - - - - 100.0 100.0 - -
Energy and taxes . . . . . . . . 3,490 80.9 - - - - 100.0 100.0 - -
Swap payments. . . . . . . . . . - 1.7 - - - - 100.0 100.0 - -
------ ------ ------ -------- ------ --------- ------ ------ ------ -------
Total Fossil/Hydro purchases. 3,490 125.4 - - - - 100.0 100.0 - -
------ ------ ------ -------- ------ --------- ------ ------ ------ -------
Other purchases . . . . . . . . . . 12,306 250.0 8,638 122.0 9,421 130.2 42.5 104.9 (8.3) (6.3)
------ ------ ------ -------- ------ --------- ------ ------ ------ -------
Sub-total regulated purchases. 22,564 810.6 18,306 906.6 22,941 1,236.7 23.3 (10.6) (20.2) (26.7)
Deferral. . . . . . . . . . . . . . - (3.6) - 95.4 - (0.6) - (103.8) - -
------ ------ ------ -------- ------ --------- ------ ------- ------ -------
Total regulated purchases. . . . 22,564 807.0 18,306 1,002.0 22,941 1,236.1 23.3 (19.5) (20.2) (18.9)
------ ------ ------ -------- ------ --------- ------ ------- ------ -------
Total generated and purchased. . . . . 37,343 996.7 39,342 1,242.0 40,739 1,415.6 (5.1) (19.8) (3.4) (12.3)
Losses/Niagara Mohawk use. . . . . . . 1,921 - 2,910 - 3,603 - (34.0) - (19.2) -
------ ------ ------ -------- ------ -------- ------- ------ ------ -------
35,422 $996.7 36,432 $1,242.0 37,136 $1,415.6 (2.8) (19.8) (1.9) (12.3)
====== ====== ====== ======== ====== ======== ======= ====== ====== =======
AVERAGE UNIT COST (CENTS PER KWH)*
Fuel for electric generation . . . . . 1.26 1.14 1.01
Electricity purchased. . . . . . . . . 3.59 4.95 5.39
Combined unit cost. . . . . . . . 2.67 2.91 3.48
* The average unit cost does not include the deferred costs.
</TABLE>
The above table presents the total costs for purchased electricity, while
reflecting only fuel costs for Niagara Mohawk generation. Other costs of power
production, such as property taxes, other operating expenses and depreciation
are included within other income statement line items.
Holdings' FUEL FOR ELECTRIC GENERATION and ELECTRICITY PURCHASED for 1999 is
explained by Niagara Mohawk's activity, as well as an increase in unregulated
supply costs of $69.3 million or 50.8%, primarily due to increased sales
requirements.
Niagara Mohawk's total COST OF GAS PURCHASED decreased 2.0% in 1999 and
decreased 21.3% in 1998. The cost fluctuations generally correspond to sales
volume changes, as well as a decrease in gas prices. Niagara Mohawk sold 1.8,
4.5, and 2.5 million Dth on the spot market in 1999, 1998, and 1997,
respectively. The total cost of gas decreased $5.4 million in 1999. This was
the result of a 2.7% decrease in the average cost per Dth purchased ($7.6
million), a $4.5 million decrease in Dth purchased for 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
consumers, and a $16.9 million decrease in purchased gas costs and certain other
items recognized and recovered through the CCAC. These decreases were offset by
a 6.4 million increase in Dth purchased and withdrawn from storage for ultimate
consumer sales ($23.6 million).
The total cost of gas decreased $73.5 million in 1998. This was the result of
a 19.3 million decrease in Dth purchased and withdrawn from storage for ultimate
consumer sales ($71.7 million), a 1.3% decrease in the average cost per Dth
purchased ($3.5 million) and a $1.0 million decrease in purchased gas costs and
certain other items recognized and recovered through the CCAC. These decreases
were partially offset by a $2.7 million increase in Dth purchased for spot
market sales.
Holdings' GAS PURCHASED expense reflects Niagara Mohawk's activity, as well as a
decrease of $4.8 million during 1999 primarily as a result of lower unregulated
sales.
OTHER OPERATION AND MAINTENANCE EXPENSE for Holdings and Niagara Mohawk have
decreased $37.4 million and $48.7, respectively in 1999. Expenses in 1999 have
decreased in part as a result of the sale of the fossil and hydro generation
assets. Partially offsetting these decreases are incremental costs associated
with the implementation of CSS as discussed above, as well as an increase in bad
debt expense of $32.2 million. Operation and maintenance expense in 1998
reflect two major storms totaling approximately $80.2 million in incremental
costs.
DEPRECIATION AND AMORTIZATION EXPENSE for both Holdings and Niagara Mohawk have
decreased approximately $10.4 million during 1999 primarily as a result of the
sale of Niagara Mohawk's two coal-fired generation plants, its hydro generation
plants and its oil and gas-fired generation plant at Oswego. However, this
decrease is partially offset as a result of placing in service several computer
system projects with depreciable lives that are significantly shorter than
typical transmission and distribution assets.
OTHER TAXES for both Holdings and Niagara Mohawk have decreased as compared to
1998 as a result of a reduction in the New York State GRT tax rate beginning
in October 1998, as well as a reduction in property taxes of $31.9 million in
connection with the sale of Niagara Mohawk's two coal-fired generation plants,
its hydro generation plants, and its oil and gas-fired plant at Oswego.
Other taxes decreased by $11.5 million in 1998 primarily due to a reduction in
GRT taxes of $17.6 million as a result of the lower sales revenue.
In approving PowerChoice, the PSC ordered that any savings from any reduction
in the interest associated with the debt issued in connection with the MRA
financing as compared to assumptions underlying Niagara Mohawk's PowerChoice
filing be deferred for future disposition. Holdings and Niagara Mohawk's OTHER
INCOME decreased in part due to the recording of a regulatory liability relating
to the MRA debt interest rate savings liability of $17.3 million as compared to
1998. The decrease in other income is also due to the recording of
approximately $44.6 million in 1998 on the deferral of MRA financing costs as
ordered by the PSC. These decreases were partially offset by the recording of
the approximately $9.0 million incentive earned under PowerChoice in 1999 on the
sale of the fossil and hydro generation assets.
Although Holdings and Niagara Mohawk's INTEREST CHARGES increased in 1999 mainly
due to the debt incurred to finance the MRA, the annualized level of charges has
decreased since $1.1 billion of debt was repaid during the year. Interest
charges increased in 1998 by $123.3 million after having remained fairly
constant for the years 1996 and 1997. The increase in 1998 is mainly due to the
interest charges incurred on the debt issued in mid-1998 in connection with the
MRA.
DIVIDENDS on Niagara Mohawk's preferred stock did not significantly change
from 1998 to 1999 and from 1997 to 1998. The changes are due to sinking fund
redemptions and variations in dividend rates on the adjustable rate series of
preferred stock. The weighted average long-term debt interest rate and
preferred dividend rate paid, reflecting the actual cost of variable rate
issues, were 7.74% and 7.00%, respectively in 1999 and were 7.46% and 7.00%,
respectively in 1998.
The increase in Holdings and Niagara Mohawk's FEDERAL AND FOREIGN INCOME TAXES
of approximately $86 million, excluding the tax benefit associated with the
extraordinary item, is primarily due to higher book taxable income in 1999 as
compared to 1998. Included in the earnings for 1999 is approximately $16.2
million of previously deferred investment tax credits associated with the two
coal-fired generation plants, the hydro generation plants, and the oil and
gas-fired plant in Oswego, which were sold. Niagara Mohawk believes this
accounting is consistent with applicable tax laws. After adjusting for
Holdings' treatment of Niagara Mohawk's preferred dividends, Holdings' effective
tax rate for 1999 is slightly higher than statutory rates. See Part II, Item 8.
Financial Statements and Supplementary Data - Note 6. Federal and Foreign Income
Taxes for a reconciliation of the tax adjustments.
Niagara Mohawk recorded an EXTRAORDINARY ITEM during 1999 for the early
extinguishment of debt of $23.8 million, net of income taxes. With Niagara
Mohawk's stronger operating cash flows and the proceeds from the sales of its
coal, hydro and its oil and gas generation plants, Niagara Mohawk redeemed over
$820 million in debt prior to its scheduled maturity. The extraordinary item
includes redemption premiums incurred, and the write-off of unamortized debt
expense and debt issuance costs associated with each of the series that was
redeemed.
EFFECTS OF CHANGING PRICES
--------------------------
Niagara Mohawk is especially sensitive to inflation because of the amount of
capital it typically needs and because its prices are regulated using a
rate-base methodology that reflects the historical cost of utility plant.
Holdings and Niagara Mohawk's consolidated financial statements are based on
historical events and transactions when the purchasing power of the dollar was
substantially different than now. The effects of inflation on most utilities,
including Niagara Mohawk, are most significant in the areas of depreciation and
utility plant. Niagara Mohawk could not replace its utility assets for the
historical cost value at which they are recorded on its books. In addition,
Niagara Mohawk would not replace these with identical assets due to
technological advances and competitive and regulatory changes that have
occurred. In light of these considerations, the depreciation charges in
operating expenses do not reflect the cost of providing service if new
facilities were installed. See Construction and Other Capital Requirements
below for a discussion of Niagara Mohawk's future capital requirements.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
---------------------------------------------------
FINANCIAL POSITION. Holdings and Niagara Mohawk's capital structure at December
31, 1999, and 1998 were as follows:
<TABLE>
<CAPTION>
NIAGARA Holdings and
HOLDINGS MOHAWK Niagara Mohawk
-------- ------------ --------------
% 1999 1999 1998
- ------------------------------ -------- ------------ --------------
<S> <C> <C> <C>
Long-term debt . . . . . . . . 61.9 63.3 64.6
Preferred stock of subsidiary. 5.5 - -
Preferred stock. . . . . . . . - 5.6 4.9
Common equity. . . . . . . . . 32.6 31.1 30.5
</TABLE>
The culmination of the MRA significantly increased the leverage of Niagara
Mohawk and Holdings. However, the anticipated increased operating cash flow
resulting from the MRA and PowerChoice agreement, including the proceeds from
the sale of the fossil and hydro generation assets, and the planned rapid
repayment of debt, should reduce the leverage in the capital structure of both
entities.
Holdings' 1999 ratio of earnings to fixed charges was 0.95 times. Niagara
Mohawk's ratios of earnings to fixed charges for 1998 and 1997 were 0.57 times
and 2.02 times, respectively. The changes in the ratio are primarily due to the
consummation of the MRA during 1998 and the redemption of over $1 billion in
debt during 1999. The MRA and PowerChoice agreement have the effect of
substantially depressing earnings during its five-year term, while at the same
time substantially improving operating cash flows. The primary result of the
MRA was to convert a large and growing off-balance sheet payment obligation that
threatened the financial viability of Niagara Mohawk into a fixed and more
manageable capital obligation.
EBITDA for the 12 months ended December 31, 1999 was approximately $1,260
million for Holdings, an increase of approximately $0.3 billion compared to the
12 months ended December 31, 1998. This increase is generated almost entirely
by Niagara Mohawk. The improvement in EBITDA is derived primarily from the
impacts of the MRA and PowerChoice. EBITDA represents earnings before interest
charges, interest income, income taxes, depreciation and amortization,
amortization of nuclear fuel, allowance for funds used during construction, MRA
regulatory asset amortization, and extraordinary items. The ratio of EBITDA to
net cash interest for 1999 was 3.2 times as compared to 2.9 times in 1998. Net
cash interest is defined as interest charges (net of allowance for funds used
during construction) and less the non-cash impact of the net amortization of
discount on long-term debt and interest accrued on the Nuclear Waste Policy Act
liability and less interest income. The ratio of EBITDA to net cash interest
also improved due to the impacts of the MRA and PowerChoice and Niagara Mohawk's
debt reduction. EBITDA is a non-GAAP measure of cash flows and is presented to
provide additional information about Holdings and Niagara Mohawk's ability to
meet its future requirements for debt service. EBITDA should not be considered
an alternative to net income as an indicator of operating performance or as an
alternative to cash flows, as presented on the Consolidated Statement of Cash
Flows, as a measure of liquidity.
The sales of the generation plants, especially nuclear, will tend to slightly
lower future EBITDA primarily as a result of the PPAs that Niagara Mohawk
entered into with the new owners of the generation assets.
Niagara Mohawk has been reviewing its capital structure in light of its
scheduled debt reduction program, its divestiture of its electric generation
assets and the changing industry. As a result, Niagara Mohawk filed two
petitions with the PSC on July 1, 1999, to refinance its preferred stock to
take advantage of lower dividend rates, and to purchase Holdings' common stock.
See Part II, Item 8. - Financial Statements and Supplementary Data, Note 4. -
Capitalization, for a further discussion of the two petitions and the actions
taken. The impact on earnings per share as a result of these stock purchases
was not significant for the year ended December 31, 1999, since earnings per
share is calculated using the weighted average of common stock outstanding.
However, the impact on future earnings per share will be more significant.
COMMON STOCK DIVIDEND. Niagara Mohawk's Board of Directors omitted its common
stock dividend beginning the first quarter of 1996. This action was taken to
help stabilize Niagara Mohawk's financial condition and provide flexibility as
Niagara Mohawk addressed growing pressure from mandated power purchases and
weaker sales. In making future dividend decisions, the Board of Directors of
Holdings and Niagara Mohawk will evaluate the relative value to shareholders of
dividend payments or the repurchase of common stock, along with standard
business considerations, their financial conditions, limitations on dividend
payments under the PowerChoice agreement, limitations on common stock dividend
payments in senior bank financing agreement if unsecured debt ratings fall below
current levels, the degree of competitive pressure on its prices, the level of
available cash flow and retained earnings and other investments to be made by
unregulated subsidiaries. For the next several years, Niagara Mohawk expects to
dedicate a substantial portion of its future expected positive cash flow to
reduce debt and buy back Holdings' common stock. See Part II, Item 8. -
Financial Statements and Supplementary Data, Note 4. - Capitalization, for a
discussion of the Holdings' common stock repurchased through December 31, 1999.
The PowerChoice agreement limits the amount of common stock dividends that can
be paid by Niagara Mohawk to Holdings, but does not limit the dividends that
Holdings may pay to its shareholders. The limit under PowerChoice is based upon
the amount of net income each year of Niagara Mohawk, plus a specified amount
ranging from $75 million in 1999 to $100 million in 2000, 2001 and 2002 and
declining thereafter through 2007. The limitation excludes one-time dividends
associated with the sale of Niagara Mohawk's generation assets. The dividend
limitation is subject to review after the term of the PowerChoice agreement.
Furthermore, Niagara Mohawk forecasts that earnings for the five-year term of
the PowerChoice agreement will be substantially depressed, as non-cash
amortization of the MRA regulatory asset is occurring (which asset is being
amortized generally over a ten-year period) and the interest costs on
the IPP debt is the greatest. The ability to improve earnings in the period
subsequent to PowerChoice will depend upon the outcome of the regulatory process
to set prices at that time. Payment of Niagara Mohawk dividends to Holdings
will be subject to the prior rights of holders of Niagara Mohawk preferred
stock, First Mortgage Bonds and other long-term debt.
During 1999, Holdings did not declare or pay any common stock dividends.
During 1999, Niagara Mohawk paid approximately $64 million in cash dividends
to Holdings, as well as the dividend of Opinac. During January 2000, Niagara
Mohawk paid approximately $36 million in cash dividends to Holdings.
CONSTRUCTION AND OTHER CAPITAL REQUIREMENTS. Niagara Mohawk's total capital
requirements consist of amounts for its construction program, see Item 8. -
Financial Statements and Supplementary Data - Note 8. - Commitments and
Contingencies - Construction Program, working capital needs, maturing debt
issues and sinking fund provisions on preferred stock. Niagara Mohawk's annual
expenditures for the years 1997 to 1999 for construction and nuclear fuel,
including related AFC and overheads capitalized, were $290.8 million, $392.2
million and $298.1 million, respectively. These expenditures, excluding nuclear
fuel and AFC, are budgeted to be approximately $219 million for 2000 and $229
million and $230 million in years 2001 and 2002, respectively. If the nuclear
sale does not occur, Niagara Mohawk estimates that it will incur expenditures
for construction and nuclear fuel of $69 million for 2000 and $32 million and
$67 million for 2001 and 2002, respectively. Capital expenditures were lower
in 1999 as compared to 1998 due in part to the sale of several of Niagara
Mohawk's generation assets. In addition, there were higher capital expenditures
in 1998 of approximately $71 million due to the costs incurred to rebuild a
portion of Niagara Mohawk's regulated transmission and distribution facilities
as a result of several storms. The estimates for 2000 and beyond include
amounts relating to Niagara Mohawk's Albany oil and gas-fired generation plant
through March 2000, its nuclear assets through June 2000 and Niagara Mohawk's
25% interest in the Roseton plant through December 2000. The estimate of
construction additions included in capital requirements for the period 2000 to
2002 will be reviewed by management to give effect to the overall objective of
further reducing construction spending where possible. Any change in the
timing or outcome of these remaining generation asset sales and nuclear sale
will effect Niagara Mohawk's capital expenditure requirements.
Mandatory debt and preferred stock retirements are expected to add approximately
another $618.1 million to the 2000 estimate of capital requirements and are
expected to add approximately $631.8, $547.1, $613.8, and $235.5 million in the
next subsequent four years. The 2000 estimate includes $105 million related to
the senior bank facility discussed below, which is classified as current pending
renegotiation of the facility.
See discussion in "Liquidity and Capital Resources" section below, which
describes how management intends to meet its future financing needs.
LIQUIDITY AND CAPITAL RESOURCES. External financing plans are subject to
periodic revision as underlying assumptions are changed to reflect developments
and market conditions. The ultimate level of financing during the period 2000
through 2004 will be affected by, among other things:
- - Niagara Mohawk's competitive position and the extent to which competition
penetrates its markets;
- - changes in electric and gas prices as a result of regulatory proceedings;
- - potential future actions with respect to IPPs not covered under the MRA;
- - uncertain energy demand due to the weather and economic conditions and
obligations to serve as provider of last resort;
- - the cash tax benefits anticipated because the MRA generated a net tax
operating loss carryforward in 1998;
- - levels of common stock repurchases;
- - levels of common dividend payments, if any, and preferred dividend
payments; and
- - the results of the remaining sales of Niagara Mohawk's generation assets.
The proceeds of the sales of the generation assets are subject to the terms of
Niagara Mohawk's mortgage indenture and the note indenture that was entered into
in connection with the MRA debt financing. Niagara Mohawk has petitioned the
PSC to issue up to an aggregate of $400 million in debt to address its financial
needs arising from the recent and prospective termination or restructuring of
additional IPP contracts. Niagara Mohawk plans to issue at least $200 million
of unsecured debt during the first half of 2000. In addition, Niagara Mohawk
may refinance existing debt to take advantage of lower interest rates.
Niagara Mohawk is obligated to use 85% of the proceeds of the sale of its
generation assets to reduce debt outstanding, as outlined in its Senior Note
indenture. In June 1999, Niagara Mohawk announced an agreement to sell its
nuclear assets to AmerGen for $135 million, which is subject to price
adjustments depending on the timing of the closing. Niagara Mohawk has also
announced on October 6, 1999, an agreement to sell its oil and gas-fired plant
at Albany for $47.5 million. In addition, Niagara Mohawk could also receive up
to an additional $11.5 million if the buyer chooses to pursue the redevelopment
of the Albany plant. For a further discussion of the terms and adjustments to
the generation assets sales agreements, see "Generation Assets Sales" above.
With Niagara Mohawk's stronger operating cash flows and proceeds from sales of
its coal, hydro, and its oil and gas facilities, approximately $1.1 billion of
debt was retired in 1999 consistent with debt reduction goals.
Niagara Mohawk has an $804 million senior bank financing with a bank group,
consisting of a $255 million term loan facility, a $125 million revolving credit
facility and $424 million for letters of credit. The letter of credit facility
provides credit support for the adjustable rate pollution control revenue bonds
issued through the NYSERDA. The interest rate applicable to the senior bank
financing is variable based on certain rate options available under the
agreement and currently approximates 6.625% (but is capped at 15%). As of
December 31, 1999, the amount outstanding under the senior bank financing was
$529 million, consisting of $105 million under the term loan facility and $424
million of letters of credit, leaving Niagara Mohawk with $275 million of
borrowing capability under the financing. The senior bank facility term expires
on June 1, 2000. As a result, the amount outstanding on this facility at
December 31, 1999, $105 million, is shown as a current liability on both
Holdings and Niagara Mohawk's balance sheets. This facility is collateralized
by first mortgage bonds. Niagara Mohawk is currently negotiating a new
financing arrangement with a bank group and believes, as a minimum, it will be
able to obtain $424 million for letters of credit prior to the expiration of
the senior bank facility on June 1, 2000. Opinac had an agreement with a bank
providing for letters of credit totaling up to $25 million which in January 2000
was replaced by 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 January 31, 2000, supports
approximately $20 million in letters of credit. Opinac is working to extend
the facility beyond September 20, 2000.
Niagara Mohawk has the ability to issue First Mortgage Bonds to the extent that
there have been maturities since June 30, 1998. Through December 31, 1999,
Niagara Mohawk had $60 million in First Mortgage Bonds maturities.
Ordinarily, construction related short-term borrowings are refunded with
long-term securities on a periodic basis. This approach generally results in a
working capital deficit. Working capital deficits may also be a result of the
seasonal nature of Niagara Mohawk's operations as well as the timing of
differences between the collection of customer receivables and the payments of
fuel and purchased power costs. Niagara Mohawk's current working capital
deficit is largely attributable to amounts due in 2000 for the Senior Notes
incurred as part of the MRA and the current classification of $105 million under
the term loan facility. Niagara Mohawk believes it has sufficient cash flow and
borrowing capacity to fund such deficits as necessary in the near term. In
addition, as noted above, Niagara Mohawk is currently negotiating a new
financing arrangement and expects to have it in place before the current
arrangement expires.
Niagara Mohawk has established a single-purpose, financing subsidiary, NM
Receivables LLC, ("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. See Part II, Item 8. Financial Statements
and Supplementary Data, Note 8. - Commitments and Contingencies for a further
discussion of this customer receivables program.
At December 31, 1999, and 1998, $215.1 million and $150 million, respectively,
of receivables had been sold by NMR to a third party. The total amount of
receivables that can be sold is $300 million. Niagara Mohawk has the discretion
to increase or decrease the actual amount sold, subject to a cap. The undivided
interest in the designated pool of receivables was sold with limited recourse.
The agreement provides for a formula based loss reserve pursuant to which
additional customer receivables are assigned to the purchaser to protect against
bad debts. At December 31, 1999, the amount of additional receivables assigned
to the purchaser, as a loss reserve, was approximately $83.2 million.
In the fourth quarter of 1999, NMR was not in compliance with a certain
statistical ratio relating to the pool of receivables sold. The purchaser has
granted a waiver for this period. While NMR is working to return to compliance
with this ratio, it is possible a non-compliance condition could continue to
exist. NMR is unable to predict whether further waivers would be granted.
In December 1998, Niagara Mohawk received a ruling from the Internal Revenue
Service ("IRS") to the effect that the amount of cash and the value of common
stock that was paid to the terminated IPP Parties was deductible and generated a
substantial net operating loss ("NOL") for federal income tax purposes, such
that Niagara Mohawk did not pay federal income taxes for the 1998 tax year.
