-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RLEZV8NQU8hw67aR+KYKDcAjBaz56W459TCS1B0zh1TANz460I40viMmeG76wQ8s q3jRwsLkurDw40mKDjC3BA== 0000071932-96-000036.txt : 19961118 0000071932-96-000036.hdr.sgml : 19961118 ACCESSION NUMBER: 0000071932-96-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NIAGARA MOHAWK POWER CORP /NY/ CENTRAL INDEX KEY: 0000071932 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 150265555 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02987 FILM NUMBER: 96663970 BUSINESS ADDRESS: STREET 1: 300 ERIE BLVD W CITY: SYRACUSE STATE: NY ZIP: 13202 BUSINESS PHONE: 3154741511 MAIL ADDRESS: STREET 1: 300 ERIE BLVD W CITY: SYRACUSE STATE: NY ZIP: 13202 FORMER COMPANY: FORMER CONFORMED NAME: CENTRAL NEW YORK POWER CORP DATE OF NAME CHANGE: 19710419 10-Q 1 10-Q 9 MONTHS 1996 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 - ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-2987. NIAGARA MOHAWK POWER CORPORATION - -------------------------------- (Exact name of registrant as specified in its charter) State of New York 15-0265555 - ----------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 Erie Boulevard West Syracuse, New York 13202 (Address of principal executive offices) (Zip Code) (315) 474-1511 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $1 par value, outstanding at October 31, 1996 - 144,365,214 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES FORM 10-Q - For the Quarter Ended September 30, 1996 INDEX - ----- PART I. FINANCIAL INFORMATION ------------------------------ Glossary of Terms Item 1. Financial Statements. a) Consolidated Statements of Income - Three Months and Nine Months ended September 30, 1996 and 1995 b) Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 c) Consolidated Statements of Cash Flows - Nine Months ended September 30, 1996 and 1995 d) Notes to Consolidated Financial Statements e) Review by Independent Accountants f) Independent Accountant's Report on the Limited Review of the Interim Financial Information Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION --------------------------- Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. Signature Exhibit Index NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- GLOSSARY OF TERMS - ----------------- TERM DEFINITION - ---- ---------- ALJ New York State PSC Administrative Law Judge COPS Competitive Opportunities Proceeding DSM Demand-Side Management Dth Dekatherms FAC Fuel Adjustment Clause FERC Federal Energy Regulatory Commission GwHrs Gigawatt-hours HYDRA-CO HYDRA-CO Enterprises, Inc. ISO Independent System Operator Kwh Kilowatt-hour NOPR Notice of Proposed Rulemaking NRC Nuclear Regulatory Commission PPA Power Purchase Agreements PRP Potentially responsible party PSC New York State Public Service Commission SFAS Statement of Financial Accounting Standards No. 71 No. 71 "Accounting for the Effects of Certain Types of Regulation" SFAS Statement of Financial Accounting Standards No. 121 No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" Unit 1 Nine Mile Point Nuclear Station Unit No. 1 Unit 2 Nine Mile Point Nuclear Station Unit No. 2 PART 1. FINANCIAL INFORMATION - ----------------------------- ITEM 1. FINANCIAL STATEMENTS. - ----------------------------- NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - ---------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1996 1995 --------- ---------- (In thousands of dollars) OPERATING REVENUES: Electric $ 829,370 $ 829,303 Gas 66,343 57,928 ---------- --------- 895,713 887,231 ---------- --------- OPERATING EXPENSES: Fuel for electric generation 55,129 70,603 Electricity purchased 286,085 251,436 Gas purchased 26,113 17,171 Other operation and maintenance expenses 284,237 200,126 Depreciation and amortization 82,475 79,850 Federal and foreign income taxes (6,287) 28,606 Other taxes 114,555 125,313 ---------- ---------- 842,307 773,105 ---------- ---------- OPERATING INCOME 53,406 114,126 ---------- ---------- OTHER INCOME AND (DEDUCTIONS): Allowance for other funds used during construction 1,138 756 Federal and foreign income taxes 289 301 Other items (net) 4,162 1,222 ---------- ---------- 5,589 2,279 ---------- ---------- INCOME BEFORE INTEREST CHARGES 58,995 116,405 ---------- ---------- INTEREST CHARGES: Interest on long-term debt 68,301 68,330 Other interest 4,550 2,850 Allowance for borrowed funds used during construction (940) (1,716) ---------- ---------- 71,911 69,464 ---------- ---------- NET INCOME/(LOSS) (12,916) 46,941 Dividends on preferred stock 9,609 9,691 ---------- ---------- BALANCE AVAILABLE FOR COMMON STOCK $ (22,525) $ 37,250 ========== ========== Average number of shares of common stock outstanding (in thousands) 144,364 144,330 Balance available per average share of common stock $ (.16) $ .26 Dividends paid per share of common stock $ .00 $ .28 The accompanying notes are an integral part of these financial statements /TABLE
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1996 1995 --------- ---------- (In thousands of dollars) OPERATING REVENUES: Electric $2,484,964 $2,522,788 Gas 534,583 428,072 ---------- ---------- 3,019,547 2,950,860 ---------- ---------- OPERATING EXPENSES: Fuel for electric generation 141,630 148,943 Electricity purchased 874,450 830,840 Gas purchased 296,665 200,828 Other operation and maintenance expenses 693,602 592,062 Depreciation and amortization 246,681 237,314 Federal and foreign income taxes 79,728 137,290 Other taxes 362,013 389,067 ---------- ---------- 2,694,769 2,536,344 ---------- ---------- OPERATING INCOME 324,778 414,516 ---------- ---------- OTHER INCOME AND (DEDUCTIONS): Allowance for other funds used during construction 2,340 1,068 Federal and foreign income taxes 4,950 (7,297) Other items (net) 13,345 19,694 ---------- ---------- 20,635 13,465 ---------- ---------- INCOME BEFORE INTEREST CHARGES 345,413 427,981 ---------- ---------- INTEREST CHARGES: Interest on long-term debt 205,089 197,699 Other interest 6,721 17,427 Allowance for borrowed funds used during construction (2,595) (7,307) ---------- ---------- 209,215 207,819 ---------- ---------- NET INCOME/(LOSS) 136,198 220,162 Dividends on preferred stock 28,760 29,952 ---------- ---------- BALANCE AVAILABLE FOR COMMON STOCK $ 107,438 $ 190,210 ========== ========== Average number of shares of common stock outstanding (in thousands) 144,344 144,328 Balance available per average share of common stock $ .74 $ 1.32 Dividends paid per share of common stock $ .00 $ .84 The accompanying notes are an integral part of these financial statements /TABLE NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - ---------------------------
ASSETS - ------ SEPTEMBER 30, 1996 (UNAUDITED) DECEMBER 31, 1995 ------------------ ---- ------------- (In thousands of dollars) UTILITY PLANT: Electric plant $ 8,592,238 $ 8,543,429 Gas plant 1,066,188 1,017,062 Nuclear fuel 546,742 517,681 Common plant 287,786 281,525 Construction work in progress 261,647 289,604 ---------- ---------- Total utility plant 10,754,601 10,649,301 Less-Accumulated depreciation and amortization 3,801,454 3,641,448 --------- ---------- Net utility plant 6,953,147 7,007,853 --------- ---------- OTHER PROPERTY AND INVESTMENTS 207,910 218,417 --------- ---------- CURRENT ASSETS: Cash, including temporary cash investments of $294,885 and $114,415, respectively 381,057 153,475 Accounts receivable (less allowance for doubtful accounts of $88,500 and $20,000, respectively) 297,908 471,442 Materials and supplies, at average cost: Coal and oil for production of electricity 17,055 27,509 Gas storage 47,936 26,431 Other 132,874 141,820 Prepaid taxes 65,142 17,239 Other 51,346 45,834 ---------- ---------- 993,318 883,750 REGULATORY ASSETS (NOTE 3): Regulatory tax asset 470,198 470,198 Deferred finance charges 239,880 239,880 Deferred environmental restoration costs (Note 2) 225,000 225,000 Unamortized debt expense 81,779 92,548 Postretirement benefits other than pensions 67,149 68,933 Other 161,862 204,253 ---------- ---------- 1,245,868 1,300,812 ---------- ---------- OTHER ASSETS 76,741 67,037 ---------- ---------- $9,476,984 $9,477,869 ========== ========== The accompanying notes are an integral part of these financial statements /TABLE NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------- CAPITALIZATION AND LIABILITIES - ------------------------------
SEPTEMBER 30, 1996 (UNAUDITED) DECEMBER 31, 1995 ------------------ ----------------- (In thousands of dollars) CAPITALIZATION: COMMON STOCKHOLDERS' EQUITY: Common stock - $1 par value; authorized 185,000,000 shares; issued 144,365,214 and 144,332,123 shares, respectively $ 144,365 $ 144,332 Capital stock premium and expense 1,784,473 1,784,247 Retained earnings 692,811 585,373 ---------- ---------- 2,621,649 2,513,952 ---------- ---------- CUMULATIVE PREFERRED STOCK, AUTHORIZED 3,400,000 SHARES, $100 PAR VALUE: Non-redeemable (optionally redeemable), issued 2,100,000 shares 210,000 210,000 Redeemable (mandatorily redeemable), issued 240,000 and 258,000 shares, respectively 22,200 24,000 CUMULATIVE PREFERRED STOCK, AUTHORIZED 19,600,000 SHARES, $25 PAR VALUE: Non-redeemable (optionally redeemable), issued 9,200,000 shares 230,000 230,000 Redeemable (mandatorily redeemable), issued 3,008,005 and 3,208,005 shares, respectively 64,530 72,850 ---------- ---------- 526,730 536,850 ---------- ---------- Long-term debt 3,476,926 3,582,414 ---------- ---------- TOTAL CAPITALIZATION 6,625,305 6,633,216 ---------- ---------- CURRENT LIABILITIES: Long-term debt due within one year 93,083 65,064 Sinking fund requirements on redeemable preferred stock 12,470 9,150 Accounts payable 229,250 268,603 Payable on outstanding bank checks 46,649 36,371 Customers' deposits 15,403 14,376 Accrued taxes 31,270 14,770 Accrued interest 73,120 64,448 Accrued vacation pay 36,131 35,214 Other 51,316 57,748 ---------- ---------- 588,692 565,744 ---------- ---------- REGULATORY LIABILITIES (NOTE 3): Deferred finance charges 239,880 239,880 Other 2,881 2,712 ---------- ---------- 242,761 242,592 ---------- ---------- OTHER LIABILITIES: Accumulated deferred income taxes 1,390,785 1,388,799 Employee pension and other benefits 255,692 245,047 Deferred pension settlement gain 19,466 32,756 Unbilled revenues 19,081 28,410 Other 110,202 116,305 ---------- ---------- 1,795,226 1,811,317 ---------- ---------- COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 3): Liability for environmental restoration 225,000 225,000 ---------- ---------- $9,476,984 $9,477,869 ========== ========== The accompanying notes are an integral part of these financial statements /TABLE NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------- INCREASE (DECREASE) IN CASH (UNAUDITED) - ---------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 ------------- ------------ (In thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 136,198 $ 220,162 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 246,681 237,314 Amortization of nuclear fuel 30,040 23,141 Provision for deferred income taxes 1,986 82,791 Gain on sale of subsidiary - (11,257) Decrease in net accounts receivable 164,205 23,793 (Increase) decrease in materials and supplies (5,683) 11,773 Decrease in accounts payable and accrued expenses (14,465) (45,096) Increase in accrued interest and taxes 25,172 20,706 Changes in other assets and liabilities (5,907) (5,301) ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 578,227 558,026 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction additions (186,860) (231,111) Nuclear fuel (29,061) (7,726) ---------- ---------- Acquisition of utility plant (215,921) (238,837) Decrease in materials and supplies related to construction 3,578 2,743 Decrease in accounts payable and accrued expenses related to construction (3,616) (11,274) (Increase) decrease in other investments 10,226 (85,331) Proceeds from sale of subsidiary (net of cash sold) - 161,087 Other (5,972) 9,236 ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (211,705) (162,376) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in long-term debt 105,000 275,000 Net change in revolving credit agreements (170,000) (99,000) Reductions of preferred stock (6,800) (9,300) Reductions in long-term debt (29,341) (23,414) Net change in short-term debt - (370,749) Dividends paid (28,760) (151,190) Other (9,039) (7,281) ---------- ---------- NET CASH USED IN FINANCING ACTIVITIES (138,940) (385,934) ---------- ---------- NET INCREASE IN CASH 227,582 9,716 Cash at beginning of period 153,475 94,330 ---------- ---------- CASH AT END OF PERIOD $381,057 $104,046 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $205,702 $207,357 Income taxes paid $80,499 $35,376 The accompanying notes are an integral part of these financial statements
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ NOTE 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The Company, in the opinion of management, has included adjustments (which include normal recurring adjustments) necessary for a fair statement of the results of operations for the interim periods presented. The consolidated financial statements for 1996 are subject to adjustment at the end of the year when they will be audited by independent accountants. The consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes for the years ended December 31, 1995, 1994 and 1993 included in the Company's 1995 Annual Report to Shareholders on Form 10-K. The Company's electric sales tend to be substantially higher in summer and winter months as related to weather patterns in its service territory; gas sales tend to peak in the winter. Notwithstanding other factors, the Company's quarterly net income will generally fluctuate accordingly. Therefore, the earnings for the three-month and nine-month periods ended September 30, 1996, should not be taken as an indication of earnings for all or any part of the balance of the year. The allowance for doubtful accounts receivable on the consolidated balance sheets amounted to $88.5 million and $20.0 million at September 30, 1996 and December 31, 1995, respectively. The Company increased its allowance for doubtful accounts by $68.5 million to recognize the increased risk of collection inherent in significantly higher levels of past-due customer bills. In addition to this increase in the allowance for doubtful accounts, the Company has already charged $46.3 million to bad debt expense for the nine months ended September 1996. (See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Increase in Allowance for Doubtful Accounts.") Certain amounts have been reclassified on the accompanying Consolidated Financial Statements to conform with the 1996 presentation. NOTE 2. CONTINGENCIES ENVIRONMENTAL CONTINGENCIES: The public utility industry typically utilizes and/or generates in its operations a broad range of potentially hazardous wastes and by- products. The Company 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 assure compliance with such requirements. The Company is also currently conducting a program to investigate and restore, as necessary to meet current environmental standards, certain properties associated with its former gas manufacturing process and other properties which the Company has learned may be contaminated with industrial waste, as well as investigating identified industrial waste sites as to which it may be determined that the Company contributed. The Company 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. The Company is currently aware of 86 sites with which it has been or may be associated, including 43 which are Company-owned. With respect to non-owned sites, the Company may be required to contribute some proportionate share of remedial costs. Investigations at each of the Company-owned sites are designed to (1) determine if environmental contamination problems exist, (2) if necessary, determine the appropriate remedial actions required for site restoration 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, the Company expects to determine site-specific remedial actions and to estimate the attendant costs for restoration. However, since technologies are still developing the ultimate cost of remedial actions may change substantially. 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, and the United States Environmental Protection Agency figure for average cost to remediate a site. Actual Company expenditures are dependent upon the total cost of investigation and remediation and the ultimate determination of the Company'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. The Company has denied any responsibility in certain of these PRP sites and is contesting liability accordingly. As a consequence of site characterizations and assessments completed to date and negotiations with PRP's, the Company has accrued a liability in the amount of $225 million, which is reflected in the Company's Consolidated Balance Sheets at September 30, 1996 and December 31, 1995. This represents the low end of the range of its share of the estimated cost for investigation and remediation. The potential high end of the range is presently estimated at approximately $900 million, including approximately $400 million in the unlikely event the Company is required to assume 100% responsibility at non-owned sites. Prior to 1995, the Company recovered 100% of its costs associated with site investigation and restoration (SIR). In the Company's 1995 rate order, costs incurred during 1995 for the investigation and restoration of Company-owned sites and sites with which it is associated were subject to 80%/20% (ratepayer/Company) sharing. In 1995, the Company incurred $11.5 million of such costs, resulting in a disallowance of $2.3 million (before tax), which the Company recognized as a loss in Other items (net) on the Consolidated Statements of Income. The PSC stated in its opinion, dated December 1995, its decision to require sharing was "on a one-time, short-term basis only, pending its further evaluation of the issue in future proceedings." In July 1996, the ALJ issued a recommended decision in the Company's November 1995 gas rate filing that recommended 100% recovery of its SIR costs. (See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Multi-Year Gas Rate Proposal.") The Company has recorded a regulatory asset representing the remediation obligations to be recovered from ratepayers. Where appropriate, the Company has provided notices of insurance claims to carriers with respect to the investigation and remediation costs for manufactured gas plant, industrial waste sites and sites for which the Company has been identified as a PRP. The Company has settled some of these claims and continues to pursue others, but is unable to predict what the ratemaking disposition will be. TAX ASSESSMENTS: The Internal Revenue Service (IRS) has conducted an examination of the Company's Federal income tax returns for the years 1987 and 1988 and has submitted a Revenue Agents' Report to the Company. The IRS has proposed various adjustments to the Company's federal income tax liability for these years which could increase the Company's Federal income tax liability by approximately $80 million, before assessment of penalties and interest. Included in these proposed adjustments are several significant issues involving Unit 2. The Company is vigorously defending its position on each of the issues, and submitted a protest to the IRS in 1993. Pursuant to the Unit 2 settlement entered into with the PSC in 1990, to the extent the IRS is able to sustain adjustments, the Company will be required to absorb a portion of any assessment. The Company believes any such disallowance will not have a material impact on its financial position or results of operations under traditional cost-of-service based ratemaking. The Company is currently attempting to finalize a settlement of these issues with the Appeals Division of the IRS. In addition, the IRS has conducted an examination of the Company's Federal income tax returns for the years 1989 and 1990. The Company received a Revenue Agents' Report in late January 1996. The IRS has raised the issue concerning the deductibility of payments made to unregulated generators in accordance with certain contracts that include a provision for a tracking account. A tracking account represents amounts that these mandated contracts required the Company to pay unregulated generators in excess of the Company's avoided costs, including a carrying charge. The IRS proposes to disallow a current deduction for amounts paid in excess of the avoided costs of the Company. Although the Company believes that any such disallowances for the years 1989 and 1990 will not have a material impact on its financial position or results of operations, it believes that a disallowance for these above-market payments for the years subsequent to 1990 could have a material adverse affect on its cash flows. The Company is vigorously defending its position on this issue. The IRS has commenced its examination of the Company's Federal income tax returns for the years 1991 through 1993. LITIGATION: The Company is unable to predict the ultimate disposition of the lawsuits referred to below. However, the Company believes it has meritorious defenses and intends to defend these lawsuits vigorously, but can neither provide any judgment regarding the likely outcome nor provide any estimate or range of possible loss. Accordingly, no provision for liability, if any, that may result from these lawsuits has been made in the Company's financial statements. (a) In March 1993, Inter-Power of New York, Inc. (Inter- Power), filed a complaint against the Company and certain of its officers and employees in the Supreme Court of the State of New York, Albany County (NYS Supreme Court). Inter-Power alleged, among other matters, fraud, negligent misrepresentation and breach of contract in connection with the Company's alleged termination of a PPA in January 1993. The plaintiff sought enforcement of the original contract or compensatory and punitive damages in an aggregate amount that would not exceed $1 billion, excluding pre-judgment interest. In early 1994, the NYS Supreme Court dismissed two of the plaintiff's claims; this dismissal was upheld by the Appellate Division, Third Department of the NYS Supreme Court. Subsequently, the NYS Supreme Court granted the Company's motion for summary judgment on the remaining causes of action in Inter-Power's complaint. In August 1994, Inter-Power appealed this decision and on July 27, 1995, the Appellate Division, Third Department affirmed the granting of summary judgment as to all counts, except for one dealing with an alleged breach of the PPA relating to the Company's having declared the agreement null and void on the grounds that Inter-Power had failed to provide it with information regarding its fuel supply in a timely fashion. This one breach of contract claim was remanded to the NYS Supreme Court for further consideration. Discovery on this one breach of contract claim is currently in progress. (b) In November 1993, Fourth Branch Associates Mechanicville (Fourth Branch) filed an action against the Company and several of its officers and employees in the NYS Supreme Court, seeking compensatory damages of $50 million, punitive damages of $100 million and injunctive and other related relief. The lawsuit grows out of the Company's termination of a contract for Fourth Branch to operate and maintain a hydroelectric plant the Company owns in the Town of Halfmoon, New York. Fourth Branch's complaint also alleges claims based on the inability of Fourth Branch and the Company to agree on terms for the purchase of power from a new facility that Fourth Branch hoped to construct at the Mechanicville site. In January 1994, the Company filed a motion to dismiss Fourth Branch's complaint. By order dated November 7, 1995, the Court granted the Company's motion to dismiss the complaint in its entirety. Fourth Branch has filed an appeal from the Court's order which was argued on October 7, 1996 and a decision is expected in mid-December 1996. Fourth Branch has filed for protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Northern District of New York. On January 5, 1996, Fourth Branch vacated the Mechanicville site. The Company and Fourth Branch recently entered into negotiations under a FERC mediation process. As a result of these negotiations, the Company has proposed to sell the hydroelectric plant to Fourth Branch for an amount which would not be material. In addition, the proposal includes a provision that would require the discontinuance of all litigation between the parties. (c) The Company is involved in a number of court cases regarding the price of overgeneration, the amount of energy that the Company is required to purchase in excess of contract levels from certain unregulated generators. The Company has paid the unregulated generators based on its short-run avoided cost (under Service Class No. 6) for all such overgeneration rather than the price which the unregulated generators contend is applicable under the contracts. At September 30, 1996, the amount of overgeneration adjustments in dispute that the Company estimates it has not paid or accrued is not significant as a result of settlements reached in the third quarter of 1996. NOTE 3. RATE AND REGULATORY ISSUES AND CONTINGENCIES The Company's financial statements conform to generally accepted accounting principles, as applied to regulated public utilities and reflect the application of SFAS No. 71. Substantively, SFAS No. 71 permits a public utility regulated on a cost-of-service basis to defer certain costs when authorized to do so by the regulator, which would otherwise be charged to expense. These deferred costs are known as regulatory assets, which in the case of the Company are approximately $1,003 million, which are net of approximately $243 million of regulatory liabilities at September 30, 1996. The portion of the $1,003 million which relates to the electric business is approximately $888 million, which are net of approximately $243 million of regulatory liabilities. Generally, regulatory assets and liabilities are allocated to the portion of the business that incurred the underlying transaction that resulted in the recognition of the regulatory asset or liability. The allocation methods used between electric and gas are consistent with those used in prior regulatory proceedings. While the allocation of regulatory assets and liabilities at September 30, 1996 is based on management's assessment, should the Company discontinue the application of SFAS No. 71, for all or a portion of its business, a final allocation would be made by evaluating circumstances at that time. Currently, substantially all of the Company's net regulatory assets have been approved by the PSC and are being amortized to expense as they are being recovered in rates as last established in April 1995. RATE FILING: The Company filed in February 1996 a request to increase electric rates. This rate increase request of 4.1% for 1996 and 4.2% for 1997 was based on the Company's cost of providing service. These rate increases are predicated on a requested rate of return on common stock equity (ROE) of approximately 11% on an annual basis and recover the Company's cost of providing electric service. At a public session on May 2, 1996, the PSC rejected the Company's request for a 1996 temporary rate increase primarily on the basis that the request did not meet the PSC's legal standard for approving emergency rate increases. In their remarks, the Chairman of the PSC and the ALJ assigned to the proceeding indicated that emergency rate relief requires meeting a higher standard than traditional cases and that a financial crisis did not exist that would jeopardize the provision of safe and adequate service. In addition, the PSC Chairman stated that an increase in electric rates would have a negative impact on economic conditions in the regions served by the Company, which he stated that the Company itself recognized in its PowerChoice proposal (see - "Competition" for a discussion of the Company's PowerChoice proposal.) The PSC Chairman also stated that the PowerChoice proposal better addresses the long-term viability of the Company, whereas a temporary rate increase does not. Accordingly, results for 1996 will reflect regulatory lag and resulting reduced ROE; however, the Company believes that the rejection of a temporary rate increase does not indicate that the Company is no longer regulated on a cost-of-service basis. Until the Company's PowerChoice proposal or another acceptable alternative is implemented, the Company will continue to pursue its traditional rate request for 1997. Originally, the Company expected an ALJ recommended decision in early October and a PSC decision in January 1997. However, in 1996, the Company and the PSC staff jointly requested (and the ALJ approved) a series of extensions totaling 180 days so parties can focus on the negotiations related to the Company's PowerChoice proposal, including its negotiations with unregulated generators. These extensions change the effective date of any rate increase to July 8, 1997 and will reduce the amount of revenues and significantly reduce the amount of earnings the Company would realize in 1997 from any price increases granted, absent additional cost reductions. The Company estimates that its 1997 rate request will require an overall electric price increase of nearly 9%. The Company expects that the PSC will approve cost-of- service based rates that provide for a reasonable rate of return until such time as the implementation of the PowerChoice proposal or a new competitive market model becomes probable. As a result the Company believes that it will continue to be regulated on a cost-of-service basis which will enable it to continue to apply SFAS No. 71 and that its regulatory assets are currently