Further, Niagara Mohawk has carried back unused NOL to the years ended 1996 and
1997, and also for the years 1988 through 1990, which resulted in a tax refund
of $135 million received in January 1999. As a result of the Agreement and Plan
of Exchange between Niagara Mohawk and Holdings on March 18, 1999, (Part II,
Item 8. - Financial Statements and Supplementary Data, Note 1. - Summary of
Significant Accounting Policies, Corporate Structure and Principles of
Consolidation), Holdings will now be the tax filer to benefit from the remaining
tax carryforward. Holdings anticipates that it will be able to utilize the
remaining $2.6 billion NOL carryforward, as of December 31, 1999, to offset
income earned in the future, before the expiration date of the NOLs in 2019.
Holdings' ability to utilize the NOL generated, as a result of the MRA, could
be limited under the rules of section 382 of the Internal Revenue Code if
certain changes in Holdings' common stock ownership were to occur in the future.
In general, the limitation is triggered by a more than 50% change in stock
ownership during an three-year testing period by shareholders that own,
directly or indirectly, 5% or more of the common stock. For purposes of making
the change in ownership computation, the IPP Parties who were issued common
stock pursuant to the MRA, are likely to be considered a separate 5% shareholder
group, as will the purchasers of common stock in the public offering completed
immediately prior to consummation of the MRA. Under the computational rules
prescribed by applicable Treasury regulations, Niagara Mohawk has experienced an
approximate 17 percentage point owner shift in its stock within the three-year
period ending on June 30, 1998, as a result of the distribution of stock to the
IPP Parties and the public offering. During the year 1999, Niagara Mohawk made
several purchases of its parents' common stock. In total, Niagara Mohawk
purchased 10 million shares of Holdings' common stock, which in aggregate would
be treated under Code Section 382 as a redemption. Holdings has performed the
testing required by Section 382 in connection with the purchases of Holdings'
common stock by Niagara Mohawk. Holdings believes it has experienced an
approximate 21 percentage point owner shift in its stock for the three year
period ending on December 31, 1999, which includes the shares issued as part of
the MRA, as well as the stock repurchased by Niagara Mohawk. Thus, if the IPP
Parties, the purchasers in the public offering, and any other five percent
shareholders collectively experience ownership increases totaling 29 percent
or more during any three year testing period that includes the consummation
dates of the public offering, the MRA and the stock purchases by Niagara
Mohawk, the statutory limit could be breached. The rules for determining a
change in stock ownership for purposes of Code Section 382 are extremely
complicated and in many respects uncertain. A stock ownership change
could occur as a result of circumstances that are not within the control of
Holdings. If a more than 50% change in ownership were to occur, Holdings'
remaining usable NOL carryforward would likely be significantly lower in the
future than the NOL carryforward amount which otherwise would be usable absent
the limitation. Consequently, Holdings' net cash position could be
significantly lower as a result of tax liabilities, which otherwise would be
eliminated or reduced through unrestricted use of the NOL carryforward.
NET CASH FROM OPERATING ACTIVITIES increased $4,035.4 million for Holdings and
$4,039.2 million for Niagara Mohawk in 1999 as compared to 1998, primarily
because the 1998 operating cash included the payments to the settling IPPs to
consummate the MRA. The operating cash flows for 1999 also improved due to
Niagara Mohawk's receipt of federal income tax refunds in January 1999 totaling
approximately $135 million and as expected, operating cash flow improved due to
the impacts of the MRA and PowerChoice.
Holdings and Niagara Mohawk's NET CASH FROM INVESTING ACTIVITIES increased
$937.9 and $1,043.6 million, respectively in 1999 as compared to 1998. These
increases are primarily due to the cash received from the sales of the Huntley
and Dunkirk coal-fired generation assets, the hydro generation assets and the
oil and gas-fired plant at Oswego.
Holdings and Niagara Mohawk's NET CASH FROM FINANCING ACTIVITIES decreased
$4,824.9 and $4,978.5 million, respectively due to the early repayment of debt,
and the dividend and related cash transfer of Opinac to Holdings on March 31,
1999. Financing activities during 1998 were positively impacted by the issuance
of the Senior Notes to finance the MRA.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Niagara Mohawk is exposed to various market risks in interest rates, commodity
prices, equity prices and foreign currency valuation because of transactions
conducted in the normal course of business. The financial instruments held or
issued by Niagara Mohawk and Niagara Mohawk Energy, Opinac's energy marketing
subsidiary are used for hedging or cost control and not for trading.
Quantitative and qualitative disclosures are discussed by market risk exposure
category:
- - Interest Rate Risk
- - Commodity Price Risk
- - Equity Price Risk
- - Foreign Currency Exchange Risk
An Exposure Management Committee ("EMC") was set up to monitor and control
efforts to manage these risks. The EMC issues and oversees the Financial Risk
Management Policy (the "Policy") applicable to the regulated company that
outlines the parameters within which corporate managers are to engage in,
manage, and report on various areas of risk exposure. At the core of the Policy
is a condition that Niagara Mohawk will engage in activities at risk, only to
the extent that those activities fall within commodities and financial markets
to which it has a physical market exposure in terms and in volumes consistent
with its core business. That core business is to supply energy, in the form of
electricity and natural gas to customers within Niagara Mohawk's service
territory. The policies of Niagara Mohawk may be revised as its primary markets
continue to change, principally as increased competition is introduced and the
role of Niagara Mohawk in these markets evolves.
Niagara Mohawk Energy maintains a separate Risk Management and Trading Policy
Manual that allows for transactions such as marketing and trading in retail and
wholesale, physically and financially settled, energy based instruments. These
actions expose Niagara Mohawk Energy to a number of risks such as forward price,
deliverability, market liquidity and credit risk. Like Niagara Mohawk's Policy,
the energy trading policy seeks to assure that risks are identified, evaluated
and actively managed.
INTEREST RATE RISK. Niagara Mohawk's exposure to changes in interest rates is
due to its financing through a senior debt facility, several series of
adjustable rate promissory notes and adjustable rate preferred stock. See Note
4. - Capitalization and Note 5. - Bank Credit Arrangements. Under the senior
debt facility, Niagara Mohawk currently has an outstanding term loan of $105
million. The adjustable rate promissory notes are currently valued at $413.8
million, and Niagara Mohawk has $121.3 million outstanding in adjustable rate
preferred stock. Another issue of $150 million of fixed-adjustable rate
preferred stock is fixed at 6.9% for the first five years then adjusts and is
not considered adjustable for this analysis. There is no interest rate cap on
the promissory notes. The interest on the term loan is variable but capped at
15%.
Dividend rates for Niagara Mohawk's preferred stock are indexed to U.S.
government interest bearing securities plus or minus an amount stipulated in
each series and have floors of 6.5% to 7.5% and caps of between 13.5% and 16.5%.
As of December 31, 1999, the rate calculated on the index for each series is
below the floor, therefore, the current rate is equal to the floor. Future
changes in the indexed rate will not result in an exposure to higher dividend
rates until the floor is exceeded. However, for the purposes of the following
sensitivity analysis, a hypothetical one percent increase from the floor
dividend rate is assumed.
Niagara Mohawk also maintains long-term debt at fixed interest rates. A
controlling factor on the exposure to interest rate variations is the mix of
fixed to variable rate instruments maintained by Niagara Mohawk. For 1999 and
1998, adjustable rate instruments comprise 7.5% and 6.4% of total
capitalization; term loan and promissory notes are 9.2% and 7.7% of total
long-term debt. The proportion of adjustable instruments to total
capitalization and debt has increased because of Niagara Mohawk's efforts to
pay down debt in 1999. However, they still remain small in relation to total
capitalization and debt thus, limiting Niagara Mohawk's exposure to interest
rate fluctuations.
If interest rates averaged one percent more in 2000 versus 1999, Niagara
Mohawk's interest expense would increase and income before taxes decrease by
approximately $5.2 million. This figure was derived by applying the
hypothetical one percent variance across the variable rate debt of $518.8
million at December 31, 1999 (the sum of the term loan and promissory notes).
The same one percent increase in Niagara Mohawk's preferred dividend rate
applied against the outstanding balance of $121.3 million would result in an
increase to dividend payments of $1.2 million, assuming that the indexed rate
was between the floor and cap. Under the current rate agreement, prices to
customers are fixed for three years, with limited increases available in years
four and five, if justified by Niagara Mohawk. Changes in the actual cost of
capital from levels assumed in the current rate agreement would create either
exposure or opportunity for Niagara Mohawk until reflected in future prices.
COMMODITY PRICE RISK. Niagara Mohawk is exposed to market fluctuations in the
prices for electricity, natural gas, and oil. Niagara Mohawk does not,
generally, speculate on movements in the underlying prices for these
commodities. Purchases are based on analyses performed in relation to fuel
needs for power generation and customer delivery for electricity and natural
gas. Niagara Mohawk's commodity price risk in regards to power generation will
be eliminated after the sale of the remaining fossil generation plants. Where
possible, Niagara Mohawk takes positions in order to mitigate expected price
increases but only to the extent that quantities are based on expectations of
delivery. Niagara Mohawk attempts to mitigate exposure through a program that
hedges risks as appropriate.
Niagara Mohawk Energy has reduced its amount of trading activity since 1998.
Any trading activities performed are accounted for on a marked-to-market basis
with changes in fair value recognized as a gain or loss in the period of change.
The fair value of open trading positions at December 31, 1999, as well as the
effect of Niagara Mohawk Energy's trading activities were not material to
Holdings' results of operations.
Activities for non-trading purposes generally consist of transactions entered
into to hedge the market fluctuations of contractual and anticipated
commitments. Gas futures and electric forward contracts are used for hedging
purposes. Changes in market value of futures and forward contracts relating to
hedged items are deferred until the physical transaction occurs, at which time,
income or loss is recognized. The fair value of open positions for non-trading
purposes at December 31, 1999, as well as the effect of these activities on
Holdings' results of operations for the same period ending, was not material.
The fair values of futures and forward contracts are determined using quoted
market prices.
The commodity risk exposure of Niagara Mohawk Energy does not constitute a
material risk of loss to Holdings.
With respect to electricity, as customers chose an alternate supplier, Niagara
Mohawk sheds commodity risk. In addition, many large customers that continue
to purchase electricity from Niagara Mohawk have agreed to take market price
risk, further lowering commodity risk. For the remaining customers that have
firm prices, Niagara Mohawk has hedged a significant portion of the commodity
cost through various physical and financial contracts. Under the principles
established in PowerChoice, as these contracts expire, customers who buy
electricity from Niagara Mohawk will bear the commodity price risk for the
amount of energy associated with the expiring contracts.
Niagara Mohawk, as part of the MRA, entered into restated indexed swap contracts
with eight IPPs and financial swap agreements as part of the sale of the Huntley
and Dunkirk coal-fired generation stations. See Note 9. - Fair Value of
Financial and Derivative Financial Instruments, for a more detailed discussion
of these swap contracts.
The fair value of the liability under the swap contracts, based upon the
difference between projected future market prices and projected contract prices
applied to the notional quantities and discounted at 8.5%, is approximately $664
million and is recorded on Niagara Mohawk's balance sheet as a liability for
swap contracts. The discount rate is based upon comparable debt instruments of
Niagara Mohawk. Based upon the PSC's approval of the restated contracts,
including the indexed swap contracts, as part of the MRA and being provided a
reasonable opportunity to recover the estimated indexed swap liability from
customers, Niagara Mohawk has recorded a corresponding regulatory asset. The
amount of the recorded liability and regulatory asset is sensitive to changes in
discount rate, anticipated future market prices and changes in the indices upon
which the indexed swap contracts are based. However, changes in anticipated
future market prices and discount rates will not impact the future cash flow of
Niagara Mohawk when considering the all-in price of the notional quantities of
energy. Specifically, as market prices rise or fall, payments under the indexed
swap contracts move inversely. Similarly, changes in discount rates will not
impact the all-in price. If the indexed contract price were to increase or
decrease by one percent, Niagara Mohawk would see a $15.6 million increase or
decrease in the present value of the projected over-market exposure. If the
market prices were to increase or fall by one percent, Niagara Mohawk would see
a $9.7 million decrease or increase in the projected over-market exposure. If
the discount rate were to increase or decrease to 9.0% or 8.0%, the net present
value of the projected over market exposure would decrease or increase by
approximately $9.3 million.
The cost of natural gas sold to customers fluctuates during the year with prices
most volatile in the winter months. Niagara Mohawk has a policy to reduce the
variability in gas costs over the winter months. Through purchase agreements
limiting or eliminating gas price volatility with three gas suppliers
(approximately 3.2 billion cubic feet ["Bcf"]) and by drawing on stored gas
supplies (approximately 21.5 Bcf), Niagara Mohawk will be able to reduce price
volatility on approximately 50% of the anticipated winter demand.
The rest of the gas needs are met through market-based purchases and are subject
to price fluctuations. On November 1, 1999, the gas commodity cost adjustment
clause ("CCAC") expired and, through an interim agreement with the PSC, was
replaced by a Gas Adjustment Clause ("GAC") that allows for recovery in gas
rates of actual commodity costs and pipeline demand charges. The GAC eliminates
gas commodity and pipeline demand price risk from the earnings of Niagara
Mohawk.
The PSC has mandated that Niagara Mohawk attempt to reduce the price volatility
in the gas commodity portion of customers' bills. In response, Niagara Mohawk's
board has authorized the use of futures, options and swaps to hedge against gas
price fluctuations. The hedging program will be consistent with the Financial
Risk Management Policy and will be monitored by the EMC. Niagara Mohawk intends
to use futures contracts and options traded on the New York Mercantile Exchange
to hedge approximately ten percent of Niagara Mohawk's winter demand.
EQUITY PRICE RISK. The NRC requires nuclear plant owners to place funds in an
external trust to provide for the cost of decommissioning of the contaminated
portions of nuclear facilities. See Note 3. - Nuclear Operations. Niagara
Mohawk has established qualified and non-qualified trust funds for Unit 1 and
Unit 2. At December 31, 1998, these funds were invested in fixed income
securities, domestic equity securities, and cash equivalents. The fixed income
securities are subject to interest rate fluctuations and the equity securities
to price change in the equity markets. The funds asset allocation was designed
to maximize returns commensurate with Niagara Mohawk's risk tolerance. As of
December 31, 1999, the funds were invested primarily in high grade, short-term
commercial paper. The current fund allocation is designed to guarantee
stability and predictability in the fund balances.
During 1999, Niagara Mohawk announced an agreement to sell its nuclear assets.
The agreement to sell the nuclear generation assets includes the transfer of the
decommissioning trust funds, at an agreed amount, to the buyer. In anticipation
of that sale, and to reduce the risk of a detrimental market shift affecting the
funds, Niagara Mohawk converted all decommissioning assets to high grade,
short-term commercial paper in October and November of 1999. The instruments
purchased have specified coupon rates and maturity dates of generally one to
four months. The fund managers can only purchase the commercial paper from a
list of companies pre-approved based on an excellent credit rating. Remaining
cash is invested in an overnight, short-term investment fund. Due to the makeup
of the funds at December 31, 1999, they no longer experience any substantial
risk of loss due to market shifts or credit risk.
FOREIGN CURRENCY EXCHANGE RISK. Holdings has a foreign currency exchange risk
as a result of its investments in Canada through its non-regulated subsidiary.
Translation adjustments due to exchange rate movement across the value of the
subsidiary is reported in Capitalization as a Foreign Currency Translation
Adjustment (see Note 4. - Capitalization) and is a component of Comprehensive
Income, see "Consolidated Statements of Comprehensive Income." In aggregate,
the risk of loss does not pose a material threat to Holdings' consolidated
results of operations or total capitalization.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A. FINANCIAL STATEMENTS
- - Report of Management
- - Report of Independent Accountants
- - NIAGARA MOHAWK HOLDINGS, INC.
- Consolidated Statements of Income and Retained Earnings for each of the
three years in the period ended December 31, 1999
- Consolidated Statements of Comprehensive Income for each of the three
years in the period ended December 31, 1999
- Consolidated Balance Sheets at December 31, 1999 and 1998
- Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1999
- - NIAGARA MOHAWK POWER CORPORATION
- Consolidated Statements of Income and Retained Earnings for each of the
three years in the period ended December 31, 1999
- Consolidated Statements of Comprehensive Income for each of the three
years in the period ended December 31, 1999
- Consolidated Balance Sheets at December 31, 1999 and 1998
- Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1999
- - Notes to Consolidated Financial Statements
<PAGE>
REPORT OF MANAGEMENT
The consolidated financial statements of Holdings and Niagara Mohawk and their
subsidiaries were prepared by and are the responsibility of management.
Financial information contained elsewhere in this Annual Report is consistent
with that in the financial statements.
To meet its responsibilities with respect to financial information, management
maintains and enforces a system of internal accounting controls, which is
designed to provide reasonable assurance, on a cost effective basis, as to the
integrity, objectivity and reliability of the financial records and protection
of assets. This system includes communication through written policies and
procedures, an organizational structure that provides for appropriate division
of responsibility and the training of personnel. This system is also tested by
a comprehensive internal audit program. In addition, a Corporate Policy
Register and a Code of Business Conduct (the "Code") supply employees with a
framework describing and defining Holdings' overall approach to business and
require all employees to maintain the highest level of ethical standards as well
as requiring all management employees to formally affirm their compliance with
the Code.
The financial statements have been audited by PricewaterhouseCoopers LLP,
Holdings and Niagara Mohawk's independent accountants, in accordance with
generally accepted auditing procedures. In planning and performing its audit,
PricewaterhouseCoopers LLP considered Holdings and Niagara Mohawk's internal
control structures in order to determine auditing procedures for the purpose of
expressing an opinion on the financial statements, and not to provide assurance
on the internal control structures. The independent accountants' audit does not
limit in any way management's responsibility for the fair presentation of the
financial statements and all other information, whether audited or unaudited, in
this Annual Report. The Audit Committee of Holdings' Board of Directors,
consisting of five outside directors who are not employees, meets regularly with
management, internal auditors and PricewaterhouseCoopers LLP to review and
discuss internal accounting controls, audit examinations and financial reporting
matters. PricewaterhouseCoopers LLP, and Holdings and Niagara Mohawk's internal
auditors have free access to meet individually with the Audit Committee at any
time, without management being resent.
/s/William E. Davis
- -------------------
William E. Davis
Chairman of the Board and
Chief Executive Officer
Niagara Mohawk Holdings, Inc. and
Niagara Mohawk Power Corporation
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Niagara Mohawk Holdings, Inc. and
Niagara Mohawk Power Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings, of comprehensive income
and of cash flows present fairly, in all material respects, the financial
position of Niagara Mohawk Holdings, Inc. and its subsidiaries ("Holdings") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 and the
accompanying consolidated balance sheets and the related consolidated statements
of income and retained earnings, of comprehensive income and of cash flows
present fairly, in all material respects, the financial position of Niagara
Mohawk Power Corporation and its subsidiaries ("Niagara Mohawk") at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity
accounting principles generally accepted in the United States. These financial
statements are the responsibility of management of Holdings and Niagara Mohawk;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Syracuse, New York
January 27, 2000
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
-------------- ----------- -----------
(in thousands of dollars)
<S> <C> <C> <C>
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . . . . $ 3,464,901 $3,390,501 $3,395,611
Gas . . . . . . . . . . . . . . . . . . . . . . . 611,226 601,276 681,230
Other . . . . . . . . . . . . . . . . . . . . . . 8,059 643 1,654
-------------- ----------- -----------
4,084,186 3,992,420 4,078,495
-------------- ----------- -----------
OPERATING EXPENSES:
Electricity purchased . . . . . . . . . . . . . . 1,012,811 1,138,453 1,322,537
Fuel for electric generation. . . . . . . . . . . 189,657 239,982 179,455
Gas purchased . . . . . . . . . . . . . . . . . . 297,641 307,841 371,615
Other operation and maintenance . . . . . . . . . 910,871 948,297 845,758
PowerChoice charge. . . . . . . . . . . . . . . . - 263,227 -
Amortization of MRA regulatory asset. . . . . . . 386,499 128,833 -
Depreciation and amortization . . . . . . . . . . 345,473 355,919 340,239
Other taxes . . . . . . . . . . . . . . . . . . . 415,082 460,940 472,212
-------------- ----------- -----------
3,558,034 3,843,492 3,531,816
-------------- ----------- -----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . 526,152 148,928 546,679
Other income . . . . . . . . . . . . . . . . . . . . 3,795 60,697 37,157
-------------- ----------- -----------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . 529,947 209,625 583,836
Interest charges . . . . . . . . . . . . . . . . . . 485,240 397,178 273,906
Preferred dividend requirement of subsidiary . . . . 36,808 36,555 37,397
-------------- ----------- -----------
INCOME (LOSS) BEFORE FEDERAL AND FOREIGN
INCOME TAXES. . . . . . . . . . . . . . . . . . . 7,899 (224,108) 272,533
Federal and foreign income taxes . . . . . . . . . . 19,180 (66,728) 126,595
-------------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. . . . . . . (11,281) (157,380) 145,938
Extraordinary item - Loss from the extinguishment
of debt, net of income taxes of $12,819 (Note 4). (23,807) - -
-------------- ----------- -----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . (35,088) (157,380) 145,938
Retained earnings at beginning of year . . . . . . . 646,040 803,420 657,482
-------------- ----------- -----------
Retained earnings at end of year . . . . . . . . . . $ 610,952 $ 646,040 $ 803,420
============== =========== ===========
AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING (IN THOUSANDS). . . . . . . . . . . . 186,689 166,186 144,404
BASIC AND DILUTED EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK BEFORE EXTRAORDINARY ITEM . . . . $ (0.06) $ (0.95) $ 1.01
EXTRAORDINARY ITEM PER AVERAGE SHARE OF
COMMON STOCK. . . . . . . . . . . . . . . . . . . (0.13) - -
-------------- ----------- -----------
BASIC AND DILUTED EARNINGS (LOSS) PER AVERAGE
SHARE OF COMMON STOCK . . . . . . . . . . . . . . $ (0.19) $ (0.95) $ 1.01
============== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
-------------------- ----------- ----------
(in thousands of dollars)
<S> <C> <C> <C>
NET INCOME (LOSS). . . . . . . . . . . . . . . $ (35,088) $(157,380) $145,938
-------------------- ---------- ---------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains on securities, net of tax. 113 304 6
Foreign currency translation adjustment . . 5,448 (6,896) (4,567)
Additional minimum pension liability. . . . (5,967) - -
-------------------- ---------- ---------
OTHER COMPREHENSIVE LOSS . . . . . . . . . . . (406) (6,592) (4,561)
-------------------- ---------- ---------
COMPREHENSIVE INCOME (LOSS). . . . . . . . . . $ (35,494) $(163,972) $141,377
==================== ========== =========
</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>
December 31,
1999 1998
------------- -----------
(in thousands of dollars)
ASSETS
<S> <C> <C>
UTILITY PLANT (NOTE 1):
Electric plant . . . . . . . . . . . . . . . . . . . . . . $ 7,221,762 $ 8,826,650
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . 630,321 604,213
Gas plant. . . . . . . . . . . . . . . . . . . . . . . . . 1,263,168 1,179,716
Common plant . . . . . . . . . . . . . . . . . . . . . . . 364,718 349,066
Construction work in progress. . . . . . . . . . . . . . . 312,322 471,802
------------- -----------
TOTAL UTILITY PLANT . . . . . . . . . . . . . . . . 9,792,291 11,431,447
Less-Accumulated depreciation and amortization . . . . . . 3,904,049 4,553,488
------------- -----------
NET UTILITY PLANT . . . . . . . . . . . . . . . . . 5,888,242 6,877,959
------------- -----------
OTHER PROPERTY AND INVESTMENTS. . . . . . . . . . . . . . . . 484,735 411,106
------------- -----------
CURRENT ASSETS:
Cash, including temporary cash investments
of $90,029 and $122,837, respectively . . . . . . . . . 116,164 172,998
Accounts receivable (less allowance for doubtful accounts
of $61,400 and $47,900, respectively) (Notes 1 and 8) . 373,510 427,588
Materials and supplies, at average cost:
Coal and oil for production of electricity. . . . . . . 9,263 42,299
Gas storage . . . . . . . . . . . . . . . . . . . . . . 39,166 38,803
Other . . . . . . . . . . . . . . . . . . . . . . . . . 90,605 118,855
Refundable federal income taxes. . . . . . . . . . . . . . - 130,411
Prepaid taxes. . . . . . . . . . . . . . . . . . . . . . . 21,489 17,282
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 24,042 22,208
------------- -----------
674,239 970,444
------------- -----------
REGULATORY ASSETS (NOTE 2):
MRA regulatory asset . . . . . . . . . . . . . . . . . . . 3,686,019 4,045,647
Swap contracts regulatory asset. . . . . . . . . . . . . . 505,723 535,000
Regulatory tax asset . . . . . . . . . . . . . . . . . . . 483,546 425,898
IPP buyout costs . . . . . . . . . . . . . . . . . . . . . 260,873 41,971
Deferred environmental restoration costs (Note 8). . . . . 240,000 220,000
Deferred loss on sale of assets. . . . . . . . . . . . . . 135,229 -
Postretirement benefits other than pensions. . . . . . . . 48,937 52,701
Unamortized debt expense . . . . . . . . . . . . . . . . . 44,903 51,922
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 112,556 95,090
------------- -----------
5,517,786 5,468,229
------------- -----------
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . 105,433 133,449
------------- -----------
$ 12,670,435 $13,861,187
============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------- ------------
(in thousands of dollars)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION (NOTE 4):
COMMON STOCKHOLDERS' EQUITY
Common stock, outstanding 177,364,863 shares. . . . . $ 1,874 $ -
Common stock of Niagara Mohawk, issued
and outstanding 187,364,863 shares . . . . . . . . - 187,365
Treasury stock, at cost - 10,000,000 shares . . . . . (157,167) -
Capital stock premium and expense . . . . . . . . . . 2,546,630 2,362,531
Accumulated other comprehensive income. . . . . . . . (26,200) (25,794)
Retained earnings . . . . . . . . . . . . . . . . . . 610,952 646,040
-------------- ------------
2,976,089 3,170,142
PREFERRED STOCK OF SUBSIDIARY:
Not subject to mandatory redemption . . . . . . . . . 440,000 440,000
Subject to mandatory redemption . . . . . . . . . . . 61,370 68,990
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . 5,042,588 6,417,225
-------------- ------------
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . 8,520,047 10,096,357
-------------- ------------
CURRENT LIABILITIES:
Long-term debt due within one year (Note 4). . . . . . . 613,740 312,240
Sinking fund requirements on redeemable preferred stock
of subsidiary (Note 4). . . . . . . . . . . . . . . . 7,620 7,620
Accounts payable . . . . . . . . . . . . . . . . . . . . 288,223 197,124
Payable on outstanding bank checks . . . . . . . . . . . 22,067 39,306
Customers' deposits. . . . . . . . . . . . . . . . . . . 15,255 17,148
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . 1,408 6,254
Accrued interest . . . . . . . . . . . . . . . . . . . . 67,593 132,236
Accrued vacation pay . . . . . . . . . . . . . . . . . . 35,334 38,727
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 67,068 91,877
-------------- ------------
1,118,308 842,532
-------------- ------------
REGULATORY AND OTHER LIABILITIES:
Accumulated deferred income taxes (Notes 1 and 6). . . . 1,568,957 1,511,417
Liability for swap contracts (Note 9). . . . . . . . . . 663,718 693,363
Employee pension and other benefits (Note 7) . . . . . . 226,223 235,376
Unbilled gas revenues (Note 1). . . . . . . . . . . . . 14,552 30,652
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 318,630 231,490
-------------- ------------
2,792,080 2,702,298
-------------- ------------
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 8):
Liability for environmental restoration. . . . . . . . . 240,000 220,000
-------------- ------------
$ 12,670,435 $13,861,187
============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
------------- ------------ ----------
(in thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ (35,088) $ (157,380) $ 145,938
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
PowerChoice charge. . . . . . . . . . . . . . . . . . . . . - 263,227 -
Amortization of the MRA regulatory asset. . . . . . . . . . 386,499 128,833 -
Depreciation and amortization . . . . . . . . . . . . . . . 345,473 355,919 340,239
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 28,285 30,798 25,241
Extraordinary loss on extinguishment of debt, net of taxes. 9,627 - -
Provision for deferred income taxes . . . . . . . . . . . . (8,325) 97,606 46,994
Unbilled revenues . . . . . . . . . . . . . . . . . . . . . (16,100) (12,629) (6,600)
Net accounts receivable (net of changes in accounts
receivable sold) . . . . . . . . . . . . . . . . . . . . 54,078 64,656 (118,939)
Materials and supplies. . . . . . . . . . . . . . . . . . . 21,800 (14,341) (1,306)
Accounts payable and accrued expenses . . . . . . . . . . . 50,358 (38,712) (11,175)
Accrued interest and taxes. . . . . . . . . . . . . . . . . (53,361) 66,842 4,180
MRA regulatory asset. . . . . . . . . . . . . . . . . . . . 2,605 (3,959,508) (7,516)
Deferral of MRA interest rate savings . . . . . . . . . . . 28,006 10,741 -
Refundable federal income taxes . . . . . . . . . . . . . . 130,411 (130,411) -
Change in IPP buyout costs regulatory asset . . . . . . . . (218,902) (41,971) -
Changes in other assets and liabilities . . . . . . . . . . 33,065 59,320 83,122
------------- ------------ ----------
Net cash provided by (used in) operating activities 758,431 (3,277,010) 500,178
------------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction additions . . . . . . . . . . . . . . . . . . . . . . (271,973) (365,396) (286,389)
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,108) (26,804) (4,368)
Less: Allowance for other funds used during construction . . . . . 5,366 8,626 5,310
------------- ------------ ----------
Acquisition of utility plant. . . . . . . . . . . . . . . . . . (292,715) (383,574) (285,447)
Materials and supplies related to construction . . . . . . . . . . 1,586 (219) 1,042
Accounts payable and accrued expenses related to construction. . . 12,589 (9,678) (2,794)
Proceeds from the sale of generation assets . . . . . . . . . . . 860,080 - -
Other investments. . . . . . . . . . . . . . . . . . . . . . . . . (73,482) (35,069) (115,533)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,272) (18,551) 8,761
------------- ------------ ----------
Net cash provided by (used in) operating activities 490,786 (447,091) (393,971)
------------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Niagara Mohawk common stock. . . . . . . . . . . . . . - 316,389 -
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . - 3,361,178 -
Proceeds from preferred stock from subsidiary. . . . . . . . . . . 150,000 - -
Reduction in preferred stock of subsidiary . . . . . . . . . . . . (157,620) (10,120) (8,870)
Reductions in long-term debt . . . . . . . . . . . . . . . . . . . (1,134,020) (135,000) (44,600)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . (157,167) - -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,244) (13,580) 97
------------- ------------ ----------
Net cash provided by (used in) operating activities (1,306,051) 3,518,867 (53,373)
------------- ------------ ----------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . (56,834) (205,234) 52,834
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . 172,998 378,232 325,398
------------- ------------ ----------
CASH AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,164 $ 172,998 $ 378,232
============= ============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 512,735 $ 315,541 $ 279,957
Income taxes paid (refunded) . . . . . . . . . . . . . . . . . . . $ (118,052) $ (12,127) $ 82,331
</TABLE>
Supplemental schedule of noncash 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.
- - Niagara Mohawk issued 20,546,264 shares of common stock, valued at $14.75 per
share ($303.1 million) to the IP Parties on June 30, 1998.
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
--------------- ----------- ----------
(in thousands of dollars)
<S> <C> <C> <C>
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . . . . $ 3,247,757 $3,261,144 $3,309,441
Gas . . . . . . . . . . . . . . . . . . . . . . . 579,583 565,229 656,963
--------------- ----------- ----------
3,827,340 3,826,373 3,966,404
--------------- ----------- ----------
OPERATING EXPENSES:
Electricity purchased . . . . . . . . . . . . . . 807,038 1,001,991 1,236,108
Fuel for electric generation. . . . . . . . . . . 189,657 239,982 179,455
Gas purchased . . . . . . . . . . . . . . . . . . 266,723 272,141 345,610
Other operation and maintenance . . . . . . . . . 889,100 937,798 835,282
PowerChoice charge. . . . . . . . . . . . . . . . - 263,227 -
Amortization of MRA regulatory asset. . . . . . . 386,499 128,833 -
Depreciation and amortization . . . . . . . . . . 344,930 355,417 339,641
Other taxes . . . . . . . . . . . . . . . . . . . 411,842 459,961 471,469
--------------- ----------- ----------
3,295,789 3,659,350 3,407,565
--------------- ----------- ----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . 531,551 167,023 558,839
Other income (deductions). . . . . . . . . . . . . . (5,682) 42,602 24,997
--------------- ----------- ----------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . 525,869 209,625 583,836
Interest charges . . . . . . . . . . . . . . . . . . 485,240 397,178 273,906
--------------- ----------- ----------
INCOME (LOSS) BEFORE FEDERAL AND FOREIGN
INCOME TAXES. . . . . . . . . . . . . . . . . . . 40,629 (187,553) 309,930
Federal and foreign income taxes . . . . . . . . . . 18,883 (66,728) 126,595
--------------- ----------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. . . . . . . 21,746 (120,825) 183,335
Extraordinary item - Loss from the extinguishment
of debt, net of income taxes of $12,819 ( Note 4) (23,807) - -
--------------- ----------- ----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . (2,061) (120,825) 183,335
Dividends on preferred stock . . . . . . . . . . . . 36,808 36,555 37,397
--------------- ----------- ----------
BALANCE AVAILABLE FOR COMMON STOCK . . . . . . . . . (38,869) (157,380) 145,938
Retained earnings at beginning of year . . . . . . . 646,040 803,420 657,482
Dividend of Opinac to Holdings (Note 1). . . . . . . 144,465 - -
Dividend to Holdings . . . . . . . . . . . . . . . . 63,719 - -
--------------- ----------- ----------
Retained earnings at end of year . . . . . . . . . . $ 398,987 $ 646,040 $ 803,420
=============== =========== ==========
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
--------------- ----------- -----------
(in thousands of dollars)
<S> <C> <C> <C>
NET INCOME (LOSS). . . . . . . . . . . . . . . $ (2,061) $ (120,825) $ 183,335
--------------- ----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains on securities, net of tax. 113 304 6
Foreign currency translation adjustment . . 1,309 (6,896) (4,567)
Additional minimum pension liability. . . . (5,967) - -
--------------- ----------- -----------
OTHER COMPREHENSIVE LOSS . . . . . . . . . . . (4,545) (6,592) (4,561)
--------------- ----------- -----------
COMPREHENSIVE INCOME (LOSS). . . . . . . . . . $ (6,606) $ (127,417) $ 178,774
=============== =========== ===========
</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>
December 31,
1999 1998
------------- -----------
(in thousands of dollars)
ASSETS
<S> <C> <C>
UTILITY PLANT (NOTE 1):
Electric plant . . . . . . . . . . . . . . . . . . . . . . $ 7,221,762 $ 8,826,650
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . 630,321 604,213
Gas plant. . . . . . . . . . . . . . . . . . . . . . . . . 1,263,168 1,179,716
Common plant . . . . . . . . . . . . . . . . . . . . . . . 364,718 349,066
Construction work in progress. . . . . . . . . . . . . . . 312,322 471,802
------------- -----------
TOTAL UTILITY PLANT . . . . . . . . . . . . . . . . 9,792,291 11,431,447
Less-Accumulated depreciation and amortization . . . . . . 3,904,049 4,553,488
------------- -----------
NET UTILITY PLANT . . . . . . . . . . . . . . . . . 5,888,242 6,877,959
------------- -----------
OTHER PROPERTY AND INVESTMENTS. . . . . . . . . . . . . . . . 349,718 411,106
------------- -----------
CURRENT ASSETS:
Cash, including temporary cash investments
of $58,276 and $122,837, respectively . . . . . . . . . 72,479 172,998
Accounts receivable (less allowance for doubtful accounts
of $59,400 and $47,900, respectively) (Notes 1 and 8) . 331,222 427,588
Materials and supplies, at average cost:
Coal and oil for production of electricity. . . . . . . 9,263 42,299
Gas storage . . . . . . . . . . . . . . . . . . . . . . 38,252 38,803
Other . . . . . . . . . . . . . . . . . . . . . . . . . 90,605 118,855
Refundable federal income taxes. . . . . . . . . . . . . . - 130,411
Prepaid taxes. . . . . . . . . . . . . . . . . . . . . . . 21,489 17,282
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 22,668 22,208
------------- -----------
585,978 970,444
------------- -----------
REGULATORY ASSETS (NOTE 2):
MRA regulatory asset . . . . . . . . . . . . . . . . . . . 3,686,019 4,045,647
Swap contracts regulatory asset. . . . . . . . . . . . . . 505,723 535,000
Regulatory tax asset . . . . . . . . . . . . . . . . . . . 483,546 425,898
IPP buyout costs . . . . . . . . . . . . . . . . . . . . . 260,873 41,971
Deferred environmental restoration costs (Note 8). . . . . 240,000 220,000
Deferred loss on sale of assets. . . . . . . . . . . . . . 135,229 -
Postretirement benefits other than pensions. . . . . . . . 48,937 52,701
Unamortized debt expense . . . . . . . . . . . . . . . . . 44,903 51,922
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 112,556 95,090
------------- -----------
5,517,786 5,468,229
------------- -----------
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . 103,884 133,449
------------- -----------
$ 12,445,608 $13,861,187
============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------- ------------
(in thousands of dollars)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION (NOTE 4):
COMMON STOCKHOLDERS' EQUITY
Common stock, issued and outstanding 187,364,863 shares . . . $ 187,365 $ 187,365
Repurchase of Holdings' common stock, at cost . . . . . . . . (157,167) -
Capital stock premium and expense . . . . . . . . . . . . . . 2,361,139 2,362,531
Accumulated other comprehensive income. . . . . . . . . . . . (5,153) (25,794)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 398,987 646,040
-------------- ------------
2,785,171 3,170,142
Non-redeemable preferred stock . . . . . . . . . . . . . . . . . 440,000 440,000
Mandatorily redeemable preferred stock . . . . . . . . . . . . . 61,370 68,990
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 5,042,588 6,417,225
-------------- ------------
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . 8,329,129 10,096,357
-------------- ------------
CURRENT LIABILITIES:
Long-term debt due within one year (Note 4). . . . . . . . . . . 613,740 312,240
Sinking fund requirements on redeemable preferred stock (Note 4) 7,620 7,620
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 244,031 197,124
Payable on outstanding bank checks . . . . . . . . . . . . . . . 22,067 39,306
Customers' deposits. . . . . . . . . . . . . . . . . . . . . . . 15,255 17,148
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 6,246 6,254
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . 67,593 132,236
Accrued vacation pay . . . . . . . . . . . . . . . . . . . . . . 35,334 38,727
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,160 91,877
-------------- ------------
1,078,046 842,532
-------------- ------------
REGULATORY AND OTHER LIABILITIES:
Accumulated deferred income taxes (Notes 1 and 6). . . . . . . . 1,575,335 1,511,417
Liability for swap contracts (Note 9). . . . . . . . . . . . . . 663,718 693,363
Employee pension and other benefits (Note 7) . . . . . . . . . . 226,223 235,376
Unbilled gas revenues (Note 1) . . . . . . . . . . . . . . . . . 14,552 30,652
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318,605 231,490
-------------- ------------
2,798,433 2,702,298
-------------- ------------
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 8):
Liability for environmental restoration. . . . . . . . . . . . . 240,000 220,000
-------------- ------------
$ 12,445,608 $13,861,187
============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
------------ ------------ ----------
(in thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ (2,061) $ (120,825) $ 183,335
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
PowerChoice charge. . . . . . . . . . . . . . . . . . . . . - 263,227 -
Amortization of the MRA regulatory asset. . . . . . . . . . 386,499 128,833 -
Depreciation and amortization . . . . . . . . . . . . . . . 344,930 355,417 339,641
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 28,285 30,798 25,241
Extraordinary loss on extinguishment of debt, net of taxes. 9,627 - -
Provision for deferred income taxes . . . . . . . . . . . . (7,543) 97,606 46,994
Unbilled revenues . . . . . . . . . . . . . . . . . . . . . (16,100) (12,629) (6,600)
Net accounts receivable (net of changes in accounts
receivable sold) . . . . . . . . . . . . . . . . . . . . 84,683 64,656 (118,939)
Materials and supplies. . . . . . . . . . . . . . . . . . . 22,355 (14,341) (1,306)
Accounts payable and accrued expenses . . . . . . . . . . . 21,751 (38,712) (11,175)
Accrued interest and taxes. . . . . . . . . . . . . . . . . (48,666) 66,842 4,180
MRA regulatory asset. . . . . . . . . . . . . . . . . . . . 2,605 (3,959,508) (7,516)
Deferral of MRA interest rate savings . . . . . . . . . . . 28,006 10,741 -
Refundable Federal income taxes . . . . . . . . . . . . . . 130,411 (130,411) -
Change in IPP buyout costs regulatory asset . . . . . . . . (218,902) (41,971) -
Changes in other assets and liabilities . . . . . . . . . . 32,850 59,822 83,720
------------ ------------ ----------
Net cash provided by (used in) operating activities 798,730 (3,240,455) 537,575
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction additions . . . . . . . . . . . . . . . . . . . . . . (271,973) (365,396) (286,389)
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,108) (26,804) (4,368)
Less: Allowance for other funds used during construction . . . . . 5,366 8,626 5,310
------------ ------------ ----------
Acquisition of utility plant. . . . . . . . . . . . . . . . . . (292,715) (383,574) (285,447)
Materials and supplies related to construction . . . . . . . . . . 1,586 (219) 1,042
Accounts payable and accrued expenses related to construction. . . 5,436 (9,678) (2,794)
Proceeds from the sale of generation assets. . . . . . . . . . . . 860,080 - -
Other investments. . . . . . . . . . . . . . . . . . . . . . . . . 43,426 (35,069) (115,533)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,866) (18,551) 8,761
------------ ------------ ----------
Net cash used in investing activities 596,497 (447,091) (393,971)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . - 316,389 -
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . - 3,361,178 -
Proceeds from preferred stock. . . . . . . . . . . . . . . . . . . 150,000
Reductions of preferred stock. . . . . . . . . . . . . . . . . . . (157,620) (10,120) (8,870)
Reductions in long-term debt . . . . . . . . . . . . . . . . . . . (1,134,020) (135,000) (44,600)
Corporate restructuring to establish holding company . . . . . . . (89,618) - -
Preferred dividends paid . . . . . . . . . . . . . . . . . . . . . (36,808) (36,555) (37,397)
Common stock dividend paid to Holdings . . . . . . . . . . . . . . (63,719) - -
Repurchase of Holdings' common stock . . . . . . . . . . . . . . . (157,167) - -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,244) (13,580) 97
------------ ------------ ----------
Net cash provided by (used in) financing activities (1,496,196) 3,482,312 (90,770)
------------ ------------ ----------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . (100,519) (205,234) 52,834
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . 172,998 378,232 325,398
------------ ------------ ----------
CASH AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,479 $ 172,998 $ 378,232
============ ============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 512,735 $ 315,541 $ 279,957
Income taxes paid (refunded) . . . . . . . . . . . . . . . . . . . $ (119,999) $ (12,127) $ 82,331
</TABLE>
Supplemental schedule of noncash financing activities:
- - On March 18, 1999, Niagara Mohawk's outstanding common stock was exchanged on
a share-for-share basis for Holdings' common stock.
- - On March 31, 1999, Niagara Mohawk distributed the stock of Opinac as a
dividend to Holdings, which included cash of $89.6 million.
- - Niagara Mohawk issued 20,546,264 shares of common stock, valued at $14.75
per share ($303.1 million) to the IPP Parties on June 30, 1998.
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE AND PRINCIPLES OF CONSOLIDATION: Niagara Mohawk Holdings,
Inc. ("Holdings") is a New York corporation. On March 18, 1999, Niagara Mohawk
Power Corporation ("Niagara Mohawk") was reorganized into a holding company
structure in accordance with an Agreement and Plan of Exchange between Niagara
Mohawk and Holdings. Niagara Mohawk's outstanding common stock was exchanged on
a share-for-share basis for Holdings' common stock. Niagara Mohawk's preferred
stock and debt was not exchanged as part of the share exchange and continue as
obligations of Niagara Mohawk.
On March 31, 1999, Niagara Mohawk distributed its ownership in the stock of
Opinac North America, Inc. ("Opinac") as a dividend to Holdings. As a result,
the net assets and accumulated other comprehensive income of Opinac are no
longer included in Niagara Mohawk's consolidated balance sheet as of December
31, 1999. The dividend completed the holding company structure, with Holdings
owning 100% of the common stock of its two subsidiaries, Niagara Mohawk and
Opinac. Niagara Mohawk and its subsidiaries manage all regulated activities and
comprise approximately 98 percent of the assets and approximately 94 percent of
the revenues of Holdings. Opinac and its subsidiaries manage all other
activities including an energy marketing company and investments in energy
related services businesses and a development stage telecommunications company.
Niagara Mohawk is subject to regulation by the PSC and FERC with respect to its
rates for service under a methodology, which establishes prices, based on
Niagara Mohawk's cost. Niagara Mohawk's accounting policies conform to GAAP,
including the accounting principles for rate-regulated entities with respect to
Niagara Mohawk's nuclear, transmission, distribution and gas operations
(regulated business), and are in accordance with the accounting requirements and
ratemaking practices of the regulatory authorities. In 1996, Niagara Mohawk
discontinued the application of regulatory accounting principles to its fossil
and hydro generation operations.
Holdings' consolidated financial statements include the accounts of Holdings'
and its wholly owned subsidiaries. Niagara Mohawk's consolidated financial
statements include its accounts as well as those of its wholly owned
subsidiaries. Inter-company balances and transactions have been eliminated.
The notes to the Consolidated Financial Statements apply to both Holdings and
Niagara Mohawk unless otherwise stated.
The closing of the MRA, which occurred on June 30, 1998, and the implementation
of PowerChoice on September 1, 1998 have depressed and will continue to
substantially depress earnings during the five-year term of PowerChoice. The
ability of Niagara Mohawk to improve earnings in the period subsequent to
PowerChoice will depend on the outcome of the regulatory process to set prices
at that time. However, operating cash flows have substantially improved. The
closing on the sale of the fossil and hydro generation assets at various times
during the year has also affected the comparability of the financial statements.
See Note 2. for a further discussion of the sales.
ESTIMATES: In order to be in conformity with GAAP, management is required to
use estimates in the preparation of Holdings and Niagara Mohawk's financial
statements.