probable of recovery. While various proposals have been made to develop a new regulatory model, including the Company's PowerChoice proposal, none of these proposals are currently probable of implementation since a number of parties are required to concur with the change in the regulatory model. For the reasons noted above, the Company believes that it continues to meet the requirements for the application of SFAS No. 71 to the electric business. However, there are a number of events that could change that conclusion during the fourth quarter of 1996 and beyond. Those future events include: inaction or inadequate action on the Company's 1997 rate request by the PSC; a decision by the Company in the future not to pursue the rate request as filed; significant unanticipated reduction in electricity usage by customers; unsuccessful results in unregulated generator negotiations; adverse results of litigation; and probable changes in the regulatory model. As discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Form 10-K for the fiscal year ended December 31, 1995, the Company was unable to earn its allowed ROE in 1995 and expects to earn substantially below its allowed ROE in 1996. In addition, if the Company's rate increase proposals with respect to 1997 and future years under traditional ratemaking are not approved, then the Company will, more likely than not, be unable to earn a reasonable ROE for such years. The inability of the Company to earn a reasonable ROE over a sustained period would indicate that its rates are not based on its cost of service. In such a case, application of SFAS No. 71 would be discontinued. The resulting after-tax charges against income would reduce retained earnings, the balance of which is currently approximately $693 million. Various requirements under applicable law and regulations and under corporate instruments, including those with respect to issuance of debt and equity securities, payment of common dividends and certain types of transfers of assets could be adversely impacted by any such write-downs. (See the discussion in Part II, Item 5. Other Information - "NRC Draft Policy Statement.") COMPETITION: The public utility industry in general, and the Company in particular, is facing increasing competitive threats. As competition increases in the marketplace, it is possible that the Company may no longer be able to continue to apply the fundamental accounting principles of SFAS No. 71. The Company believes that in the future some form of market-based pricing will replace cost-based pricing in certain aspects of its business. In that regard, in October 1995, the Company filed its PowerChoice proposal with the PSC. (See Form 10-K for fiscal year ended December 31, 1995, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "PowerChoice Proposal.") The PowerChoice proposal, as amended by the Company's August 1, 1996 announcement discussed below, would: - Create a competitive wholesale electricity market and allow direct access by retail customers. - Separate the Company's non-nuclear power generation business from the remainder of the business. - Provide relief from above market unregulated generator PPAs that were mandated by federal and state public policy. - Stabilize average prices for Company electric customers, with reductions to industrial customers to facilitate economic and job growth in the service territory. The separated non-nuclear generation business would no longer be rate-regulated and, accordingly, existing regulatory assets related to the non-nuclear power generation business, amounting to approximately $98 million, which is net of approximately $2 million of regulatory liabilities at September 30, 1996, would be charged against income if and when PowerChoice (or a similar proposal) becomes probable of implementation. Of the remaining electric business, under PowerChoice, the Company has proposed that its nuclear generation and electric transmission and distribution business continue to be rate-regulated on a cost-of-service basis (but with performance objectives) and, accordingly, it would continue to apply SFAS No. 71. The Company currently expects to retain ownership of its nuclear assets, but will continue to investigate various options that may be available to mitigate the risk of ownership of these assets. (See Part II, Item 5. Other Information - "New York Nuclear Operating Company.") While the Company expects to pursue performance based cost-of-service regulation, the ultimate form and substance of rate regulation applied to nuclear operations will determine whether SFAS No. 71 can continue to be applied. If the Company determines it could no longer apply SFAS No. 71, existing nuclear regulatory assets of approximately $264 million, which is net of nuclear regulatory liabilities of approximately $240 million at September 30, 1996 would be charged against income. The PowerChoice proposal also includes provisions for recovery of "stranded costs" by the generation business through surcharges on rates for retail transmission and distribution customers. Stranded costs are those costs of utilities that may become unrecoverable due to a change in the regulatory environment and include costs related to the Company's generating plants, regulatory assets and overpriced unregulated generator contracts. As discussed below, the Company has offered to buy out 44 unregulated generator contracts for a combination of cash and securities. While the Company believes that buy out costs should be recoverable as part of the implementation of PowerChoice, or a form thereof, resolution of this issue is subject to negotiation and approval by the PSC. Until resolved, no assurance can be given as to the total amount recoverable or whether the criteria of SFAS No. 71 can be met to record a regulatory asset for the amount recoverable. Critical to the stabilization of average prices and restructuring of the Company's markets and business envisioned in the PowerChoice proposal are substantial reductions in the Company's embedded cost structure. The Company has commenced negotiations with the unregulated generators with the objective of reducing unregulated generator costs. On August 1, 1996 the Company announced it had offered to terminate 44 unregulated generator contracts in exchange for a combination of cash and securities from a new restructured Niagara Mohawk Power Corporation (NMPC). Under the plan, the Company would buy out contracts which account for more than 90% of the above-market power costs that the Company is required to buy from unregulated generators. The restructured NMPC would include electric and gas transmission and distribution assets and nuclear assets. The new securities would be subordinate to existing first mortgage bonds and not impair the rights of first mortgage bondholders. The plan would also create a separate non-nuclear generating company. The offer is subject to negotiation and is conditioned on receipt of appropriate regulatory and other approvals including PSC approval of an appropriate price structure consistent with the levels envisioned by the PowerChoice proposal. The offer, if accepted, would clear the way for implementation of PowerChoice, or a form thereof, which the Company has indicated depends upon reducing the cost of power the Company is required to purchase from unregulated generators. The Company cannot predict whether the offer will be accepted and implemented as proposed. The Company's desire is to conclude negotiations on the offer in the fourth quarter of 1996 although, there can be no assurance that such negotiations will be successful or will be concluded within that time frame. The Company does not presently expect that its PowerChoice proposal or any other alternative proposal could be fully effective before sometime in 1997, at the earliest. In addition, the Company cannot predict whether the PowerChoice proposal, in its current or a modified form, or an alternative proposal will be implemented. PSC AND FERC REGULATORY PROCEEDINGS: On May 16, 1996, the PSC issued its decision in its COPS case to restructure New York State's electric industry. (See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - "PSC Competitive Opportunities Proceeding - Electric.") Although the PSC's decision outlines its overall vision of how the electricity industry should be deregulated and restructured for competition, it did not provide a detailed plan for implementation and instead ordered filings from the major utilities, except the Company and Long Island Lighting Company (LILCO), by October 1, 1996. The October 1 filings were required to address the corporate structure of each utility both in the short and long term and the schedule for and cost of attaining that structure; a schedule for introducing retail access to all of the utility's customers and a set of unbundled tariffs that are consistent with the retail access program; and a rate plan to be effective for the transition to a competitive market, including mechanisms to reduce rates and address stranded costs. The Company was exempted from the October 1 filing by the PSC because the PSC determined that the Company's PowerChoice restructuring proposal met the requirements of the PSC's decision in its COPS proceeding. However, the Company made a filing to address several retail issues. The Company's filing also urged the PSC to be as permissive as possible in allowing the natural development of the competitive marketplace. In addition, it argued that regulated and unregulated companies should be permitted to coexist under the same holding company. In April 1996, FERC issued its final rules on open transmission access and stranded cost issues. (See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - "FERC Rulemaking on Open Access and Stranded Cost Recovery.") IMPAIRMENT OF LONG-LIVED ASSETS: In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121. This Statement, which the Company adopted in 1996, requires that long-lived assets and certain identifiable intangibles held and used by an entity, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company is required to estimate future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. Furthermore, this Statement amends SFAS No. 71 to clarify that regulatory assets should be charged against earnings if the assets are no longer considered probable of recovery rather than probable of loss. While the Company is unable to predict the outcome of its PowerChoice proposal, or various FERC and PSC initiatives, the Company has analyzed the provisions of SFAS No. 121, as it relates to the impairment of its investment in generating plant, under two scenarios: traditional cost-based rate-making and its PowerChoice proposal, as filed. As a result of these analyses, the effects of adopting SFAS No. 121, as it relates to the impairment of the Company's investment in generating plant, did not have an effect on its results of operations and financial condition. However, to the extent the PowerChoice proposal is significantly altered or an alternative proposal is implemented, a new asset impairment analysis must be performed, with no assurance as to whether an impairment might exist. In addition, the Company expects that the PSC will approve cost-of-service based rate increases until such time as a new competitive regulatory model is developed. NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- REVIEW BY INDEPENDENT ACCOUNTANTS - --------------------------------- The Company's independent accountants, Price Waterhouse LLP, have made limited reviews (based on procedures adopted by the American Institute of Certified Public Accountants) of the unaudited Consolidated Balance Sheet of Niagara Mohawk Power Corporation and Subsidiary Companies as of September 30, 1996 and the unaudited Consolidated Statements of Income for the three-month and nine-month periods ended September 30, 1996 and 1995 and the unaudited Consolidated Statements of Cash Flows for the nine- months ended September 30, 1996 and 1995. The accountants' report regarding their limited reviews of the Form 10-Q of Niagara Mohawk Power Corporation and its subsidiaries appears on the next page. That report does not express an opinion on the interim unaudited consolidated financial information. Price Waterhouse LLP has not carried out any significant or additional audit tests beyond those which would have been necessary if their report had not been included. Accordingly, such report is not a "report" or "part of the Registration Statement" within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply. PRICE WATERHOUSE LLP ONE MONY PLAZA SYRACUSE NY 13202 TELEPHONE 315-474-6571 REPORT OF INDEPENDENT ACCOUNTANTS November 13, 1996 To the Stockholders and Board of Directors of Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse NY 13202 We have reviewed the condensed consolidated balance sheet of Niagara Mohawk Power Corporation and its subsidiaries as of September 30, 1996, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 1996 and 1995 and of cash flows for the nine months ended September 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet at December 31, 1995, and the related consolidated statements of income, retained earnings and cash flows for the year then ended (not presented herein); and in our report dated January 25, 1996, we expressed an unqualified opinion (containing an explanatory paragraph with respect to the Company's application of Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation [SFAS No. 71]) on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1995 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. To the Stockholders and Board of Directors November 13, 1996 Page 2 As discussed in Note 3, the Company believes that it continues to meet the requirements for application of SFAS No. 71 and that its regulatory assets are currently probable of recovery in future rates charged to customers. There are a number of events that could change these conclusions in the fourth quarter of 1996 and beyond, resulting in material adverse effects on the Company's financial condition and results of operations. As also discussed in Note 3, the Company's PowerChoice proposal, in its current form, would restructure the Company to facilitate a transition to a competitive electric generation market. If it becomes probable that the proposal (or a similar proposal) will be implemented and certain other conditions are met by third parties, the Company would discontinue application of SFAS No. 71 with respect to the non-nuclear portion of its electric generation business and write-off the related net regulatory assets, currently approximately $98 million. While the Company expects to pursue performance based cost-of-service regulation, the form and substance of rate regulation applied to nuclear operations will determine whether SFAS No. 71 can continue to be applied. If the Company determines it could no longer apply SFAS No. 71, existing nuclear net regulatory assets, currently approximately $264 million, would be written-off. Such actions, in the aggregate, could have a material adverse effect on the Company's results of operations and financial condition. /s/ Price Waterhouse LLP - ------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Certain statements included in this Quarterly Report on Form 10-Q regarding expected capital expenditures, statements of management's plans and objectives for the Company's future operations and statements of future economic performance, including those contained in or implied by the discussion under Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations), are forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934. Those forward-looking statements include information on the financial condition of the Company, expected PSC approval of cost-of-service based electric rate increases, an expected decrease in future bad debt expense, expected construction expenditures, the Company's borrowing capacity to fund working capital deficits, and the assumptions described in the Quarterly Report on Form 10-Q underlying such forward-looking statements. The Company's actual results and developments may differ materially from the results discussed in or implied by such forward-looking statements, due to a number of important factors. Those factors include, but are not limited to, matters described in the context of such forward-looking statements, as well as such other factors as set forth in the Notes to Consolidated Financial Statements contained herein and in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. FINANCIAL CHALLENGES The Company faces significant challenges in its efforts to maintain its financial condition in the face of expanding competition. While utilities across the nation must address these concerns to varying degrees, the Company believes that it is more financially vulnerable because of its large industrial customer base, an oversupply of high-cost mandated power purchases from unregulated generators, an excess supply of wholesale power at relatively low prices, a high tax burden, a stagnant economy in the Company's service territory and significant investments in nuclear plants. Moreover, solving the problems the Company faces, including the implementation of PowerChoice, requires the cooperation and agreement of third parties outside the Company's control and, thus, limits the options available to solve those problems and keep the Company financially viable. Company Proposal to Buy Out Unregulated Generator Contracts On August 1, 1996 the Company announced it had offered to terminate 44 unregulated generator contracts in exchange for a combination of cash and securities from a newly restructured NMPC. The offer, if accepted, would clear the way for the implementation of PowerChoice, which the Company has indicated depends upon reducing the cost of power the Company is required to purchase from unregulated generators. The 44 contracts represent more than 90% of the above-market cost of mandated purchases by the Company. The securities included in the offer would be issued by a restructured NMPC, which would include electric and gas transmission and distribution assets and nuclear assets. The new securities would be subordinate to the existing first mortgage bonds of the Company. The proposed buy out would not impair the rights of the Company's existing first mortgage bondholders. The buy out offer is conditioned, among other things, on receipt of appropriate regulatory and other approvals including PSC approval of an appropriate price structure consistent with the levels envisioned by the PowerChoice proposal. The Company cannot predict whether the offer will be accepted and implemented as proposed. The Company's desire is to conclude negotiations on the offer in the fourth quarter of 1996, with the appropriate approvals following in 1997, although there can be no assurance that such negotiations will be successful or will be concluded within that time frame. PSC PROPOSAL OF NEW UNREGULATED GENERATOR OPERATING AND PPA MANAGEMENT PROCEDURES (See Form 10-K for the fiscal year ended December 31, 1995, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Unregulated Generators.") On August 21, 1996, the PSC proposed to examine the circumstances under which a utility, including the Company, may legally curtail purchases from unregulated generators; whether utilities should be permitted to collect data that will assist in monitoring unregulated generator's compliance with federal qualifying facility (QF) requirements, which are standards that unregulated generators must satisfy under the Public Utility Regulatory Act of 1978; and if utilities should be allowed to demand security from unregulated generators to ensure the repayment of advance payments made under their purchased power contracts. The PSC noted that some of the current unregulated generator contracts are far above market prices and are causing utilities to seek rate increases. In addition, the PSC stated that its proposal was initiated to protect ratepayers, since it would ensure just and reasonable rates in the event ongoing negotiations between utilities and unregulated generators fail. A FERC rule issued in the early 1980s describes the circumstances under which a utility may refuse to purchase power from an unregulated generator and avoid payment. More specifically, it stated that a utility that will incur increased costs as a result of the purchase may curtail or avoid the purchase if the utility provides the unregulated generator with advance notice. In addition, the claimed operating conditions for such curtailment were subject to state regulatory commission verification, before or after such curtailment. Previously, the PSC required verification in advance of such curtailment, among other conditions. The PSC is now considering verification after such curtailment. Under this proposed approach, the PSC and utilities would no longer have to invest significant time and resources trying to predict what might happen, as was the case when the PSC required verification in advance of such curtailment. In addition, the PSC is requesting comments on the procedures for, and the contents of, utility programs for monitoring QF status. The PSC stated that if unregulated generators are violating the QF standards, then the obligation of the utility to pay the full contract rate is generally excused or mitigated. The Company cannot predict the outcome of this matter, but is encouraged by the PSC's proposal to implement new unregulated generator procedures. However, the Company remains committed to the proposal it made to terminate 44 unregulated generator contracts. (See - "Company Proposal to Buy Out Unregulated Generator Contracts."). 1996 AND 1997 ELECTRIC RATE FILING When PowerChoice was announced, the Company said that failure to approve the plan would mean continued price escalation under traditional regulation, or failing that, further deterioration in the Company's financial condition. While negotiations are continuing on PowerChoice, in view of increasing unregulated generator payments, continued weak sales expectations, the Company found it necessary to seek price increases. The Company filed for price increases of 4.1% for 1996 and 4.2% for 1997. The 1996 rate filing was for temporary rate relief for which the Company asked for immediate action. As discussed in Note 3 to the Company's Consolidated Financial Statements, on May 2, 1996, the PSC rejected the Company's request for a temporary rate increase primarily on the basis that the request did not meet the PSC's legal standard for approving emergency rate increases. The Company is continuing to pursue its traditional rate request for 1997 in order to preserve the Company's right to traditional cost-based rates in the event that an acceptable solution cannot be achieved through negotiation of the PowerChoice proposal. In 1996, the Company and the PSC staff jointly requested a series of extensions totaling 180 days so parties can focus on negotiations related to the Company's PowerChoice proposal, including its negotiations with unregulated generators. The ALJ has approved the extensions, changing the effective date of the requested rate increase to July 8, 1997. The Company expects that the PSC will approve cost-of-service based rate increases until such time as implementation of a new competitive market model becomes probable. For a discussion of certain factors that could cause actual results to differ materially, see Part I, Item 1. Financial Statements - Note 3 - "Rate and Regulatory Issues and Contingencies - Rate Filing." PSC COMPETITIVE OPPORTUNITIES PROCEEDING - ELECTRIC (See Form 10-K for the fiscal year ended December 31, 1995, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "PSC Competitive Opportunities Proceeding - Electric.") On May 16, 1996 the PSC issued its decision in its COPS case to restructure New York State's electric industry. The decision calls for a competitive wholesale power market in early 1997 and the introduction of retail access for all electric customers in early 1998. The goals cited in its decision included lowering consumer rates, increasing choice, continuing reliability of service, continuing environmental and public policy programs, mitigating concerns about market power and continuing customer protections and the obligation to serve. To implement its policies, the PSC directed major utilities, excluding the Company and LILCO, to file restructuring proposals and rate plans by October 1, 1996, consistent with these goals. Although exempt from this filing as a result of the PowerChoice restructuring proposal, the Company made a filing to address several retail issues. The Company's filing also urged the PSC to be as permissive as possible in allowing the natural development of the competitive marketplace. In addition, it argued that regulated and unregulated companies should be permitted to coexist under the same holding company. Subsequent to these October 1 filings, all parties in the COPS proceeding will be able to review and comment on the documents. The PSC will then review each filing. In addition, the PSC decision in the COPS proceeding states that recovery of utility stranded costs may be accomplished by a non- bypassable "wire charge" to be imposed by distribution companies. Stranded costs are utility costs that may become unrecoverable due to a change in the regulatory environment. The calculation of the amount of stranded costs, and the timing of recovery, will be determined individually for each utility as part of the October 1 filings. The PSC decision suggests that a careful balancing of customer and utility interests and expectations is necessary, and that the level of stranded cost recovery will ultimately depend upon the particular circumstances of each utility. The PSC stated that collaborative efforts would continue to take place to accomplish the following: - distinguish and classify transmission and distribution facilities; - continue reviewing the role of Energy Service Companies (ESCOs) in a competitive retail market, including the development of licensing requirements and consumer safeguards, policies relating to the transfer of the obligation to serve, funding mechanisms that might be needed to assure fairness among all ESCOs and matters related to billing and metering functions; - address transmission pricing; and - set forth the structure of the ISO, and the Market Exchange. The PSC stated that the ISO must have the authority and the means to ensure reliability of the bulk power system. In September 1996, the Energy Association of New York State (Energy Association) and its member companies filed a lawsuit in the NYS Supreme Court that asked the court to order a review of the PSC's COPS decision. The Energy Association includes the Company and seven other investor owned utilities as members. Even though the Company believes that the PSC's objectives in its COPS decision are consistent with the Company's PowerChoice proposal, the Company wanted to protect its legal rights until all issues relating to competition in the New York State electric industry are settled fairly. The Company cannot predict the outcome of this matter or its effects on the Company's results of operations or financial condition. On October 9, 1996, the PSC issued an order establishing the procedures and schedule for the recently issued COPS decision. This order allows 150 days from the date of the filings to resolve outstanding issues on the utility filings, and has assigned the ALJ to the cases. It has allowed 90 days for discovery and potential negotiations, and 60 days of litigation if negotiation does not bring about a settlement. FERC RULEMAKING ON OPEN ACCESS AND STRANDED COST RECOVERY (See Form 10-K for the fiscal year ended December 31, 1995, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "FERC NOPR on Stranded Investment.") In April 1996, the FERC issued two final rules and a NOPR. The first rule addresses open transmission access and stranded cost issues. The second rule requires utilities to establish electronic systems to share information about available transmission capacity and also establishes standards of conduct. The NOPR proposes to establish a new system for utilities to use in reserving capacity on their own and others' transmission lines. The first rule opens wholesale power sales to competition. Under this rule, public utilities owning, controlling or operating transmission lines are required to file non-discriminatory open access tariffs that offer others the same service they provide themselves, and in accordance with the pro forma tariff issued by the FERC. In addition, the first rule provides for the full recovery of stranded wholesale costs, leaving it up to the states to decide the issue of recovery of stranded retail costs, unless the state regulators lack authority to decide this issue. However, the FERC said it will determine stranded cost recovery in the case where retail customers become wholesale purchasers through municipalization. FERC's final rules did not require the divestiture of generation from transmission, nor did it require an ISO to run the transmission grid. However, the FERC did offer guidelines for the creation of ISOs that are subject to its approval. The NOPR proposes that each utility would replace the open access pro forma tariff with a capacity reservation tariff (CRT), by December 31, 1997. Under the proposed CRT, utilities and all other power market participants would reserve firm rights to transfer power between designated receipt and delivery points. FERC stated its belief that the proposed reservation-based service appears to be more compatible with open access systems. In May 1996, the New York Power Pool's (NYPP) Executive Committee approved the restructuring of the NYPP, of which the Company is a member, into an ISO in order to comply with FERC's guidelines. The NYPP plans to file an ISO tariff with the FERC by December 1996. The Company is actively involved in the restructuring of the NYPP into a statewide ISO. In late May 1996, the Company was among a number of parties which filed petitions with the FERC seeking rehearing of certain portions of its first rule. The Company stated that various exceptions to the principle of full recovery of stranded costs adopted in that rule would distort competition in the markets for electric power which the rule was designed to promote. In addition, the Company stated that these limitations on the recovery of stranded costs may deprive utilities of a reasonable opportunity to recover their prudently incurred costs, particularly those utilities like the Company, that face high levels of stranded costs due to past government mandates. The Company also urged the FERC to make certain technical changes to its rules for the recovery of stranded costs in the municipalization context. The Company is unable to predict the outcome of this matter. The FERC has granted rehearing for purposes of further consideration; however, the FERC has an indefinite period within which to consider and act on rehearing petitions. MULTI-YEAR GAS RATE PROPOSAL In November 1995, the Company filed for a 5.8% gas rate increase to be effective October 1, 1996. (See Form 10-K for the fiscal year ended December 31, 1995, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "PowerChoice Proposal - Multi-Year Gas Rate Proposal.") In addition, the Company proposed a performance- based regulation (PBR) mechanism, including a gas cost incentive mechanism for gas operations to become effective October 1, 1997. This filing also included a complete unbundling of the Company's sales service allowing customers to choose alternative gas suppliers plus a move to a rate structure for the transportation of gas that would mitigate the throughput risk to the Company. It also proposed the discontinuation of the weather normalization clause and sought flexibility in pursuing unregulated opportunities related to the gas business. The ALJ assigned to the Company's gas rate case proceeding issued a recommended decision in July 1996 which would allow the Company to increase its base rates $8.4 million or 1.4% and included an allowed ROE of 11.4%. In addition, the ALJ recommended that the PBR proposal and rate restructuring be addressed in a second phase of this gas rate proceeding. The ALJ also recommended the continuation of the weather normalization clause. With respect to the Company's SIR costs (see Item 1. Financial Statements - Note 2 - "Contingencies - Environmental Contingencies"), the ALJ recommended 100% recovery of these costs. The period in which the PSC must render a decision in this case has been extended through December 1, 1996 to allow additional time for settlement negotiations. The Company is unable to predict the outcome of this proceeding. In March 1996, in a generic rate proceeding, the PSC ordered all New York utilities to refile their tariffs to implement a service unbundling by May 1996 (March 1996 Order). The Company refiled its tariff on April 29, 1996, which became effective on a temporary basis on June 1, 1996. Under the approved tariff, all of the Company's gas customers, including residential and commercial customers, have the opportunity to buy natural gas from other sources with the company providing delivery service for a separate fee. These changes have not had a material impact on the Company's natural gas throughput risk since the Company sells gas at cost and the margins derived from the delivery service are essentially the same as the sales service. The revised rate structure that had been proposed by the Company to reduce the throughput risk has been transferred into the Company's November 1995 rate proceeding. In addition to the tariff filing to implement service unbundling, the Company and other utilities filed a petition for rehearing of certain of the determinations made in the PSC's March 1996 Order. These determinations included the PSC's requirement that converting customers are responsible for pipeline capacity held by the utility on their behalf for only a three-year period rather than for the remaining life of the pipeline contract. In addition, the March 1996 Order states that the utility is obligated to provide back-up service to a converting customer or provide service to a new customer even if the utility does not currently have sufficient pipeline capacity needed to service that customer. However, the March 1996 Order is unclear as to how the costs of such capacity would be recovered by the utility after the three-year period. The Company also asked for clarification regarding the "test" the PSC would use to determine whether the utility has adequately demonstrated its efforts to relieve itself of "excess" capacity. The PSC issued an order on rehearing and did not substantively change or clarify the issues. INCREASE IN ALLOWANCE FOR DOUBTFUL ACCOUNTS As previously disclosed by the Company, there has been a significant increase in past due accounts receivable since 1995. A number of factors have contributed to the increase, including rising prices (particularly to residential customers). Rising prices have been driven by increased payments to unregulated generators and high taxes and have been passed on in customers' bills. The stagnant economy in the Company's service territory since the early 1990's has adversely affected collection of past due accounts. Also, laws, regulations and regulatory policies impose more stringent collection limitations on the Company than those imposed on business in general; for example, the inability to terminate service during certain time periods. The Company's collection efforts were also affected by employee turnover with the relocation to the new Collection Center in Buffalo, New York and the Voluntary Early Retirement Program in 1994. The Company is developing and implementing a variety of strategies to improve its collections and reduce its past due accounts receivable levels and bad debt expense. While a number of strategies can and will be implemented by the Company unilaterally, other strategies will require the support of the PSC regarding interpretation or alteration of the PSC's rules and regulations, and still others may require legislative action. The Company has initiated discussions with the staff of the PSC to explore changes in practices that require the PSC's support, and is formulating strategies to address legislative impediments. The information gathered in developing these strategies enabled management to update its risk assessment of the accounts receivable portfolio. Based on this assessment, management determined that the level of risk associated primarily with the older accounts had increased and the historical loss experience no longer applied. Accordingly, the Company has determined that a significant portion of the past due accounts receivable (principally of residential customers) may be uncollectible, and has increased its allowance for doubtful accounts by $68.5 million (31 cents per share) to $88.5 million as of September 30, 1996. Since the Company was denied a temporary rate increase in 1996 and there has been a delay in the 1997 rate filing due to negotiations related to the Company's PowerChoice proposal, management is considering filing a petition with the PSC requesting recovery of this increase through the rate-setting process. In addition to this increase in the allowance for doubtful accounts, the Company has already charged $46.3 million to bad debt expense for the nine months ended September 1996. For the nine months ended September 1995, the Company had charged $25.3 million to bad debt expense. The allowance for doubtful accounts is based on critical assumptions and judgments as to the effectiveness of collection efforts. However, future results with respect to collecting the past due receivables may prove to be different from those anticipated. The Company is hopeful that, future bad debt expense will be lower than that experienced in 1996, as a result of the implementation of new collection strategies. Such a result is necessarily dependent upon the following factors, including, among other things, the effectiveness of the strategies discussed above, the support of regulators and legislators to allow utilities to move towards commercial collection practices and improvement in the condition of the economy in the Company's service territory. The Company has been pursuing PowerChoice to address high prices that are the result of traditional price regulation, but the introduction of competition requires that policies and practices that were central to traditional regulation, including those involving collections, be changed so as not to jeopardize the benefits of competition. SALE OF 50 PERCENT INTEREST IN CANADIAN NIAGARA POWER COMPANY, LIMITED In October 1996, Opinac Energy Corporation, a wholly-owned subsidiary of the Company, sold 50 percent of its interest in Canadian Niagara Power Company, Limited (CNP) to Fortis Inc. (Fortis), a widely held Canadian holding company, resulting in an after-tax gain of approximately $14 million. CNP was a wholly- owned subsidiary of Opinac Energy Corporation. COMMON STOCK DIVIDEND The board of directors omitted the common stock dividend for all of 1996. This action was taken to help stabilize the Company's financial condition and provide flexibility as the Company addresses growing pressure from mandated power purchases and weaker sales and is the primary reason for the increase in the cash balance. In making future dividend decisions, the board will evaluate, along with standard business considerations, the level and timing of future rate relief, the progress of negotiating with unregulated generators within the context of its PowerChoice proposal, the degree of competitive pressure on its prices, and other strategic considerations. LIQUIDITY AND CAPITAL RESOURCES (See Form 10-K for the fiscal year ended December 31, 1995, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Financial Position, Liquidity and Capital Resources.") On April 25, 1996, Moody's Investors Service (Moody's) lowered its ratings on the Company's senior secured debt, to Ba3 from Ba1; senior unsecured debt to B2 from Ba2; its preferred stock to b3 from ba3. Moody's "Not Prime" rating for the Company's commercial paper remains unchanged. Moody's stated that it downgraded the long-term credit ratings of the Company, based on the limited progress made in achieving the goals identified in the Company's PowerChoice proposal, among other financial concerns, which may ultimately lead to a voluntary bankruptcy filing. In addition, Moody's stated that due to the level of uncertainty and potential volatility of the situation, its rating outlook on the Company remains negative. On May 22, 1996, Standard & Poor's (S&P) lowered its ratings on the Company's senior secured debt to BB- from BB; senior unsecured debt to B from B+; its preferred stock to B- from B; and commercial paper to not rated from B. S&P stated that the downgrade results from the inability of the financially weak Company and the unregulated generators to make substantive progress in their renegotiation of unregulated generator contracts. In addition, S&P stated that the lack of progress after several months of negotiations between the Company and the unregulated generators increases the uncertainty that a settlement can be achieved. Cash flows to meet the Company's requirements for the first nine months of 1996 and 1995 are reported in the Consolidated Statements of Cash Flows on Page 7. During March 1996, the Company completed an $804 million senior debt facility with a bank group for the purposes of consolidating and refinancing certain of the Company's existing working capital lines of credit and letter of credit facilities and providing additional reserves of bank credit. This senior debt facility will enhance the Company's financial flexibility during the period 1996 through June 1999. The senior debt facility consists 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 New York State Energy and Development Authority. As of September 30, 1996, the amount outstanding under the senior debt facility was $118 million, consisting of $105 million of borrowing and a $13 million letter of credit under the term loan facility, leaving the Company with $275 million of borrowing capability under the facility. The facility expires on June 30, 1999 (subject to earlier termination upon the implementation of the Company's PowerChoice restructuring proposal or any other significant restructuring plan). This facility is collateralized by first mortgage bonds which were issued on the basis of additional property. As of September 30, 1996, the Company could issue an additional $1,311 million aggregate principal amount of first mortgage bonds under the Company's mortgage trust indenture. This amount is based upon retired bonds without regard to an interest coverage test. The Company believes that it will spend approximately $290 million for construction in 1996. For the nine months ended September 30, 1996, the Company had incurred approximately $186.9 million for construction additions. The actual amount of construction expenditures depends on, among other things, the timing of expenditures, which may be affected by storm damage. Ordinarily, construction-related short-term borrowings are refunded with long-term securities on a periodic basis. This approach generally results in the Company showing a working capital deficit. Working capital deficits may also be a result of the seasonal nature of the Company's operations as well as timing differences between the collection of customer receivables and the payment of fuel and purchased power costs. The Company is experiencing a significant deterioration in its collections as compared to prior years' experience and is taking steps to improve collection. (See - "Increase in Allowance for Doubtful Accounts.") The Company believes it has sufficient borrowing capacity to fund such deficits as necessary in the near term. However, the Company's borrowing capacity to fund such deficits may be affected by the factors discussed in the following paragraph. External financing plans are subject to periodic revision as underlying assumptions are changed to reflect developments, market conditions and, most importantly, implementation of the Company's PowerChoice proposal or in the alternative, the Company's rate proceedings. The ultimate level of financing during the period 1996 through 1999 will be effected by, among other things: the outcome of the restructuring envisioned in the PowerChoice proposal (or a similar proposal), including the Company's recent offer to buy out 44 unregulated generator contracts; the alternatives the Company may pursue if the Company's offer is not accepted; the outcome of the 1997 and future traditional rate requests; levels of common dividend payments, if any, and preferred dividend payments; the Company's competitive position and the extent to which competition penetrates the Company's markets; uncertain energy demand due to the weather and economic conditions; and the extent to which the Company reduces non-essential programs and manages its cash flow during this period. The Company could also be affected by the outcome of the NRC's consideration of new rules for adequate financial assurance of nuclear decommissioning obligations. (See Part II, Item 5. Other Information - "NRC Draft Policy Statement.") In the longer term, in the absence of PowerChoice or some reasonably equivalent solution, financing will depend on the amount of rate relief that may be granted. RESULTS OF OPERATIONS The following discussion presents the material changes in results of operations for the three months and nine months ended September 30, 1996 in comparison to the same periods in 1995. The Company's results of operations reflect the seasonal nature of its business, with peak electric loads in summer and winter periods. Gas sales peak principally in the winter. The earnings for the three months and nine months periods should not be taken as an indication of earnings for all or any part of the balance of the year. THREE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 1995 The Company experienced a loss during the third quarter of 1996 in the amount of $22.5 million or 16 cents per share, as compared with earnings of $37.3 million or 26 cents per share in 1995. The loss in the third quarter of 1996 reflects a charge of $68.5 million or 31 cents per share, reflecting an increased allowance for doubtful customer bills. The allowance is necessary to properly recognize the increased risk of collecting significantly higher levels of past-due customer bills. In addition, the Company experienced an increase in bad debt expense in the third quarter of 1996 of $8.6 million or 4 cents per share and lower margins on public sales. ELECTRIC REVENUES Electric revenues were $829 million during the third quarters of both 1996 and 1995. As shown in the table below, FAC revenues increased $23.0 million, which reflects the increased payments made to unregulated generators. These increases were offset by lower electric sales to ultimate customers and a decrease in the amount of unbilled revenues recorded. The Company recorded $10.9 million of unbilled, non-cash revenues in the third quarter of 1995 in accordance with the 1995 rate order. There were no unbilled revenues recorded in the third quarter of 1996. FAC revenues $ 23.0 million Unbilled revenues (10.9) Changes in volume and mix of sales to ultimate customers (12.1) ------- $ - million ======= ELECTRIC SALES Electric Kwh sales to ultimate consumers were approximately 8.3 billion in the third quarter of 1996, a 0.4% decrease from the same period in 1995. After adjusting for the effects of weather, sales to ultimate consumers increased 3.0%. Sales for resale increased 157 million Kwhs or 13.6% due to an increased demand for electricity in the northeast, resulting in a net increase in total electric Kwh sales of 152 million or 1.6%. Sales for resale generally result in low margin contribution to the Company due to regulatory sharing mechanisms and relatively low prices caused by excess supply. Electric fuel and purchased power costs increased $19.2 million or 6.0%. This increase is the result of a $42.5 million increase in actual purchased power costs (including increased payments to unregulated generators of $37.8 million or 16.7%), partially offset by a $17.3 million decrease in costs deferred and recovered through the operation of the FAC and a $6.0 million decrease in actual fuel costs. The decrease in fuel costs reflects a 5.6% decrease in Company generation due to unregulated generator purchase requirements, which reduced the operation of the Company's fossil plants during the third quarter of 1996. GAS REVENUES Gas revenues increased $8.4 million or 14.5% in the third quarter of 1996 from the comparable period in 1995 as set forth in the table below: Sales to ultimate consumers $ 2.7 million Purchased gas adjustment clause revenues 1.3 Spot market sales 4.4 ----- $ 8.4 million ===== GAS SALES Gas sales to ultimate consumers increased .1 million Dth or 3.0% from 1995. After adjusting for the effects of weather, sales to ultimate consumers decreased 4.3%. Spot market sales (sales for resale) which are generally from the higher priced gas available to the Company and therefore yield margins that are substantially lower than traditional sales to ultimate consumers, also increased. In addition, changes in purchased gas adjustment clause revenues are generally margin-neutral. The total cost of gas included in expense increased $8.9 million or 52.1% in 1996. This was the result of a 0.9 million increase in Dth purchased and withdrawn from storage for ultimate consumer sales ($5.1 million) and a $4.1 million increase in Dth purchased for spot market sales and a $1.8 million increase in purchased gas costs and certain other items recognized and recovered through the purchased gas adjustment clause (GAC), partially offset by a 5.5% decrease in the average cost per Dth purchased ($2.1 million). The Company's net cost per Dth sold, as charged to expense and excluding spot market purchases, increased to $3.37 in 1996 from $2.96 in 1995. OTHER OPERATION AND MAINTENANCE EXPENSES increased $84.1 million primarily as a result of a charge of $68.5 million, reflecting an increase in the Company's allowance for doubtful accounts to recognize the increased risk of collection inherent in significantly higher levels of past-due customer bills. (See - "Increase in Allowance for Doubtful Accounts.") In addition, the Company experienced an increase in bad debt write-offs of $8.6 million. FEDERAL AND FOREIGN INCOME TAXES (NET) decreased $34.9 million as a result of a decrease in pre-tax income. OTHER TAXES decreased by approximately $10.8 million primarily as a result of lower real estate taxes ($3.5 million) and year-to- year differences in the accounting of regulatory deferrals ($4.4 million). NINE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1995 Earnings for the first nine months of 1996 were $107.4 million or 74 cents per share, as compared with $190.2 million or $1.32 per share in 1995. Earnings for the first nine months of 1996 were lower because 1995 earnings included the recording of a one-time, non-cash adjustment of prior years' DSM incentive revenues of $17 million, $9.4 million of revenues earned under the Unit 1 operating incentive sharing mechanism and a gain on the sale of HYDRA-CO of $11.3 million that collectively increased 1995 earnings by 17 cents per share. In addition, an increase in bad debt expense of $21.0 million or 9 cents per share and a charge of $68.5 million or 31 cents per share to increase the Company's allowance for doubtful accounts to properly recognize the increased risk of collecting significantly higher levels of past due customer bills also contributed to lower 1996 earnings. ELECTRIC REVENUES As shown in the table below, electric revenues, decreased $37.8 million or 1.5% from 1995, primarily due to a decrease in miscellaneous electric revenues. Miscellaneous electric revenues were lower in 1996 because 1995 electric revenues included the recording of $66.4 million of unbilled, non-cash revenues in accordance with the 1995 rate order, $9.4 million of revenues earned under the Unit 1 operating incentive sharing mechanism and a one-time, non-cash adjustment of prior year's DSM incentive revenues of $17 million. However, higher electric sales due to the colder weather and higher electric rates (effective April 26, 1995) partly offset those factors that contributed to lower electric revenues. Increase in base rates $ 44.9 million Sales to other electric utilities 24.5 Unit 1 incentive surcharge ( 9.4) Changes in volume and mix of sales to ultimate customers ( 9.7) DSM revenues (21.7) Unbilled revenues (66.4) ------- $(37.8) million ======= ELECTRIC SALES Electric Kwh sales to ultimate consumers were approximately 25.3 billion in 1996, a 1.3% increase from the same period in 1995 primarily as a result of colder weather. After adjusting for the effects of weather, sales to ultimate consumers would have increased 1.2%. Sales for resale increased 1,192 million Kwh (41.7%) due to increased demand for electricity in the northeast, resulting in a net increase in total electric Kwh sales of 1,545 million (5.5%). Sales for resale generally result in low margin contribution to the Company due to regulatory sharing mechanisms and relatively low prices caused by excess supply.
NINE MONTHS ENDED SEPTEMBER 30, ELECTRIC REVENUES (Thousands) SALES (GwHrs) ---------------------------------- -------------------------- % % 1996 1995 Change 1996 1995 Change Residential $ 958,368 $ 922,152 3.9 7,767 7,644 1.6 Commercial 936,885 942,443 (0.6) 8,790 8,776 0.2 Industrial 393,093 399,503 (1.6) 5,374 5,328 0.9 Industrial - Special 43,709 42,452 3.0 3,230 3,112 3.8 Other 39,821 37,332 6.7 178 160 11.3 --------- ---------- ------ ------ ------ ---- Total to Ultimate Consumers 2,371,876 2,343,882 1.2 25,339 25,020 1.3 Other Electric Systems 85,385 60,891 40.2 4,051 2,859 41.7 Miscellaneous 13,154 103,882 (87.3) - - - Subsidiary 14,549 14,133 2.9 303 269 12.6 ---------- --------- ------ ----- ------- ---- TOTAL $2,484,964 $2,522,788 (1.5) 29,693 28,148 5.5 ========== ========== ====== ====== ====== ==== /TABLE As indicated in the table below, internal generation increased in 1996, principally at Unit 1 and Unit 2. From February 8, 1995 to April 4, 1995, Unit 1 was taken out of service for a planned refueling and maintenance outage. From April 8, 1995 to June 2, 1995, Unit 2 was taken out for a planned refueling and maintenance outage. The amount of electricity delivered to the Company by unregulated generators decreased by approximately 468 GwHrs or 4.5%, but total unregulated generator costs increased by approximately $80.6 million or 11.1%, as explained below. HYDROELECTRIC UNREGULATED GENERATOR PROJECTS Due to high precipitation and spring run-off levels so far this year, hydroelectric unregulated generator projects produced and therefore increased energy deliveries to the Company by 586 GwHrs under PPAs resulting in increased payments to those unregulated generators of $53.3 million. In addition, a major new hydroelectric unregulated generator came on line in November 1995, contributing to the increase in hydroelectric deliveries. "MUST RUN" UNREGULATED GENERATOR COGENERATION PROJECTS A substantial portion of the Company's portfolio of unregulated generator projects operate on a "must run" basis. This means that they tend to run to the maximum production levels regardless of the need or economic value of the electricity produced. Despite delivering 590 GwHrs less, due to a higher weighted average price, payments to "must run" unregulated generators increased $3.0 million. With respect to "must run" unregulated generator cogeneration projects, a number of elements combined to reduce the aggregate deliveries from "must run" unregulated generators. These elements included renegotiation of certain contracts, maintenance outages at certain unregulated generator facilities and lower deliveries from other facilities. SCHEDULABLE COGENERATION PROJECTS The Company has renegotiated PPAs with a number of unregulated generator cogeneration projects in order to obtain the right to schedule the electricity deliveries of the project. The terms of these PPAs allow the Company to schedule energy deliveries from the facilities and then pay for the energy delivered. The Company is also required to make fixed payments, whether or not the unregulated generator plant produces electricity so long as it is available for service. (See Form 10-K for the fiscal year ended December 31, 1995, Part II, Item 8. Notes to Consolidated Financial Statements - Note 9. Commitments and Contingencies - "Long-term Contracts for the Purchase of Electric Power.") Quantities from schedulable cogeneration unregulated generators decreased 464 GwHrs. Payments to schedulable unregulated generators increased by $24.3 million, primarily due to increased fixed payments of approximately $25.6 million. The increase in fixed payments is caused by a new schedulable unregulated generator whose plant came on line in May 1995 and due to escalation factors included in the PPAs. In addition, payments to schedulable unregulated generators reflect the increase in the cost of natural gas.
NINE MONTHS ENDED SEPTEMBER 30, GwHrs Cost (Millions) Cents/Kwhr. ----------------------- -------------------------- ------------ % % 1996 1995 Change 1996 1995 Change 1996 1995 FUEL FOR ELECTRIC GENERATION: Coal 5,314 5,150 3.2 $ 75.2 $ 74.8 0.5 1.4 1.5 Oil 392 469 (16.4) 17.0 19.0 (10.5) 4.3 4.1 Natural Gas 244 934 (73.9) 7.1 18.4 (61.4) 2.9 2.0 Nuclear 6,417 4,889 31.3 36.1 27.7 30.3 0.6 0.6 Hydro 2,883 2,021 42.7 - - - - - ------ ------ ----- -------- ------ ----- --- --- 15,250 13,463 13.3 135.4 139.9 (3.2) 0.9 1.0 ------ ------ ----- -------- ------ ----- --- --- ELECTRICITY PURCHASED: Unregulated Generators: Capacity - - - 158.4 132.8 19.3 - - Energy and taxes 10,027 10,495 (4.5) 649.7 594.7 9.2 6.5 5.7 ------ ------ ------ --------- ------ ------- --- --- Total UG purchases 10,027 10,495 (4.5) 808.1 727.5 11.1 8.1 6.9 Other 7,159 7,209 (0.7) 98.0 98.3 (0.3) 1.4 1.4 ------ ------ ------ --------- ------ ------- --- --- 17,186 17,704 (2.9) 906.1 825.8 9.7 5.3 4.7 ------ ------ ------ --------- ------ ------- --- --- 32,436 31,167 4.1 1,041.5 965.7 7.9 3.2 3.1 ------ ------ ------ --------- ------ ------- --- --- Fuel adjustment clause - - - (25.4) 14.1 (280.1) - - Losses/Company use 2,743 3,019 (9.1) - - - - - ------ ------ ------ --------- ------ ------- --- --- 29,693 28,148 5.5 $1,016.1 $979.8 3.7 3.4 3.5 ====== ====== ====== ========= ====== ======= === === /TABLE GAS REVENUES Gas revenues increased $106.5 million or 24.9% in 1996 from the comparable period in 1995 as set forth in the table below: Sales to ultimate customers $ 46.0 million Spot market sales 32.3 Purchased gas adjustment clause revenues 28.2 ------ $106.5 million ======= GAS SALES Due to colder weather during the first quarter of 1996, gas sales to ultimate consumers for the first nine months of 1996 increased 8.5 million Dth or 14.5% from 1995. After adjusting for the effects of weather, sales to ultimate consumers decreased 5.8%. Spot market sales (sales for resale), which are generally from the higher priced gas available to the Company and therefore yield margins that are substantially lower than traditional sales to ultimate consumers, also increased. In addition, changes in purchased gas adjustment clause revenues are generally margin- neutral.