UTILITY PLANT: The cost of additions to utility plant and replacements of
retirement units of property are capitalized. Costs include direct material,
labor, overhead and AFC. Replacement of minor items of utility plant and the
cost of current repairs and maintenance are charged to expense. Whenever
utility plant is retired, its original cost, together with the cost of removal,
less salvage, is charged to accumulated depreciation.
The output of the co-owned generation units, Roseton Units No. 1 and 2 (which
has a capability of 1,200 MW) and Nine Mile Point Nuclear Station Unit No. 2,
and related expenses are shared in the same proportions as the co-tenants'
respective ownership interests. Niagara Mohawk's share of expenses associated
with these plants are included in the appropriate operating expenses in Niagara
Mohawk's Consolidated Statements of Income.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION: Niagara Mohawk capitalizes AFC in
amounts equivalent to the cost of funds devoted to plant under construction for
its regulated business. AFC rates are determined in accordance with FERC and
PSC regulations. The AFC rate in effect at December 31, 1999 was 8.86%. AFC is
segregated into its two components, borrowed funds and other funds, and is
reflected in the "Interest charges" and "Other income" sections, respectively,
in both Holdings and Niagara Mohawk's Consolidated Statements of Income. The
amount of AFC credits recorded in each of the three years ended December 31, in
thousands of dollars, was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- ------
<S> <C> <C> <C>
Other income . . $5,366 $ 8,626 $5,310
Interest charges 7,252 10,228 4,396
</TABLE>
The amount of AFC credits in 1999 for fossil and hydro generation, included in
the total above, is $518,000 as compared to $1,034,000 in 1998 and $1,179,000 in
1997.
DEPRECIATION, AMORTIZATION AND NUCLEAR GENERATION PLANT DECOMMISSIONING COSTS:
For accounting and regulatory purposes, Niagara Mohawk's depreciation is
computed on the straight-line basis using the license lives for its nuclear
class of depreciable property and the average service lives for all other
classes. The percentage relationship between the total provision for
depreciation and average depreciable property was approximately 3.4% to 3.6% for
the years 1997 through 1999. Niagara Mohawk performs depreciation studies to
determine service lives of classes of property and adjusts the depreciation
rates when necessary.
Estimated decommissioning costs (costs to remove a nuclear plant from service in
the future) for Niagara Mohawk's Unit 1 and its share of Unit 2 are being
accrued over the service lives of the units, recovered in rates through an
annual allowance and currently charged to operations through depreciation.
Niagara Mohawk currently recognizes the liability for nuclear decommissioning
over the service life of the plants as an increase to accumulated depreciation.
As discussed in Notes 2 and 3, Niagara Mohawk announced an agreement to sell its
nuclear assets. As par of the agreement, Niagara Mohawk will transfer its
decommissioning liability, as well as the decommissioning funds, which will be
increased by Niagara Mohawk to a specified amount at the time of the transfer.
See Note 3. Nuclear Operations - Nuclear Plant Decommissioning, for more
information on the decommissioning fund. Absent such a nuclear sale, Niagara
Mohawk plans to commence decommissioning of both units using a method which
removes or decontaminates the Units' components properly at that time.
Amortization of the cost of nuclear fuel is determined on the basis of the
quantity of heat produced for the generation of electric energy. The cost of
disposal of nuclear fuel, which presently is $.001 per KWh of net generation
available for sale, is based upon a contract with the DOE. These costs are
charged to operating expense as part of fuel for electric generation.
REGULATED REVENUES: Niagara Mohawk bills its customers on a monthly cycle basis
at approved tariffs based on energy delivered and a minimum customer service
charge. Revenues are determined based on these bills plus an estimate for
unbilled energy delivered between the cycle billing date and the end of the
accounting period. In February 1999, a new customer service billing system was
implemented which converted all customers previously billed on a bi-monthly
cycle to a monthly basis. (See Note 8 "Customer Service System" for a further
discussion of this new system). The unbilled revenues included in accounts
receivable at December 31, 1999 and 1998 were $143.9 million and $205.6 million,
respectively.
In accordance with PowerChoice, Niagara Mohawk recognizes changes in accrued
unbilled electric revenues in its results of operations. Previously, Niagara
Mohawk did not recognize accrued unbilled electric revenues in its results of
operations until authorized and used them to reduce future revenue requirements.
Such amounts were included in "Other Liabilities" pending regulatory
disposition. Under the PowerChoice agreement, $8.6 million of unrecognized
unbilled electric revenues as of September 1, 1998, the implementation date of
PowerChoice, were netted with certain other regulatory assets and liabilities
and any subsequent changes in the estimated unbilled electric revenues are
recognized currently in results of operations.
Pursuant to Niagara Mohawk's 1996 three-year gas settlement, changes in accrued
unbilled gas revenues are deferred. At December 31, 1999 and 1998, $14.6
million and $30.7 million, respectively, of unbilled gas revenues remain
unrecognized in results of operations.
Prior to September 1, 1998, Niagara Mohawk's tariffs included an electric fuel
adjustment clause, such that electricity costs above or below the levels allowed
in approved rate schedules, were billed or credited to customers. Niagara
Mohawk, as authorized by the PSC, charged operations for electricity cost
variances in the period of recovery. Under the PowerChoice agreement, the
electric fuel adjustment clause was discontinued as of September 1, 1998.
The 1996 three-year gas settlement agreement established a gas commodity cost
adjustment clause ("CCAC"). Niagara Mohawk's gas CCAC provides for the
collection or pass back of certain increases or decreases from the base
commodity cost of gas as established in the gas settlement agreement. The
maximum annual risk or benefit to Niagara Mohawk is $2.25 million. All savings
or excess costs beyond that amount flow to ratepayers. The PSC approved an
interim gas rate agreement on October 15, 1999 and January 12, 2000 that
included a provision for the implementation of a return to a full gas cost
collection mechanism and termination of the cost sharing mechanism, effective
November 1, 1999.
UNREGULATED REVENUES: Unregulated revenues and the related costs of gas and
electricity are accrued and recorded in the month of delivery, based on contract
price and nominated natural gas and electricity transmission reservation volumes
sold to customers and purchased from suppliers. Adjustments are made to reflect
actual volumes delivered or purchased when the actual volumetric information
becomes available from the transporters.
FEDERAL INCOME TAXES: As directed by the PSC, Niagara Mohawk defers any amounts
payable pursuant to the alternative minimum tax rules. Deferred investment tax
credits are amortized over the useful life of the underlying property. Deferred
investment tax credits related to the assets that have been sold are taken into
income in accordance with IRS rules. Holdings and its United States'
subsidiaries file a consolidated federal income tax return. Income taxes are
allocated to each company based on its taxable income.
STATEMENTS OF CASH FLOWS: Holdings and Niagara Mohawk consider all highly
liquid investments, purchased with a remaining maturity of three months or less,
to be cash equivalents. The consolidated cash flow statements for Holdings and
Niagara Mohawk have been presented to reflect the closing on the sale of the
fossil and hydro generation assets, such that certain individual line items are
net of the effects of the sale. (For example, the change in materials and
supplies was reduced by the sale of inventory to the buyers of the fossil and
hydro generation assets).
TREASURY STOCK: 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 twenty million shares through December 31,
2001. The cost to acquire Holdings' common stock by Niagara Mohawk is presented
as "Treasury stock" in Holdings' financial statements and as "Repurchase of
Holdings' common stock" on Niagara Mohawk's financial statements. See Note 4
for a discussion of the stock repurchased during 1999.
EARNINGS PER SHARE: Basic earnings per share ("EPS") is computed based on the
weighted average number of common shares outstanding for the period. Treasury
stock is not considered outstanding and thus, reduces the weighted average
shares outstanding. The number of options outstanding at December 31, 1999,
1998 and 1997 that could potentially dilute basic EPS, (but are considered
antidilutive for each period because the options exercise price was greater than
the average market price of common shares), is immaterial. Therefore, the
calculation of both basic and dilutive EPS is the same for each period.
DERIVATIVES: 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, (see Note 9) as derivative instruments and has recorded a
liability at fair value under SFAS No. 80, "Accounting for Futures Contracts."
These swap contracts qualify as hedges of future purchase commitments and will
continue to qualify as hedges under SFAS No. 133. The financial sharing
agreement entered into as part of the agreement to sell Niagara Mohawk's nuclear
generation assets will be a derivative instrument as defined by SFAS No. 133 and
will be recorded upon the closing of such sale. See Note 8 - "Long-term
Contracts for the Purchase of Electric Power - Nuclear Contracts" for a further
discussion of the financial sharing agreement. Holdings and Niagara Mohawk
continue to assess the applicability of this new standard to other contractual
obligations.
ENERGY TRADING: The Emerging Issues Task Force ("EITF") of the FASB reached a
conclusion on Issue No. 98-10, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities" to be applied for fiscal years beginning
after December 15, 1998. This EITF states that energy trading contracts should
be marked-to-market with the gains and losses included in earnings. Contracts
that are designed as hedges of non-trading activities are outside the scope of
this EITF. Niagara Mohawk's energy contracts and the majority of the marketing
activities of NM Energy are not energy trading as defined by this EITF, and
therefore, Holdings and its subsidiaries do not account for its energy contracts
on a marked-to-market basis.
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.
RECLASSIFICATIONS: Certain amounts from prior years have been reclassified on
the accompanying Consolidated Financial Statements to conform with the 1999
presentation.
Holdings' prior years consolidated financial statements have been prepared from
Niagara Mohawk's prior year consolidated financial statements, except that
accounts have been reclassified to reflect Holdings' structure.
NOTE 2. 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. 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 $5.5 billion at December 31, 1999. These
regulatory assets are probable of recovery.
Niagara Mohawk has recorded the following regulatory assets on its Consolidated
Balance Sheets reflecting the rate actions of its regulators:
MRA REGULATORY ASSET
Under PowerChoice, 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, 1999. Niagara Mohawk's rates under PowerChoice have been designed
to permit recovery of the MRA regulatory asset.
SWAP CONTRACT REGULATORY ASSET
The swap contract regulatory asset represents the expected future recovery of
the swap contract liability. 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 IPP PPA contracts and in the financial swaps
associated with the PPAs from the sale of the Huntley and Dunkirk coal-fired
generation plants. The portion of this regulatory asset associated with the
restated IPP PPA contracts will be amortized over ten years ending in June 2008,
in accordance with the MRA, 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. The amount of
this regulatory asset will fluctuate as estimates of future market and contract
prices change over the terms of the contracts. For a further discussion of the
several PPAs and other financial agreements that Niagara Mohawk has entered into
as part of the MRA and the sale of its generation assets, see Note 8 -
"Long-term contracts for the purchase of electric power and Note 9."
REGULATORY TAX ASSET
The regulatory tax asset represents the expected future recovery from ratepayers
of the tax consequences of temporary differences between the recorded book bases
and the tax bases of assets and liabilities. This amount is primarily timing
differences related to depreciation. These amounts are recovered and amortized
as the related temporary differences reverse. In January 1993, the PSC issued a
Statement of Interim Policy on Accounting and Ratemaking Procedures that
required adoption of SFAS No. 109 on a revenue-neutral basis.
IPP BUYOUT COSTS
Niagara Mohawk is also permitted to defer and amortize the cost of any
additional IPP contract buyouts. In 1999, there have been four IPP contracts
for approximately 127 MW terminated for a total consideration (cash and/or
notes) of $229.2 million. Niagara Mohawk estimates that it will have reduced
IPP payments by approximately $60 million annually, net of purchases of power
at market price as a result of the contract buyouts. Deferred costs
associated with IPP buyouts will generally be amortized over five years in
accordance with PowerChoice, unless PSC approval is obtained for a different
amortization period. Niagara Mohawk retains the annual net savings of the
buyouts during the remaining term of PowerChoice to offset the amortization
expense. Niagara Mohawk is negotiating buyouts and amendments of other IPP
contracts. Niagara Mohawk is unable to determine the timing and outcome of
these negotiations.
DEFERRED ENVIRONMENTAL RESTORATION COSTS
The deferred environmental restoration costs regulatory asset represents Niagara
Mohawk's share of the estimated costs to investigate and perform certain
remediation activities at both Niagara Mohawk-owned sites and non-owned sites
with which it may be associated. Niagara Mohawk has recorded a regulatory asset
representing the remediation obligations to be recovered from ratepayers.
PowerChoice and Niagara Mohawk's gas rates decisions provide for the recovery of
these costs over the settlement periods. Niagara Mohawk believes future costs,
beyond the settlement periods, will continue to be recovered in rates. See Note
8. - Environmental Contingencies.
DEFERRED LOSS ON THE SALE OF ASSETS
PowerChoice requires Niagara Mohawk to divest its portfolio of fossil and hydro
generation assets. During 1999, Niagara Mohawk completed the sale its
hydroelectric generation plants, its two coal-fired generation plants and its
Oswego oil and gas-fired plant for $860 million. These assets had a combined
net book value of $956.8 million (including materials and supplies and fuel) at
the time of their sale. In addition, there were purchase price adjustments of
$26.7 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 October 6, 1999, Niagara Mohawk announced an agreement to sell its Albany oil
and gas-fired plant to PSEG Power LLC ("PSEG") for $47.5 million. The 400 MW
Albany plant has a net book value of approximately $32.0 million (including
materials and supplies and fuel) as of December 31, 1999. 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. No amount has been
reflected in the anticipated proceeds from the sale of Albany for the
redevelopment fee or the post closing property tax adjustment. Niagara Mohawk
expects to complete the Albany sale transaction in the first quarter of 2000.
The sale of the Roseton Steam Station, of which Niagara Mohawk owns 25%, is
being pursued by Central Hudson. The remaining ownership interests are Central
Hudson, the operator of the plant (35%), and Consolidated Edison Company of New
York, Inc. (40%). Although Central Hudson stated that it expects to sell this
plant by early 2001, to assure divestiture of this asset, Niagara Mohawk entered
into an agreement with Central Hudson, subject to regulatory approval, to sell
its interest in the plant to Central Hudson at approximately net book value by
no later than January 1, 2003. Niagara Mohawk's share of the plant has a net
book value of approximately $40.8 million (which includes materials and supplies
and fuel) as of December 31, 1999.
The following table summarizes Niagara Mohawk's electric plant assets as of
December 31, 1999 and 1998, showing the impact on Niagara Mohawk's electric
plant from the completed sales through December 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, December 31,
1999 1998
ORIGINAL NET BOOK Original Net Book
PLANT TYPE COST VALUE Cost Value
- ----------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Unit 1 * $1,504,718 $ 957,884 $1,503,833 $ 985,141
Unit 2 * 749,204 476,934 748,763 490,504
Albany 126,147 27,202 130,476 29,319
Roseton 92,544 34,448 91,871 36,842
Dunkirk - - 274,737 140,878
Huntley - - 399,660 204,868
Oswego - - 622,953 299,743
Hydro - - 448,212 214,351
---------- ---------- ---------- ----------
Total generation 2,472,613 1,496,468 4,220,505 2,401,646
Transmission and
Distribution 4,277,210 2,862,408 4,142,255 2,795,782
Other/General 471,939 313,115 463,890 331,878
---------- ---------- ---------- ----------
Total Electric Plant $7,221,762 $4,671,991 $8,826,650 $5,529,306
========== ========== ========== ==========
* - Excludes nuclear fuel
</TABLE>
The PowerChoice agreement provides for deferral and future recovery of net
losses, if any, resulting from the sale of the fossil and hydro generation asset
portfolio. As of December 31, 1999, Niagara Mohawk has recorded a regulatory
asset of $135.2 million for the net loss on the sale of its two coal-fired
generation plants, its hydro generation assets, and its oil and gas fired plant
at Oswego, which includes $3.0 million in employee-related severance costs. The
net loss is included in Niagara Mohawk's balance sheet as "Deferred Loss on the
Sale of Assets." In accordance with PowerChoice, Niagara Mohawk will not earn a
return on the deferred loss during the PowerChoice period. The amount of this
regulatory asset is subject to change as a result of post closing adjustments on
the sales, transaction costs, the accounting treatment relating to the hydro
PPAs, the amount of severance and other costs and the outcome of the sale of the
remaining fossil assets. Niagara Mohawk has petitioned the PSC to defer, as
part of the regulatory asset associated with the sale of the fossil and hydro
generation assets, the amount by which the actual amount incurred on the hydro
PPAs exceeds the forecasted amount reflected in PowerChoice. After all the
fossil and hydro sales transactions have been completed, Niagara Mohawk
estimates that it will have a net loss (stranded costs) of approximately $150
million, including an estimate of the future deferrable hydro payments. Niagara
Mohawk is required to submit to the PSC a final accounting of the costs and
proceeds from the sale of its assets upon completion of the final sale. 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 earned an incentive as provided for in PowerChoice of $9.0 million
based on the asset sales concluded in 1999, which is reflected in income in 1999
and is recorded as an other regulatory asset in the Consolidated Balance Sheets.
An additional incentive is expected to be earned upon the completion of the
remaining assets sales of approximately $6.0 million. Niagara Mohawk will begin
recovery of this amount in 2001, over a period not to exceed 5 years.
Niagara Mohawk has also announced an agreement to sell its nuclear generation
assets. Niagara Mohawk estimates its net loss from the nuclear sale to be in
the range of $1,800 to $1,850 million. Niagara Mohawk has petitioned the PSC
for approval to defer this net loss for future recovery, which approval is a
condition of the closing of the sale of the nuclear assets. See Note 3. -
Nuclear Operations, for a complete discussion regarding this announced sale of
Niagara Mohawk's nuclear generation assets and its regulatory treatment.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The postretirement benefits other than pensions regulatory asset represent the
excess of such costs recognized in accordance with SFAS No. 106 over the amount
received in rates. In accordance with a PSC policy statement, postretirement
benefit costs other than pensions were phased into rates generally over a
five-year period and amounts deferred are being amortized and recovered over a
period of approximately 15 years.
UNAMORTIZED DEBT EXPENSE
The unamortized debt expense regulatory asset represents the costs to issue and
redeem certain long-term debt securities, which were retired prior to maturity.
These amounts are amortized as interest expense ratably over the lives of the
related issues in accordance with PSC directives.
OTHER
Included in the other regulatory asset is the accumulation of numerous
miscellaneous regulatory deferrals, including the deferral of nuclear outage
costs, uncollectible accounts receivable, nuclear decontamination and
decommissioning fund costs, and income earned on gas rate sharing mechanisms.
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 effect Niagara Mohawk's, and therefore, Holdings'
ability to pay dividends.
Under PowerChoice, 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.
NOTE 3. NUCLEAR OPERATIONS
Niagara Mohawk is the owner and operator of the 613 MW Unit 1 and the operator
and a 41% co-owner of the 1,143 MW Unit 2. The remaining ownership interests
are Long Island Power Authority (LIPA) - 18%; NYSEG - 18%; Rochester Gas and
Electric Corporation (RG&E) - 14%; and Central Hudson - 9%. Unit 1 was placed
in commercial operation in 1969 and Unit 2 in 1988.
ANNOUNCED SALE: On June 24, 1999, Niagara Mohawk announced an agreement to
sell its nuclear assets to AmerGen Energy Company, LLC ("AmerGen"), a joint
venture of PECO Energy Company and British Energy, for approximately $135
million, which is subject to price adjustments depending on the time of
closing. Along with the asset purchase agreement, Niagara Mohawk also signed
PPAs with AmerGen to purchase energy and capacity at negotiated prices. See
Note 8 for a further discussion of these PPAs under "Long term contracts for
the purchase of electric power."
New York State Electric and Gas Corporation is also a party to the agreement and
has agreed to sell its 18% share of Unit 2 to AmerGen. The sale to AmerGen was
subject to a previously existing agreement among the five co-owners of Unit 2
that gives the co-owners the right to match a third-party purchase offer made
for any share of the plant. On December 21, 1999, RG&E, a 14% co-owner,
submitted a notice stating it would match the AmerGen agreement.
As a condition of the sale transaction, Niagara Mohawk will pre-fund its
nuclear decommissioning trust funds (discussed below) at the closing to a
predetermined amount (which amount is contingent upon tax rulings and the
closing date). The trust funds will be transferred to the buyer at the closing,
and the buyer will assume full responsibility for the decommissioning of Unit 1
and its ownership share of Unit 2. If the sale occurs on July 1, 2000, Niagara
Mohawk estimates that it will be required to make additional contributions to
the decommissioning trust funds of approximately $90 million.
At December 31, 1999, the net book value of Niagara Mohawk's nuclear generation
assets (including materials, supplies and nuclear fuel) was approximately
$1.6 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.
Niagara Mohawk estimates its net loss (stranded costs) from the nuclear sale to
be in the range of $1,800 to $1,850 million. Niagara Mohawk has petitioned the
PSC for approval to defer this net loss for future recovery, which approval is a
condition of the closing of the sale of the nuclear assets. Accordingly,
Niagara Mohawk would record a regulatory asset for the amount of the actual net
loss upon the closing of the sale. The recording of the regulatory asset is
ultimately conditioned on an assessment by Niagara Mohawk that the amounts are
probable of future recovery in rates and that the rates ultimately approved by
the PSC can be charged to and collected from customers without unanticipated
reduction in demand.
The amount of the net loss on the sale of the nuclear assets is subject to
change as a result of closing price adjustments, transaction costs and the final
amount needed to pre-fund the decommissioning trust funds. The estimated range
of loss excludes any accounting requirements relating to the nuclear PPAs.
Niagara Mohawk has proposed to recover the regulatory asset, plus a return on
the unamortized balance over a period not to exceed 15 years beginning in 2000,
with a significant portion of the recovery likely to occur in years subsequent
to the MRA regulatory asset amortization. Niagara Mohawk's current rate
structure includes recovery and a return on the nuclear assets. Niagara Mohawk
proposes to recover a return on and a return of stranded nuclear costs within
the rate structures contained in its PowerChoice agreement. This sale is also
contingent upon approval by, among others, the PSC, NRC, IRS, and the SEC.
Niagara Mohawk originally requested PSC approval by December 1999 and has filed
an application with the NRC to transfer the licenses to AmerGen. It is unlikely
that any sale will close prior to the planned Unit 2 refueling and maintenance
outage scheduled to begin in March 2000. A delay in the sale through the
planned outage would result in an increase in the purchase price of Unit 2 as
specified in the agreement to reflect the estimated costs of the refueling and
maintenance outage. The sale price of Unit 1 decreases if the sale occurs
after the Unit 2 refueling and maintenance outage. Until the sale is closed,
Niagara Mohawk generally bears the risks associated with unexpected costs of
the refueling outage at Unit 2 and any unscheduled outages at both units,
including investigations and unexpected maintenance and capital costs. The
purchase agreement terminates if the sale has not occurred before September 1,
2000. 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 PowerChoice rates. In addition, Niagara Mohawk would continue to
participate in the PSC regulatory proceeding regarding the future of nuclear
assets in New York State. On October 27, 1999, the FERC approved the sale of
the transmission assets connected to the nuclear plants to AmerGen. On January
26, 2000, the PSC Staff had informed the ALJ and all parties, including Niagara
Mohawk, that they believed the terms of the proposed nuclear sale were not in
the public interest. The PSC Staff is continuing its discussions with AmerGen,
as well as exploring other options, including giving other interested parties
the opportunity to put forth competing proposals. Niagara Mohawk cannot
predict the outcome of this proceeding, but is committed to pursue the sale
of Unit 1 and Unit 2.