NINE MONTHS ENDED SEPTEMBER 30, GAS REVENUES (Thousands) SALES (Thousands of Dth) ------------------------------- ------------------------------- % % 1996 1995 Change 1996 1995 Change Residential $326,778 $275,513 18.6 44,692 39,030 14.5 Commercial 127,638 105,086 21.5 19,900 17,474 13.9 Industrial 11,205 8,224 36.2 2,301 1,925 19.5 -------- -------- --------- ------- ------- -------- Total to Ultimate Consumers 465,621 388,823 19.8 66,893 58,429 14.5 Other Gas Systems 101 705 (85.7) 22 150 (85.3) Transportation of Customer-Owned Gas 35,806 34,993 2.3 95,965 107,395 (10.6) Spot Market Sales 33,299 1,038 3,108.0 9,298 551 1,587.5 Miscellaneous (244) 2,513 (109.7) - - - -------- -------- --------- ------- ------- -------- TOTAL TO SYSTEM CORE CUSTOMERS $534,583 $428,072 24.9 172,178 166,525 3.4 ======== ======== ========= ======= ======= ========
The total cost of gas included in expense increased $95.8 million or 47.7%. This was the result of a 9.1 million increase in Dth purchased and withdrawn from storage for ultimate consumer sales ($29.2 million) and a $25.9 million increase in Dth purchased for spot market sales, coupled with a 9.4% increase in the average cost per Dth purchased ($19.7 million) and a $21.0 million increase in purchased gas costs and certain other items recognized and recovered through the purchased GAC. The Company's net cost per Dth sold, as charged to expense and excluding spot market purchases, increased to $4.11 in the first nine months of 1996 from $3.53 in the same period in 1995. OTHER OPERATION AND MAINTENANCE EXPENSES increased $101.5 million primarily as a result of a charge of $68.5 million, reflecting an increase in the Company's allowance for doubtful accounts to recognize the increased risk of collection inherent in significantly higher levels of past-due customer bills (See "Increase in Allowance for Doubtful Accounts.") In addition, the Company experienced an increase in bad debt expense of $21.0 million. This was partially offset by a decrease in Unit 1 and Unit 2 operation and maintenance costs which were higher in 1995 as a result of planned refueling and maintenance outages. On February 8, 1995, Unit 1 was taken out of service for a planned refueling and maintenance outage and returned to service on April 4, 1995. Its next refueling and maintenance outage is scheduled to begin in February 1997. On April 8, 1995, Unit 2 was taken out of service for a planned refueling and maintenance outage and returned to service on June 2, 1995. On September 27, 1996, Unit 2 was taken out for a planned refueling and maintenance outage and returned to service on November 2, 1996. OTHER ITEMS (NET) decreased by $6.3 million in the first nine months of 1996 from the comparable period in 1995 principally because 1995 included a $21.6 million pre-tax gain from the sale of HYDRA-CO, partially offset by certain accounting requirements of the 1995 rate order. FEDERAL AND FOREIGN INCOME TAXES (NET) decreased by approximately $69.8 million primarily due to a decrease in pre-tax income. OTHER TAXES decreased by approximately $27.1 million primarily as a result of lower real estate taxes ($6.2 million) and year-to- year differences in the accounting for regulatory deferrals ($15.6 million). PART II. OTHER INFORMATION - --------------------------- NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- ITEM 5. OTHER INFORMATION. NRC DRAFT POLICY STATEMENT In September 1996, the NRC issued a draft policy statement on the Restructuring and Economic Deregulation of the Electric Utility Industry (Draft Policy Statement). The policy statement addresses NRC's concerns about the adequacy of decommissioning funds and about the potential impact on operational safety. Current NRC regulations allow a utility to set aside decommissioning funds annually over the estimated life of a plant (See Form 10-K for the fiscal year ended December 31, 1995, Part II, Item 8. Notes to Consolidated Financial Statements - Note 3. Nuclear Operations - "Nuclear Plant Decommissioning.") The policy statement declares the NRC will: - Continue to conduct reviews of financial qualifications, decommissioning funding and antitrust requirements of nuclear power plants; - Establish and maintain working relationships with state and federal rate-regulators; - Evaluate the relative responsibilities of power plant co- owners and co-licensees; and - Re-evaluate the adequacy of current regulations in light of economic and other changes resulting from rate deregulation. In addition, the policy statement stresses that no license may be transferred without prior written approvals from the NRC. In addition, prior written approvals are required for mergers, formation of holding companies or the sale of facilities, including a partial sale. The Company is currently evaluating the Draft Policy Statement and plans to file its comments by the December 9, 1996 due date. NEW YORK NUCLEAR OPERATING COMPANY In October 1996, the Company and Rochester Gas and Electric Corporation (RG&E) announced plans to form a joint nuclear operating company to support and manage the operations of RG&E's Ginna nuclear plant and the Company's Unit 1 and Unit 2 nuclear plants. The plan includes the initial formation of a nuclear services company, called the New York Nuclear Operating Company, to provide support services such as quality assessment, emergency preparedness, engineering support and fuel management. Ultimately, the plan calls for the creation of a joint operating company to manage the three plants. The Company's executive vice president and chief nuclear officer, B. Ralph Sylvia, has been selected to initially head the formation of the nuclear services and operating company. NM RECEIVABLES CORPORATION The Company has established a single-purpose wholly-owned subsidiary, NM Receivables Corporation, to facilitate its sale of an individed interest in a designated pool of customer receivables, including accrued unbilled revenues. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: Exhibit 3(ii) - By-laws of NMPC, as amended September 26, 1996. Exhibit 10-11 - NMPC Officers' Long Term Incentive Compensation - Plan Document. Exhibit 10-17 - Employment Agreement between NMPC and David J. Arrington, Sr. Vice President, Human Resources, dated July 1, 1996. Exhibit 10-18 - Employment Agreement between NMPC and Albert J. Budney, Jr., President and Chief Operating Officer, dated July 1, 1996. Exhibit 10-19 - Employment Agreement between NMPC and William E. Davis, Chairman of the Board and Chief Executive Officer, dated July 1, 1996. Exhibit 10-20 - Employment Agreement between NMPC and Darlene D. Kerr, Sr. Vice President, Energy Distribution dated July 1, 1996. Exhibit 10-21 - Employment Agreement between NMPC and Gary J. Lavine, Sr. Vice President, Legal and Corporate Relations, dated July 1, 1996. Exhibit 10-22 - Employment Agreement between NMPC and John W. Powers, Sr. Vice President and Chief Financial Officer, dated July 1, 1996. Exhibit 10-23 - Employment Agreement between NMPC and B. Ralph Sylvia, Executive Vice President, Electric Generation and Chief Nuclear Officer, dated July 1, 1996. Exhibit 11 - Computation of the Average Number of Shares of Common Stock Outstanding for the Three Months and Nine Months Ended September 30, 1996 and 1995. Exhibit 12 - Statement Showing Computations of Ratio of Earnings to Fixed Charges, Ratio of Earnings to Fixed Charges without AFC and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends for the Twelve Months Ended September 30, 1996. Exhibit 15 - Accountants' Acknowledgement Letter. Exhibit 27 - Financial Data Schedule. In accordance with Paragraph 4(iii) of Item 601(b) of Regulation S-K, the Company agrees to furnish to the Securities and Exchange Commission, upon request, a copy of the agreements comprising the $804 million senior debt facility that the Company completed with a bank group during March 1996. The total amount of long-term debt authorized under such agreement does not exceed 10 percent of the total consolidated assets of the Company and its subsidiaries. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter for which this report is filed. NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NIAGARA MOHAWK POWER CORPORATION (Registrant) Date: November 13, 1996 By /s/ Steven W. Tasker -------------------- Steven W. Tasker Vice President-Controller and Principal Accounting Officer NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- EXHIBIT INDEX - ------------- EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 3(ii) By-laws of NMPC, as amended September 26, 1996. 10-11 NMPC Officers' Long Term Incentive Compensation - Plan Document. 10-17 Employment Agreement between NMPC and David J. Arrington, Sr. Vice President, Human Resources, dated July 1, 1996. 10-18 Employment Agreement between NMPC and Albert J. Budney, Jr., President and Chief Operating Officer, dated July 1, 1996. 10-19 Employment Agreement between NMPC and William E. Davis, Chairman of the Board and Chief Executive Officer, dated July 1, 1996. 10-20 Employment Agreement between NMPC and Darlene D. Kerr, Sr. Vice President, Energy Distribution, dated July 1, 1996. 10-21 Employment Agreement between NMPC and Gary J. Lavine, Sr. Vice President, Legal and Corporate Relations, dated July 1, 1996. 10-22 Employment Agreement between NMPC and John W. Powers, Sr. Vice President and Chief Financial Officer, dated July 1, 1996. 10-23 Employment Agreement between NMPC and B. Ralph Sylvia, Executive Vice President, Electric Generation and Chief Nuclear Officer, dated July 1, 1996. 11 Computation of the Average Number of Shares of Common Stock Outstanding for the Three Months and Nine Months Ended September 30, 1996 and 1995. 12 Statement Showing Computations of Ratio of Earnings to Fixed Charges, Ratio of Earnings to Fixed Charges without AFC and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends for the Twelve Months Ended September 30, 1996. 15 Accountants' Acknowledgement Letter. 27 Financial Data Schedule. EXHIBIT 3(ii) BY-LAWS - ------- NIAGARA MOHAWK POWER CORPORATION - -------------------------------- ADOPTED JANUARY 5, 1950 - ----------------------- (As Amended September 26, 1996) *Index Additional Officers Lost Stock Certificates Adjournments Notices of Meetings Amendments Officers Annual Meeting Place of Meeting Assistant Officers President Audit Committee Procedure Bonds Proxies Certificate of Stock Quorum Chairman of the Board Record Date Committees Registrar Compensation Resignation Controller Scrip Corporate Charter Secretary Corporate Seal Special Meetings Directors Stock Directors' Meetings Stockholders' Meetings Election Term of Office Executive Committee Transfer Agent Finance Committee Transfers of Shares Finances Treasurer Fiscal Year Vacancies General Provisions Vice Presidents Indemnification; Insurance Voting Inspectors of Election *This Index does not constitute part of the By-Laws or have any bearing upon the interpretation of their terms and provisions. BY-LAWS OF NIAGARA MOHAWK POWER CORPORATION ARTICLE I - --------- BY-LAWS SUPPLEMENT CORPORATE CHARTER - ------------------------------------ SECTION 1. CORPORATE CHARTER: The provisions of these by-laws supplement the corporate charter. The provisions of the latter shall govern over the provisions of these by-laws in the event of any conflict. Elections of directors and meetings of stockholders in addition to those provided by these by-laws may be held in accordance with the provisions of the corporate charter. The term "corporate charter" as used in these by-laws includes the Certificate of Consolidation of Antwerp Light and Power Company, Baldwinsville Light and Heat Company of Baldwinsville, N.Y., Fulton Fuel and Light Company, Fulton Light, Heat and Power Company, Malone Light and Power Company, Northern New York Utilities, Inc., The Norwood Electric Light and Power Company, Peoples Gas and Electric Company of Oswego, St. Lawrence County Utilities, Inc., St. Lawrence Valley Power Corporation, The Syracuse Lighting Company, Inc., and Utica Gas and Electric Company forming Niagara Hudson Public Service Corporation, filed in the Department of State of the State of New York on July 31, 1937, all certificates supplemental thereto or amendatory thereof or in restatement thereof filed in the Department of State of the State of New York (including specifically but without limitation among all such supplemental or amendatory certificates heretofore filed or hereafter to be filed, the Certificate of Change of Name of Niagara Hudson Public Service Corporation to Central New York Power Corporation, filed in the Department of State of the State of New York on September 15, 1937, the Certificate of Consolidation of New York Power and Light Corporation and Buffalo Niagara Electric Corporation and Central New York Power Corporation which is to survive the consolidation and be named Niagara Mohawk Power Corporation pursuant to Sections 26-a and 86 of the Stock Corporation Law and to Subdivision 4 of Section 11 of the Transportation Corporations Law, filed in the Department of State of the State of New York on January 5, 1950, and the Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk Power Corporation pursuant to Sections 26-a and 36 of the Stock Corporation Law, filed in the Department of State of the State of New York on January 5, 1950), and includes also all resolutions of the board of directors fixing the designations, preferences, privileges and voting powers of any series of stock of the corporation, and all other instruments which are binding upon, and define or set forth the rights of, the stockholders of the corporation. ARTICLE II - ---------- MEETINGS OF STOCKHOLDERS - ------------------------ SECTION 1. ANNUAL MEETING: The annual meeting of the stockholders of the corporation for the election of directors and the transaction of such other business as may properly come before it shall be held on the first Tuesday in May in each year. If that day be a legal holiday in any year, the meeting shall be held on the next day following that is not a legal holiday. Business properly brought before any such annual meeting shall include matters specifically set forth in the corporation's proxy statement with respect to such meeting, matters which the Chairman of the Board of Directors in his sole discretion causes to be placed on the agenda of any such annual meeting and (i) any proposal of a stockholder of this corporation and (ii) any nomination by a stockholder of a person or persons for election as director or directors, if such stockholder has made a written request to this corporation to have such proposal or nomination considered at such annual meeting, as provided herein, and further provided that such proposal or nomination is otherwise proper for consideration under applicable law and the certificate of incorporation and by-laws of the corporation. Notice of any proposal to be presented by any stockholder or of the name of any person to be nominated by any stockholder for election as a director of the corporation must be received by the secretary of the corporation at its principal executive office not less than 45 nor more than 90 days prior to the date of the annual meeting; provided, however, that if the date of the annual meeting is first publicly announced or disclosed (in a public filing or otherwise) less than 55 days prior to the date of the meeting, such notice shall be given not more than ten days after such date is first so announced or disclosed. Public notice shall be deemed to have been given more than 55 days in advance of the annual meeting if the corporation shall have previously disclosed, in these by-laws or otherwise, that the annual meeting in each year is to be held on a determinable date, unless and until the Board of Directors determines to hold the meeting on a different date. Any stockholder who gives notice of any such proposal shall deliver therewith the text of the proposal to be presented and a brief written statement of the reasons why such stockholder favors the proposal and setting forth such stockholder's name and address, the number and class of all shares of each class of stock of the corporation beneficially owned by such stockholder and any material interest of such stockholder in the proposal (other than as a stockholder). Any stockholder desiring to nominate any person for election as a director of the corporation shall deliver with such notice a statement in writing setting forth the name of the person to be nominated, the number and class of all shares of each class of stock of the corporation beneficially owned by such person, the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation subsequently adopted by the Securities and Exchange Commission applicable to the corporation), such person's signed consent to serve as a director of the corporation if elected, such stockholder's name and address and the number and class of all shares of each class of stock of the corporation beneficially owned by such stockholder. As used herein, shares "beneficially owned" shall mean all shares as to which such person, together with such person's affiliates and associates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as well as all shares as to which such person, together with such person's affiliates and associates, has the right to become the beneficial owner pursuant to any agreement or understanding, or upon the exercise of warrants, option or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall determine whether such notice has been duly given and shall direct that proposals and nominees not be considered if such notice has not been so given. SECTION 2. SPECIAL MEETINGS: Special meetings of the stockholders of the corporation may be called at any time by a majority of the entire board of directors or by the Chairman of the Board or the President. Such request shall state the purpose or purposes of the proposed meeting. Special meetings of stockholders for the election of directors in accordance with the provisions of the corporate charter providing for a special election of directors in the event of default in the payment of dividends on the preferred stock or preference stock for a specified period and on the termination of such default may be called as provided in the corporate charter. SECTION 3. PLACE AND NOTICE OF STOCKHOLDERS' MEETINGS: Meetings of Stockholders shall be held at the principal office of the corporation in the City of Syracuse, New York, or at such other place or places in the State of New York as may be determined from time to time by the board of directors. For meetings other than annual meetings, the notice shall also state by and at whose direction and for what purpose or purposes the meeting is called. If the manner of giving notice of the meeting is not specified by law or the corporate charter, notice shall be given by mailing, postage prepaid, not less than ten (10) nor more than fifty (50) days before such meeting, a copy of the notice of such meeting, stating the purpose or purposes for which the meeting is called and the time when and the place where it is to be held, to each stockholder of record on the record date established pursuant to Article VII, Section 4 entitled to vote at the meeting at his address as it appears on the stock book of the corporation, unless he shall have filed with the Secretary of the corporation a written request that notices intended for him be mailed to some other address, in which case it shall be mailed to the address designated in such request. If, at any meeting, action is proposed to be taken which would, if taken, entitle shareholders fulfilling the requirements of Section 623 of the New York Business Corporation Law to receive payment for their shares, the notice of such meeting shall also include a statement to that effect. SECTION 4. BUSINESS AT STOCKHOLDERS' MEETINGS: Business transacted at all meetings of stockholders shall be confined to the objects stated in the notice of the meeting and matters germane thereto. In the absence of fraud, the determination of the holders of a majority of the stock present in person or by proxy and entitled to vote at the meeting shall be conclusive as to whether any proposed action or proceeding at such meeting is within the scope of the notice of such meeting. SECTION 5. PROCEDURE: The order of business and all other matters of procedure at every meeting of stockholders may be determined by the presiding officer. SECTION 6. QUORUM: Except as otherwise provided by law or in the corporate charter, the presence of a majority of the holders of shares, in person or by proxy, entitled to vote thereat shall constitute a quorum at any shareholders' meeting. SECTION 7. ADJOURNMENTS: Except as otherwise provided by the corporate charter, the stockholders entitled to vote who are present in person or by proxy at any meeting of stockholders, whether or not a quorum shall be present or represented at the meeting, shall have power by a majority vote to adjourn the meeting from time to time without further notice other than announcement at the meeting, unless the board of directors shall fix a new record date in respect of such adjourned meeting, in which case the provisions of Section 3 of this Article shall apply. At any adjourned meeting at which the requisite amount of voting stock shall be present in person or by proxy any business may be transacted which might have been transacted at the meeting as originally called, and the stockholders entitled to vote at the meeting as originally called, and no others, unless the board of directors shall have fixed a new record date in respect thereof, shall be entitled to vote at such adjourned meeting. SECTION 8. VOTING: Whenever an action shall require the vote of stockholders, the tabulations that identify the particular vote of a stockholder on all proxies, consents, authorizations and ballots shall be kept confidential, except as disclosure may be required (i) by applicable law, (ii) in pursuit or defense of legal proceedings, (iii) to resolve a bona fide dispute as to the authenticity of one or more proxies, consents, authorizations or ballots or as to the accuracy of any tabulation of such proxies, consents, authorizations or ballots, (iv) if an individual stockholder requests that his or her vote and identity be forwarded to the corporation, or (v) in the event of a proxy or consent solicitation in opposition to the solicitation of the Board of Directors of the corporation; and the receipt and tabulation of such votes will be by an independent third party not affiliated with the corporation. Comments written on proxies, consents, authorizations and ballots will be transcribed and provided to the secretary of the corporation without reference to the vote of the stockholder, except where such stockholder has requested that the nature of their vote be forwarded to the corporation. Stockholders shall have such voting rights as may be granted by law and the provisions of the corporate charter. All questions presented to stockholders for decision shall be decided by a vote of shares. Voting may be viva voce unless a stockholder present in person or by proxy and entitled to vote at the meeting shall demand a vote by ballot in which event a vote by ballot shall be taken. Except where otherwise provided by law, the corporate charter or these by-laws, elections shall be determined by a plurality vote and all other questions that shall be submitted to stockholders for decision shall be decided by a majority of the votes cast. SECTION 9. INSPECTORS OF ELECTION: Two inspectors of election who are not employees or directors of the corporation, shall be appointed by the directors to serve at each meeting of stockholders, or of a class of stockholders, such inspectors to serve at such meeting and any adjournments thereof; and such inspectors shall have authority to count and report upon the votes cast at such meeting upon the election of directors and such other questions as may be voted upon by ballot. In the event that any such inspector of election shall not have been appointed by the directors to serve at such meeting, or, having been appointed, shall be absent from such meeting or adjournment or unable to serve thereat, such inspector shall be appointed by the presiding officer at such meeting or adjournment. The inspectors appointed to act at any meeting of stockholders, before entering upon the discharge of their duties, shall be sworn faithfully to execute the duties of inspectors at such meeting with strict impartiality and according to the best of their ability, and the oath so taken shall be subscribed by them and shall be filed in the records of such meeting. The inspectors shall be responsible for determining the number of shares outstanding, the voting power of each, the shares represented at the meeting, the existence of a quorum, and the validity and effect of any proxies. They shall also receive and tabulate all votes, ballots or consents and determine the result of any election, hear and determine all challenges and questions arising in connection with any election and do such acts to conduct the election according to the applicable provisions of law of the State of New York. SECTION 10. PROXIES: Each stockholder entitled to vote at any meeting of stockholders may be represented and vote at such meeting by his proxy, authorized and acting in manner as provided by the applicable laws of the State of New York. No proxy shall be valid after the expiration of eleven (11) months from the date of its execution unless otherwise provided in the proxy in accordance with law. ARTICLE III - ----------- DIRECTORS - --------- SECTION 1. NUMBER AND QUALIFICATIONS: Except as otherwise required by the provisions of the corporate charter relating to the rights of the holders of any class or series of preferred or preference stock having a preference over the common stock as to dividends or to elect directors under specified circumstances, the board of directors shall consist of not less than nine (9) nor more than twenty-one (21) persons, the exact number initially to be fifteen (15) persons, subject to change from time to time to any number not less than nine (9) nor more than twenty-one (21) persons by the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the board for adoption). Directors need not be stockholders. No person, other than those serving on November 11, 1976, who has reached age 70 shall stand for election as a director. SECTION 2. ELECTION AND TENURE OF OFFICE: Except as otherwise provided by law, the corporate charter or these by-laws, the directors of the corporation shall be elected at the annual meeting of the stockholders or at any meeting of the stockholders held in lieu of such annual meeting, which meeting, for the purposes of these by-laws, shall be deemed the annual meeting. The directors shall be classified, with respect to the time for which they severally hold office into three classes, as nearly equal in number as possible, one class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1989, another class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1990, and another class to hold office initially for a term expiring at the annual meeting of stockholders to be held in 1991, with the members of each class to hold office until their successors are elected and qualified. At each annual meeting of the stockholders of the corporation, the successors to the class of directors whose terms expire at that meeting shall be elected, to hold office until the annual meeting of stockholders held in the third year following the year of their election. Except as otherwise provided in the corporate charter, the directors shall hold office until the annual meeting at which their respective terms expire and until their successors are elected and have qualified. The election of directors shall be conducted by two inspectors of election appointed as hereinbefore provided. The election need not be by ballot and shall be decided by a plurality vote. SECTION 3. RESIGNATION; REMOVAL: Any director of the corporation may resign at any time by giving his resignation to the chief executive officer of the corporation, or to the Secretary. Such resignation shall take effect at the time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Subject to the rights of the holders of any class or series of preferred or preference stock having preference over the holders of common stock as to dividends or to elect directors under specified circumstances, any director, or the entire board of directors, may be removed from office at any time, but only for cause. SECTION 4. VACANCIES: Except as otherwise provided by the corporate charter, if the office of any director becomes vacant for any reason, a majority of the directors then in office, whether or not such majority shall constitute a quorum, may choose a successor who, to the extent required by New York law, shall hold office until the next annual meeting of stockholders at which the election of directors is in the regular order of business and until his successor has been elected and qualified; provided that if New York law does not so require, such director shall hold office for the full unexpired term of the director whose seat he is filling, or any such vacancy in the board of directors may be filled by the stockholders entitled to vote at any meeting of stockholders, notice of which shall have referred to the proposed election. Except as otherwise provided by the corporate charter, in the event of an increase in the number of directors pursuant to Section 1 of this Article III, a majority of the directors then in office, whether or not such majority shall constitute a quorum, may elect the additional director or directors who to the extent required by New York law, shall hold office until the next annual meeting of stockholders at which the election of directors is in the regular order of business and until his successor has been elected and qualified; provided that if New York law does not so require, such director or directors shall hold office for the full unexpired term of the class of directors to which such director or directors is elected, or any such director or directors may be elected by the stockholders entitled to vote at any meeting of stockholders, notice of which shall have referred to the proposed election. No decrease in the number of authorized directors constituting the entire board of directors shall shorten the term of any incumbent director. SECTION 5. COMPENSATION: Members of the board of directors shall be entitled to compensation for service and the board of directors may assign duties to any member or members of the board and may fix the amount of compensation therefor, which shall be a charge to be paid by the corporation. The board of directors may elect or appoint members of the board as officers, members of committees, or agents of the corporation, may assign duties to be performed and may fix the amount of the respective salaries, fees or other compensation thereto, and the amount so fixed shall be a charge to be paid by the corporation. In addition to any other compensation provided pursuant to these by-laws, each director shall be entitled to receive a fee, in amount as fixed from time to time by resolution of the board of directors, for attendance at any meeting of the board, or of any committee of the board, together with his expenses of attendance, if any. SECTION 6. MEETINGS OF DIRECTORS: Regular meetings of the board of directors shall be held at such times and at such places as may be determined by the board of directors, or by the Chairman of the Board or by the President. Special meetings of the board may be called from time to time by any three directors, or by the Chairman of the Board or by the President. Any action required or permitted to be taken by the board or any committee thereof may be taken without a meeting if all board or committee members file one or more written consents to a resolution authorizing the action with the respective minutes of the board or committee as the case may be. Any one or more members of the board or of any of its committees may participate in a meeting of the board or committee by conference telephone or similar communications equipment allowing all participants in the meeting to hear each other at the same time. Participation by such means shall constitute presence at a meeting. SECTION 7. NOTICE OF MEETINGS OF BOARD OF DIRECTORS: Notice of each meeting of the board of directors, stating the time and place thereof, shall be given to each member of the board by the Secretary, or an Assistant Secretary, by mailing the same, postage prepaid, addressed to each member of the board at his residence or usual place of business not less than three (3) days before the meeting, or by delivering the same to each member of the board personally or to his residence or usual place of business, or by sending the same by telegraph to his residence or usual place of business, not less than two (2) days before the meeting. Meetings of the board of directors may also be held at any time and place without notice provided all the members are present at such meeting without protest or, at any time before or after the meeting, shall sign a written waiver of notice. The notice of any meeting of the board of directors need not specify the purpose or purposes for which the meeting is called, except as otherwise expressly provided in these by-laws. SECTION 8. QUORUM: At all meetings of the board of directors, except where otherwise provided by law, the corporate charter, or these by-laws, a quorum shall be required for the transaction of business and shall consist of not less than one-third of the entire board, if the number of members be more than nine (9), but not less than a majority, if the number of directors be less than nine (9); and the vote of a majority of the directors present shall decide any questions that may come before the meeting. A majority of the directors present at any meeting, although less than a quorum, may adjourn the same from time to time, without notice other than announcement at the meeting, until a quorum is present. SECTION 9. PROCEDURE: The order of business and all other matters of procedure at every meeting of directors may be determined by the presiding member. ARTICLE IV - ---------- COMMITTEES OF DIRECTORS - ----------------------- SECTION 1. DESIGNATION: The board of directors, by resolution or resolutions adopted by a majority of the entire board, shall designate an Executive Committee, an Audit Committee and a Finance Committee, and may designate one or more other committees, each committee to consist of three (3) or more directors of the corporation. In the interim between meetings of the board, the Executive Committee shall have and may exercise the powers of the board of directors granted by the corporate charter and these by-laws and by resolution of the board, and such other committees shall have only such powers as shall be granted by these by-laws and by resolution of the board; provided, however, that no committee shall have authority as to the following matters: (a) The submission to shareholders of any action that needs shareholders' approval by law; (b) The filling of vacancies in the board of directors or in any committee; (c) The fixing of compensation of the directors for serving on the board or on any committee; (d) The amendment or repeal of the by-laws, or the adoption of new by-laws; or (e) The amendment or repeal of any resolution of the board which, by its terms, shall not be so amendable or repealable. Each committee shall serve at the pleasure of the board of directors and shall have such name or names as may be determined from time to time by the by-laws or by resolution or resolutions adopted by the board of directors. Except as otherwise required by law, the existence of any such committee may be terminated, or its powers and authority modified, at any time by resolution of the board of directors. SECTION 2. EXECUTIVE COMMITTEE: When the board of directors is not in session, the Executive Committee shall have all of the authority of the board of directors, except it shall have no authority as to the matters specified in Section 1 of this Article IV. The Chairman of the Board shall be Chairman of the Executive Committee. The members of the Executive Committee shall serve at the pleasure of the board of directors. SECTION 3. AUDIT COMMITTEE: The Audit Committee shall recommend to the board of directors the accounting firm to be selected by the board or to be recommended by it for shareholder approval, as independent auditor of the corporation and its subsidiaries; act on behalf of the board in meeting and reviewing with the independent auditors, the chief internal auditor and the appropriate corporate officers matters relating to corporate financial reporting and accounting procedures and policies, adequacy of internal controls and the scope of the respective audits of the independent auditors and the internal auditor; review the results of such audits with the respective auditing agency and reporting thereon to the board; review and make recommendations to the board concerning the independent auditor's fees and services; review interim and annual financial reports and disclosures and submit to the board any recommendations it may have from time to time with respect to financial reporting and accounting practices and policies; be consulted, and its consent obtained, prior to the selection or termination of the chief internal auditor; oversee matters involving compliance with Corporate business ethics policies including the work of the Business Ethics Council; review management's assessment of financial risks; authorize special investigations and studies, as appropriate, in fulfillment of its function as specified herein or by resolution of the board of directors; and perform any other duties or functions deemed appropriate by the board of directors. The Committee will conduct a self-assessment at least every three years of its performance in relation to its powers and responsibilities. The membership of such committee shall consist only of directors of the corporation who are not, and have not been, officers of the company. SECTION 4. FINANCE COMMITTEE: The Finance Committee shall exercise such powers of the board of directors as shall be provided in one or more resolutions of the board of directors with respect to the issuance by the corporation of securities and evidences of indebtedness and the participation by the corporation in other financing transactions and with respect to the authorization of the making, modification, alteration, termination or abrogation of notes, bills, mortgages, sales, deeds, financing leases, liens and contracts of the corporation and shall further be empowered to take any action in connection with the determination of the terms of any securities, evidences or indebtedness or other financing transactions of the corporation, the issuance of which by the corporation or the participation in which by the corporation shall have theretofore been approved by the board of directors, and shall further perform any other duties or functions deemed appropriate by the board of directors. SECTION 5. RECORDS AND PROCEDURE: Said committees shall keep regular minutes of their proceedings and report the same to the board when required. Unless otherwise determined by the board of directors each committee may appoint a chairman and a secretary and such other officers of the committee as it may deem advisable, may determine the time and place of holding each meeting of the committee, the notice of meetings to be given to members, and all other procedural questions which may arise in connection with the work of the committee. ARTICLE V - --------- OFFICERS - -------- SECTION 1. OFFICERS: The officers of the corporation shall consist of a Chairman of the Board, a President, one or more Vice-Presidents, a Secretary, a Controller, a Treasurer, and such Assistant Secretaries, Assistant Controllers and Assistant Treasurers and other officers as shall be elected or appointed by the board of directors. The board of directors may elect or appoint a General Counsel upon such terms and with such powers and duties as it may prescribe and may also designate the General Counsel an officer of the corporation. SECTION 2. ELECTION: The officers of the corporation shall be elected or appointed by the board of directors at the meeting of the board held after each annual meeting of the stockholders. The Chairman of the Board and the President shall be elected or appointed by the board of directors from among their number. Any number of Vice-Presidents, the Secretary, the Controller, the Treasurer and other officers established pursuant to resolution of the board of directors shall also be elected or appointed by the board of directors. SECTION 3. TERM OF OFFICE: The officers of the corporation shall hold office until the meeting of the board of directors held after the next annual meeting of the stockholders and until their successors are elected and have qualified, unless a shorter term is fixed or unless removed, subject to the provisions of law, by the board of directors. The Chairman of the Board, the President, any Vice-President, the Secretary, the Controller or the Treasurer may be removed at any time, with or without cause, by the board of directors provided that notice of the meeting at which such action shall have been taken shall set forth such action as one of the purposes of such meeting. Any other officer of the corporation may be removed at any time, with or without cause, by the board of directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the board of directors at any time to serve the remaining current term of that office. SECTION 4. CHAIRMAN OF THE BOARD: There shall be a chairman of the Board of Directors, with the official title "Chairman of the Board", who shall be the chief executive officer of the corporation. The Chairman of the Board shall preside at meetings of the stockholders, the board of directors and the Executive Committee. He shall recommend to the board policies to be followed by the corporation, and, subject to the board, shall have general charge of the policies and business of the corporation and general supervision of the details thereof, and shall supervise the operation, maintenance and preservation of the properties of the corporation. He shall keep the board of directors informed respecting the business of the corporation. He shall have authority to sign on behalf of the corporation all contracts and other documents or instruments to be signed or executed by the corporation, and, in all cases where the duties and powers of subordinate officers and agents of the corporation are not specifically prescribed by the by-laws or by resolutions of the board of directors, the Chairman of the Board may prescribe such duties and powers. He shall perform such other duties as may from time to time be assigned to him by the board of directors. SECTION 5. THE PRESIDENT: The President shall have the direction of and responsibility for the operations of the corporation and such other powers and duties as the board of directors or the Chairman of the Board shall designate from time to time and, in the absence or inability to act of the Chairman of the Board, shall have the powers and duties of the Chairman of the Board. The President, unless some other person is thereunto specifically authorized by vote of the board of directors, shall have authority to sign all contracts and other documents and instruments of the corporation. SECTION 6. THE VICE-PRESIDENTS: The Vice-Presidents may be designated by such title or titles and in such order of seniority as the board of directors may determine. The Vice-Presidents shall perform such of the duties and exercise such of the powers of the President on behalf of the corporation as may be assigned to them respectively from time to time by the board of directors or by the Chairman of the Board or the President, and, subject to the control of the board, shall have authority to sign on behalf of the corporation all contracts and other documents or instruments necessary for the conduct of the business of the corporation. The Vice Presidents shall perform such other duties as may from time to time be assigned to them respectively by the board of directors or the Chairman of the Board or the President. SECTION 7. THE SECRETARY AND ASSISTANT SECRETARIES: The Secretary shall cause notices of all meetings of stockholders and directors to be given as required by law, the corporate charter, and these by-laws. He shall attend all meetings of stockholders and of the board of directors and keep the minutes thereof. He shall affix the corporate seal to and sign such instruments as require the seal and his signature and shall perform such other duties as usually pertain to his office or as are required of him by the board of directors or the Chairman of the Board or the President. Any Assistant Secretary may, in the absence or disability of the Secretary, or at his request, perform the duties and exercise the powers of the Secretary, and shall perform such other duties as the board of directors, the Chairman of the Board, the President or the Secretary shall prescribe. The Secretary or any Assistant Secretary may certify under the corporate seal as to the corporate charter or these by-laws or any provision thereof, the acts of the board of directors or any committee thereof, the tenure, signatures, identity and acts of officers of the corporation or other corporate facts, and any such certificate may be relied upon by any person or corporation to whom the same shall be given until receipt of written notice to the contrary. In the absence of the Secretary and of an Assistant Secretary, the stockholders or the board of directors may appoint a secretary pro tem to record the proceedings of their respective meetings and to perform such other acts pertaining to said office as they may direct. SECTION 8. THE CONTROLLER AND ASSISTANT CONTROLLERS: The Controller shall be the chief accounting officer of the corporation. He shall have general supervision of the accounting and financial reporting policies of the corporation, and shall recommend policies and procedures and shall render current and periodic reports of financial status to the Chairman of the Board, the President and the board of directors. He shall perform such other duties as usually pertain to his office or as are required of him by the board of directors or the Chairman of the Board or the President. Any Assistant Controller may, in the absence or disability of the Controller, or at his request, perform the duties and exercise the powers of the Controller and shall perform such other duties as the board of directors, the Chairman of the Board, the President or the Controller shall prescribe. SECTION 9. THE TREASURER AND ASSISTANT TREASURERS: The Treasurer is authorized and empowered to receive and collect all moneys due the corporation and to receipt for the same. He shall be empowered to execute on behalf of the corporation all instruments, agreements and certificates necessary or appropriate to effect the issuance by the corporation of securities or evidences of indebtedness or to permit the corporation to enter into and perform any other financing transactions to the extent the foregoing are within the ordinary course of business of the corporation or have been authorized by the board of directors or a committee thereof. He shall cause to be entered in books of the corporation to be kept for that purpose full and accurate accounts of all moneys received by and paid on account of the corporation. He shall make and sign such reports, statements, and instruments as may be required of him by the board of directors or by laws of the United States or the State of New York, or by commission, bureau, department or agency created under any such laws, and shall perform such other duties as usually pertain to his office or as are required of him by the board of directors or the Chairman of the Board or the President. Any Assistant Treasurer may, in the absence or disability of the Treasurer, or at his request, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as the board of directors, the Chairman of the Board, or the President, or the Treasurer shall prescribe. SECTION 10. ADDITIONAL OFFICERS: In addition to the officers provided for by these by-laws, the board of directors may, from time to time, designate and appoint such other officers as may be necessary or convenient for the transaction of the business and affairs of the corporation. Such other officers shall have such powers and duties as may be assigned to them by resolution of the board of directors. SECTION 11. OFFICERS HOLDING TWO OR MORE OFFICES: Any two or more of the above-mentioned offices may be held by the same person, except that the President shall not also be the Secretary, but no officer shall execute or verify any instrument in more than one capacity if such instrument be required by law or otherwise to be executed or verified by any two or more officers. SECTION 12. DUTIES OF OFFICERS MAY BE DELEGATED: In case of the absence of any officer of the corporation, or for any other reason that the board of directors may deem sufficient, the board of directors may delegate, for the time and to the extent specified, the powers or duties of any officer to any other officer, or to any director. SECTION 13. COMPENSATION: The compensation of all officers with an assigned salary level above the scale of Salary Grade N as prescribed in the Salary Administration Program, as adopted by the board of directors, shall be fixed by the board of directors. The compensation of all other officers and employees shall be fixed by the Chairman of the Board or by the President in accordance with the Salary Administration Program. SECTION 14. BONDS: The board of directors may require any officer, agent or employee of the corporation to give a bond to the corporation, conditional upon the faithful performance of his duties, with one or more sureties and in such amount as may be satisfactory to the board of directors. The premium payable to any surety company for such bond shall be paid by the corporation. ARTICLE VI - ---------- INDEMNIFICATION OF DIRECTORS AND OFFICERS; INSURANCE - ---------------------------------------------------- SECTION 1. INDEMNIFICATION: The corporation shall fully indemnify, to the extent not expressly prohibited by law, each person involved in, or made or threatened to be made a party to, any action, claim or proceeding, whether civil or criminal, including any investigative, administrative, legislative, or other proceeding, and including an action by or in the right of the corporation or any other corporation, or any partnership, joint venture, trust, employee benefit plan, or other enterprise, and including appeals therein (any such action or proceeding being hereinafter referred to as a "Matter"), by reason of the fact that such person, such person's testator or intestate (i) is or was a director or officer of the corporation, or (ii) is or was serving, at the request of the corporation, as a director, officer, or in any other capacity, any other corporation, or any partnership, joint venture, trust, employee benefit plan, or other enterprise, against any and all judgments, fines, penalties, amounts paid in settlement, and expenses, including attorneys' fees, actually and reasonably incurred as a result of or in connection with any Matter, except as provided in the next paragraph. No indemnification shall be made to or on behalf of any such person if a judgment or other final adjudication adverse to such person establishes that such person's acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that such person personally gained in fact a financial profit or other advantage to which such person was not legally entitled. In addition, no indemnification shall be made with respect to any Matter initiated by any such person against the corporation, or a director or officer of the corporation, other than to enforce the terms of this article, unless such Matter was authorized by the board of directors. Further, no indemnification shall be made with respect to any settlement or compromise of any Matter unless and until the corporation has consented to such settlement or compromise. In making any determination regarding any person's entitlement to indemnification hereunder, it shall be presumed that such person is entitled to indemnification, and the corporation shall have the burden of proving the contrary. Written notice of any Matter for which indemnity may be sought by any person shall be given to the corporation as soon as practicable and the corporation shall be permitted to participate therein. Such person shall cooperate in good faith with any request that common counsel be utilized by the parties to any Matter who are similarly situated, unless to do so would be inappropriate due to actual or potential differing interests between or among such parties. SECTION 2. ADVANCEMENT OF EXPENSES: Except in the case of a Matter against a director, officer, or other person specifically approved by the board of directors, the corporation shall, subject to Section 1 above, pay expenses actually and reasonably incurred by or on behalf of such a person in connection with any Matter in advance of the final disposition of such Matter. Such payments shall be made promptly upon receipt by the corporation, from time to time, of a written demand of such person for such advancement, together with an undertaking by or on behalf of such person to repay any expenses so advanced to the extent that the person receiving the advancement is ultimately found not to be entitled to indemnification for part or all of such expenses. SECTION 3. RIGHTS NOT EXCLUSIVE: The rights to indemnification and advancement of expenses granted by or pursuant to this article (i) shall not limit or exclude, but shall be in addition to, any other rights which may be granted by or pursuant to any statute, corporate charter, by-law, resolution, or agreement, (ii) shall be deemed to constitute contractual obligations of the corporation to any director, officer, or other person who serves in a capacity referred to herein at any time while this article is in effect, (iii) are intended to be retroactive and shall be available with respect to events occurring prior to the adoption of this article, and (iv) shall continue to exist after the repeal or modification hereof with respect to events occurring prior thereto. It is the intent of this article to require the corporation to indemnify the persons referred to herein for the aforementioned judgments, fines, penalties, amounts paid in settlement, and expenses, including attorneys' fees, in each and every circumstance in which such indemnification could lawfully be permitted by express provisions of by-laws, and the indemnification required by this article shall not be limited by the absence of an express recital of such circumstances. SECTION 4. AUTHORIZATION OF CONTRACTS: The corporation may, with the approval of the board of directors, enter into an agreement with any person who is, or is about to become, a director or officer of the corporation, or who is serving, or is about to serve, at the request of the corporation, as a director, officer, or in any other capacity, any other corporation, or any partnership, joint venture, trust, employee benefit plan, or other enterprise, which agreement may provide for indemnification of such person and advancement of expenses to such person upon terms, and to the extent, not prohibited by law. The failure to enter into any such agreement shall not affect or limit the rights of any such person under this article. SECTION 5. INSURANCE: The corporation may purchase and maintain insurance to indemnify the corporation and the directors and officers within the limits permitted by law. SECTION 6. SEVERABILITY: If any provision of this article is determined at any time to be unenforceable in any respect, the other provisions shall not in any way be affected or impaired thereby. ARTICLE VII - ----------- STOCK - ----- SECTION 1. TRANSFER AGENT AND REGISTRAR: The board of directors may appoint one or more individuals, banks, firms of bankers, or trust companies the agent or agents of the corporation for the transfer of shares of its stock, and may also appoint one or more individuals, bank, firms of bankers, or trust companies registrar or registrars for the registering of shares of its stock. SECTION 2. CERTIFICATE OF STOCK: The certificates of stock of the corporation shall be numbered and shall be recorded in the books of the corporation as they are issued. They shall contain the holder's name and number of shares and shall be signed by the Chairman of the Board, the President or a Vice-President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and shall be sealed with the corporate seal, which may be a facsimile. Where any such certificate is signed by a registrar, the signatures of any such Chairman of the Board, President, Vice President, Secretary, Assistant Secretary, Treasurer or Assistant Treasurer upon such certificate may be facsimiles. In case any such officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such before such certificate is issued, it may be issued by the corporation with the same effect as if such officer had not ceased to be such at the date of its issue. No certificate of stock shall be valid until countersigned by a transfer agent if the corporation have a transfer agent for the class or series of stock represented by such certificate whose signature may be a facsimile and until registered by a registrar if the corporation have a registrar for such class or series. SECTION 3. TRANSFERS OF SHARES: Subject to applicable law, shares of stock shall be transferable on the books of the corporation by the holder thereof, in person or by duly authorized attorney, upon the surrender to the corporation or any transfer agent of the corporation of the certificate representing the shares to be transferred, duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the owner thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of New York. The board of directors, to the extent permitted by law, shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, and registration of certificates of stock. SECTION 4. FIXING OF RECORD DATE OR CLOSING TRANSFER BOOKS: The board of directors may fix a day and hour, not more than fifty (50) days prior to the day on which any meeting of stockholders is to be held, as the time as of which stockholders entitled to notice of or to vote at such meeting and at all adjournments thereof shall be determined; and in the event such record date is fixed by the board of directors no one other than the holders of record on such date of stock entitled to notice of or to vote at such meeting shall be entitled to notice of or to vote at such meeting or, unless a new record date be fixed as provided in Article II, Section 7 of these by-laws, any adjournment thereof. The board of directors may at its option, in lieu of fixing a record date as aforesaid, prescribe a period, not exceeding fifty (50) days prior to any meeting of stockholders, during which no transfer of shares on the books of the corporation may be made. The board of directors may fix a day and hour, not exceeding fifty (50) days preceding the date fixed for the payment of a dividend or the making of any distribution, or for the delivery of evidences or rights or evidences of interests arising out of any change, conversion or exchange of stock, as a record time for the determination of the stockholders, or stockholders of any class or series, entitled to receive any such dividend, distribution, rights, or interests, and in such case only stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, rights, or interests, or the board of directors may at its option prescribe a period, not exceeding fifty (50) days prior to the date for such payment, distribution or delivery, during which no transfer of stock on the books of the corporation may be made. SECTION 5. LOST STOCK CERTIFICATES: The holder of any certificate representing shares of stock of the corporation shall immediately notify the corporation of any mutilation, loss, or destruction thereof, and the board of directors or an officer or officers duly authorized thereunto by the board of directors may in its or his discretion authorize one or more new certificates for the same number of shares in the aggregate to be issued to such holder upon the surrender of the mutilated certificate, or, in case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction and the deposit of indemnity by way of bond or otherwise in such form and amount and with such surety or sureties or security as the board of directors or such officer or officers may require to protect the corporation against loss of liability by reason of the issuance of such new certificates; but the board of directors may in its discretion refuse to issue new certificates save upon the order of the court having jurisdiction in such matters. SECTION 6. SCRIP: The board of directors may from time to time authorize the issuance by the corporation of scrip certificates representing interests in fractions of a full share of any class or series of stock of the corporation, and, subject to the provisions of the corporate charter and applicable provisions of law, shall have power to prescribe the rights, and the conditions and limitations thereof, to which the holders of such scrip certificates shall be entitled in respect of such scrip certificates and of the interests in shares of stock of the corporation represented thereby, which rights and the conditions and limitations thereon shall be set forth therein to the extent required by law. Such scrip certificates may be issued in registered or bearer form, as the board of directors may determine. ARTICLE VIII - ------------ GENERAL PROVISIONS - ------------------ SECTION 1. FINANCES: The funds of the corporation shall be deposited in its name with such bank or banks, firm or firms of bankers, trust company or trust companies as the board of directors may from time to time designate. All checks, notes, drafts and other negotiable instruments of the corporation shall be signed by such officer or officers, agent or agents, employee or employees or such other person or persons as may be designated by the board of directors from time to time by resolution, or by the Chairman of the Board or the President or the Treasurer in the exercise of authority conferred by resolution of the board of directors. No officers, agents, employees of the corporation, or other person, along or with others, shall have power to make any checks, notes, drafts or other negotiable instruments in the name of the corporation or to bind the corporation thereby, except as in this article provided. SECTION 2. FISCAL YEAR: The fiscal year of the corporation shall be the calendar year unless otherwise provided by the board of directors. ARTICLE IX - ---------- CORPORATE SEAL - -------------- SECTION 1. FORM OF SEAL: The seal of the corporation shall bear the name of the corporation, the year of its incorporation, and such appropriate design as the board of directors may approve. The seal on stock certificates or on any corporate obligation for the payment of money may be facsimile. ARTICLE X - --------- AMENDMENTS - ---------- SECTION 1. PROCEDURE: These by-laws may be added to, amended, altered, or repealed at any meeting of stockholders, notice of which shall have referred to the proposed action, by the vote of the holders of record of a majority of the outstanding shares of the corporation entitled to vote, or, to the extent permitted by law, at any meeting of the board of directors, notice of which shall have referred to the proposed action, by the affirmative vote of a majority of the board of directors. SECTION 2. AMENDMENT OF BY-LAW REGULATING ELECTION OF DIRECTORS: If any by-law regulating an impending election of directors is adopted or amended or repealed by the board of directors, there shall be set forth in the notice of the next meeting of stockholders for the election of directors the by-law so adopted or amended or repealed, together with a concise statement of the changes made. EX-10.11 2 Exhibit 10-11 NIAGARA MOHAWK POWER CORPORATION OFFICER LONG TERM INCENTIVE PLAN Article 1. Establishment, Purpose and Duration 1.1 Establishment of the Plan. Niagara Mohawk Power Corporation, a New York corporation (hereinafter referred to as the " Company " ), hereby establishes an incentive compensation plan to be known as the "Niagara Mohawk Power Corporation Officer Long Term Incentive Plan" (hereinafter referred to as the "Plan"), as set forth in this document. The Plan permits the grant of SAR's, Stock Units and Dividend Equivalents, as defined herein. The Plan shall become effective as of September 25, 1996 (the "Effective Date") and shall remain in effect as provided in Section 1.3 herein. 1.2 Purpose of the Plan. The purpose of the Plan is to promote the success and enhance the value of the Company through the retention and continued motivation of Participants, focusing their efforts toward the execution of business strategies directed toward improving financial returns to shareholders. 1.3 Duration of the Plan. The Plan shall commence on the Effective Date, as described in Section 1.1 herein, and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 14 herein, until September 24, 2006. The applicable terms of the Plan and any terms and conditions applicable to SARs or Stock Units, including any deferral elections, granted prior to such date shall survive the termination of the Plan . Article 2. Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below and, when such meaning is intended, the initial letter of the word is capitalized: 2.1 "Award" means, individually or collectively, a grant under the Plan of SARs or Stock Units. 2.2 "Award Agreement" means an agreement entered into by each Participant and the Company, setting forth the terms and provisions applicable to an Award granted to a Participant under the Plan. 2.3 "Base Value" of an SAR shall have the meaning set forth in Section 6.2 herein. 2.4 "Board" or "Board of Directors" means the Board of Directors of the Company . 2.5 "Cause" means: (i) a material default or other material breach by a Participant of his obligations under any Employment Agreement he may have with the Company, (ii) failure by a Participant diligently and competently to perform his duties under any Employment Agreement he may have with the Company, or otherwise, or (iii) misconduct, dishonesty, insubordination or other act by a Participant detrimental to the good will of the Company or damaging the Company's relationships with its customers, suppliers or employees. "Cause" shall be determined in good faith by the Committee. 2.6 "Change in Control" of the Company shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied: (1) The acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding Shares of the Company or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subparagraph (3) below are satisfied; or (2) Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75 % of, respectively, the then outstanding shares of common stock of the corporation resulting from such organization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors are then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Shares and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions as their ownership immediately prior to such reorganization, merger or consolidation, of the Outstanding Shares and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Shares or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (4) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Shares and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership immediately prior to such sale or other disposition of the Outstanding Shares and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Shares or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company; provided, however, that the implementation of the corporate restructuring contemplated by the Company's PowerChoice proposal filed with the New York Public Service Commission on October 6, 1995, or any substantially similar corporate restructuring (as determined by the Committee) shall not be deemed to be a "Change in Control". 2.7 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.8 "Committee" means the committee, as specified in Article 3, appointed by the Board to administer the Plan with respect to grants of Awards. 2.9 "Company" means Niagara Mohawk Power Corporation, a New York corporation, or any successor thereto as provided in Article 16 herein. 2.10 "Director" means any individual who is a member of the Board of Directors of the Company. 2.11 "Disability" shall have the meaning ascribed to such term under Section 22(e)(3) of the Code. 2.12 "Dividend Equivalent" means, with respect to Shares underlying a Stock Unit, an amount equal to all cash and stock dividends declared on an equal number of outstanding Shares on all common stock dividend payment dates occurring during the Vesting Period. 2.13 "Eligible Employee" means an Employee who is eligible to participate in the Plan, as set forth in Section 5.1 herein. 2.14 "Employee" means any full-time employee of the Company, who is not covered by any collective bargaining agreement to which the Company is a party. Directors who are not otherwise employed by the Company shall not be considered Employees under the Plan. For purposes of the Plan, transfer of employment of a Participant from the Company to any one of its Subsidiaries shall not be deemed a termination of employment. 2.15 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. 2.16 "Exercise Period" means the period during which an SAR is exercisable, as set forth in the related Award Agreement. 2.17 "Fair Market Value" means the average of the daily opening and closing sale prices as reported in the consolidated transaction reporting system. 2.18 "Participant" means an Employee of the Company who has outstanding an Award granted under the Plan. 2.19 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as used in Sections 13(d) and 14(d) thereof, including usage in the definition of a "group" in Section 13(d) thereof. 2.20 "Retirement" shall have the meaning ascribed to such term in the tax-qualified defined benefit pension plan maintained by the Company for the benefit of some or all of its non-represented employees. 2.21 "Shares" means the shares of common stock of the Company, par value $1. 2.22 "Stock Appreciation Right" or "SAR" means a right, designated as an SAR, to receive a payment on the day the right is exercised, pursuant to the terms of Article 6 herein. Each SAR shall be denominated in terms of one Share. 2.23 "Stock Unit" means a right, designated as a Stock Unit, to receive a payment as soon as practicable following the last day of a Vesting Period, pursuant to the terms of Article 7 herein. Each Stock Unit shall be denominated in terms of one Share. 2.24 "Subsidiary" means any corporation that is a "subsidiary corporation" of the Company as that term is defined in Section 424(f) of the Code. 2.25 "Valuation Period" means the 12 trading day period ending on and including the relevant date. 2.26 "Vesting Period" means the period during which Stock Units are not yet payable, as set forth in the related Award Agreement. Article 3. Administration 3.1 The Committee. The Plan shall be administered by the Compensation and Succession Committee of the Board, or by any other Committee appointed by the Board consisting of not less than two (2) non-employee Directors. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. 