Upon closing of the sale of the nuclear assets, Niagara Mohawk will continue to
be liable for all spent nuclear fuel fees associated with electricity generated
and sold and Unit 1 and Unit 2, prior to the closing. See "Nuclear Fuel
Disposal Cost" for a discussion of the Nuclear Waste Policy Act of 1982 and
Niagara Mohawk's determination of liability. This liability will remain with
Niagara Mohawk until the DOE provides disposal facilities. Niagara Mohawk also
retains liability for changes enacted prior to closing, if any, in the disposal
fees already paid to the DOE for fuel burned from 1983 through closing of the
sale or in the pre-1983 liability. Niagara Mohawk has recovered these costs in
rates in the past and believes that any increases in these costs would
ultimately be included in the rate process.
NUCLEAR PLANT DECOMMISSIONING: If the sale does not occur, Niagara Mohawk
estimates its site specific costs for decommissioning Unit 1 and its ownership
interest in Unit 2 at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Unit 1 Unit 2
-------------- -------------
<S> <C> <C>
Site Study (year). . . . . . 1995 1995
End of Plant Life (year) . . 2009 2026
Radioactive Dismantlement
to Begin (year) . . . . . * 2028
Method of Decommissioning. . * Immediate
Dismantlement
Cost of Decommissioning
(in January 2000 dollars). . In millions of dollars
Radioactive Components . . . * $ 214
Non-radioactive Components . * 52
Fuel Dry Storage/Continuing
Care. . . . . . . . . . . * 46
--------------
$ 312
==============
</TABLE>
* Niagara Mohawk has not made a final decision on the timing of decommissioning
for Unit 1. Decommissioning could occur immediately after end of license
shutdown in 2009 or coincident with Unit 2 decommissioning which would
commence in 2026. The cost of decommissioning Unit 1 in January 2000
dollars is estimated to be $594 million for immediate dismantlement or $724
million for delayed dismantlement. Projected earnings from the
decommissioning fund are expected to approximate the cost impact of inflation
and continuing care under a delayed scenario. The final decision to
decommission Unit 1 immediately after shutdown or to delay will occur much
closer to the end of license shutdown date of 2009 so that Niagara Mohawk can
adequately evaluate the variables that could impact total costs. These
variables include but are not limited to the inflation projections, actual
earnings rate on the decommissioning fund, the uncertainty of the
availability of a low level waste disposal site and the DOE acceptance date
and rate of spent fuel disposal.
Niagara Mohawk estimates that by the time decommissioning is completed, the
above costs will ultimately amount to $1.0 billion (immediate dismantlement) or
$1.7 billion (delayed dismantlement) for Unit 1 and $0.9 billion for Niagara
Mohawk's share of Unit 2, using approximately 3.5% as an annual inflation
factor.
In addition to the costs mentioned above, Niagara Mohawk would expect to incur
post-shutdown costs for plant ramp down, insurance and property taxes. In 2000
dollars, these costs are expected to amount to $117 million (immediate
dismantlement) or $127 million (delayed dismantlement) for Unit 1 and $65
million for Niagara Mohawk's share of Unit 2. The amounts will escalate
to $193 million (immediate dismantlement) or $210 million (delayed
dismantlement) and $190 million for Unit 1 and Niagara Mohawk's share of
Unit 2, respectively, by the time decommissioning is expected to be completed.
NRC regulations require owners of nuclear power plants to place funds into an
external trust to provide for the cost of decommissioning radioactive portions
of nuclear facilities and establish minimum amounts that must be available in
such a trust at the time of decommissioning. The allowance for Unit 1 and
Niagara Mohawk's share of Unit 2 was approximately $28 million for the year
ended December 31, 1999. PowerChoice permits rate recovery for all radioactive
and non-radioactive cost components for both units, including post-shutdown
costs, based upon the amounts estimated in the 1995 site specific studies
described above, which are higher than the NRC minimum. The annual
decommissioning allowance (which includes funds to be placed into the external
trust plus internal reserves) for 2000 will increase to $43.3 million of which
$28 million is for radioactive components and $15.3 million is for non-
radioactive components. There is no assurance that the decommissioning
allowance recovered in rates will ultimately aggregate a sufficient amount to
decommission the units. Niagara Mohawk believes that if decommissioning costs
are higher than currently estimated, the costs would ultimately be included in
the rate process.
Decommissioning costs recovered in rates are reflected in "Accumulated
depreciation and amortization" on the balance sheet and amount to $353.1 million
and $315.5 million at December 31, 1999 and 1998, respectively for both units.
Additionally at December 31, 1999, the fair value of funds accumulated in
Niagara Mohawk's external trusts were $210.2 million for Unit 1 and $70.9
million for its share of Unit 2. The trusts are included in "Other Property and
Investments." Earnings on the external trust aggregated $45.3 million through
December 31, 1999, and because the earnings are available to fund
decommissioning, have also been included in "Accumulated depreciation and
amortization." For a further discussion on the earnings on the external trust,
see Note 9. Amounts recovered for non-radioactive dismantlement are accumulated
in an internal reserve fund, which has an accumulated balance of $65 million at
December 31, 1999.
NUCLEAR LIABILITY INSURANCE: The Atomic Energy Act of 1954, as amended,
requires the purchase of nuclear liability insurance from the Nuclear Insurance
Pools in amounts as determined by the NRC. At the present time, Niagara Mohawk
maintains the required $200 million of nuclear liability insurance.
With respect to a nuclear incident at a licensed reactor, the statutory limit
for the protection of the public under the Price-Anderson Amendments Act of
1988, which is in excess of the $200 million of nuclear liability insurance, is
currently $8.89 billion without the 5% surcharge discussed below. This limit
would be funded by assessments of up to $83.9 million for each of the 106
presently licensed nuclear reactors in the United States, payable at a rate not
to exceed $10 million per reactor, per year, per incident. Such assessments are
subject to periodic inflation indexing and to a 5% surcharge if funds prove
insufficient to pay claims. With the 5% surcharge included, the statutory limit
is $9.34 billion.
Niagara Mohawk's interest in Units 1 and 2 could expose it to a maximum
potential loss, for each accident, of $124.2 million (with 5% assessment)
through assessments of $14.1 million per year in the event of a serious nuclear
accident at its own or another licensed U.S. commercial nuclear reactor. The
amendments also provide, among other things, that insurance and indemnity will
cover precautionary evacuations, whether or not a nuclear incident actually
occurs.
This liability will transfer to the purchaser of the nuclear generation assets.
NUCLEAR PROPERTY INSURANCE: The Nine Mile Point Nuclear Site has $500 million
primary nuclear property insurance with the American Nuclear Insurers (ANI). In
addition, there is $2.25 billion in excess of the $500 million primary nuclear
insurance with Nuclear Electric Insurance Limited ("NEIL"). The total nuclear
property insurance is $2.75 billion. NEIL also provides insurance coverage
against the extra expense incurred in purchasing replacement power during
prolonged accidental outages. The insurance provides coverage for outages for
162 weeks, after a 12- week waiting period. NEIL insurance is subject to
retrospective premium adjustment under which Niagara Mohawk could be assessed up
to approximately $8.8 million per loss.
Upon the completion of the sale of the nuclear generation assets, and for up to
a period of 6 years following the sale, Niagara Mohawk will still be liable for
retrospective premium adjustments that are associated with NEIL losses that
occurred prior to the date of the sale. As of December 31, 1999, Niagara Mohawk
has not been made aware of any material retrospective premium adjustments.
LOW LEVEL RADIOACTIVE WASTE: Niagara Mohawk currently uses the Barnwell, South
Carolina waste disposal facility for low level radioactive waste. However,
continued access to Barnwell is not assured, and Niagara Mohawk has implemented
a low level radioactive waste management program so that Unit 1 and Unit 2 are
prepared to properly handle interim on-site storage of low level radioactive
waste for at least a ten-year period.
Under the Federal Low Level Waste Policy Amendment Act of 1985, New York State
was required by January 1, 1993 to have arranged for the disposal of all low
level radioactive waste within the state or in the alternative, contracted for
the disposal at a facility outside the state. To date, New York State has made
no funding available to support siting for a disposal facility.
NUCLEAR FUEL DISPOSAL COST: In January 1983, the Nuclear Waste Policy Act of
1982 (the "Nuclear Waste Act") established a cost of $.001 per KWh of net
generation for current disposal of nuclear fuel and provides for a determination
of Niagara Mohawk's liability to the DOE for the disposal of nuclear fuel
irradiated prior to 1983. The Nuclear Waste Act also provides three payment
options for liquidating such liability and Niagara Mohawk has elected to delay
payment, with interest, until the year in which Niagara Mohawk initially plans
to ship irradiated fuel to an approved DOE disposal facility. Progress in
developing the DOE facility has been slow and it is anticipated that the DOE
facility will not be ready to accept deliveries until at least 2010. In July
1996, the United States Circuit Court of Appeals for the District of Columbia
ruled that the DOE had an obligation to accept spent fuel from the nuclear
industry by January 31, 1998 even though a permanent storage site would not be
ready by then. The DOE did not appeal this decision. On January 31, 1997,
Niagara Mohawk joined a number of other utilities, states, state agencies and
regulatory commissions in filing a suit in the U.S. Court of Appeals for the
District of Columbia against the DOE. The suit requested the court to suspend
the utilities payments into the Nuclear Waste Fund and to place future payments
into an escrow account until the DOE fulfills its obligation to accept spent
fuel. The DOE did not meet its January 31, 1998 deadline and indicated it was
not obligated to provide a financial remedy for delay. On November 14, 1997 the
United States Court of Appeals for the District of Columbia Circuit issued a
writ of mandamus precluding DOE from excusing its own delay on the grounds that
it has not yet prepared a permanent repository or interim storage facility. On
December 11, 1997, 27 utilities, including Niagara Mohawk, petitioned the DOE to
suspend their future payments to the Nuclear Waste Fund until the DOE begins
moving fuel from their plant sites. The petition further sought permission to
escrow payments to the waste fund beginning in February 1998. On January 12,
1998, the DOE denied the petition. In 1998, both the House and the U.S. Senate
passed legislation to reform the federal government's spent nuclear fuel
disposal policy. This legislation authorized DOE to construct an interim spent
fuel storage facility to accommodate acceptance of spent fuel beginning no later
than June 2003. Additionally, this legislation required the payment of one-time
fees by electric utilities for the disposal of fuel irradiated prior to 1983 to
be paid to the Nuclear Waste Fund no later than September 30, 2001. However,
this legislation was never sent to the President for approval. As of December
31, 1999, Niagara Mohawk has recorded a liability of $126.0 million in other
long-term debt for the disposal of nuclear fuel irradiated prior to 1983.
Niagara Mohawk has several alternatives under consideration to provide
additional spent fuel storage facilities, as necessary. Each alternative will
likely require NRC approval, may require other regulatory approvals and would
likely require incurring additional costs, which Niagara Mohawk has included in
its decommissioning estimates for both Unit 1 and its share of Unit 2. Niagara
Mohawk does not believe that the possible unavailability of the DOE disposal
facility until 2010 will inhibit operation of either Unit.
<PAGE>
NOTE 4. CAPITALIZATION
HOLDINGS CAPITAL STOCK
Holdings is authorized to issue 300,000,000 shares of common stock, $0.01 par
value. In addition, Holdings is authorized to issue 50,000,000 shares of
preferred stock, $0.01 par value. The table below summarizes changes in the
capital stock issued and outstanding and the related capital account for 1999:
<TABLE>
<CAPTION>
Capital Stock Accumulated
Common Stock Treasury Premium and Other
$0.01 Par Value Stock Expense Comprehensive
Shares Amount* (at cost) * (Net) * Income *
- -------------------------- -------------- ------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998 (a). . . - $ - $ - $ - $ -
Exchange (a) . . . . . . . 187,364,863 1,874 2,548,022 (29,722)
Issued by subsidiary . . . (1,479)
Redemptions by subsidiary. 87
Treasury stock, at cost. . (10,000,000) (157,167)
Other comprehensive
income adjustments. . . 3,521
-------------- ------------- --------------- ----------- -----------
DECEMBER 31, 1999. . . . . 177,364,863 $ 1,874 $ (157,167) $2,546,630 $(26,201)
============== ============= =============== =========== =========
</TABLE>
* In thousands of dollars
(a) On March 18, 1999, the common stock of Niagara Mohawk was exchanged on a
share for share basis with Holdings (see Note 1).
The cumulative amount of foreign currency translation adjustment was $(21,048),
the unrealized gain on securities was $814 and the additional minimum pension
liability was $5,967 at December 31, 1999.
<PAGE>
NIAGARA MOHAWK CAPITAL STOCK
Niagara Mohawk is authorized to issue 250,000,000 shares of common stock, $1 par
value; 3,400,000 shares of preferred stock, $100 par value; 19,600,000 shares of
preferred stock, $25 par value; and 8,000,000 shares of preference stock, $25
par value. The table below summarizes changes in the capital stock issued and
outstanding and the related capital accounts for 1997, 1998, and 1999:
<TABLE>
<CAPTION>
Preferred Stock
-----------------------------------------------------------------------------
Common Stock $100 Par Value $25 Par Value
$1 Par Value Non- Non-
Shares Amount* Shares Redeemable* Redeemable* Shares Redeemable* Redeemable*
----------------------- ------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996 . . 144,365,214 $ 144,365 2,340,000 $ 210,000 $ 24,000 (a) 12,064,005 $230,000 $ 71,600 (a)
Issued. . . . . . . . 54,137 54 - - - - - -
Redemptions . . . . . (18,000) - (1,800) (282,801) - (7,070)
Other comprehensive
income adjustments
----------- --------- ---------- ---------- --------- ----------- -------- ---------
DECEMBER 31, 1997 . . 144,419,351 $ 144,419 2,322,000 $ 210,000 $ 22,200 (a) 11,781,204 $230,000 $ 64,530 (a)
Issued. . . . . . . . 42,945,512 42,946 - - - - - -
Redemptions . . . . . (18,000) - (1,800) (332,801) - (8,320)
Other comprehensive
income adjustments
----------- --------- ---------- ---------- --------- ----------- -------- ---------
DECEMBER 31, 1998 . . 187,364,863 $ 187,365 2,304,000 $ 210,000 $ 20,400 (a) 11,448,403 $230,000 $ 56,210 (a)
Issued. . . . . . . . - - - 3,000,000 (c) 150,000 -
Redemptions . . . . . (18,000) - (1,800) (6,232,801)(c) (150,000) (5,820)
Repurchased Holdings'
common stock . . .
Dividend of Opinac. .
Other comprehensive
income adjustments
----------- --------- ---------- ---------- --------- ----------- -------- --------
DECEMBER 31, 1999 . . 187,364,863 $ 187,365 2,286,000 $ 210,000 $ 18,600 (a) 8,215,602 $230,000 $ 50,390 (a)
=========== ========= ========== ========== ========= =========== ======== ========
Capital Stock Accumulated Repurchased
Premium and Other Holdings'
Expense Comprehensive Common
(Net)* Income* Stock
---------------------------------------------
<C> <C> <C>
DECEMBER 31, 1996 . . $1,798,366 ($14,641) $0
Issued. . . . . . . 426
Redemptions 98
Other comprehensive
income adjustments (4,561)
---------- --------- ---------
DECEMBER 31, 1997 . . $1,798,890 ($19,202) $0
Issued. . . . . . . . 563,540
Redemptions 101
Other comprehensive
income adjustments (6,592)
---------- --------- ---------
DECEMBER 31, 1998 . . $2,362,531 ($25,794) $0
Issued. . . . . . . . (1,479)
Redemptions . . . . . 87
Repurchased Holdings'
common stock ($157,167)
Dividend of Opinac 25,186 (b)
Other comprehensive
income adjustments (4,545)
---------- --------- ----------
DECEMBER 31, 1999 . $2,361,139 ($5,153) ($157,167)
========== ========= ==========
</TABLE>
* In thousands of dollars
(a) Includes sinking fund requirements due within one year.
(b) On March 31, 1999, Niagara Mohawk distributed its ownership interest in
the stock of Opinac as a dividend to Holdings. As a result, the
accumulated other comprehensive income of Opinac of $25,186 million,
which is entirely made up of foreign currency translation adjustment,
is no longer included in Niagara Mohawk's "Accumulated Other Comprehensive
Income." (See Note 1)
(c) The fixed-adjustable rate preferred stock issued during 1999 has a $25
par value with a $50 liquidation preference.
The cumulative amount of unrealized gain on securities was $814 and the
additional minimum pension liability was $5,967 at December 31, 1999.
<PAGE>
Niagara Mohawk has been reviewing its capital structure in light of its
scheduled debt reduction program, its divestiture of its electric generation and
the changing industry. As a result, Niagara Mohawk filed two petitions with the
PSC on July 1, 1999. The PSC approved the petitions on September 22, 1999 as
follows:
- - REFINANCE NIAGARA MOHAWK PREFERRED STOCK - The PSC approved Niagara Mohawk's
petition to issue up to $350 million in preferred stock to refinance
existing preferred stock outstanding through December 31, 2000. During
November 1999, Niagara Mohawk completed the sale of $150 million of
fixed-adjustable rate preferred stock (Series D) at a fixed rate of 6.9%
for the first five years. The 3 million shares of fixed-adjustable rate
preferred stock has a $25 par value with a $50 liquidation preference.
Niagara Mohawk used the proceeds from the sale to redeem its 9.5% series of
$25 par value optionally-redeemable preferred stock on December 31, 1999.
- - PURCHASE OF HOLDINGS' COMMON STOCK - 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 20 million shares
through December 31, 2001.
During the third quarter of 1999, Niagara Mohawk entered into two agreements,
which expire in less than one year, whereby two agents would purchase up to 9
million shares of Holdings' common stock on Niagara Mohawk's behalf. At any
time prior to the expiration of these agreements, Niagara Mohawk can
repurchase the common stock from the agents and is required to reimburse
these agents (in stock and/or cash) for the costs they incurred to buy the
stock plus a carrying charge. The two agents have incurred a total of
approximately $140.3 million to purchase the 9 million shares. During
December 1999, Niagara Mohawk purchased 4 million shares from one of the
agents for approximately $64.3 million, including fees paid to the agent.
The remaining 5 million shares repurchased by the other agent, but not yet
paid for by Niagara Mohawk (with the exception of $1.4 million in carrying
charges) remain in the number of shares outstanding in computing Holdings'
earnings per share.
During the fourth quarter of 1999, Niagara Mohawk repurchased an additional 6
million shares of Holdings' common stock on the open market for approximately
$91.5 million, including fees.
<PAGE>
NIAGARA MOHAWK NON-REDEEMABLE PREFERRED STOCK
(Optionally Redeemable)
Niagara Mohawk had certain issues of preferred stock, which provide for optional
redemption at December 31, as follows:
<TABLE>
<CAPTION>
Redemption price
per share
In thousands of dollars (Before adding
Series Shares 1999 1998 accumulated dividends)
- ----------------------------------------------------------------------------
PREFERRED $100 PAR VALUE:
<S> <C> <C> <C> <C>
3.40% 200,000 $ 20,000 $ 20,000 $103.50
3.60% 350,000 35,000 35,000 104.85
3.90% 240,000 24,000 24,000 106.00
4.10% 210,000 21,000 21,000 102.00
4.85% 250,000 25,000 25,000 102.00
5.25% 200,000 20,000 20,000 102.00
6.10% 250,000 25,000 25,000 101.00
7.72% 400,000 40,000 40,000 102.36
PREFERRED $25 PAR VALUE:
9.50% 6,000,000 - 150,000
Adjustable Rate -
Series A 1,200,000 30,000 30,000 25.00
Series C 2,000,000 50,000 50,000 25.00
Series D 3,000,000 150,000 - 50.00
--------- ---------
$440,000 $440,000
========= =========
</TABLE>
<PAGE>
NIAGARA MOHAWK MANDATORILY REDEEMABLE PREFERRED STOCK
At December 31, Niagara Mohawk had certain issues of preferred stock, as
detailed below, which provide for mandatory and optional redemption. These
series require mandatory sinking funds for annual redemption and provide
optional sinking funds through which Niagara Mohawk may redeem, at par, a like
amount of additional shares (limited to 120,000 shares of the 7.45% series).
The option to redeem additional amounts is not cumulative.
<TABLE>
<CAPTION>
Redemption price
per share
(Before adding
accumulated dividends)
Shares In thousands of dollars Eventual
Series 1999 1998 1999 1998 1999 Minimum
- ----------------------------------------------------------------------------------------------------------
PREFERRED $100 PAR VALUE:
<S> <C> <C> <C> <C> <C> <C>
7.45% 186,000 204,000 $18,600 $20,400 $ 101.21 $100.00
PREFERRED $25 PAR VALUE:
7.85% 365,602 548,403 9,140 13,710 25.00 25.00
Adjustable Rate -
Series B. . . . . . . . 1,650,000 1,700,000 41,250 42,500 25.00 25.00
------- -------
68,990 76,610
Less sinking fund requirements 7,620 7,620
------- --------
$61,370 $68,990
======= ========
</TABLE>
Niagara Mohawk's five-year mandatory sinking fund redemption requirements for
preferred stock are as follows:
Redemption
Requirement
(in thousands)
- --------------
2000 $7,620
2001 7,620
2002 3,050
2003 3,050
2004 3,050
<PAGE>
NIAGARA MOHAWK LONG-TERM DEBT
Long-term debt at December 31, consisted of the following:
<TABLE>
<CAPTION>
In thousands of dollars
Series Due 1999 1998
- -------------------------- ------------------------------
FIRST MORTGAGE BONDS:
<S> <C> <C> <C>
9 1/2% 2000 $ 150,000 $ 150,000
6 7/8% 2001 210,000 210,000
9 1/4% 2001 100,000 100,000
5 7/8% 2002 230,000 230,000
6 7/8% 2003 85,000 85,000
7 3/8% 2003 220,000 220,000
8% 2004 232,425 300,000
6 5/8% 2005 110,000 110,000
9 3/4% 2005 137,981 150,000
7 3/4% 2006 275,000 275,000
*6 5/8% 2013 45,600 45,600
9 1/2% 2021 - 150,000
8 3/4% 2022 136,597 150,000
8 1/2% 2023 146,020 165,000
7 7/8% 2024 170,257 210,000
*5.15% 2025 75,000 75,000
*7.2% 2029 115,705 115,705
---------- ----------
Total First Mortgage Bonds 2,439,585 2,741,305
---------- ----------
SENIOR NOTES:
6 1/2% 1999 - 300,000
7% 2000 340,244 450,000
7 1/8% 2001 302,439 400,000
7 1/4% 2002 302,439 400,000
7 3/8% 2003 302,439 400,000
7 5/8% 2005 302,439 400,000
7 3/4% 2008 600,000 600,000
8 1/2% 2010 500,000 500,000
Unamortized discount
on 8 1/2% Senior Note. . (126,374) (156,216)
---------- ----------
Total Senior Notes . . . . 2,523,626 3,293,784
---------- ----------
PROMISSORY NOTES:
*Adjustable Rate Series due
2015 100,000 100,000
2023 69,800 69,800
2025 75,000 75,000
2026 50,000 50,000
2027 25,760 25,760
2027 93,200 93,200
TERM LOAN AGREEMENT 105,000 105,000
UNSECURED NOTES PAYABLE:
Medium Term Notes, Various
rates, due 2000-2004 - 20,000
OTHER 186,902 174,462
UNAMORTIZED PREMIUM (DISCOUNT) (12,545) (18,846)
---------- ----------
TOTAL LONG-TERM DEBT 5,656,328 6,729,465
Less long-term debt due
within one year 613,740 312,240
---------- -----------
$5,042,588 $6,417,225
=========== ===========
* Tax-exempt pollution control related issues
</TABLE>
Niagara Mohawk's long-term debt increased significantly upon the closing of the
MRA on June 30, 1998. The MRA was largely financed through the Senior Notes.
The Senior Notes are unsecured obligations of Niagara Mohawk and rank pari passu
in right of payment to its First Mortgage Bonds, the senior bank financing and
unsecured medium term notes.
Niagara Mohawk is obligated to use 85% of the net proceeds of the sales of the
generation assets to reduce its senior debt outstanding within 180 days after
the receipt of such proceeds. To date, Niagara Mohawk has received $860 million
on the sale of its two coal-fired generation plants, its hydro electric
generation plants, and its oil and gas-fired plant in Oswego. During 1999
Niagara Mohawk redeemed approximately $1.1 billion in debt using the proceeds
from the assets sales and from improved cash flow. See Notes 2 and 3 for a
discussion of the status of the remaining generation asset sales.
Several series of First Mortgage Bonds and Promissory Notes were issued to
secure a like amount of tax-exempt revenue bonds issued by NYSERDA.
Approximately $414 million of such securities bear interest at a daily
adjustable interest rate (with an option to convert to other rates, including a
fixed interest rate which would require Niagara Mohawk to issue First Mortgage
Bonds to secure the debt) which averaged 3.23% for 1999 and 3.39% for 1998 and
are supported by bank direct pay letters of credit. Pursuant to agreements
between NYSERDA and Niagara Mohawk, proceeds from such issues were used for the
purpose of financing the construction of certain pollution control facilities at
Niagara Mohawk's generation facilities or to refund outstanding tax-exempt bonds
and notes (see Note 5).
Other long-term debt in 1999 consists of obligations under capital leases of
approximately $22.1 million, a liability to the DOE for nuclear fuel disposal of
approximately $126.0 million and a liability for IPP contract terminations not
related to the MRA of approximately $38.8 million. The aggregate maturities of
long-term debt for the five years subsequent to December 31, 1999, excluding
capital leases, in millions, are approximately $610.5, $624.2, $544.0, $610.7
and $232.4, respectively. A reduction in debt that will occur from applying
proceeds from additional generation asset sales may impact the schedule of
maturities of long-term debt.
EARLY EXTINGUISHMENT OF DEBT
During 1999, Niagara Mohawk redeemed approximately $822 million in long-term
debt prior to its scheduled maturity. Holdings and Niagara Mohawk charged to
earnings, as an extraordinary item approximately $23.8 million, after tax, for
redemption premiums incurred, and unamortized debt expense and issuance costs.
This extraordinary item had a 13 cents per share, after tax effect on Holdings'
1999 earnings per share.
NOTE 5. BANK CREDIT ARRANGEMENTS
Niagara Mohawk has an $804 million senior bank financing with a bank group
consisting of a $255 million term loan facility, a $125 million revolving credit
facility and $424 million for letters of credit. The letter of credit facility
provides credit support for the adjustable rate pollution control revenue bonds
issued through the NYSERDA, discussed in Note 4. As of December 31, 1999, the
amount outstanding under the senior bank financing was $529 million, consisting
of $105 million under the term loan facility and $424 million of letters of
credit, leaving Niagara Mohawk with $275 million of borrowing capability under
the financing. The senior bank facility term expires on June 1, 2000. As a
result, the amount outstanding on this facility at December 31, 1999, $105
million, is shown as a current liability on both Holdings and Niagara Mohawk's
balance sheets. Niagara Mohawk is currently negotiating a new financing
arrangement with a bank group, and believes as a minimum it will be able to
obtain $424 million for letters of credit prior to the expiration of the senior
bank facility on June 1, 2000. The interest rate applicable to the facility is
variable based on certain rate options available under the agreement and
currently approximates 6.625% (but capped at 15%).
Opinac had an agreement with a bank providing for letters of credit totaling up
to $25 million, which in January 2000 was replaced by 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 January 31, 2000, supports approximately $20 million in letters
of credit. Opinac is working to extend the facility beyond September 30, 2000.
Holdings and Niagara Mohawk did not have any short-term debt outstanding at
December 31, 1999 and 1998.
NOTE 6. FEDERAL AND FOREIGN INCOME TAXES
The federal income tax amounts included in Note 6 are for Holdings. The amounts
for Niagara Mohawk are no materially different.
Components of United States and foreign income before income taxes:
<TABLE>
<CAPTION>
In thousands of dollars
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
United States. . . . . . . . $ 25,276 $(206,372) $315,027
Foreign. . . . . . . . . . . 6,124 8,227 (1,621)
Consolidating eliminations
Income before income taxes
and preferred dividend
requirement of subsidiary 13,307 10,592 (3,476)
----------- ---------- ---------
$ 44,707 $(187,553) $309,930
=========== ========== =========
</TABLE>
Following is a summary of the components of Federal and foreign income tax and
a reconciliation between the amount of Federal income tax expense reported in
the Consolidated Statements of Income and the computed amount at the statutory
tax rate:
<TABLE>
<CAPTION>
In thousands of dollars
1999 * 1998 1997
---------------------------------
<S> <C> <C> <C>
COMPONENTS OF FEDERAL AND FOREIGN INCOME TAXES:
Current Federal tax expense . . . . . . . . . . $ 24,637 $(155,320) $ 77,565
----------- ---------- --------
Deferred tax expense:
Federal. . . . . . . . . . . . . . . . . . . (6,931) 84,466 47,836
Foreign. . . . . . . . . . . . . . . . . . . 1,474 4,126 1,194
----------- ---------- --------
(5,457) 88,592 49,030
----------- ---------- --------
Total . . . . . . . . . . . . . . . . . . $ 19,180 $ (66,728) $126,595
=========== ========== ========
</TABLE>
* Does not include the tax benefit of $12.819 million associated with the
extraordinary item for the loss on the extinguishment of debt in 1999.
<PAGE>
RECONCILIATION BETWEEN FEDERAL AND FOREIGN INCOME TAXES AND THE TAX COMPUTED AT
PREVAILING U.S. STATUTORY RATE ON INCOME BEFORE INCOME TAXES:
<TABLE>
<CAPTION>
Computed tax $15,648 $(65,644) $108,475
- ---------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
INCREASE (REDUCTION) INCLUDING THOSE ATTRIBUTABLE TO
FLOW-THROUGH OF CERTAIN TAX ADJUSTMENTS:
Depreciation . . . . . . . . . . . . . . . . . . . . 21,380 20,808 34,926
Cost of removal. . . . . . . . . . . . . . . . . . . (6,809) (7,859) (8,168)
Allowance for funds used
during construction . . . . . . . . . . . . . . . (2,442) (4,207) (2,952)
Expiring foreign tax credits . . . . . . . . . . . . 692 10,053 -
Pension settlement amortization. . . . . . . . . . . (278) (3,317) (2,391)
Debt premium & mortgage
recording tax . . . . . . . . . . . . . . . . . . 14,402 (9,408) 23
Real estate taxes. . . . . . . . . . . . . . . . . . 3,540 1,968 2,408
Provided at other than statutory
rate. . . . . . . . . . . . . . . . . . . . . . . 1,185 - -
Subsidiaries . . . . . . . . . . . . . . . . . . . . (2,294) 3,853 (1,820)
Reserve for Hydra-Co sale expenses . . . . . . . . . (1,181) (15) (276)
Deferred investment tax credit
reversal *. . . . . . . . . . . . . . . . . . . . (23,539) (7,454) (7,454)
Other. . . . . . . . . . . . . . . . . . . . . . . . (1,124) (5,506) 3,824
--------- --------- ---------
3,532 (1,084) 18,120
--------- --------- ---------
Federal and foreign income
taxes **. . . . . . . . . . . . . . . . . . . . . $ 19,180 $(66,728) $126,595
========= ========= =========
Effective Tax Rate . . . . . . . . . . . . . . . . . 43.0% 35.6% 40.8%
========= ========= =========
</TABLE>
* Deferred investment tax credits of $16.2 million related to the fossil and
hydro generation assets that have been sold have been taken into income in
1999 in accordance with IRS rules.
** Does not include the tax benefit of $12.819 million associated with the
extraordinary item for the loss on the extinguishment of debt in 1999.
<PAGE>
At December 31, the deferred tax liabilities (assets) were comprised of the
following:
<TABLE>
<CAPTION>
In thousands of dollars
1999 1998
------------- ------------
<S> <C> <C>
Alternative minimum tax . . . . . $ (97,652) $ (82,621)
Unbilled revenue. . . . . . . . . (12,771) (81,685)
Non-utilized NOL carryforward . . (930,117) (1,161,898)
Other . . . . . . . . . . . . . . (336,478) (290,035)
------------- ------------
Total deferred tax assets. . . (1,377,018) (1,616,239)
------------- ------------
Depreciation related. . . . . . . 1,275,804 1,292,582
Investment tax credit related . . 65,554 76,418
MRA terminated IPP contracts. . . 1,172,380 1,415,977
Other . . . . . . . . . . . . . . 432,237 342,679
------------- ------------
Total deferred tax liabilities 2,945,975 3,127,656
------------- ------------
Accumulated deferred income
taxes. . . . . . . . . . . . . $ 1,568,957 $ 1,511,417
============= ============
</TABLE>
In December 1998, Niagara Mohawk received a ruling from the IRS to the effect
that the amount of cash and the value of common stock that was paid to the
terminated IPP Parties was deductible in 1998 and generated a substantial net
operating loss for federal income tax purposes, such that Niagara Mohawk did not
pay federal income taxes for 1998. Further, Niagara Mohawk has carried back
unused NOL carryforward to the years 1996 and 1997, and also for the years 1988
through 1990, which resulted in a tax refund of $135 million that were received
in January 1999. Holdings anticipates that it will be able to utilize the
remaining $3.3 billion NOL carryforward prior to its expiration date in 2019.
The amount of the NOL carryforward as of December 31, 1999 is $2.6 billion.
Holdings' ability to utilize the NOL carryforward generated, as a result of the
MRA could be limited under the rules of section 382 of the Internal Revenue Code
if certain changes in Holdings' common stock ownership were to occur in the
future.
NOTE 7. PENSION AND OTHER RETIREMENT PLANS
Niagara Mohawk and its affiliates have a non-contributory defined benefit
pension plan covering substantially all employees, which was amended during 1998
to include a cash balance benefit in which the participant has an account to
which amounts are credited based on qualifying compensation and with interest
determined annually based on average annual 30-year Treasury bond yield. The
majority of the costs and benefits associated with this plan are attributable to
Niagara Mohawk employees. Supplemental non-qualified, non-contributory
executive retirement programs provide additional defined pension benefits for
certain officers. In addition, Niagara Mohawk and its affiliates provide
certain contributory health care and life insurance benefits for active and
retired employees and dependents.
The changes in benefit obligations, plan assets and plan funded status for these
pension and other retirement plans as of, and for the year ended December 31,
are summarized as follows:
<TABLE>
<CAPTION>
In thousands of dollars
Pension Benefits Other Retirement Benefits
--------------------------- ---------------------------
1999 1998 1999 1998
--------------------------- ---------------------------
CHANGE IN BENEFIT OBLIGATION:
<S> <C> <C> <C> <C>
Benefit obligation at January 1 . . . . . $ 1,302,197 $ 1,172,428 $ 547,620 $ 519,851
Service cost . . . . . . . . . . . . . 34,743 30,430 15,367 14,338
Interest cost. . . . . . . . . . . . . 85,821 79,748 35,555 35,338
Benefits paid to participants. . . . . (234,683) (75,650) (35,568) (32,917)
Plan amendments. . . . . . . . . . . . 19,300 33,694 - (6,579)
Curtailments . . . . . . . . . . . . . (4,818) - 7,287 -
Settlements. . . . . . . . . . . . . . (32,058) - - -
Actuarial (gain) loss. . . . . . . . . (58,669) 61,547 (51,203) 17,589
-------------- ------------ ---------- ----------
Benefit obligation at December 31 . . . . 1,111,833 1,302,197 519,058 547,620
-------------- ------------ ---------- ----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at January 1. . 1,446,512 1,304,338 210,046 181,101
Contributions. . . . . . . . . . . . . 11,878 12,446 9,435 9,466
Net return on plan assets. . . . . . . 157,627 198,943 25,609 19,479
Benefits paid to participants. . . . . (234,152) (69,215) - -
Settlements. . . . . . . . . . . . . . (37,218) - - -
-------------- ------------ ---------- ----------
Fair value of plan assets at December 31. 1,344,647 1,446,512 245,090 210,046
-------------- ------------ ---------- ----------
Funded status . . . . . . . . . . . . . . 232,814 144,315 (273,968) (337,574)
Unrecognized initial obligation . . . . . 12,788 16,887 141,570 152,460
Unrecognized net gain from actual
return on plan assets. . . . . . . . . (366,232) (360,450) - -
Unrecognized net loss (gain) from past
experience different from that assumed (17,612) 41,914 (14,507) 55,335
Unrecognized prior service cost . . . . . 81,178 79,269 (15,508) (27,532)
Accumulated other comprehensive income. . (6,746) - - -
-------------- ------------ ---------- ----------
Benefits liability on Holdings'
consolidated balance sheet . . . . . . $ (63,810) $ (78,065) $(162,413) $(157,311)
============== ============ ========== ==========
</TABLE>
In 1999, Niagara Mohawk experienced a net curtailment/settlement gain of $35.3
million due to the employee transfers associated with the sale of the hydro and
fossil generating plants and normal terminations electing lump sum pension
benefits distributions under the cash balance option and receiving
postemployment medical and life insurance benefits. After a portion of the gain
was allocated to the co-tenants, $9.4 million of the net gain was included in
the deferred loss on the sale of the assets; the remaining $23.6 was deferred as
an Other Regulatory Liability as required by PSC regulations.
The non-qualified executive pension plan has no plan assets due to the nature of
the plan, and therefore, has an accumulated benefit obligation in excess of plan
assets of $12.4 million and $8.8 million at December 31, 1999 and 1998,
respectively.
The following table summarizes the components of the net annual benefit costs.
<TABLE>
<CAPTION>
In thousands of dollars
Pension Benefits Other Retirement Benefits
--------------------------------- -------------------------------
1999 1998 1997 1999 1998 1997
--------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost . . . . . . $ 34,743 $ 30,430 $ 27,106 $ 15,367 $ 14,338 $ 12,255
Interest cost. . . . . . 85,821 79,748 74,984 35,555 35,338 34,829
Expected return
on plan assets. . . . (97,151) (95,472) (84,859) (17,501) (16,752) (13,234)
Amortization of the
initial obligation. . 2,526 2,559 2,559 10,890 10,890 10,890
Amortization of
gains and losses. . . (1,574) (8,408) (9,226) 10,695 8,367 6,967
Amortization of prior
service costs . . . . 7,675 4,899 3,892 (10,271) (9,508) (8,745)
---------- ---------- --------- --------- --------- ---------
Net benefit cost before
curtailments and
settlements. . . . . . . 32,040 13,756 14,456 44,735 42,673 42,962
Curtailment loss . . . . 6,470 - - 5,370 - -
Settlement gain. . . . . (47,102) - - - - -
---------- ---------- --------- --------- --------- ---------
Net benefit cost (1) . . $ (8,592) $ 13,756 $ 14,456 $ 50,105 $ 42,673 $ 42,962
========== ========== ========= ========= ========= =========
</TABLE>
(1) A portion of the benefit costs relates to construction labor, and
accordingly, is allocated to construction projects.
<TABLE>
<CAPTION>
Pension Benefits Other Retirement Benefits
------------------------- --------------------------
1999 1998 1999 1998
------------------------- --------------------------
<S> <C> <C> <C> <C>
Weighted average assumptions
as of December 31:
Discount rate . . . . . . . . . 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets. 9.25 9.25 9.25 9.25
Rate of compensation increase
(plus merit increases). . . . 2.50 2.50 N/A N/A
Health care cost trend rate:
Under age 65. . . . . . . . . N/A N/A 6.00 7.00
Over age 65 . . . . . . . . . N/A N/A 5.50 6.00
</TABLE>
The assumed health cost trend rates decline to 5% in 2000 and remain at that
level thereafter. The assumed health cost trend rates can have a significant
effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:
<PAGE>
<TABLE>
<CAPTION>
1% Increase 1% Decrease
- ----------------------------------------- ------------ -----------
<S> <C> <C>
Effect on total of service and interest
cost components of net periodic
postretirement health care benefit cost $ 4,920 $ (4,130)
Effect on the health care component of
the accumulated postretirement
benefit obligation. . . . . . . . . . . 40,839 (35,091)
</TABLE>
Holdings recognizes the obligation to provide postemployment benefits if the
obligation is attributable to employees' past services, rights to those benefits
are vested, payment is probable and the amount of the benefits can be reasonably
estimated. At December 31, 1999 and 1998, Holdings' postemployment benefit
obligation is approximately $15.7 million and $15.3 million, respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
LONG-TERM CONTRACTS FOR THE PURCHASE OF ELECTRIC POWER: Niagara Mohawk has
several types of long-term contracts for the purchase of electric power.
Niagara Mohawk's commitments under these long-term contracts, as of January 1,
2000, excluding its commitments with NYPA, which are shown separately, are
summarized in the table below. Following the table are descriptions of the
different types of these long-term contracts. For a detailed discussion of the
financial swap agreements that Niagara Mohawk has entered into as part of the
MRA and the sale of its generation assets (the sale of the Huntley and Dunkirk
coal-fired generation plants and the announced sale of the Albany oil and
gas-fired generation plant) which are not included in the table below, see Note
9.
<TABLE>
<CAPTION>
(In thousands of dollars)
Estimated Estimated
Fixed Costs * Variable Costs * Estimated Estimated
-------------------------- --------------------- Purchased Purchased
Capacity, Capacity Energy
Year Capacity Energy and Taxes *** Total * (in MW) (in MWh)
- --------- -------------------------- --------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
2000. . . $ 128,995 $ 221,032 $ 350,027 2,260.7 5,776,572
2001. . . 102,157 198,441 300,598 2,253.5 5,119,974
2002. . . 40,288 182,337 222,625 1,620.6 3,478,141
2003. . . 30,226 182,216 212,443 1,615.2 3,465,277
2004. . . 15,218 175,067 190,285 738.3 3,249,885
2005-2015 94,852 1,829,292 1,924,144 712.8** 34,592,593
</TABLE>
* Nominal value
** MW value represents the average annual quantity of purchased capacity
*** Does not include puts (see below)
<PAGE>
PURPA Contracts
- ---------------
Under the requirements of PURPA, Niagara Mohawk is required to purchase power
generated by IPPs, as defined therein. Niagara Mohawk has 112 PPAs with 120
IPP facilities, amounting to approximately 1,000 MW of capacity at December 31,
1999. All of this capacity amount is considered firm and excludes PPAs that
provide energy only. The table above includes the estimated payments for fixed
costs (capacity) and variable costs (capacity, energy and related taxes) that
Niagara Mohawk estimates it will be obligated to make under these 112 IPP
contracts, excluding the financial obligation under the swap contracts. The
payments to the IPPs are subject to the tested capacity and availability of the
facilities, scheduling and price escalation. These payments have been
significantly reduced by the consummation of the MRA and additional IPP buyouts
made in 1999. See Note 2 "IPP Buyout Costs" for a further discussion of the
additional IPP buyouts made in 1999.
Fixed capacity costs (in the table above) relate to three contracts as follows:
1) a contract with an IPP that was a party to the MRA,
2) a contract for the sale of the Oswego generation assets as discussed further
below, and
3) the contract for the sale of the hydroelectric generation assets as
discussed further below.
With respect to the IPP contract, Niagara Mohawk is required to
make capacity payments, including payments when the facility is not operating
but available for service. The terms of this contract allows Niagara Mohawk to
schedule energy deliveries and then pay for the energy delivered. Contracts
relating to the remaining IPP facilities in service at December 31, 1999,
require Niagara Mohawk to pay only when energy is delivered, except when Niagara
Mohawk decides that it would be better to pay a particular project a reduced
payment to have the project reduce its high priced energy deliveries. Niagara
Mohawk paid approximately $435 million, $785 million and $1,106 million in 1999,
1998 and 1997 for 6,765,000 MWh, 9,700,000 MWh and 13,500,000 MWh, respectively,
of electric power under all IPP contracts.
Fossil/Hydro Contracts
- ----------------------
As part of the sale of Niagara Mohawk's fossil and hydro generation assets,
Niagara Mohawk entered into PPAs with the buyers of these assets for the
purchase of capacity and energy as discussed in more detail below. The table
above includes the estimated payments for variable costs and quantities
(capacity and energy) associated with the PPAs that Niagara Mohawk estimates it
will make under these contracts. Niagara Mohawk paid approximately $123.7
million in 1999 for 2,409 MW of capacity and 3,490,000 MWh of electric power
under these PPAs. The table above does not include the estimated payments for
the PPAs entered into with the buyers of the Albany Steam Station and the
nuclear generation assets, since Niagara Mohawk has not closed on these asset
sales.
The hydro PPA calls for the purchase of all energy and capacity through
September 2001 at prices that approximate forecasted future market prices.
Niagara Mohawk anticipates that the energy and capacity to be purchased under
the hydro PPA to be at quantities approximating historical generation levels,
subject to the effects of water flow availability. The Oswego PPA is primarily
a contract for capacity with a nominal amount of energy at prices above
forecasted future market prices.
Nuclear Contracts
- -----------------
As part of the agreement with AmerGen to sell its nuclear generation assets,
Niagara Mohawk would enter into PPAs to purchase energy and capacity at
negotiated prices. The negotiated prices are expected to be, on average, above
projected market prices during the term of the PPAs. Niagara Mohawk would pay
only for delivered output from the units. The terms of the PPAs would be for
five years from Unit 1 and three years from Unit 2. Upon the expiration of the
PPA for Unit 2, there would be a financial sharing agreement whereby Niagara
Mohawk would be entitled to future payments from the purchaser over a ten-year
period if electric energy market prices exceed certain amounts during the
ten-year sharing period. Niagara Mohawk has proposed to the PSC that any future
payments received under the financial sharing agreement will serve to reduce the
unamortized regulatory asset recorded as a result of the sale of the nuclear
assets. See Note 3. - Nuclear Operations, for a complete discussion of the
proposed sale of the nuclear generation assets.
PUT Contracts
- -------------
As a part of the MRA, Niagara Mohawk signed put agreements with approximately
one-third of the IPP Parties whereby the IPP Parties have an option to put the
physical delivery of energy to Niagara Mohawk at market prices. These put
agreements will be in effect until the NYISO meets certain volume and capacity
conditions for a consecutive six-month period. If the NYISO does not meet the
defined volume and capacity transactions that are outlined in the put
agreements, then the put agreements are in effect until June 2008. Since
Niagara Mohawk cannot predict if and when the NYISO will meet the volume and
capacity conditions, the cost and quantity of energy associated with the put
agreements have not been included in the table above. During 1999, Niagara
Mohawk paid $75.9 million to the IPP Parties for 2,782,678 MWh of electric
power received as part of these put agreements. If the put agreements remain
in effect, Niagara Mohawk expects to pay approximately $77.1 million to $91.3
million for 4,031,000 MWh to 4,093,000 MWh of electric power in each of the
years 2000 to 2004.