3.2 Authority of the Committee. The Committee shall have full power except as limited by law, the Articles of Incorporation and the Bylaws of the Company, subject to such other restricting limitations or directions as may be imposed by the Board and subject to the provisions herein, to determine the size and types of Awards; to determine the terms and conditions of such Awards in a manner consistent with the Plan; to construe and interpret the Plan and any agreement or instrument entered into under the Plan; to establish, amend or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 14 herein) to amend the terms and conditions of any outstanding Award. Further, the Committee shall make all other determinations that may be necessary or advisable for the administration of the Plan. As permitted by law, the Committee may delegate its authorities as identified hereunder. 3.3 Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its shareholders, Employees, Participants and their estates and beneficiaries. 3.4 Costs. The Company shall pay all costs of administration of the Plan. Article 4. Adjustments in Authorized Shares In the event of any merger, reorganization consolidation, recapitalization, separation, liquidation, stock dividend, split-up, share combination or other change in the corporate structure of the Company affecting the Shares, such adjustment shall be made in the number of SARs and Stock Units that may be granted under the Plan, and in the number and/or price of outstanding Awards granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of SARs and Stock Units subject to an Award shall always be a whole number. Article 5. Eligibility and Participation 5.1 Eligibility. Persons eligible to participate in the Plan include all Employees who are officers of the Company, as determined by the Committee, including Employees who are members of the Board, but excluding Directors who are not Employees. 5.2 Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees those to whom Awards shall be granted and shall determine the nature and amount of each Award. Article 6. Stock Appreciation Rights 6.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Eligible Employees at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of SARs granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs. 6.2 Base Value. The Base Value of an SAR shall equal the Fair Market Value of a Share determined for the 12 trading day period immediately preceding the date of the grant, or for such other period as the Compensation Committee, in its sole discretion, shall determine at the time of grant. 6.3 Exercise and Payment of SARs. A Participant may exercise an SAR at any time during the Exercise Period. SARs shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of SARs being exercised. Upon exercise of an SAR, a Participant shall be entitled to receive payment in cash from the Company in an amount equal to the product of: (a) the excess of (i) the Fair Market Value of a Share on the date of exercise over (ii) the Base Value of the SAR, multiplied by (b) the number of Shares with respect to which the SAR is exercised. 6.4 SAR Award Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall specify the number of SARs granted, the Base Value, the Exercise Period, the expiration date and such other provisions as the Committee shall determine. 6.5 Lapse of SARs. Subject to the provisions of Article 9, an SAR will lapse upon the earlier of (i) ten (l0) years from the date of grant and (ii) the expiration of the Exercise Period as set forth in the grant. Article 7. Stock Units 7. 1 Grant of Stock Units. Subject to the terms and conditions of the Plan, Stock Units may be granted to Eligible Employees at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Stock Units granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such Stock Units. 7.2 Vesting of Stock Units. The Vesting Period of Stock Units granted under the Plan shall be determined by the Committee, in its sole discretion, as set forth in the related Award Agreement. 7.3 Payment of Stock Units. After the applicable Vesting Period has ended, the holder of Stock Units shall be entitled to receive, for each Stock Unit held, payment in cash from the Company in an amount equal to the Fair Market Value of one Share determined as of the Valuation Period ending on the last day of the Vesting Period. Payment shall be made as soon as practicable following the last day of the Vesting Period. 7.4 Stock Unit Award Agreement. Each Stock Unit grant shall be evidenced by an Award Agreement that shall specify the number of Stock Units granted, the Vesting Period and such other provisions as the Committee shall determine. Article 8. Dividend Equivalents Simultaneously with the grant of Stock Units, the Participant shall be granted Dividend Equivalents, to be credited to a bookkeeping entry account, on each common stock dividend payment date with respect to the Shares subject to such Award. In the case of cash dividends, the number of Dividend Equivalents credited on each common stock dividend payment date shall equal the number of Shares (including fractional Shares) that could be purchased on the dividend payment date, based on the average of the opening and closing sale price, as reported in the consolidated transaction reporting system on that date, with cash dividends that would have been paid on Awards of Stock Units and on Dividend Equivalents previously credited to such bookkeeping entry account, if such Stock Units or Dividend Equivalents were Shares. In the case of stock dividends, the number of Dividend Equivalents credited on each stock dividend payment date shall be equal to the number of Shares (including fractional Shares) that would have been issued as a stock dividend in respect of the Participant's Stock Units and on Dividend Equivalents previously credited to such bookkeeping entry account, if such Stock Units or Dividend Equivalents were Shares. Participants shall receive cash payment from the Company of the Fair Market Value of the Dividend Equivalents, if and when they receive payment of the related Stock Units, the Fair Market Value of such Dividend Equivalents to be determined in the same manner as for the related Stock Units. The Committee may, in its discretion, establish such rules and procedures governing the crediting of Dividend Equivalents, including timing and payment contingencies that apply to the Dividend Equivalents, as the Committee deems necessary or appropriate in order to comply with applicable law. Article 9. Termination of Employment; Transferability 9.1 Disability; Involuntary Termination. In the event the employment of a Participant is terminated by reason of Disability or involuntarily by the Company (other than for Cause): (i) during a Vesting Period for Stock Units, the Participant shall receive a full payout of the Stock Units and related Dividend Equivalents, as and when provided in Section 7.3 herein; (ii) before the Exercise Period commences for SARs subject to an Award, such SARs may be exercised in full at any time during the one year period commencing on the day the Exercise Period begins; and (iii) during the Exercise Period for SARs, but before exercise, such SARs may be exercised in full at any time during the one year period after such termination, but in no event after the Exercise Period for such SARs has expired. 9.2 Death. In the event the employment of a Participant is terminated by reason of death: (i) during the Vesting Period for Stock Units, the Participant's beneficiary or estate shall receive a full payout of the Stock Units and related Dividend Equivalents. The payout shall be made promptly based on the Fair Market Value of a Share on the date of death; and (ii) before the Exercise Period commences for SARs subject to an Award or during the Exercise Period, but before exercise, the Participant's beneficiary or estate shall receive a full payout of all SARs subject to an Award, to the extent the Fair Market Value of a Share exceeds the Base Value of the SAR on the date of death. 9.3 Corporate Restructuring. In the event (i) the corporate restructuring as contemplated by the Company's PowerChoice proposal filed with the New York Public Service Commission on October 6, 1995, or any substantially similar corporate restructuring (determined by the Committee), is implemented and (ii) the employment of a Participant with the Company is terminated (other than for Cause), then with respect to Awards granted prior to implementation of the restructuring, (i) during a Vesting Period for Stock Units, the Participant shall receive a full payout of Stock Units and related Dividend Equivalents, as and when provided in Section 7.3 herein; (ii) before the Exercise Period commences for SARs subject to an Award, such SARs may be exercised in full at any time during the one year period commencing on the day the Exercise Period begins; and (iii) during the Exercise Period for SARs, but before exercise, such SARs may be exercised in full at any time during the one year period after such termination, but in no event after the Exercise Period for such SARs has expired. 9.4 Retirement. In the event the employment of a Participant is terminated by reason of Retirement: (i) during a Vesting Period for Stock Units, the Participant shall receive a prorated payout of the Stock Units and related Dividend Equivalents. The prorated payout shall be determined by the Committee, shall be based upon the length of time that the Participant held the Stock Units during the Vesting Period and shall be made as and when provided in Section 7.3 herein; (ii) before the Exercise Period commences for SARs subject to an Award, the number of SARs subject to an Award shall be prorated by the Committee, based upon the length of time that the Participant held the SARs before Retirement; after the Exercise Period commences, the prorated SARs may be exercised at any time in full or in part from time to time during the Exercise Period, and (iii) during the Exercise Period for SARs, but before exercise, such SARs may be exercised at any time in full or in part from time to time during the Exercise Period. Other than as set forth in Article 13, in the event that a Participant's employment terminates for any reason other than as set forth in Sections 9.l, 9.2, 9.3 and 9.4, above, all Stock Units, SARs and Dividend Equivalents shall be forfeited by the Participant to the Company. 9.5 Nontransferability of Awards. Notwithstanding the foregoing, the Committee may in its discretion authorize a participant to transfer all or a portion of any award to the participant's family members on such terms prescribed by the Committee. No Award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all Awards granted to a Participant under the Plan shall be exercisable/payable during his or her lifetime only by or to such Participant or his or her legal representative. 9.6 Right of Committee. Subject to the provisions of Section 14.2 herein, all provisions in this Article 9 are subject to the Committee's right, at any time, to make such other determinations as it may choose, in its sole discretion. Furthermore, should more than one section of Article 9 and/or Article 13 apply to a situation, the Committee shall have the right, in its sole discretion, to determine which section and/or article to apply. Article 10. Beneficiary Designation Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his death before he receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. The spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of beneficiary or beneficiaries other than the spouse. Article 11. Deferrals The Committee may permit a Participant to defer such Participant's receipt of the payment of cash that would otherwise be due to such Participant. If any such deferral election is permitted, the Committee shall, in its sole discretion, establish such rules and procedures as it deems necessary or desirable for such payment deferrals. Article 12. Rights of Employees 12.1 Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, for any reason or no reason, in the Company's sole discretion, nor confer upon any Participant any right to continue in the employ of the Company. 12.2 Participation. No Employee shall have the right to be selected to receive an Award under the Plan, or, having been so selected, to be selected to receive a future Award. Article 13. Change in Control Upon the occurrence of a Change in Control, as defined herein, unless otherwise specifically prohibited by the terms of Article 17 herein: (a) Any and all SARs granted hereunder shall be deemed to have been exercised on the date such Change in Control occurs; (b) Any Vesting Period with respect to Stock Units shall be deemed to have expired, and there shall be paid out in cash to Participants within thirty (30) days following the effective date of the Change in Control the cash payment due with respect to such Stock Units and related Dividend Equivalents, with a Valuation Period ending on the effective date of the Change in Control. Article 14. Amendment, Modification and Termination 14.1 Amendment. Modification and Termination. The Board may, at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part. 14.2 Awards Previously Granted. No termination, amendment or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award, unless such termination, modification or amendment is required by applicable law. Article 15. Tax Withholding The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising out of or as a result of an Award made under the Plan. Article 16. Successors All obligations of the Company under the Plan, with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. Article 17. Legal Construction 17.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular and the singular shall include the plural. 17.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 17.3 Requirements of Law. The granting of Awards under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 17.4 Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with, and governed by, the laws of the State of New York, without regard to conflicts of law provisions. EX-10.17 3 Exhibit 10-17 EMPLOYMENT AGREEMENT Agreement made as of the 1st day of July, 1996, between NIAGARA MOHAWK POWER CORPORATION (the "Company"), and David J. Arrington (the "Executive"). WHEREAS, the Company desires to employ the Executive, and the Executive desires to accept/continue employment with the Company, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereby agree as follows: 1. Term of Agreement. The Company shall employ the Executive, and the Executive shall serve the Company, for the period beginning July 1, 1996 and expiring on June 30, 1999,subject to earlier termination as provided under paragraph 4 hereof. This Agreement shall be extended automatically by one year commencing on July 1, 1997 and on July 1st of each year thereafter, unless either party notifies the other to the contrary not later than sixty (60) days prior to such date. Notwithstanding any such notice by the Company, this Agreement shall remain in effect for a period of thirty-six months from the date of a "Change in Control" (as that term is defined in Schedule B hereto, unless such notice was given at least 18 months prior to the date of the Change in Control). 2. Duties. The Executive shall serve the Company as its Senior Vice President - Human Resources. During the term of this Agreement, the Executive shall, except during vacation or sick leave, devote the whole of the Executive's time, attention and skill to the business of the Company during usual business hours (and outside those hours when reasonably necessary to the Executive's duties hereunder); faithfully and diligently perform such duties and exercise such powers as may be from time to time assigned to or vested in the Executive by the Company's Board of Directors (the "Board") or by any officer of the Company superior to the Executive; obey the directions of the Board and of any officer of the Company superior to the Executive; and use the Executive's best efforts to promote the interests of the Company. The Executive may be required in pursuance of the Executive's duties hereunder to perform services for any company controlling, controlled by or under common control with the Company (such companies hereinafter collectively called "Affiliates") and to accept such offices in any Affiliates as the Board may require. The Executive shall obey all policies of the Company and applicable policies of its Affiliates. 3. Compensation. During the term of this Agreement: a. The Company shall pay the Executive a base salary at an annual rate of $190,000, which shall be payable periodically in accordance with the Company's then prevailing payroll practices, or such greater amount as the Company may from time to time determine; b. The Executive shall be entitled to participate in the Company's Supplemental Executive Retirement Plan ("SERP") according to its terms, as modified by Schedule A hereto; c. The Executive shall be entitled to participate in the Company's Officers Incentive Compensation Plan, Stock Option Plan and Performance Share Unit Plan, and any successors thereto, in accordance with the terms thereof; and d. The Executive shall be entitled to such expense accounts, vacation time, sick leave, perquisites of office, fringe benefits, insurance coverage, and other terms and conditions of employment as the Company generally provides to its employees having rank and seniority at the Company comparable to the Executive. 4. Termination. The Company shall continue to employ the Executive, and the Executive shall continue to work for the Company, during the term of this Agreement, unless the Agreement is terminated in accordance with the following provisions: a. This Agreement shall terminate automatically upon the death of the Executive. Any right or benefit accrued on behalf of the Executive or to which the Executive became entitled under the terms of this Agreement prior to death (other than payment of base salary in respect of the period following the Executive's death), and any obligation of the Company to the Executive in respect of any such right or benefit, shall not be extinguished by reason of the Executive's death. Any base salary earned and unpaid as of the date of the Executive's death shall be paid to the Executive's estate in accordance with paragraph 4g. below. b. By notice to the Executive, the Company may terminate this Agreement upon the "Disability" of the Executive. The Executive shall be deemed to incur a Disability when (i) a physician selected by the Company advises the Company that the Executive's physical or mental condition has rendered the Executive unable to perform the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation and will continue to render him unable to perform the essential functions of the Executive's position in such manner, for a period exceeding 12 consecutive months, or (ii) due to a physical or mental condition, the Executive has not performed the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation, for a period of 12 consecutive months. Following termination of this Agreement pursuant to clause (i) of the preceding sentence of this subparagraph, the Executive shall continue to receive his base salary under paragraph 3a. hereof for a period of 12 months from the date of his Disability, reduced by any benefits payable during such period under the Company's short-term disability plan and long-term disability plan. Thereafter, or in the event of termination of this Agreement pursuant to clause (ii) of the preceding sentence, the Executive shall receive benefits under the Company's long-term disability plan in lieu of any further base salary under paragraph 3a. hereof. c. By notice to the Executive, the Company may terminate the Executive's employment at any time for "Cause". The Company must deliver such notice within ninety (90) days after the Board both (i) has or should have had knowledge of conduct or an event allegedly constituting Cause, and (ii) has reason to believe that such conduct or event could be grounds for Cause. For purposes of this Agreement "Cause" shall mean (i) the Executive is convicted of, or has plead guilty or nolo contendere to, a felony; (ii) the willful and continued failure by the Executive to perform substantially his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Executive by the Company which specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; (iii) the Executive engages in conduct that constitutes gross neglect or willful misconduct in carrying out his duties under this Agreement involving material economic harm to the Company or any of its subsidiaries; or (iv) the Executive has engaged in a material breach of Section 6 or 7 of this Agreement. In the event the termination notice is based on clause (ii) of the preceding sentence, the Executive shall have ten (10) business days following receipt of the notice of termination to cure his conduct, to the extent such cure is possible, and if the Executive does not cure within the ten (10) business day period, his termination of employment in accordance with such termination notice shall be deemed to be for Cause. The determination of Cause shall be made by the Board upon the recommendation of the Compensation and Succession Committee of the Board. Following a Change in Control, such determination shall be made in a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4) of the membership of the Board, excluding members who are employees of the Company, at a meeting called for the purpose of determining that Executive has engaged in conduct which constitutes Cause (and at which Executive had a reasonable opportunity, together with his counsel, to be heard before the Board prior to such vote). The Executive shall not be entitled to the payment of any additional compensation from the Company, except to the extent provided in paragraph 4g. hereof, in the event of the termination of his employment for Cause. d. If any of the following events, any of which shall constitute "Good Reason", occurs within thirty-six months after a Change in Control, the Executive, by notice of the Company, may voluntarily terminate the Executive's employment for Good Reason within ninety (90) days after the Executive both (i) has or should have had knowledge of conduct or an event allegedly constituting Good Reason, and (ii) has reason to believe that such conduct or event could be grounds for Good Reason. In such event, the Executive shall be entitled to the severance benefits set forth in subparagraph 4f. below. (i) the Company assigns any duties to the Executive which are materially inconsistent in any adverse respect with the Executive's position, duties, offices, responsibilities or reporting requirements immediately prior to a Change in Control, including any diminution of such duties or responsibilities; or (ii) the Company reduces the Executive's base salary, including salary deferrals, as in effect immediately prior to a Change in Control; or (iii) the Company discontinues any bonus or other compensation plan or any other benefit, retirement plan (including the SERP), stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health plan, disability plan or similar plan (as the same existed immediately prior to the Change in Control) in which the Executive participated or was eligible to participate in immediately prior to the Change in Control and in lieu thereof does not make available plans providing at least comparable benefits; or (iv) the Company takes action which adversely affects the Executive's participation in, or eligibility for, or materially reduces the Executive's benefits under, any of the plans described in (iii) above, or deprives the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or fails to provide the Executive with the number of paid vacation days to which the Executive was entitled in accordance with the Company's normal vacation policy immediately prior to the Change in Control; or (v) the Company requires the Executive to be based at any office or location other than one within a 50-mile radius of the office or location at which the Executive was based immediately prior to the Change in Control; or (vi) the Company purports to terminate the Executive's employment otherwise than as expressly permitted by this Agreement; or (vii) the Company fails to comply with and satisfy paragraph 5 hereof, provided that such successor has received prior written notice from the Company or from the Executive of the requirements of paragraph 5 hereof. The Executive shall have the sole right to determine, in good faith, whether any of the above events has occurred. e. The Company may terminate the Executive's employment at any time without Cause. f. In the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Company shall pay the Executive a severance benefit, payable in twenty-four equal monthly installments, equal to two years' base salary at the rate in effect as of the date of termination, plus the greater of (i) two times the most recent annual bonus paid to the Executive under the Corporation's Annual Officers Incentive Compensation Plan (the "OICP") or any similar annual bonus plan (excluding the pro rata bonus referred to in the next sentence) or (ii) two times the average annual bonus paid to the Executive for the three prior years under the OICP or such similar plan (excluding the pro rata annual bonus referred to in the next sentence). If one hundred eighty (180) days or more have elapsed in the Company's fiscal year in which such termination occurs, the Company shall also pay the Executive in a lump sum, within ninety (90) days after the end of such fiscal year, a pro rata portion of Executive's annual bonus in an amount equal to (A) the bonus which would have been payable to Executive under OICP or any similar plan for the fiscal year in which Executive's termination occurs, multiplied by (B) a fraction, the numerator of which is the number of days in the fiscal year in which the termination occurs through the termination date and the denominator of which is three hundred sixty-five (365). For purposes of the first sentence of this subparagraph 4f., there shall be taken into account as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the sum of (x) cash payments with respect to Restricted Stock Units (and related Dividend Equivalents) granted to the Executive under the Corporation's 1995 Stock Incentive Plan and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the Corporation's 1995 Stock Incentive Plan by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997, there shall be taken into account for purposes of the first sentence of this subparagraph 4f. as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the Corporation's 1995 Stock Incentive Plan. If the termination of the Executive's employment occurs prior to December 31, 1997 and prior to a Change in Control, the amount of any adjustments to the severance benefit required as a result of the preceding two sentences of this subparagraph 4f. shall be paid to the Executive in a lump sum no later than March 15, 1998. In addition, in the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Executive shall be entitled to continue participation in the Company's employee benefit plans (other than its qualified and non-qualified retirement plans) for a two-year period from the date of termination, provided, however, that if Executive cannot continue to participate in any of the benefit plans, the Company shall otherwise provide equivalent benefits to the Executive and his dependents on the same after-tax basis as of continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes employed by another employer and becomes eligible to participate in an employee benefit plan of such employer, the benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides any additional benefits necessary to give Executive the benefits provided hereunder. g. Upon termination pursuant to subparagraphs 4a., b., c., d., or e. above, the Company shall pay the Executive or the Executive's estate any base salary earned and unpaid to the date of termination, and any outstanding funds advanced by the Company to or on behalf of the Executive shall become immediately due and payable. h. The parties intend that no severance benefits hereunder shall be paid to the extent that such benefits (either alone or when aggregated with other benefits contingent on a Change in Control and paid to or for benefit of the Executive) constitute "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, under the circumstances set forth below, severance benefits payable under this Agreement shall be subject to the following reduction notwithstanding anything in this Agreement to the contrary. If the aggregate present value (as determined pursuant to Section 280G of the Code) of severance benefits payable under this Agreement which, together with all other payments by the Company to the Executive or for the Executive's benefit, would be "parachute payments" within the meaning of Section 280G of the Code, the payments pursuant to this Agreement shall be reduced (reducing first the severance benefit provided in the first sentence of subparagraph 4f. hereof) to the largest amount as will result in no portion of such payments being treated as excess parachute payments. i. The determination of whether and to what extent the payments shall be reduced under this Agreement, pursuant to the foregoing subparagraph h., including apportionment among specific payments and benefits, shall be made by the Executive in good faith, and such determination shall be conclusive and binding on the Company. The Company shall make the calculations referred to in subparagraph h. above within thirty days following the termination of the Executive's employment and shall provide such calculations and the basis therefor to the Executive within such period. In the event a reduction is required, the Executive shall give notice to the Company, within 20 days of the Executive's receipt of such calculations and related information, of the Executive's determination of the reduction. j. Upon the occurrence of a Change in Control the Company shall pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably thereafter incur as a result of any contest, litigation or arbitration (regardless of the outcome thereof) by the Company, or by the Executive of the validity of, or liability under, this Agreement or the SERP (including any contest by the Executive about the amount of any payment pursuant to this Agreement or pursuant to the SERP), plus in each case interest on any delayed payment at the rate of 150% of the Prime Rate posted by the Chase Manhattan Bank, N.A. or its successor, provided, however, that the Company shall not be liable for the Executive's legal fees and expenses if the Executive's position in such contest, litigation or arbitration is found by the neutral decision-maker to be frivolous. 5. Successor Liability. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform. As used in this Agreement, "Company" shall mean the company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 6. Confidential Information. The Executive agrees to keep secret and retain in the strictest confidence all confidential matters which relate to the Company, its subsidiaries and affiliates, including, without limitation, customer lists, client lists, trade secrets, pricing policies and other business affairs of the Company, its subsidiaries and affiliates learned by him from the Company or any such subsidiary or affiliate or otherwise before or after the date of this Agreement, and not to disclose any such confidential matter to anyone outside the Company or any of its subsidiaries or affiliates, whether during or after his period of service with the Company, except (i) as such disclosure may be required or appropriate in connection with his work as an employee of the Company or (ii) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information. The Executive agrees to give the Company advance written notice of any disclosure pursuant to clause (ii) of the preceding sentence and to cooperate with any efforts by the Company to limit the extent of such disclosure. Upon request by the Company, the Executive agrees to deliver promptly to the Company upon termination of his services for the Company, or at any time thereafter as the Company may request, all Company subsidiary or affiliate memoranda, notes, records, reports, manuals, drawings, designs, computer file in any media and other documents (and all copies thereof) relating to the Company's or any subsidiary's or affiliate's business and all property of the Company or any subsidiary or affiliate associated therewith, which he may then possess or have under his direct control, other than personal notes, diaries, Rolodexes and correspondence. 7. Non-Compete and Non-Solicitation. During the Executive's employment by the Company and for a period of one year following the termination thereof for any reason, the Executive covenants and agrees that he will not for himself or on behalf of any other person, partnership, company or corporation, directly or indirectly, acquire any financial or beneficial interest in (except as provided in the next sentence), provide consulting services to, be employed by, or own, manage, operate or control any business which is in competition with a business engaged in by the Company or any of its subsidiaries or affiliates in any state of the United States in which any of them are engaged in business at the time of such termination of employment for as long as they carry on a business therein. Notwithstanding the preceding sentence, the Executive shall not be prohibited from owning less than five (5%) percent of any publicly traded corporation, whether or not such corporation is in competition with the Company. The Executive hereby covenants and agrees that, at all times during the period of his employment and for a period of one year immediately following the termination thereof for any reason, the Executive shall not employ or seek to employ any person employed at that time by the Company or any of its subsidiaries, or otherwise encourage or entice such person or entity to leave such employment. It is the intention of the parties hereto that the restrictions contained in this Section be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. Specifically, if any court of competent jurisdiction should hold that any portion of the foregoing description is overly broad as to one or more states of the United States, then that state or states shall be eliminated from the territory to which the restrictions of paragraph (a) of this Section applies and the restrictions shall remain applicable in all other states of the United States. 8. No Mitigation. The Executive shall not be required to mitigate the amount of any payments or benefits provided for in Section 4f. hereof by seeking other employment or otherwise and no amounts earned by the Executive shall be used to reduce or offset the amounts payable hereunder, except as otherwise provided in Section 4f. 9. Ownership of Work Product. Any and all improvements, inventions, discoveries, formulae, processes, methods, know-how, confidential data, trade secrets and other proprietary information (collectively, "Work Products") within the scope of any business of the Company or any Affiliate which the Executive may conceive or make or have conceived or made during the Executive's employment with the Company shall be and are the sole and exclusive property of the Company, and that the Executive, whenever requested to do so by the Company, at its expense, shall execute and sign any and all applications, assignments or other instruments and do all other things which the Company may deem necessary or appropriate (i) to apply for, obtain, maintain, enforce, or defend letters patent of the United States or any foreign country for any Work Product, or (ii) to assign, transfer, convey or otherwise make available to the Company the sole and exclusive right, title and interest in and to any Work Product. 