While the PPAs for the generation asset sales, which were entered into as an
integral part of the generation sales, are above market, they are designed to
help Niagara Mohawk meet the objectives of rate reduction and price cap
commitments as well as meet expected demand as the "provider of last resort" as
outlined in the PowerChoice agreement.
At January 1, 2000, Niagara Mohawk had long-term contracts to purchase electric
power from the following generation facilities owned by NYPA:
<TABLE>
<CAPTION>
Expiration Purchased Estimated
date of capacity annual
Facility contract in MW capacity cost
- ----------------------------- ---------- ----------- --------------
<S> <C> <C> <C>
Niagara - hydroelectric
project. . . . . . . . . . 2007 951 $ 28,392,000
St. Lawrence - hydroelectric
project. . . . . . . . . . 2007 104 1,248,000
Blenheim-Gilboa - pumped
storage generating station 2002 270 7,452,000
----------- --------------
1,325 $ 37,092,000
=========== ==============
</TABLE>
The purchase capacities shown above are based on the contracts currently in
effect. The estimated annual capacity costs are subject to price escalation and
are exclusive of applicable energy charges. The total cost of purchases under
these contracts, plus other miscellaneous NYPA purchases, was approximately, in
millions, $112.4, $93.1 and $91.0 for the years 1999, 1998 and 1997,
respectively. Niagara Mohawk continues to have a contract with NYPA's
Fitzpatrick nuclear facility to purchase for resale up to 46 MW of power for
NYPA's economic development customers.
In addition to the contractual commitments described above, Niagara Mohawk
entered into a four-year contract, expiring in June 2003, that gives it the
option to buy additional power at market prices from the Huntley coal-fired
generation plant, now owned by NRG. If Niagara Mohawk needs any additional
energy to meet its load it can purchase the electricity from other IPPs, other
utilities, other energy merchants or through the NYISO at market prices.
GAS SUPPLY, STORAGE AND PIPELINE COMMITMENTS: In connection with its regulated
gas business, Niagara Mohawk has long-term commitments with a variety of
suppliers and pipelines to purchase gas commodity, provide gas storage
capability and transport gas commodity on interstate gas pipelines.
The table below sets forth Niagara Mohawk's estimated commitments at December
31, 1999, for the next five years, and thereafter.
<TABLE>
<CAPTION>
(In thousands of dollars)
Gas Storage/
Year Gas Supply Pipeline
- ---------- -------------------- ---------
<S> <C> <C>
2000 . . . $ 55,175 $ 73,039
2001 . . . 52,538 66,203
2002 . . . 39,445 33,067
2003 . . . 39,445 11,535
2004 . . . 39,445 11,535
Thereafter 72,305 45,237
</TABLE>
With respect to firm gas supply commitments, the amounts are based upon volumes
specified in the contracts giving consideration for the minimum take provisions.
Commodity prices are based on New York Mercantile Exchange quotes and
reservation charges, when applicable. Storage and pipeline capacity
commitments' amounts are based upon volumes specified in the contracts, and
represent demand charges priced at current filed tariffs. At December 31, 1999,
Niagara Mohawk's firm gas supply commitments extend through October 2006, while
the gas storage and transportation commitments extend through October 2012.
Gas Multi-Year Rate and Restructuring Proposal
- ----------------------------------------------
Niagara Mohawk filed a three-year gas rate and restructuring proposal on March
11, 1999 in anticipation of the expiration of its 1996 three-year gas rate
settlement agreement, which expired on November 1, 1999. Niagara Mohawk is
currently negotiating with the PS and other parties, but has not reached a
final agreement. However, on October 15, 1999 and January 12, 2000, the PSC
approved an interim arrangement that freezes delivery rates at current levels,
subject to refund if the permanent rates are lower and allows the pass through
to customers the benefits of lowered pipeline costs. In addition, the interim
arrangement minimizes Niagara Mohawk's exposure to stranded costs. The interim
agreement also included provisions for the implementation of both unbundled gas
rates and a return to a full gas cost collection mechanism (gas adjustment
clause "GAC") effective November 1, 1999. In addition, Niagara Mohawk is
allowed to recover all commodity costs along with fixed capacity costs for
capacity actually used to serve customers. It also provides that, pending
resolution of the issue in that case, costs for capacity upstream of CNG that
are not actually required for sales customer demands or offset by assignment and
secondary market release (stranded capacity costs) are not recoverable beginning
November 1, 1999. However, the potential for stranded costs are not considered
material to Niagara Mohawk's results of operations or financial condition. The
exposure may increase in the future as additional customers select alternative
suppliers. Niagara Mohawk is continuing to work with the PSC and other
interested parties to reach a final settlement, but it cannot predict the
timing or outcome of such a settlement.
Future of the Natural Gas Industry
- ----------------------------------
In November 1998, the PSC issued its Policy Statement concerning the Future of
the Natural Gas Industry in New York State and Order Terminating Capacity
Assignment ("PSC Policy Statement"). The PSC envisions a transitional time
frame of three to seven years for local gas distribution companies ("LDC") to
exit the business of purchasing natural gas (the "merchant" function). The PSC
established a process comprising three basic elements, to be pursued in parallel
in the exiting of the merchant function:
1. Addressing the issues involved in the exiting of the merchant function on
a utility-by-utility basis as part of the LDCs individual rate plans;
2. Collaboration among staff, LDCs, marketers, pipelines and other
stakeholders of generic issues such as operational and reliability issues,
protocols and information systems requiring a status report by April 1,
1999; and
3. Coordination of issues faced by electric utilities, including provider of
last resort issues and a plan to allow competition in other areas, such as
metering, billing and information services.
In December 1998, Niagara Mohawk notified the PSC that its specific operational
and reliability requirements continue to warrant certain mandatory capacity
assignment and inclusion of capacity costs in transportation rates after April
1, 1999. Niagara Mohawk will continue to assign CNG capacity until a final
determination is reached in the current rate and restructuring case. The PSC
noted in its PSC Policy Statement that it will provide LDCs with a reasonable
opportunity to recover these strandable costs if they can demonstrate compliance
with the PSC's directives to minimize such costs.
As a result of the collaborative process established in the PSC Policy
Statement, on August 19, 1999, the PSC issued an order requiring that marketers
serving firm customers have firm, primary delivery point capacity for the five
winter months of November through March, but allowed an alternative for
marketers, only for the 1999 - 2000 heating season, to have firm secondary
delivery point capacity and to pay the LDC a standby charge to provide backup
service. LDCs that implemented this Order would be presumed to have met the
PSC's directive to minimize their stranded costs.
Niagara Mohawk believes that it has taken numerous actions to reduce its
capacity obligations and its potential stranded costs, but is unable to predict
the outcome of this matter. Niagara Mohawk has addressed the issues from the
PSC Policy Statement in its three-year gas rate and restructuring proposal filed
on March 11, 1999 and as noted above, Niagara Mohawk is currently working with
the PSC and other interested parties to reach a final settlement.
SALE OF CUSTOMER RECEIVABLES: Niagara Mohawk has established a single-purpose,
financing subsidiary, NM Receivables LLC ("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. For
receivables sold, Niagara Mohawk has retained collection and administrative
responsibilities as agent for the purchaser. As collections reduce previously
sold undivided interests, new receivables are customarily sold. NMR has its own
separate creditors which, upon liquidation of NMR, will be entitled to be
satisfied out of its assets prior to any value becoming available to Niagara
Mohawk. The sale of receivables are in fee simple for a reasonably equivalent
value and are not secured loans. Some receivables have been contributed in the
form of a capital contribution to NMR in fee simple for reasonably equivalent
value, and all receivables transferred to NMR are assets owned by NMR in fee
simple and are not available to pay Niagara Mohawk's creditors.
At December 31, 1999 and 1998, $215.1 million and $150 million, respectively, of
receivables had been sold by NMR to a third party. The undivided interest in
the designated pool of receivables was sold with limited recourse. The
agreement provides for a formula based loss reserve pursuant to which
additional customer receivables are assigned to the purchaser to protect against
bad debts. At December 31, 1999, the amount of additional receivables assigned
to the purchaser, as a loss reserve, was approximately $83.2 million.
To the extent actual loss experience of the pool receivables exceeds the loss
reserve, the purchaser absorbs the excess. Concentrations of credit risk to the
purchaser with respect to accounts receivable are limited due to Niagara
Mohawk's large, diverse customer base within its service territory. Niagara
Mohawk generally does not require collateral, i.e., customer deposits.
In the fourth quarter of 1999, NMR was not in compliance with a certain
statistical ratio relating to the pool of receivables sold. The purchaser has
granted a waiver for this period. While NMR is working to return to compliance
with this ratio, it is possible a non-compliance condition could continue to
exist. NMR is unable to predict whether further waivers would be granted.
CUSTOMER SERVICE SYSTEM: Niagara Mohawk implemented a new customer service
system in mid-February 1999, which experienced transition issues in customer
satisfaction, incremental costs and PSC scrutiny. The PSC has begun an inquiry
into the development and implementation costs of CSS, as well as Niagara
Mohawk's exposure to operational issues during transition. Niagara Mohawk is
unable to predict the outcome or financial consequences, if any, of the PSC
inquiry.
ENVIRONMENTAL CONTINGENCIES: 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 86 which are Niagara Mohawk-owned. With respect to non-owned sites,
Niagara Mohawk may be required to contribute some proportionate share of
remedial costs. Although one party can, as a matter of law, be held liable for
all of the remedial costs at a site, regardless of fault, in practice costs are
usually allocated among PRPs. Niagara Mohawk has denied any responsibility at
certain of these PRP sites and is contesting liability accordingly.
Investigations at each of the Niagara Mohawk-owned sites are designed to (1)
determine if environmental contamination problems exist, (2) if necessary,
determine the appropriate remedial actions and (3) where appropriate, identify
other parties who should bear some or all of the cost of remediation. Legal
action against such other parties will be initiated where appropriate. After
site investigations are completed, Niagara Mohawk expects to determine
site-specific remedial actions and to estimate the attendant costs for
restoration. However, since investigations are ongoing for most sites, the
estimated cost of remedial action is subject to change.
Estimates of the cost of remediation and post-remedial monitoring are based upon
a variety of factors, including identified or potential contaminants; location,
size and use of the site; proximity to sensitive resources; status of regulatory
investigation and knowledge of activities at similarly situated sites.
Additionally, Niagara Mohawk's estimating process includes an initiative where
these factors are developed and reviewed using direct input and support obtained
from the DEC. Actual Niagara Mohawk expenditures are dependent upon the total
cost of investigation and remediation and the ultimate determination of Niagara
Mohawk's share of responsibility for such costs, as well as the financial
viability of other identified responsible parties since clean-up obligations are
joint and several. Niagara Mohawk has denied any responsibility at certain of
these PRP sites and is contesting liability accordingly.
As a consequence of site characterizations and assessments completed to date and
negotiations with PRPs, Niagara Mohawk has accrued a liability in the amount of
$240 million and $220 million, which is reflected in both Niagara Mohawk's and
Holdings' Consolidated Balance Sheets at December 31, 1999 and 1998,
respectively. The potential high end of the range is presently estimated at
approximately $480 million, including approximately $245 million in the unlikely
event Niagara Mohawk is required to assume 100% responsibility at non-owned
sites. Niagara Mohawk increased its environmental liability $20 million in 1999
as compared to 1998 primarily as a result of the availability of information on
certain sites resulting from progress made on feasibility studies. The
probabilistic method was used to determine the amount to be accrued for 24 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 remediation obligations to be recovered from ratepayers. PowerChoice and
the gas settlements provide for the continued application of deferral accounting
for expense recognition resulting from this effort.
Niagara Mohawk recently informed the DEC in response to an October 1999 request
for information, of 24 additional former manufactured gas plant sites that it
may be associated with, including 2 sites that are currently owned by Niagara
Mohawk. Niagara Mohawk is unable to predict what further action the DEC may
take with respect to these sites.
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 December 31, 1999. The surface water-based portions of
Niagara Mohawk's Harbor Point site are subject to continuing feasibility study
evaluations and review by the DEC. 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. 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. The case management order, as amended by the
Court, establishes February 29, 2000 as the trial ready date. As a result,
Niagara Mohawk cannot predict the outcome of the pending litigation against the
defendants or the allocation of Niagara Mohawk's share of the costs to remediate
the Harbor Point and surrounding sites.
CONSTRUCTION PROGRAM: Niagara Mohawk is committed to an ongoing construction
program to assure transmission and delivery of its electric and gas services.
Niagara Mohawk presently estimates that the construction program for the years
2000 through 2002 will require approximately $678 million, excluding AFC and
nuclear fuel. For the years 2000 through 2002, the estimates, in millions, are
$219, $229, and $230, respectively, which includes amounts relating to Niagara
Mohawk's nuclear assets through June 2000, its Albany plant through March 2000,
and Niagara Mohawk's 25 percent ownership share in the Roseton plant through
December 2000. If the nuclear sale does not occur, Niagara Mohawk estimates it
will incur expenditures for construction and nuclear fuel of $69 million for
2000 and $32 million and $67 million for 2001 and 2002, respectively. Any delay
in the timing or outcome of these remaining generation asset sales will effect
Niagara Mohawk's capital expenditure requirements.
NOTE 9. FAIR VALUE OF FINANCIAL AND DERIVATIVE FINANCIAL INSTRUMENTS
The discussion that follows covers Holdings and Niagara Mohawk and its
subsidiaries. When necessary, specific reference is made to the subsidiary
company. The figures for Holdings and Niagara Mohawk differ only in the Cash
and temporary cash investments. All other figures shown for Holdings are the
same for Niagara Mohawk.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND TEMPORARY CASH INVESTMENTS: The carrying amount approximates fair
value because of the short maturity of the financial instruments.
LONG-TERM DEBT AND MANDATORILY REDEEMABLE PREFERRED STOCK: The fair value of
fixed rate long-term debt and redeemable preferred stock is estimated using
quoted market prices where available or discounting remaining cash flows at
Niagara Mohawk's incremental borrowing rate. The carrying value of NYSERDA
bonds and other long-term debt are considered to approximate fair value.
DERIVATIVE FINANCIAL INSTRUMENTS: The fair value of futures and forward
contracts are determined using quoted market prices and broker quotes. (See
Note 8 for a discussion of the financial sharing agreement that Niagara Mohawk
has entered into in connection with the announced sale of the nuclear generation
assets.)
SWAP CONTRACTS: Niagara Mohawk has two different types of swap contracts; the
IPP indexed swap contracts and the swap contracts resulting from the sale of
Niagara Mohawk's Huntley and Dunkirk coal-fired generation plants. The terms of
the two types of contracts are as follows:
- - IPP INDEXED SWAP CONTRACTS - Niagara Mohawk, as part of the MRA, entered
into restated contracts with eight IPPs. The contracts have a term of ten
years and are structured as indexed swap contracts where Niagara Mohawk
receives or makes payments to the eight IPPs based upon the differential
between the contract price and a market reference price for electricity.
Niagara Mohawk has recorded the liability for these contractual obligation
and recorded a corresponding regulatory asset since payments under these
restated contracts are authorized and are currently being recovered under
PowerChoice. The amount of this liability and regulatory asset will
fluctuate as estimates of future market and contract prices change over the
term of the contracts, and will decrease over the life of the contract as
notional quantities are settled.
The contract prices are fixed for the first two years changing to an indexed
pricing formula primarily related to gas prices, thereafter. Contract
quantities are fixed for each year of the full ten-year term of the contracts
and average 4.1 million MWh. The indexed pricing structure ensures that the
price paid for energy and capacity will fluctuate relative to the underlying
market cost of gas and general indices of inflation.
- - HUNTLEY AND DUNKIRK GENERATING STATION SWAP CONTRACTS - As part of the
transaction to sell the Huntley and Dunkirk coal-fired generation plants,
Niagara Mohawk entered into PPAs to purchase energy and capacity from the
buyer, NRG Energy, Inc. ("NRG"). Niagara Mohawk was required to purchase a
portion of the energy generated by the two coal-fired plants; however, it had
call options to purchase additional energy if needed. The aggregate energy
and capacity costs in the PPAs were above forecasted future market prices.
The PPAs converted to financial swaps ("swaps") on December 1, 1999 and have
the same economic terms as the energy contracts, with no physical delivery o
energy.
The agreements expire in June of 2003. As of December 31, 1999, Niagara
Mohawk has recorded a $56.4 million swap contract liability for the present
value of the difference between the contract energy prices and projected
market prices and has recorded a corresponding swap contract regulatory
asset. The asset and liability will be amortized over the remaining term of
the swaps as nominal energy quantities are settled and may be adjusted as
periodic reassessments are made of future energy prices. These amounts are
included with the swap contract asset and liability.
The agreements to purchase capacity and energy began at the sale date of the
assets (June 1999). Base quantities were set by the contract with a call
option on additional amounts. The contracts converted to financial swaps at
December 1, 1999 triggered by the ISO implementation. Contract quantities
average 2.9 million MWh annually. These agreements expire in June 2003.
In connection with the pending sale of the Albany plant, Niagara Mohawk has
entered into a contract with the new owner that is intended to compensate PSEG
in the near term for the costs of running the plant. This contract will be
recorded as a financial agreement at the time of the closing on the sale. 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. 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. This combination of a swap
with one party having an option is called a swaption. If the market price is
expected to be higher than the contract price, Niagara Mohawk would likely
exercise the option, elect a call amount, and PSEG will make a swap payment to
Niagara Mohawk. If the market price is expected to be below the contract price,
Niagara Mohawk would not likely choose to name a call amount, 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 expects to account for this contract as a hedge of
future purchase commitments upon the closing of the sale, expected to occur in
the first quarter of 2000. The costs associated with the Albany contract are
recoverable under Niagara Mohawk's PowerChoice rates.
At December 31, 1999, Niagara Mohawk projects that it will make the following
payments in connection with the IPP and Huntley and Dunkirk swap contracts for
the years 2000 to 2004, and thereafter:
<TABLE>
<CAPTION>
Projected
Payment
(in thousands
Year of dollars)
- ---------- ---------------
<S> <C>
2000 . . . $ 106,866
2001 . . . 120,253
2002 . . . 124,109
2003 . . . 114,166
2004 . . . 100,907
Thereafter 367,816
</TABLE>
The financial instruments held or issued by Holdings and Niagara Mohawk are for
purposes other than trading. The estimated fair values of their financial
instruments are as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
1999 1998
CARRYING FAIR Carrying Fair
At December 31, AMOUNT VALUE Amount Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NIAGARA MOHAWK
Cash and temporary cash
investments $ 72,479 $ 72,479 $ 172,998 $ 172,998
HOLDINGS
Cash and temporary cash
investments $ 116,164 $ 116,164 $ 172,998 $ 172,998
Mandatorily redeemable
preferred stock 68,990 66,564 76,610 86,444
Long-term debt:
First Mortgage bonds 2,439,585 2,380,992 2,741,305 2,905,141
Senior Notes 2,523,626 2,423,611 3,293,784 3,324,777
Medium-term notes - - 20,000 23,290
Promissory notes 413,760 413,760 413,760 413,760
Other 269,827 269,827 253,195 253,195
Swap contract
regulatory asset* 663,718 663,718 693,362 693,362
* Includes a portion reported in MRA Regulatory Asset
</TABLE>
Niagara Mohawk Energy's marketing activities generally consist of transactions
entered into to hedge the market fluctuations of contractual and anticipated
commitments. Gas futures and electric forward contracts are used for hedging
purposes. Changes in market value of futures and forward contracts relating to
hedged items are deferred until the physical transaction occurs, at which time,
income or loss is recognized.
At December 31, 1999, Niagara Mohawk Energy's open positions consisted of long
and short gas futures and long electric forward contracts with approximate fair
values as follows:
<TABLE>
<CAPTION>
1999 1998
FAIR VALUE UNITS Fair Value Units
POSITIONS (IN MILLIONS) (IN MILLIONS) (in millions) (in millions)
- ---------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Gas - Long $ 9.6 3.9 DTH $ 4.8 2.5 Dth
Gas - Short $ 4.7 2.0 DTH $ 1.2 0.7 Dth
Electric - Long $ 4.1 4.7 MWH $ 2.2 0.5 MWh
Electric - Short - - - -
</TABLE>
The fair value of both the open gas and electric positions for non-trading
purposes at December 31, 1999 and 1998, as well as the effect of these
activities on Holdings' results of operations for the same period endings were
not material.
The fair value of futures and forward contracts are determined using quoted
market prices.
Niagara Mohawk's investments in debt and equity securities consist of trust
funds for the purpose of funding the nuclear decommissioning of Unit 1 and its
share of Unit 2 (see Note 3 - Nuclear Plant Decommissioning), investments held
by Opinac and a trust fund for certain pension benefits. Holdings and Niagara
Mohawk have classified all investments in debt and equity securities as
available for sale and have recorded all such investments at their fair market
value at December 31, 1999.
The nuclear decommissioning trust funds comprise over 73% of the investments in
debt and equity securities. The agreement to sell the nuclear generation assets
includes the transfer of the decommissioning trust funds, at an agreed amount,
to the buyer. In anticipation of that sale, and to reduce the risk of a
detrimental market shift affecting the funds, Niagara Mohawk converted all
decommissioning assets to high grade, short-term commercial paper in October and
November of 1999. The instruments purchased have specified coupon rates and
maturity dates of generally 1 to 4 months. Remaining cash is invested in an
overnight, short-term investment fund. Due to the current makeup of the funds
the book and market values are approximately equal therefore the decommissioning
funds no longer experience any substantial unrealized gains or losses. These
Actions also increased the sales activity for 1999 affecting both the proceeds
reported and the realized gains and losses.
The proceeds from the sale of investments were $463.9 million, $202.1 million,
and $159.7 million in 1999, 1998, and 1997, respectively. Net realized and
unrealized gains and losses related to the nuclear decommissioning trust are
reflected in "Accumulated depreciation and amortization" on the Consolidated
Balance Sheets, which is consistent with the method used by Niagara Mohawk to
account for the decommissioning costs recovered in rates. The unrealized gains
and losses related to the investments held by the pension trust and Opinac for
the period ending December 31, 1999 are not material to Holdings' results of
operations.
The recorded fair values and cost basis of Holdings and Niagara Mohawk's
investments in debt and equity securities is as follows:
<TABLE>
<CAPTION>
(in thousands of dollars)
AT DECEMBER 31, 1999 1998
GROSS UNREALIZED FAIR Gross Unrealized Fair
Security Type COST GAIN (LOSS) VALUE Cost Gain (Loss) Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Obligations $ - $ - $ - $ - $ 19,291 $ 2,621 $ (117) $ 21,795
Commercial Paper 346,181 1,812 - 347,993 82,930 1,269 - 84,199
Tax Exempt
Obligations 8,143 33 (311) 7,865 104,538 6,786 (164) 111,160
Corporate
Obligations 8,057 1,532 (1) 9,588 100,736 22,684 (2,856) 120,564
Other 18,542 - - 18,542 6,666 - - 6,666
-------- -------- ------- --------- -------- ------- -------- --------
$380,923 $ 3,377 $ (312) $383,988 $314,161 $33,360 $(3,137) $344,384
======== ======== ======== ========= ======== ======= ======== ========
</TABLE>
Using the specific identification method to determine cost, the gross realized
gains and gross realized losses were:
<TABLE>
<CAPTION>
(In thousands of dollars)
Year ended December 31, 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Realized gains. . . . . $ 26,609 $5,350 $3,487
Realized losses . . . . 15,140 2,221 686
</TABLE>
The contractual maturities of Holdings and Niagara Mohawk's investments in debt
securities is as follows:
<TABLE>
<CAPTION>
At December 31, 1999 Fair Value Cost
- -------------------- ----------- --------
<S> <C> <C>
Less than 1 year . . $ 335,155 $333,343
1 year to 5 years. . 1,404 1,420
5 years to 10 years. 2,061 2,098
Due after 10 years . 4,399 4,625
</TABLE>
<PAGE>
NOTE 10. STOCK BASED COMPENSATION
Under Holdings' stock compensation plans, stock units and stock appreciation
rights ("SARs") may be granted to officers, key employees and directors. In
addition, Holdings' plans allow for the grant of stock options to officers. The
table below sets forth the activity under Holdings' stock compensation plans for
the years 1997 through 1999. On March 18, 1999, Niagara Mohawk's common stock
was exchanged for Holdings' common stock and the SARs, the stock units and the
options were likewise exchanged. (See Note 1.)