10. Arbitration. Any dispute or controversy between the parties relating to this Agreement (except any dispute relating to paragraphs 6 or 7 hereof) or relating to or arising out of the Executive's employment with the Company, shall be settled by binding arbitration in the City of Syracuse, State of New York, pursuant to the Employment Dispute Resolution Rules of the American Arbitration Association and shall be subject to the provisions of Article 75 of the New York Civil Practice Law and Rules. Judgment upon the award may be entered in any court of competent jurisdiction. Notwithstanding anything herein to the contrary, if any dispute arises between the parties under paragraphs 6 or 7 hereof, or if the Company makes any claim under paragraphs 6 or 7, the Company shall not be required to arbitrate such dispute or claim but shall have the right to institute judicial proceedings in any court of competent jurisdiction with respect to such dispute or claim. If such judicial proceedings are instituted, the parties agree that such proceedings shall not be stayed or delayed pending the outcome of any arbitration proceedings hereunder. 11. Notices. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered personally or sent by certified mail, postage prepaid, or overnight delivery addressed as follows: If to the Company: Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, New York 13202 ATTN: Corporate Secretary If to the Executive: 4302 Hepatica Hill Road Manlius, NY 13104 or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt. 12. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto, and supersedes, and is in full substitution for any and all prior understandings or agreements, oral or written, with respect to the Executive's employment. 13. Amendment. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 14. Miscellaneous. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Company (except to an Affiliate) or by the Executive without the prior written consent of the other party. 15. Severability. If any provision of this Agreement, or portion thereof, is so broad, in scope or duration, so as to be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflicts of law. 17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 18. Performance Covenant. The Executive represents and warrants to the Company that the Executive is not party to any agreement which would prohibit the Executive from entering into this Agreement or performing fully the Executive's obligations hereunder. 19. Survival of Covenants. The obligations of the Executive set forth in paragraphs 6, 7, 9 and 10 represent independent covenants by which the Executive is and will remain bound notwithstanding any breach by the Company, and shall survive the termination of this Agreement. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. ________________________ NIAGARA MOHAWK POWER CORPORATION David J. Arrington By:______________________________ WILLIAM E. DAVIS Chairman of the Board and Chief Executive Officer SCHEDULE A Modifications in Respect of David J. Arrington ("Executive") to the Supplemental Executive Retirement Plan ("SERP") of the Niagara Mohawk Power Corporation ("Company") I. Subsection 1.8 of Section I of the SERP is hereby modified to provide that the term "Earnings" shall mean the sum of the (i) Executive's base annual salary, whether or not deferred and including any elective before-tax contributions made by the Executive to a plan qualified under Section 401(k) of the Internal Revenue Code, averaged over the final 36 months of the Executive's employment with the Company and (ii) the average of the annual bonus earned by the Executive under the Corporation's Annual Officers Incentive Compensation Plan ("OICP"), whether or not deferred, in respect of the final 36 months of the Executive's employment with the Company. If (A) the Executive is an employee of the Company on December 31, 1997 or (B) prior to December 31, 1997 the Executive's employment is terminated and the Executive is entitled to payment under Article 9 of the Corporation's 1995 Stock Incentive Plan ("SIP") for all or a portion of the Stock Units and Stock Appreciation Rights granted to the Executive under SIP, there shall be taken into account for purposes of the preceding sentence as an annual bonus under the OICP, the sum of (x) cash payments made with respect to Stock Units (and related Dividend Equivalents) granted to the Executive under the SIP and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the SIP, prorated if applicable to Article 9 of the SIP, by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997 (and, if applicable, prior to the Executive's termination of employment), there shall be taken into account for purposes of the first sentence hereof as an annual bonus under the OICP the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the SIP. II. Subsection 2.1 of Section II of the SERP is hereby modified to provide that full SERP benefits are vested following eight (8) years of continuous service with the Company. III. Subsection 4.3 of Section IV of the SERP is hereby modified to provide that in the event of (x) the Executive's involuntary termination of employment by the Company, at any time, other than for Cause, (y) the termination of this Agreement on account of the Executive's Disability or (z) the Executive's termination of employment for Good Reason within the 36 full calendar month period following a Change in Control (as defined in Schedule B of this Agreement), the Executive shall be 100% vested in his full SERP benefit (i.e., 60% of Earnings (as modified above)) regardless of the Executive's years of continuous service with the Company. If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive benefits commencing no earlier than age 55, calculated pursuant to Section III of the SERP. IV. Except as provided above, the provisions of the SERP shall apply and control participation therein and the payment of benefits thereunder. SCHEDULE B For purposes of this Agreement, the term "Change in Control" shall mean: (1) The acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii)any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subparagraph (3) of this Schedule B are satisfied; or (2) Individuals who, as of the date hereof, constitute the Company's Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (4) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. EX-10.18 4 Exhibit 10-18 EMPLOYMENT AGREEMENT Agreement made as of the 1st day of July, 1996, between NIAGARA MOHAWK POWER CORPORATION (the "Company"), and Albert J. Budney, Jr. (the "Executive"). WHEREAS, the Company desires to employ the Executive, and the Executive desires to accept/continue employment with the Company, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereby agree as follows: 1. Term of Agreement. The Company shall employ the Executive, and the Executive shall serve the Company, for the period beginning July 1, 1996 and expiring on June 30, 1999, subject to earlier termination as provided under paragraph 4 hereof. This Agreement shall be extended automatically by one year commencing on July 1, 1997 and on July 1st of each year thereafter, unless either party notifies the other to the contrary not later than sixty (60) days prior to such date. Notwithstanding any such notice by the Company, this Agreement shall remain in effect for a period of thirty-six months from the date of a "Change in Control" (as that term is defined in Schedule B hereto, unless such notice was given at least 18 months prior to the date of the Change in Control). 2. Duties. The Executive shall serve the Company as its President and Chief Operating Officer. During the term of this Agreement, the Executive shall, except during vacation or sick leave, devote the whole of the Executive's time, attention and skill to the business of the Company during usual business hours (and outside those hours when reasonably necessary to the Executive's duties hereunder); faithfully and diligently perform such duties and exercise such powers as may be from time to time assigned to or vested in the Executive by the Company's Board of Directors (the "Board") or by any officer of the Company superior to the Executive; obey the directions of the Board and of any officer of the Company superior to the Executive; and use the Executive's best efforts to promote the interests of the Company. The Executive may be required in pursuance of the Executive's duties hereunder to perform services for any company controlling, controlled by or under common control with the Company (such companies hereinafter collectively called "Affiliates") and to accept such offices in any Affiliates as the Board may require. The Executive shall obey all policies of the Company and applicable policies of its Affiliates. 3. Compensation. During the term of this Agreement: a. The Company shall pay the Executive a base salary at an annual rate of $315,000, which shall be payable periodically in accordance with the Company's then prevailing payroll practices, or such greater amount as the Company may from time to time determine; b. The Executive shall be entitled to participate in the Company's Supplemental Executive Retirement Plan ("SERP") according to its terms, as modified by Schedule A hereto; c. The Executive shall be entitled to participate in the Company's Officers Incentive Compensation Plan, Stock Option Plan and Performance Share Unit Plan, and any successors thereto, in accordance with the terms thereof; and d. The Executive shall be entitled to such expense accounts, vacation time, sick leave, perquisites of office, fringe benefits, insurance coverage, and other terms and conditions of employment as the Company generally provides to its employees having rank and seniority at the Company comparable to the Executive. 4. Termination. The Company shall continue to employ the Executive, and the Executive shall continue to work for the Company, during the term of this Agreement, unless the Agreement is terminated in accordance with the following provisions: a. This Agreement shall terminate automatically upon the death of the Executive. Any right or benefit accrued on behalf of the Executive or to which the Executive became entitled under the terms of this Agreement prior to death (other than payment of base salary in respect of the period following the Executive's death), and any obligation of the Company to the Executive in respect of any such right or benefit, shall not be extinguished by reason of the Executive's death. Any base salary earned and unpaid as of the date of the Executive's death shall be paid to the Executive's estate in accordance with paragraph 4g. below. b. By notice to the Executive, the Company may terminate this Agreement upon the "Disability" of the Executive. The Executive shall be deemed to incur a Disability when (i) a physician selected by the Company advises the Company that the Executive's physical or mental condition has rendered the Executive unable to perform the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation and will continue to render him unable to perform the essential functions of the Executive's position in such manner, for a period exceeding 12 consecutive months, or (ii) due to a physical or mental condition, the Executive has not performed the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation, for a period of 12 consecutive months. Following termination of this Agreement pursuant to clause (i) of the preceding sentence of this subparagraph, the Executive shall continue to receive his base salary under paragraph 3a. hereof for a period of 12 months from the date of his Disability, reduced by any benefits payable during such period under the Company's short-term disability plan and long-term disability plan. Thereafter, or in the event of termination of this Agreement pursuant to clause (ii) of the preceding sentence, the Executive shall receive benefits under the Company's long-term disability plan in lieu of any further base salary under paragraph 3a. hereof. c. By notice to the Executive, the Company may terminate the Executive's employment at any time for "Cause". The Company must deliver such notice within ninety (90) days after the Board both (i) has or should have had knowledge of conduct or an event allegedly constituting Cause, and (ii) has reason to believe that such conduct or event could be grounds for Cause. For purposes of this Agreement "Cause" shall mean (i) the Executive is convicted of, or has plead guilty or nolo contendere to, a felony; (ii) the willful and continued failure by the Executive to perform substantially his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Executive by the Company which specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; (iii) the Executive engages in conduct that constitutes gross neglect or willful misconduct in carrying out his duties under this Agreement involving material economic harm to the Company or any of its subsidiaries; or (iv) the Executive has engaged in a material breach of Section 6 or 7 of this Agreement. In the event the termination notice is based on clause (ii) of the preceding sentence, the Executive shall have ten (10) business days following receipt of the notice of termination to cure his conduct, to the extent such cure is possible, and if the Executive does not cure within the ten (10) business day period, his termination of employment in accordance with such termination notice shall be deemed to be for Cause. The determination of Cause shall be made by the Board upon the recommendation of the Compensation and Succession Committee of the Board. Following a Change in Control, such determination shall be made in a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4) of the membership of the Board, excluding members who are employees of the Company, at a meeting called for the purpose of determining that Executive has engaged in conduct which constitutes Cause (and at which Executive had a reasonable opportunity, together with his counsel, to be heard before the Board prior to such vote). The Executive shall not be entitled to the payment of any additional compensation from the Company, except to the extent provided in paragraph 4g. hereof, in the event of the termination of his employment for Cause. d. If any of the following events, any of which shall constitute "Good Reason", occurs within thirty-six months after a Change in Control, the Executive, by notice of the Company, may voluntarily terminate the Executive's employment for Good Reason within ninety (90) days after the Executive both (i) has or should have had knowledge of conduct or an event allegedly constituting Good Reason, and (ii) has reason to believe that such conduct or event could be grounds for Good Reason. In such event, the Executive shall be entitled to the severance benefits set forth in subparagraph 4f. below. (i) the Company assigns any duties to the Executive which are materially inconsistent in any adverse respect with the Executive's position, duties, offices, responsibilities or reporting requirements immediately prior to a Change in Control, including any diminution of such duties or responsibilities; or (ii) the Company reduces the Executive's base salary, including salary deferrals, as in effect immediately prior to a Change in Control; or (iii) the Company discontinues any bonus or other compensation plan or any other benefit, retirement plan (including the SERP), stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health plan, disability plan or similar plan (as the same existed immediately prior to the Change in Control) in which the Executive participated or was eligible to participate in immediately prior to the Change in Control and in lieu thereof does not make available plans providing at least comparable benefits; or (iv) the Company takes action which adversely affects the Executive's participation in, or eligibility for, or materially reduces the Executive's benefits under, any of the plans described in (iii) above, or deprives the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or fails to provide the Executive with the number of paid vacation days to which the Executive was entitled in accordance with the Company's normal vacation policy immediately prior to the Change in Control; or (v) the Company requires the Executive to be based at any office or location other than one within a 50-mile radius of the office or location at which the Executive was based immediately prior to the Change in Control; or (vi) the Company purports to terminate the Executive's employment otherwise than as expressly permitted by this Agreement; or (vii) the Company fails to comply with and satisfy paragraph 5 hereof, provided that such successor has received prior written notice from the Company or from the Executive of the requirements of paragraph 5 hereof. The Executive shall have the sole right to determine, in good faith, whether any of the above events has occurred. e. The Company may terminate the Executive's employment at any time without Cause. f. In the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Company shall pay the Executive a severance benefit, payable in twenty-four equal monthly installments, equal to two years' base salary at the rate in effect as of the date of termination, plus the greater of (i) two times the most recent annual bonus paid to the Executive under the Corporation's Annual Officers Incentive Compensation Plan (the "OICP") or any similar annual bonus plan (excluding the pro rata bonus referred to in the next sentence) or (ii) two times the average annual bonus paid to the Executive for the three prior years under the OICP or such similar plan (excluding the pro rata annual bonus referred to in the next sentence). If one hundred eighty (180) days or more have elapsed in the Company's fiscal year in which such termination occurs, the Company shall also pay the Executive in a lump sum, within ninety (90) days after the end of such fiscal year, a pro rata portion of Executive's annual bonus in an amount equal to (A) the bonus which would have been payable to Executive under OICP or any similar plan for the fiscal year in which Executive's termination occurs, multiplied by (B) a fraction, the numerator of which is the number of days in the fiscal year in which the termination occurs through the termination date and the denominator of which is three hundred sixty-five (365). For purposes of the first sentence of this subparagraph 4f., there shall be taken into account as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the sum of (x) cash payments with respect to Restricted Stock Units (and related Dividend Equivalents) granted to the Executive under the Corporation's 1995 Stock Incentive Plan and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the Corporation's 1995 Stock Incentive Plan by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997, there shall be taken into account for purposes of the first sentence of this subparagraph 4f. as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the Corporation's 1995 Stock Incentive Plan. If the termination of the Executive's employment occurs prior to December 31, 1997 and prior to a Change in Control, the amount of any adjustments to the severance benefit required as a result of the preceding two sentences of this subparagraph 4f. shall be paid to the Executive in a lump sum no later than March 15, 1998. In addition, in the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Executive shall be entitled to continue participation in the Company's employee benefit plans (other than its qualified and non-qualified retirement plans) for a two-year period from the date of termination, provided, however, that if Executive cannot continue to participate in any of the benefit plans, the Company shall otherwise provide equivalent benefits to the Executive and his dependents on the same after-tax basis as of continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes employed by another employer and becomes eligible to participate in an employee benefit plan of such employer, the benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides any additional benefits necessary to give Executive the benefits provided hereunder. g. Upon termination pursuant to subparagraphs 4a., b., c., d., or e. above, the Company shall pay the Executive or the Executive's estate any base salary earned and unpaid to the date of termination, and any outstanding funds advanced by the Company to or on behalf of the Executive shall become immediately due and payable. h. The parties intend that no severance benefits hereunder shall be paid to the extent that such benefits (either alone or when aggregated with other benefits contingent on a Change in Control and paid to or for benefit of the Executive) constitute "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, under the circumstances set forth below, severance benefits payable under this Agreement shall be subject to the following reduction notwithstanding anything in this Agreement to the contrary. If the aggregate present value (as determined pursuant to Section 280G of the Code) of severance benefits payable under this Agreement which, together with all other payments by the Company to the Executive or for the Executive's benefit, would be "parachute payments" within the meaning of Section 280G of the Code, the payments pursuant to this Agreement shall be reduced (reducing first the severance benefit provided in the first sentence of subparagraph 4f. hereof) to the largest amount as will result in no portion of such payments being treated as excess parachute payments. i. The determination of whether and to what extent the payments shall be reduced under this Agreement, pursuant to the foregoing subparagraph h., including apportionment among specific payments and benefits, shall be made by the Executive in good faith, and such determination shall be conclusive and binding on the Company. The Company shall make the calculations referred to in subparagraph h. above within thirty days following the termination of the Executive's employment and shall provide such calculations and the basis therefor to the Executive within such period. In the event a reduction is required, the Executive shall give notice to the Company, within 20 days of the Executive's receipt of such calculations and related information, of the Executive's determination of the reduction. j. Upon the occurrence of a Change in Control the Company shall pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably thereafter incur as a result of any contest, litigation or arbitration (regardless of the outcome thereof) by the Company, or by the Executive of the validity of, or liability under, this Agreement or the SERP (including any contest by the Executive about the amount of any payment pursuant to this Agreement or pursuant to the SERP), plus in each case interest on any delayed payment at the rate of 150% of the Prime Rate posted by the Chase Manhattan Bank, N.A. or its successor, provided, however, that the Company shall not be liable for the Executive's legal fees and expenses if the Executive's position in such contest, litigation or arbitration is found by the neutral decision-maker to be frivolous. 5. Successor Liability. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform. As used in this Agreement, "Company" shall mean the company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 6. Confidential Information. The Executive agrees to keep secret and retain in the strictest confidence all confidential matters which relate to the Company, its subsidiaries and affiliates, including, without limitation, customer lists, client lists, trade secrets, pricing policies and other business affairs of the Company, its subsidiaries and affiliates learned by him from the Company or any such subsidiary or affiliate or otherwise before or after the date of this Agreement, and not to disclose any such confidential matter to anyone outside the Company or any of its subsidiaries or affiliates, whether during or after his period of service with the Company, except (i) as such disclosure may be required or appropriate in connection with his work as an employee of the Company or (ii) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information. The Executive agrees to give the Company advance written notice of any disclosure pursuant to clause (ii) of the preceding sentence and to cooperate with any efforts by the Company to limit the extent of such disclosure. Upon request by the Company, the Executive agrees to deliver promptly to the Company upon termination of his services for the Company, or at any time thereafter as the Company may request, all Company subsidiary or affiliate memoranda, notes, records, reports, manuals, drawings, designs, computer file in any media and other documents (and all copies thereof) relating to the Company's or any subsidiary's or affiliate's business and all property of the Company or any subsidiary or affiliate associated therewith, which he may then possess or have under his direct control, other than personal notes, diaries, Rolodexes and correspondence. 7. Non-Compete and Non-Solicitation. During the Executive's employment by the Company and for a period of one year following the termination thereof for any reason, the Executive covenants and agrees that he will not for himself or on behalf of any other person, partnership, company or corporation, directly or indirectly, acquire any financial or beneficial interest in (except as provided in the next sentence), provide consulting services to, be employed by, or own, manage, operate or control any business which is in competition with a business engaged in by the Company or any of its subsidiaries or affiliates in any state of the United States in which any of them are engaged in business at the time of such termination of employment for as long as they carry on a business therein. Notwithstanding the preceding sentence, the Executive shall not be prohibited from owning less than five (5%) percent of any publicly traded corporation, whether or not such corporation is in competition with the Company. The Executive hereby covenants and agrees that, at all times during the period of his employment and for a period of one year immediately following the termination thereof for any reason, the Executive shall not employ or seek to employ any person employed at that time by the Company or any of its subsidiaries, or otherwise encourage or entice such person or entity to leave such employment. It is the intention of the parties hereto that the restrictions contained in this Section be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. Specifically, if any court of competent jurisdiction should hold that any portion of the foregoing description is overly broad as to one or more states of the United States, then that state or states shall be eliminated from the territory to which the restrictions of paragraph (a) of this Section applies and the restrictions shall remain applicable in all other states of the United States. 8. No Mitigation. The Executive shall not be required to mitigate the amount of any payments or benefits provided for in Section 4f. hereof by seeking other employment or otherwise and no amounts earned by the Executive shall be used to reduce or offset the amounts payable hereunder, except as otherwise provided in Section 4f. 9. Ownership of Work Product. Any and all improvements, inventions, discoveries, formulae, processes, methods, know-how, confidential data, trade secrets and other proprietary information (collectively, "Work Products") within the scope of any business of the Company or any Affiliate which the Executive may conceive or make or have conceived or made during the Executive's employment with the Company shall be and are the sole and exclusive property of the Company, and that the Executive, whenever requested to do so by the Company, at its expense, shall execute and sign any and all applications, assignments or other instruments and do all other things which the Company may deem necessary or appropriate (i) to apply for, obtain, maintain, enforce, or defend letters patent of the United States or any foreign country for any Work Product, or (ii) to assign, transfer, convey or otherwise make available to the Company the sole and exclusive right, title and interest in and to any Work Product. 10. Arbitration. Any dispute or controversy between the parties relating to this Agreement (except any dispute relating to paragraphs 6 or 7 hereof) or relating to or arising out of the Executive's employment with the Company, shall be settled by binding arbitration in the City of Syracuse, State of New York, pursuant to the Employment Dispute Resolution Rules of the American Arbitration Association and shall be subject to the provisions of Article 75 of the New York Civil Practice Law and Rules. Judgment upon the award may be entered in any court of competent jurisdiction. Notwithstanding anything herein to the contrary, if any dispute arises between the parties under paragraphs 6 or 7 hereof, or if the Company makes any claim under paragraphs 6 or 7, the Company shall not be required to arbitrate such dispute or claim but shall have the right to institute judicial proceedings in any court of competent jurisdiction with respect to such dispute or claim. If such judicial proceedings are instituted, the parties agree that such proceedings shall not be stayed or delayed pending the outcome of any arbitration proceedings hereunder. 11. Notices. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered personally or sent by certified mail, postage prepaid, or overnight delivery addressed as follows: If to the Company: Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, New York 13202 ATTN: Corporate Secretary If to the Executive: 8414 Hobnail Road Manlius, NY 13104 or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt. 12. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto, and supersedes, and is in full substitution for any and all prior understandings or agreements, oral or written, with respect to the Executive's employment. 13. Amendment. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 14. Miscellaneous. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Company (except to an Affiliate) or by the Executive without the prior written consent of the other party. 15. Severability. If any provision of this Agreement, or portion thereof, is so broad, in scope or duration, so as to be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflicts of law. 17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 18. Performance Covenant. The Executive represents and warrants to the Company that the Executive is not party to any agreement which would prohibit the Executive from entering into this Agreement or performing fully the Executive's obligations hereunder. 19. Survival of Covenants. The obligations of the Executive set forth in paragraphs 6, 7, 9 and 10 represent independent covenants by which the Executive is and will remain bound notwithstanding any breach by the Company, and shall survive the termination of this Agreement. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. _____________________________ NIAGARA MOHAWK POWER CORPORATION Albert J. Budney, Jr. By:______________________________ DAVID J. ARRINGTON Senior Vice President - Human Resources SCHEDULE A Modifications in Respect of Albert J. Budney, Jr.("Executive") to the Supplemental Executive Retirement Plan ("SERP") of the Niagara Mohawk Power Corporation ("Company") I. Subsection 1.8 of Section I of the SERP is hereby modified to provide that the term "Earnings" shall mean the sum of the (i) Executive's base annual salary, whether or not deferred and including any elective before-tax contribution made by the Executive to a plan qualified under Section 401(k) of the Internal Revenue Code, averaged over the final 36 months of the Executive's employment with the Company and (ii) the average of the annual bonus earned by the Executive under the Corporation's Annual Officers Incentive Compensation Plan ("OICP"), whether or not deferred, in respect of the final 36 months of the Executive's employment with the Company. If (A) the Executive is an employee of the Company on December 31, 1997 or (B) prior to December 31, 1997 the Executive's employment is terminated and the Executive is entitled to payment under Article 9 of the Corporation's 1995 Stock Incentive Plan ("SIP") for all or a portion of the Stock Units and Stock Appreciation Rights granted to the Executive under SIP, there shall be taken into account for purposes of the preceding sentence as an annual bonus under the OICP, the sum of (x) cash payments made with respect to Stock Units (and related Dividend Equivalents) granted to the Executive under the SIP and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the SIP, prorated if applicable to Article 9 of the SIP, by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997 (and, if applicable, prior to the Executive's termination of employment), there shall be taken into account for purposes of the first sentence hereof as an annual bonus under the OICP the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the SIP. II. Subsection 2.1 of Section II of the SERP is hereby modified to provide that full SERP benefits are vested following eight (8) years of continuous service with the Company. III. Subsection 4.3 of Section IV of the SERP is hereby modified to provide that in the event of (x) the Executive's involuntary termination of employment by the Company, at any time, other than for Cause, (y) the termination of this Agreement on account of the Executive's Disability or (z) the Executive's termination of employment for Good Reason within the 36 full calendar month period following a Change in Control (as defined in Schedule B of this Agreement), the Executive shall be 100% vested in his full SERP benefit (i.e., 60% of Earnings (as modified above)) regardless of the Executive's years of continuous service with the Company. If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive benefits commencing no earlier than age 55, calculated pursuant to Section III of the SERP. IV. Except as provided above, the provisions of the SERP shall apply and control participation therein and the payment of benefits thereunder. SCHEDULE B For purposes of this Agreement, the term "Change in Control" shall mean: (1) The acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subparagraph (3) of this Schedule B are satisfied; or (2) Individuals who, as of the date hereof, constitute the Company's Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (4) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. EX-10.19 5 Exhibit 10-19 EMPLOYMENT AGREEMENT Agreement made as of the 1st day of July, 1996, between NIAGARA MOHAWK POWER CORPORATION (the "Company"), and William E. Davis (the "Executive"). WHEREAS, the Company desires to employ the Executive, and the Executive desires to accept/continue employment with the Company, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereby agree as follows: 1. Term of Agreement. The Company shall employ the Executive, and the Executive shall serve the Company, for the period beginning July 1, 1996 and expiring on June 30, 1999, subject to earlier termination as provided under paragraph 4 hereof. This Agreement shall be extended automatically by one year commencing on July 1, 1997 and on July 1st of each year thereafter, unless either party notifies the other to the contrary not later than sixty (60) days prior to such date. Notwithstanding any such notice by the Company, this Agreement shall remain in effect for a period of thirty-six months from the date of a "Change in Control" (as that term is defined in Schedule B hereto, unless such notice was given at least 18 months prior to the date of the Change in Control). 