<TABLE>
<CAPTION>
SARS UNITS OPTIONS
---------- --------- --------
<S> <C> <C> <C>
OUTSTANDING AT DECEMBER 31, 1996 790,600 460,728 298,583
Granted. . . . . . . . . . . . . 296,300 208,750 -
Exercised. . . . . . . . . . . . - (2,514) -
Forfeited. . . . . . . . . . . . - - -
---------- --------- --------
OUTSTANDING AT DECEMBER 31, 1997 1,086,900 666,964 298,583
Granted. . . . . . . . . . . . . 1,723,500 488,428 -
Exercised. . . . . . . . . . . . (42,700) (211,403) -
Forfeited. . . . . . . . . . . . (28,000) (10,550) (12,000)
---------- --------- --------
OUTSTANDING AT DECEMBER 31, 1998 2,739,700 933,439 286,583
Granted. . . . . . . . . . . . . 253,200 148,531 -
Exercised. . . . . . . . . . . . (5,500) (173,991) -
Forfeited. . . . . . . . . . . . (134,838) (42,985) (39,208)
---------- --------- --------
OUTSTANDING AT DECEMBER 31, 1999 2,852,562 864,994 247,375
========== ========= ========
</TABLE>
Stock units are payable in cash at the end of a defined vesting period,
determined at the date of the grant, based upon Holdings' stock price for a
defined period. SARs become exercisable, as determined at the grant date, and
are payable in cash based upon the increase in Holdings' stock price from a
specified level. As such, for these awards, compensation expense is recognized
over the vesting period of the award based upon changes in Holdings' stock price
for that period. Options granted over the period 1992 to 1995 are currently
exercisable with expirations ten years from the grant date. These options are
all considered to be antidilutive for EPS calculations. Included in Holdings
and Niagara Mohawk's results of operations for the years ending 1999, 1998 and
1997, is approximately $(1.9) million, $9.8 million and $3.2 million,
respectively, related to these plans.
As permitted by SFAS No. 123 - "Accounting for Stock-Based Compensation" ("SFAS
No. 123") Holdings' has elected to follow Accounting Principles Board Opinion
No. 25-"Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations in accounting for its employee stock options. Since stock units
and SARs are payable in cash, the accounting under APB No. 25 and SFAS No. 123
is the same. Therefore, the pro forma disclosure of information regarding net
income, as required by SFAS No. 123, relates only to Holdings' outstanding stock
options, the effect of which is immaterial to the financial statements for the
years ended 1999, 1998 and 1997. There is no effect on earnings per share for
these years resulting from the pro-forma adjustments to net income.
NOTE 11. SEGMENT INFORMATION
Holdings is organized between regulated and unregulated activities. Within the
regulated business, Niagara Mohawk, which has 98% of total assets and 94% of
total revenues, there are two principal business units: Energy Delivery and
Nuclear. As discussed in Note 2, Niagara Mohawk is in the process of selling
its remaining fossil and nuclear generation assets. Although there are two
identified business units, financial performance and resource allocation are
measured and managed at the regulated business level.
Holdings and Niagara Mohawk use a shareholder value based management system. The
measure of shareholder value creation is Economic Value Added ("EVA"). EVA (tm)
is the financial measure used to evaluate projects, allocate resources and
report and provide performance incentives.
Holdings' unregulated activities do not meet the reporting thresholds of SFAS
No. 131, but comprise a substantial portion of "other" in the accompanying
table.
<TABLE>
<CAPTION>
Depreciation Federal &
Total & Foreign Economic Construction Identifiable
(In thousands of dollars) Revenues Amortization* Income Taxes** Value Added Expenditures Assets
- ------------------------- -------------- -------------- ---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1999
REGULATED COMPANY . . . . $ 3,827,340 $ 731,429 $ 18,883 $ (732,041) $ 298,081 $ 12,445,608
OTHER . . . . . . . . . . 257,645 543 10 (27,374) - 224,827
ELIMINATIONS. . . . . . . (799) - 287 - - -
-------------- -------------- ---------------- ------------- ------------- -------------
TOTAL CONSOLIDATED. $ 4,084,186 $ 731,972 $ 19,180 $ (759,415) $ 298,081 $ 12,670,435
========================= ============== ============== ================ ============= ============= =============
1998
Regulated Company . . . . $ 3,826,373 $ 484,250 $ (63,131) $ (697,948) $ 392,200 $ 13,733,055
Other . . . . . . . . . . 169,086 502 (3,597) (31,471) - 128,132
Eliminations. . . . . . . (3,009) - - - - -
-------------- -------------- ---------------- ------------- -------------- -------------
Total Consolidated. $ 3,992,450 $ 484,752 $ (66,728) $ (729,419) $ 392,200 $ 13,861,187
========================= ============== ============== ================ ============= ============= =============
1997
Regulated Company . . . . $ 3,966,404 $ 339,641 $ 125,401 $ (650,188) $ 290,757 $ 9,431,763
Other . . . . . . . . . . 114,444 598 1,194 (32,009) - 152,378
Eliminations. . . . . . . (2,353) - - - - -
-------------- -------------- ---------------- ------------- ------------- -------------
Total Consolidated. $ 4,078,495 $ 340,239 $ 126,595 $ (682,197) $ 290,757 $ 9,584,141
========================= ============== ============== ================ ============= ============= =============
</TABLE>
* Includes amortization of the MRA regulatory asset in 1998 and 1999.
** Excludes the tax benefit of $12.189 million associated with the extraordinary
item for the loss on extinguishment of debt recorded in 1999.
EVA (tm) 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.
In each of the three years, an adjustment was made to include the recognition of
the liability for remaining future over-market contracts with IPPs and the
corresponding recognition of imputed interest on that liability. In addition,
there was a significant adjustment in 1998 to reflect the re-capitalization for
EVA (tm) purposes of the PowerChoice charge and the incremental operating
expenses associated with the January 1998 ice storm.
EVA (tm)is further segmented between EVA (tm) from Operations and EVA (tm)
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 Economic Value Added to total consolidated net
income for the years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 1999 1998 1997
- ------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Economic Value Added:
Operations. . . . . . . . . . . . $ (261,697) $ (248,624) $ (266,459)
IPP-Related . . . . . . . . . . . (497,718) (480,795) (415,738)
----------- ----------- -----------
Total Economic Value Added. . . . . . (759,415) (729,419) (682,197)
Charge for Use of Investor's Capital. 1,163,596 1,225,437 1,237,499
Adjustments for Significant Items . . (58,536) (351,388) (189,938)
Interest Charges (net of taxes) . . . (320,119) (265,455) (182,029)
Extraordinary item (net of taxes) . . (23,806) - -
Niagara Mohawk Preferred Dividends. . (36,808) (36,555) (37,397)
----------- ----------- -----------
Consolidated Net Income (loss) . . $ (35,088) $ (157,380) $ 145,938
=========== =========== ===========
</TABLE>
<PAGE>
NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Operating revenues, operating income, net income (loss) and earnings (loss) per
common share by quarters from 1999, 1998 and 1997, respectively, are shown in
the following tables. Quarterly information for Holdings prior to 1999 is
Niagara Mohawk's, but has been reclassified to reflect Holdings' structure.
Holdings and Niagara Mohawk, in their opinion, have included all adjustments
necessary for a fair presentation of the results of operations for the quarters.
Due to the seasonal nature of the regulated utility business, the annual amounts
are not generated evenly by quarter during the year. Niagara Mohawk's quarterly
results of operations reflect the seasonal nature of its business, with peak
electric loads in summer and winter periods. Gas sales peak in the winter.
<TABLE>
<CAPTION>
NIAGARA MOHAWK HOLDINGS, INC.
-----------------------------
In thousands of dollars Basic and
Diluted
Net Earnings
Operating Operating Income (Loss) per
Quarter Ended Revenues Income (Loss) (Loss) Common Share
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31,. 1999 $ 1,016,504 $ 94,830 $ (18,166) ($0.10)
1998 904,066 99,666 (26,457) (0.14)
1997 1,011,589 81,137 (1,355) (0.01)
September 30, 1999 $ 1,034,227 $ 98,321 $ (31,707) ($0.17)
1998 979,774 111,231 8,516 0.05
1997 942,636 108,049 22,330 0.15
June 30,. . . 1999 $ 914,321 $ 81,153 $ (36,047) ($0.19)
1998 944,684 (193,538) (150,579) (1.04)
1997 957,091 129,000 31,340 0.22
March 31, . . 1999 $ 1,119,134 $ 251,848 $ 50,832 $ 0.27
1998 1,163,897 131,569 11,140 0.08
1997 1,167,179 228,493 93,623 0.65
</TABLE>
<TABLE>
<CAPTION>
NIAGARA MOHAWK POWER CORPORATION
--------------------------------
In thousands of dollars
-----------------------
Net
Operating Operating Income
Quarter Ended Revenues Income (Loss) (Loss)
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31,. 1999 $ 933,562 $ 95,797 $ (10,811)
1998 886,432 103,263 (17,433)
1997 960,304 86,024 7,881
September 30, 1999 $ 927,296 $ 99,006 $ (23,443)
1998 930,631 110,287 17,653
1997 896,570 110,174 31,683
June 30,. . . 1999 $ 870,461 $ 82,464 $ (27,663)
1998 910,906 (180,824) (141,408)
1997 945,698 130,704 40,749
March 31, . . 1999 $1,096,021 $ 254,284 $ 59,856
1998 1,098,404 134,297 20,363
1997 1,163,832 231,937 103,022
</TABLE>
During the second and third quarters of 1999, Holdings and Niagara Mohawk
recorded an extraordinary item for the early extinguishment of debt of $10.8
million or 6 cents per share and $13.0 million or 7 cents per share,
respectively. In the first quarter of 1998, Holdings and Niagara Mohawk
expensed $70.2 million associated with the January 1998 ice storm (of which
$62.9 million was considered incremental) or 28 cents per common share. In the
second quarter of 1998, Holdings and Niagara Mohawk recorded a non-cash
write-off of $263.2 million ($1.18 per common share) associated with the portion
of the MRA disallowed in rates by the PSC.
<PAGE>
ELECTRIC STATISTICS
<TABLE>
<CAPTION>
(MILLIONS OF KWH)
1999 1998 1997
------------- ----------- ----------
<S> <C> <C> <C>
REGULATED ELECTRIC SALES:
Residential. . . . . . . . . . . . . 10,227 9,643 9,905
Commercial . . . . . . . . . . . . . 11,838 11,560 11,552
Industrial . . . . . . . . . . . . . 6,985 6,843 7,191
Industrial-Special . . . . . . . . . 4,506 4,568 4,507
Other. . . . . . . . . . . . . . . . 200 241 235
Other electric systems . . . . . . . 1,666 3,577 3,746
------------- ----------- ----------
Total regulated electric sales. . 35,422 36,432 37,136
UNREGULATED ELECTRIC SALES: . . . . . . 6,355 4,571 3,257
------------- ----------- ----------
TOTAL ELECTRIC SALES. . . . . . . 41,777 41,003 40,393
============= =========== ==========
(THOUSANDS OF DOLLARS)
REGULATED ELECTRIC REVENUES:
Residential. . . . . . . . . . . . . $ 1,250,295 1,201,697 $1,227,245
Commercial . . . . . . . . . . . . . 1,192,390 1,220,067 1,233,417
Industrial . . . . . . . . . . . . . 485,009 480,942 531,164
Industrial-Special . . . . . . . . . 65,178 63,870 61,820
Other. . . . . . . . . . . . . . . . 50,294 55,119 54,545
Other electric systems . . . . . . . 47,851 94,756 83,794
Distribution of energy . . . . . . . 56,068 30,761 543
Transmission of energy . . . . . . . 100,455 94,545 100,716
Miscellaneous. . . . . . . . . . . . 217 19,387 16,197
------------ ----------- ----------
Total regulated electric revenue. 3,247,757 3,261,144 3,309,441
UNREGULATED ELECTRIC REVENUE: . . . . . 217,144 129,357 86,170
------------- ---------- ----------
TOTAL ELECTRIC REVENUE. . . . . . $ 3,464,901 $3,390,501 $3,395,611
============= =========== ==========
REGULATED ELECTRIC
CUSTOMERS (AVERAGE) . . . . . . . 1,550,225 1,550,770 1,553,958
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(THOUSANDS OF DTH)
1999 1998 1997
----------- -------- --------
<S> <C> <C> <C>
REGULATED GAS SALES:
Residential . . . . . . . . . . . 51,624 47,250 55,203
Commercial. . . . . . . . . . . . 16,505 17,023 22,069
Industrial. . . . . . . . . . . . 453 752 1,381
----------- -------- --------
Total regulated sales. . . . . 68,582 65,025 78,653
Other gas systems . . . . . . . . 10 17 28
Spot market . . . . . . . . . . . 1,834 4,501 2,451
Transportation of customer -
owned gas. . . . . . . . . . . 137,240 127,850 152,813
----------- -------- --------
Total regulated gas delivered. 207,666 197,393 233,945
UNREGULATED GAS SALES: . . . . . . . 11,020 13,863 6,762
----------- -------- --------
TOTAL GAS SALES. . . . . . . . 218,686 211,256 240,707
=========== ======== ========
(THOUSANDS OF DOLLARS)
REGULATED GAS REVENUES:
Residential . . . . . . . . . . . $ 390,208 $378,150 $436,136
Commercial. . . . . . . . . . . . 107,669 110,499 148,213
Industrial. . . . . . . . . . . . 2,340 3,618 6,549
Other gas systems . . . . . . . . 57 69 130
Spot market . . . . . . . . . . . 4,277 8,749 6,346
Transportation of customer -
owned gas. . . . . . . . . . . 58,032 54,091 55,657
Miscellaneous . . . . . . . . . . 17,000 10,053 3,932
----------- -------- --------
Total regulated gas revenues . 579,583 565,229 656,963
UNREGULATED GAS REVENUES:. . . . . . 31,643 36,047 24,267
----------- -------- --------
TOTAL GAS REVENUES . . . . . . $ 611,226 $601,276 $681,230
=========== ======== ========
REGULATED GAS
CUSTOMERS (AVERAGE). . . . . . 541,956 530,633 528,566
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Holdings and Niagara Mohawk have nothing to report for this item.
EXHIBIT 11
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
COMPUTATION OF AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
<TABLE>
<CAPTION>
Average Number
of Shares Out-
standing as shown
on Consolidated
(1) (2) Statements of Income
Shares of Number (3) (3 divided by
Common of Days Share Days number of days
Year Ended December 31, Stock Outstanding (2 x 1) in year)
- ----------------------------- ----------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
1999
- ----
JANUARY 1 - MARCH 18 187,364,863 77 14,427,094,451
MARCH 18 - DECEMBER 31 (Note 1) 187,364,863 288 53,961,080,544
SHARES REPURCHASED BY
NIAGARA MOHAWK 10,000,000 (a) 246,683,200
----------- --------------
177,364,863 68,141,491,795 186,689,019
=========== ============== ===========
1998
- ----
January 1 - December 31 144,419,351 365 52,713,063,115
Shares issued in accordance
with the MRA Agreement
June 30 42,945,512 185 7,944,919,720
----------- --------------
187,364,863 60,657,982,835 166,186,254
=========== ============== ===========
1997
- ----
January 1 - December 31 144,365,214 365 52,693,303,110
Shares issued at various
times during the period -
Acquisition - Syracuse
Suburban Gas Company, Inc. 54,137 (b) 14,260,096
----------- --------------
144,419,351 52,707,563,206 144,404,283
=========== ============== ===========
</TABLE>
(a) Number of days outstanding not shown as shares represent an
accumulation of purchases of Holdings' common stock by Niagara Mohawk
during the last quarter of 1999. Shares days for the shares repurchased
are based on the total number of days each share was repurchased during
the year.
(b) Number of days outstanding not shown as shares represent an accumulation
of weekly, monthly and quarterly issues throughout the year. Share days
for shares issued are based on the total number of days each share was
outstanding during the year.
Note 1: On March 18, 1999, the common stock of Niagara Mohawk was exchanged
on a share-for-share basis with Holdings. The number of shares of
common stock outstanding for 1998 and 1997 is Niagara Mohawk's.
Note 2: Earnings per share calculated on both a basic and diluted basis are
the same due to the effects of rounding.
EXHIBIT 12A
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
STATEMENT SHOWING COMPUTATIONS OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999
------------
<S> <C>
A. Net Income (Loss) per
Statements of Income . . $ (35,088)
B. Taxes Based on Income or
Profits. . . . . . . . . 6,361
------------
C. Earnings, Before Income
Taxes. . . . . . . . . . (28,727)
D. Fixed Charges (a) 554,973
------------
E. Earnings Before Income
Taxes and Fixed Charges. $ 526,246
============
F. Ratio of Earnings to
Fixed Charges (E/D). . . 0.95
============
</TABLE>
(a) Includes a portion of rentals deemed representative of the interest
factor of $25,673.
EXHIBIT 12B
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT SHOWING COMPUTATIONS OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997 1996 1995
--------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
A. Net Income (Loss) per
Statements of Income . . $ (2,062) $(120,825) $183,335 $110,390 $248,036
B. Taxes Based on Income or
Profits. . . . . . . . . 6,064 (66,728) 126,595 66,221 159,393
--------- ---------- --------- --------- --------
C. Earnings, Before Income
Taxes. . . . . . . . . . 4,002 (187,553) 309,930 176,611 407,429
D. Fixed Charges (a) 518,165 433,313 304,451 308,323 314,973
--------- --------- --------- --------- --------
E. Earnings Before Income
Taxes and Fixed Charges. 522,167 245,760 614,381 484,934 722,402
========= ========= ========= ========= ========
PREFERRED DIVIDEND FACTOR:
F. Preferred Dividend
Requirements . . . . . . $ 36,808 $ 36,555 $ 37,397 $ 38,281 $ 39,596
========= ========== ========= ======== ========
G. Ratio of Pre-Tax Income
to Net Income (C/A). . . N/A N/A 1.69 1.60 1.64
H. Preferred Dividend Factor
(FxG) . . . . . . . . . $ 36,808 $ 36,555 $ 63,201 $ 61,250 $ 64,937
I. Fixed Charges . . . . . 518,165 433,313 304,451 308,323 314,973
--------- ---------- --------- --------- --------
J. Fixed Charges and Preferred
Dividends Combined . . . $554,973 $ 469,868 $367,652 $369,573 $379,910
========= ========== ========= ========= ========
K. Ratio of Earnings to
Fixed Charges (E/D). . . 1.01 0.57 2.02 1.57 2.29
========= ========== ========= ========= ========
L. Ratio of Earnings to Fixed
Charges and Preferred
Dividends Combined (E/J) 0.94 0.52 1.67 1.31 1.90
========= ========== ========= ========= ========
</TABLE>
(a) Includes a portion of rentals deemed representative of the interest
factor: $25,673, $25,907 for 1998, $26,149 for 1997, $26,600 for 1996,
and $27,312 for 1995.
N/A - Not applicable due to net loss displayed in line A.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Niagara Mohawk
Holdings, Inc. Registration Statement on Form S-8 (No. 333-13781) and in the
Prospectus constituting part of the Registration Statement on Form S-3 (No.
333-55923) and incorporated by reference in Niagara Mohawk Power Corporation
Registration Statements on Form S-8 (Nos. 33-36189 and 33-42771) and in the
Prospectus constituting part of the Registration Statements on Form S-3 (Nos.
33-50703, 33-51073, 33-54827 and 33-55546) and in the Prospectus/Proxy Statement
constituting part of the Registration Statement on Form S-4 (No. 333-49769) of
our report dated January 27, 2000 relating to the financial statements, which
appears in the Annual Report to Shareholders, which is incorporated in this
Annual Report on Form 8-K.
Yours very truly,
/s/PricewaterhouseCoopers LLP
- -----------------------------
PRICEWATERHOUSECOOPERS LLP
Syracuse, New York
February 10, 2000
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME, AND
CONSOLIDATED STATEMENT OF CASH FLOWS OF NIAGARA MOHAWK HOLDINGS, INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001079182
<NAME> NIAGARA MOHAWK HOLDINGS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 5888242
<OTHER-PROPERTY-AND-INVEST> 484735
<TOTAL-CURRENT-ASSETS> 674239
<TOTAL-DEFERRED-CHARGES> 5517786
<OTHER-ASSETS> 105433
<TOTAL-ASSETS> 12670435
<COMMON> 1874
<CAPITAL-SURPLUS-PAID-IN> 2520430
<RETAINED-EARNINGS> 610952
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2976089
61370
440000
<LONG-TERM-DEBT-NET> 5042588
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 613740
7620
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3529028
<TOT-CAPITALIZATION-AND-LIAB> 12670435
<GROSS-OPERATING-REVENUE> 4084186
<INCOME-TAX-EXPENSE> 19180
<OTHER-OPERATING-EXPENSES> 3558034
<TOTAL-OPERATING-EXPENSES> 3558034
<OPERATING-INCOME-LOSS> 526152
<OTHER-INCOME-NET> 3795
<INCOME-BEFORE-INTEREST-EXPEN> 529947
<TOTAL-INTEREST-EXPENSE> 485240
<NET-INCOME> (35088)
36808
<EARNINGS-AVAILABLE-FOR-COMM> (35088)
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 758431
<EPS-BASIC> (.19)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME,
AND CONSOLIDATED STATEMENT OF CASH FLOWS OF NIAGARA MOHAWK POWER
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000071932
<NAME> NIAGARA MOHAWK POWER CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 5888242
<OTHER-PROPERTY-AND-INVEST> 349718
<TOTAL-CURRENT-ASSETS> 585978
<TOTAL-DEFERRED-CHARGES> 5517786
<OTHER-ASSETS> 103884
<TOTAL-ASSETS> 12445608
<COMMON> 187365
<CAPITAL-SURPLUS-PAID-IN> 2355986
<RETAINED-EARNINGS> 398987
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2785171
61370
440000
<LONG-TERM-DEBT-NET> 5042588
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 613740
7620
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3495119
<TOT-CAPITALIZATION-AND-LIAB> 12445608
<GROSS-OPERATING-REVENUE> 3827340
<INCOME-TAX-EXPENSE> 18883
<OTHER-OPERATING-EXPENSES> 3295789
<TOTAL-OPERATING-EXPENSES> 3295789
<OPERATING-INCOME-LOSS> 531551
<OTHER-INCOME-NET> (5682)
<INCOME-BEFORE-INTEREST-EXPEN> 525869
<TOTAL-INTEREST-EXPENSE> 485240
<NET-INCOME> (2061)
36808
<EARNINGS-AVAILABLE-FOR-COMM> (38869)
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 798730
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