2. Duties. The Executive shall serve the Company as its Chairman of the Board and Chief Executive Officer. During the term of this Agreement, the Executive shall, except during vacation or sick leave, devote the whole of the Executive's time, attention and skill to the business of the Company during usual business hours (and outside those hours when reasonably necessary to the Executive's duties hereunder); faithfully and diligently perform such duties and exercise such powers as may be from time to time assigned to or vested in the Executive by the Company's Board of Directors (the "Board") or by any officer of the Company superior to the Executive; obey the directions of the Board and of any officer of the Company superior to the Executive; and use the Executive's best efforts to promote the interests of the Company. The Executive may be required in pursuance of the Executive's duties hereunder to perform services for any company controlling, controlled by or under common control with the Company (such companies hereinafter collectively called "Affiliates") and to accept such offices in any Affiliates as the Board may require. The Executive shall obey all policies of the Company and applicable policies of its Affiliates. 3. Compensation. During the term of this Agreement: a. The Company shall pay the Executive a base salary at an annual rate of $450,500, which shall be payable periodically in accordance with the Company's then prevailing payroll practices, or such greater amount as the Company may from time to time determine; b. The Executive shall be entitled to participate in the Company's Supplemental Executive Retirement Plan ("SERP") according to its terms, as modified by Schedule A hereto; c. The Executive shall be entitled to participate in the Company's Officers Incentive Compensation Plan, Stock Option Plan and Performance Share Unit Plan, and any successors thereto, in accordance with the terms thereof; and d. The Executive shall be entitled to such expense accounts, vacation time, sick leave, perquisites of office, fringe benefits, insurance coverage, and other terms and conditions of employment as the Company generally provides to its employees having rank and seniority at the Company comparable to the Executive. 4. Termination. The Company shall continue to employ the Executive, and the Executive shall continue to work for the Company, during the term of this Agreement, unless the Agreement is terminated in accordance with the following provisions: a. This Agreement shall terminate automatically upon the death of the Executive. Any right or benefit accrued on behalf of the Executive or to which the Executive became entitled under the terms of this Agreement prior to death (other than payment of base salary in respect of the period following the Executive's death), and any obligation of the Company to the Executive in respect of any such right or benefit, shall not be extinguished by reason of the Executive's death. Any base salary earned and unpaid as of the date of the Executive's death shall be paid to the Executive's estate in accordance with paragraph 4g. below. b. By notice to the Executive, the Company may terminate this Agreement upon the "Disability" of the Executive. The Executive shall be deemed to incur a Disability when (i) a physician selected by the Company advises the Company that the Executive's physical or mental condition has rendered the Executive unable to perform the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation and will continue to render him unable to perform the essential functions of the Executive's position in such manner, for a period exceeding 12 consecutive months, or (ii) due to a physical or mental condition, the Executive has not performed the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation, for a period of 12 consecutive months. Following termination of this Agreement pursuant to clause (i) of the preceding sentence of this subparagraph, the Executive shall continue to receive his base salary under paragraph 3a. hereof for a period of 12 months from the date of his Disability, reduced by any benefits payable during such period under the Company's short-term disability plan and long-term disability plan. Thereafter, or in the event of termination of this Agreement pursuant to clause (ii) of the preceding sentence, the Executive shall receive benefits under the Company's long-term disability plan in lieu of any further base salary under paragraph 3a. hereof. c. By notice to the Executive, the Company may terminate the Executive's employment at any time for "Cause". The Company must deliver such notice within ninety (90) days after the Board both (i) has or should have had knowledge of conduct or an event allegedly constituting Cause, and (ii) has reason to believe that such conduct or event could be grounds for Cause. For purposes of this Agreement "Cause" shall mean (i) the Executive is convicted of, or has plead guilty or nolo contendere to, a felony; (ii) the willful and continued failure by the Executive to perform substantially his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Executive by the Company which specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; (iii) the Executive engages in conduct that constitutes gross neglect or willful misconduct in carrying out his duties under this Agreement involving material economic harm to the Company or any of its subsidiaries; or (iv) the Executive has engaged in a material breach of Section 6 or 7 of this Agreement. In the event the termination notice is based on clause (ii) of the preceding sentence, the Executive shall have ten (10) business days following receipt of the notice of termination to cure his conduct, to the extent such cure is possible, and if the Executive does not cure within the ten (10) business day period, his termination of employment in accordance with such termination notice shall be deemed to be for Cause. The determination of Cause shall be made by the Board upon the recommendation of the Compensation and Succession Committee of the Board. Following a Change in Control, such determination shall be made in a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4) of the membership of the Board, excluding members who are employees of the Company, at a meeting called for the purpose of determining that Executive has engaged in conduct which constitutes Cause (and at which Executive had a reasonable opportunity, together with his counsel, to be heard before the Board prior to such vote). The Executive shall not be entitled to the payment of any additional compensation from the Company, except to the extent provided in paragraph 4g. hereof, in the event of the termination of his employment for Cause. d. If any of the following events, any of which shall constitute "Good Reason", occurs within thirty-six months after a Change in Control, the Executive, by notice of the Company, may voluntarily terminate the Executive's employment for Good Reason within ninety (90) days after the Executive both (i) has or should have had knowledge of conduct or an event allegedly constituting Good Reason, and (ii) has reason to believe that such conduct or event could be grounds for Good Reason. In such event, the Executive shall be entitled to the severance benefits set forth in subparagraph 4f. below. (i) the Company assigns any duties to the Executive which are materially inconsistent in any adverse respect with the Executive's position, duties, offices, responsibilities or reporting requirements immediately prior to a Change in Control, including any diminution of such duties or responsibilities; or (ii) the Company reduces the Executive's base salary, including salary deferrals, as in effect immediately prior to a Change in Control; or (iii) the Company discontinues any bonus or other compensation plan or any other benefit, retirement plan (including the SERP), stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health plan, disability plan or similar plan (as the same existed immediately prior to the Change in Control) in which the Executive participated or was eligible to participate in immediately prior to the Change in Control and in lieu thereof does not make available plans providing at least comparable benefits; or (iv) the Company takes action which adversely affects the Executive's participation in, or eligibility for, or materially reduces the Executive's benefits under, any of the plans described in (iii) above, or deprives the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or fails to provide the Executive with the number of paid vacation days to which the Executive was entitled in accordance with the Company's normal vacation policy immediately prior to the Change in Control; or (v) the Company requires the Executive to be based at any office or location other than one within a 50-mile radius of the office or location at which the Executive was based immediately prior to the Change in Control; or (vi) the Company purports to terminate the Executive's employment otherwise than as expressly permitted by this Agreement; or (vii) the Company fails to comply with and satisfy paragraph 5 hereof, provided that such successor has received prior written notice from the Company or from the Executive of the requirements of paragraph 5 hereof. The Executive shall have the sole right to determine, in good faith, whether any of the above events has occurred. e. The Company may terminate the Executive's employment at any time without Cause. f. In the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Company shall pay the Executive a severance benefit, payable in twenty-four equal monthly installments, equal to two years' base salary at the rate in effect as of the date of termination, plus the greater of (i) two times the most recent annual bonus paid to the Executive under the Corporation's Annual Officers Incentive Compensation Plan (the "OICP") or any similar annual bonus plan (excluding the pro rata bonus referred to in the next sentence) or (ii) two times the average annual bonus paid to the Executive for the three prior years under the OICP or such similar plan (excluding the pro rata annual bonus referred to in the next sentence). If one hundred eighty (180) days or more have elapsed in the Company's fiscal year in which such termination occurs, the Company shall also pay the Executive in a lump sum, within ninety (90) days after the end of such fiscal year, a pro rata portion of Executive's annual bonus in an amount equal to (A) the bonus which would have been payable to Executive under OICP or any similar plan for the fiscal year in which Executive's termination occurs, multiplied by (B) a fraction, the numerator of which is the number of days in the fiscal year in which the termination occurs through the termination date and the denominator of which is three hundred sixty-five (365). For purposes of the first sentence of this subparagraph 4f., there shall be taken into account as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the sum of (x) cash payments with respect to Restricted Stock Units (and related Dividend Equivalents) granted to the Executive under the Corporation's 1995 Stock Incentive Plan and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the Corporation's 1995 Stock Incentive Plan by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997, there shall be taken into account for purposes of the first sentence of this subparagraph 4f. as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the Corporation's 1995 Stock Incentive Plan. If the termination of the Executive's employment occurs prior to December 31, 1997 and prior to a Change in Control, the amount of any adjustments to the severance benefit required as a result of the preceding two sentences of this subparagraph 4f. shall be paid to the Executive in a lump sum no later than March 15, 1998. In addition, in the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Executive shall be entitled to continue participation in the Company's employee benefit plans (other than its qualified and non-qualified retirement plans) for a two-year period from the date of termination, provided, however, that if Executive cannot continue to participate in any of the benefit plans, the Company shall otherwise provide equivalent benefits to the Executive and his dependents on the same after-tax basis as of continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes employed by another employer and becomes eligible to participate in an employee benefit plan of such employer, the benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides any additional benefits necessary to give Executive the benefits provided hereunder. g. Upon termination pursuant to subparagraphs 4a., b., c., d., or e. above, the Company shall pay the Executive or the Executive's estate any base salary earned and unpaid to the date of termination, and any outstanding funds advanced by the Company to or on behalf of the Executive shall become immediately due and payable. h. The parties intend that no severance benefits hereunder shall be paid to the extent that such benefits (either alone or when aggregated with other benefits contingent on a Change in Control and paid to or for benefit of the Executive) constitute "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, under the circumstances set forth below, severance benefits payable under this Agreement shall be subject to the following reduction notwithstanding anything in this Agreement to the contrary. If the aggregate present value (as determined pursuant to Section 280G of the Code) of severance benefits payable under this Agreement which, together with all other payments by the Company to the Executive or for the Executive's benefit, would be "parachute payments" within the meaning of Section 280G of the Code, the payments pursuant to this Agreement shall be reduced (reducing first the severance benefit provided in the first sentence of subparagraph 4f. hereof) to the largest amount as will result in no portion of such payments being treated as excess parachute payments. i. The determination of whether and to what extent the payments shall be reduced under this Agreement, pursuant to the foregoing subparagraph h., including apportionment among specific payments and benefits, shall be made by the Executive in good faith, and such determination shall be conclusive and binding on the Company. The Company shall make the calculations referred to in subparagraph h. above within thirty days following the termination of the Executive's employment and shall provide such calculations and the basis therefor to the Executive within such period. In the event a reduction is required, the Executive shall give notice to the Company, within 20 days of the Executive's receipt of such calculations and related information, of the Executive's determination of the reduction. j. Upon the occurrence of a Change in Control the Company shall pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably thereafter incur as a result of any contest, litigation or arbitration (regardless of the outcome thereof) by the Company, or by the Executive of the validity of, or liability under, this Agreement or the SERP (including any contest by the Executive about the amount of any payment pursuant to this Agreement or pursuant to the SERP), plus in each case interest on any delayed payment at the rate of 150% of the Prime Rate posted by the Chase Manhattan Bank, N.A. or its successor, provided, however, that the Company shall not be liable for the Executive's legal fees and expenses if the Executive's position in such contest, litigation or arbitration is found by the neutral decision-maker to be frivolous. 5. Successor Liability. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform. As used in this Agreement, "Company" shall mean the company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 6. Confidential Information. The Executive agrees to keep secret and retain in the strictest confidence all confidential matters which relate to the Company, its subsidiaries and affiliates, including, without limitation, customer lists, client lists, trade secrets, pricing policies and other business affairs of the Company, its subsidiaries and affiliates learned by him from the Company or any such subsidiary or affiliate or otherwise before or after the date of this Agreement, and not to disclose any such confidential matter to anyone outside the Company or any of its subsidiaries or affiliates, whether during or after his period of service with the Company, except (i) as such disclosure may be required or appropriate in connection with his work as an employee of the Company or (ii) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information. The Executive agrees to give the Company advance written notice of any disclosure pursuant to clause (ii) of the preceding sentence and to cooperate with any efforts by the Company to limit the extent of such disclosure. Upon request by the Company, the Executive agrees to deliver promptly to the Company upon termination of his services for the Company, or at any time thereafter as the Company may request, all Company subsidiary or affiliate memoranda, notes, records, reports, manuals, drawings, designs, computer file in any media and other documents (and all copies thereof) relating to the Company's or any subsidiary's or affiliate's business and all property of the Company or any subsidiary or affiliate associated therewith, which he may then possess or have under his direct control, other than personal notes, diaries, Rolodexes and correspondence. 7. Non-Compete and Non-Solicitation. During the Executive's employment by the Company and for a period of one year following the termination thereof for any reason, the Executive covenants and agrees that he will not for himself or on behalf of any other person, partnership, company or corporation, directly or indirectly, acquire any financial or beneficial interest in (except as provided in the next sentence), provide consulting services to, be employed by, or own, manage, operate or control any business which is in competition with a business engaged in by the Company or any of its subsidiaries or affiliates in any state of the United States in which any of them are engaged in business at the time of such termination of employment for as long as they carry on a business therein. Notwithstanding the preceding sentence, the Executive shall not be prohibited from owning less than five (5%) percent of any publicly traded corporation, whether or not such corporation is in competition with the Company. The Executive hereby covenants and agrees that, at all times during the period of his employment and for a period of one year immediately following the termination thereof for any reason, the Executive shall not employ or seek to employ any person employed at that time by the Company or any of its subsidiaries, or otherwise encourage or entice such person or entity to leave such employment. It is the intention of the parties hereto that the restrictions contained in this Section be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. Specifically, if any court of competent jurisdiction should hold that any portion of the foregoing description is overly broad as to one or more states of the United States, then that state or states shall be eliminated from the territory to which the restrictions of paragraph (a) of this Section applies and the restrictions shall remain applicable in all other states of the United States. 8. No Mitigation. The Executive shall not be required to mitigate the amount of any payments or benefits provided for in Section 4f. hereof by seeking other employment or otherwise and no amounts earned by the Executive shall be used to reduce or offset the amounts payable hereunder, except as otherwise provided in Section 4f. 9. Ownership of Work Product. Any and all improvements, inventions, discoveries, formulae, processes, methods, know-how, confidential data, trade secrets and other proprietary information (collectively, "Work Products") within the scope of any business of the Company or any Affiliate which the Executive may conceive or make or have conceived or made during the Executive's employment with the Company shall be and are the sole and exclusive property of the Company, and that the Executive, whenever requested to do so by the Company, at its expense, shall execute and sign any and all applications, assignments or other instruments and do all other things which the Company may deem necessary or appropriate (i) to apply for, obtain, maintain, enforce, or defend letters patent of the United States or any foreign country for any Work Product, or (ii) to assign, transfer, convey or otherwise make available to the Company the sole and exclusive right, title and interest in and to any Work Product. 10. Arbitration. Any dispute or controversy between the parties relating to this Agreement (except any dispute relating to paragraphs 6 or 7 hereof) or relating to or arising out of the Executive's employment with the Company, shall be settled by binding arbitration in the City of Syracuse, State of New York, pursuant to the Employment Dispute Resolution Rules of the American Arbitration Association and shall be subject to the provisions of Article 75 of the New York Civil Practice Law and Rules. Judgment upon the award may be entered in any court of competent jurisdiction. Notwithstanding anything herein to the contrary, if any dispute arises between the parties under paragraphs 6 or 7 hereof, or if the Company makes any claim under paragraphs 6 or 7, the Company shall not be required to arbitrate such dispute or claim but shall have the right to institute judicial proceedings in any court of competent jurisdiction with respect to such dispute or claim. If such judicial proceedings are instituted, the parties agree that such proceedings shall not be stayed or delayed pending the outcome of any arbitration proceedings hereunder. 11. Notices. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered personally or sent by certified mail, postage prepaid, or overnight delivery addressed as follows: If to the Company: Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, New York 13202 ATTN: Corporate Secretary If to the Executive: 88 West Lake Street Skaneateles, NY 13152 or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt. 12. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto, and supersedes, and is in full substitution for any and all prior understandings or agreements, oral or written, with respect to the Executive's employment. 13. Amendment. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 14. Miscellaneous. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Company (except to an Affiliate) or by the Executive without the prior written consent of the other party. 15. Severability. If any provision of this Agreement, or portion thereof, is so broad, in scope or duration, so as to be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflicts of law. 17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 18. Performance Covenant. The Executive represents and warrants to the Company that the Executive is not party to any agreement which would prohibit the Executive from entering into this Agreement or performing fully the Executive's obligations hereunder. 19. Survival of Covenants. The obligations of the Executive set forth in paragraphs 6, 7, 9 and 10 represent independent covenants by which the Executive is and will remain bound notwithstanding any breach by the Company, and shall survive the termination of this Agreement. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. ________________________ NIAGARA MOHAWK POWER CORPORATION William E. Davis By:______________________________ DAVID J. ARRINGTON Senior Vice President - Human Resources SCHEDULE A Modifications in Respect of William E. Davis ("Executive") to the Supplemental Executive Retirement Plan ("SERP") of the Niagara Mohawk Power Corporation ("Company") I. Subsection 1.8 of Section I of the SERP is hereby modified to provide that the term "Earnings" shall mean the sum of the (i) Executive's base annual salary, whether or not deferred and including any elective before-tax contributions made by the Executive to a plan qualified under Section 401(k) of the Internal Revenue Code, averaged over the final 36 months of the Executive's employment with the Company and (ii) the average of the annual bonus earned by the Executive under the Corporation's Annual Officers Incentive Compensation Plan ("OICP"), whether or not deferred, in respect of the final 36 months of the Executive's employment with the Company. If (A) the Executive is an employee of the Company on December 31, 1997 or (B) prior to December 31, 1997 the Executive's employment is terminated and the Executive is entitled to payment under Article 9 of the Corporation's 1995 Stock Incentive Plan ("SIP") for all or a portion of the Stock Units and Stock Appreciation Rights granted to the Executive under SIP, there shall be taken into account for purposes of the preceding sentence as an annual bonus under the OICP, the sum of (x) cash payments made with respect to Stock Units (and related Dividend Equivalents) granted to the Executive under the SIP and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the SIP, prorated if applicable to Article 9 of the SIP, by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997 (and, if applicable, prior to the Executive's termination of employment), there shall be taken into account for purposes of the first sentence hereof as an annual bonus under the OICP the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the SIP. II. Subsection 2.1 of Section II of the SERP is hereby modified to provide that full SERP benefits are vested following eight (8) years of continuous service with the Company. III. Subsection 4.3 of Section IV of the SERP is hereby modified to provide that in the event of (x) the Executive's involuntary termination of employment by the Company, at any time, other than for Cause, (y) the termination of this Agreement on account of the Executive's Disability or (z) the Executive's termination of employment for Good Reason within the 36 full calendar month period following a Change in Control (as defined in Schedule B of this Agreement), the Executive shall be 100% vested in his full SERP benefit (i.e., 60% of Earnings (as modified above)) regardless of the Executive's years of continuous service with the Company. If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive benefits commencing no earlier than age 55, calculated pursuant to Section III of the SERP. IV. Except as provided above, the provisions of the SERP shall apply and control participation therein and the payment of benefits thereunder. SCHEDULE B For purposes of this Agreement, the term "Change in Control" shall mean: (1) The acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subparagraph (3) of this Schedule B are satisfied; or (2) Individuals who, as of the date hereof, constitute the Company's Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or Consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (4) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. EX-10.20 6 Exhibit 10-20 EMPLOYMENT AGREEMENT Agreement made as of the 1st day of July, 1996, between NIAGARA MOHAWK POWER CORPORATION (the "Company"), and Darlene D. Kerr (the "Executive"). WHEREAS, the Company desires to employ the Executive, and the Executive desires to accept/continue employment with the Company, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereby agree as follows: 1. Term of Agreement. The Company shall employ the Executive, and the Executive shall serve the Company, for the period beginning July 1, 1996 and expiring on June 30, 1999, subject to earlier termination as provided under paragraph 4 hereof. This Agreement shall be extended automatically by one year commencing on July 1, 1997 and on July 1st of each year thereafter, unless either party notifies the other to the contrary not later than sixty (60) days prior to such date. Notwithstanding any such notice by the Company, this Agreement shall remain in effect for a period of thirty-six months from the date of a "Change in Control" (as that term is defined in Schedule B hereto, unless such notice was given at least 18 months prior to the date of the Change in Control). 2. Duties. The Executive shall serve the Company as its Senior Vice President - Energy Distribution. During the term of this Agreement, the Executive shall, except during vacation or sick leave, devote the whole of the Executive's time, attention and skill to the business of the Company during usual business hours (and outside those hours when reasonably necessary to the Executive's duties hereunder); faithfully and diligently perform such duties and exercise such powers as may be from time to time assigned to or vested in the Executive by the Company's Board of Directors (the "Board") or by any officer of the Company superior to the Executive; obey the directions of the Board and of any officer of the Company superior to the Executive; and use the Executive's best efforts to promote the interests of the Company. The Executive may be required in pursuance of the Executive's duties hereunder to perform services for any company controlling, controlled by or under common control with the Company (such companies hereinafter collectively called "Affiliates") and to accept such offices in any Affiliates as the Board may require. The Executive shall obey all policies of the Company and applicable policies of its Affiliates. 3. Compensation. During the term of this Agreement: a. The Company shall pay the Executive a base salary at an annual rate of $210,000, which shall be payable periodically in accordance with the Company's then prevailing payroll practices, or such greater amount as the Company may from time to time determine; b. The Executive shall be entitled to participate in the Company's Supplemental Executive Retirement Plan ("SERP") according to its terms, as modified by Schedule A hereto; c. The Executive shall be entitled to participate in the Company's Officers Incentive Compensation Plan, Stock Option Plan and Performance Share Unit Plan, and any successors thereto, in accordance with the terms thereof; and d. The Executive shall be entitled to such expense accounts, vacation time, sick leave, perquisites of office, fringe benefits, insurance coverage, and other terms and conditions of employment as the Company generally provides to its employees having rank and seniority at the Company comparable to the Executive. 4. Termination. The Company shall continue to employ the Executive, and the Executive shall continue to work for the Company, during the term of this Agreement, unless the Agreement is terminated in accordance with the following provisions: a. This Agreement shall terminate automatically upon the death of the Executive. Any right or benefit accrued on behalf of the Executive or to which the Executive became entitled under the terms of this Agreement prior to death (other than payment of base salary in respect of the period following the Executive's death), and any obligation of the Company to the Executive in respect of any such right or benefit, shall not be extinguished by reason of the Executive's death. Any base salary earned and unpaid as of the date of the Executive's death shall be paid to the Executive's estate in accordance with paragraph 4g. below. b. By notice to the Executive, the Company may terminate this Agreement upon the "Disability" of the Executive. The Executive shall be deemed to incur a Disability when (i) a physician selected by the Company advises the Company that the Executive's physical or mental condition has rendered the Executive unable to perform the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation and will continue to render him unable to perform the essential functions of the Executive's position in such manner, for a period exceeding 12 consecutive months, or (ii) due to a physical or mental condition, the Executive has not performed the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation, for a period of 12 consecutive months. Following termination of this Agreement pursuant to clause (i) of the preceding sentence of this subparagraph, the Executive shall continue to receive his base salary under paragraph 3a. hereof for a period of 12 months from the date of his Disability, reduced by any benefits payable during such period under the Company's short-term disability plan and long-term disability plan. Thereafter, or in the event of termination of this Agreement pursuant to clause (ii) of the preceding sentence, the Executive shall receive benefits under the Company's long-term disability plan in lieu of any further base salary under paragraph 3a. hereof. c. By notice to the Executive, the Company may terminate the Executive's employment at any time for "Cause". The Company must deliver such notice within ninety (90) days after the Board both (i) has or should have had knowledge of conduct or an event allegedly constituting Cause, and (ii) has reason to believe that such conduct or event could be grounds for Cause. For purposes of this Agreement "Cause" shall mean (i) the Executive is convicted of, or has plead guilty or nolo contendere to, a felony; (ii) the willful and continued failure by the Executive to perform substantially his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Executive by the Company which specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; (iii) the Executive engages in conduct that constitutes gross neglect or willful misconduct in carrying out his duties under this Agreement involving material economic harm to the Company or any of its subsidiaries; or (iv) the Executive has engaged in a material breach of Section 6 or 7 of this Agreement. In the event the termination notice is based on clause (ii) of the preceding sentence, the Executive shall have ten (10) business days following receipt of the notice of termination to cure his conduct, to the extent such cure is possible, and if the Executive does not cure within the ten (10) business day period, his termination of employment in accordance with such termination notice shall be deemed to be for Cause. The determination of Cause shall be made by the Board upon the recommendation of the Compensation and Succession Committee of the Board. Following a Change in Control, such determination shall be made in a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4) of the membership of the Board, excluding members who are employees of the Company, at a meeting called for the purpose of determining that Executive has engaged in conduct which constitutes Cause (and at which Executive had a reasonable opportunity, together with his counsel, to be heard before the Board prior to such vote). The Executive shall not be entitled to the payment of any additional compensation from the Company, except to the extent provided in paragraph 4g. hereof, in the event of the termination of his employment for Cause. d. If any of the following events, any of which shall constitute "Good Reason", occurs within thirty-six months after a Change in Control, the Executive, by notice of the Company, may voluntarily terminate the Executive's employment for Good Reason within ninety (90) days after the Executive both (i) has or should have had knowledge of conduct or an event allegedly constituting Good Reason, and (ii) has reason to believe that such conduct or event could be grounds for Good Reason. In such event, the Executive shall be entitled to the severance benefits set forth in subparagraph 4f. below. (i) the Company assigns any duties to the Executive which are materially inconsistent in any adverse respect with the Executive's position, duties, offices, responsibilities or reporting requirements immediately prior to a Change in Control, including any diminution of such duties or responsibilities; or (ii) the Company reduces the Executive's base salary, including salary deferrals, as in effect immediately prior to a Change in Control; or (iii) the Company discontinues any bonus or other compensation plan or any other benefit, retirement plan (including the SERP), stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health plan, disability plan or similar plan (as the same existed immediately prior to the Change in Control) in which the Executive participated or was eligible to participate in immediately prior to the Change in Control and in lieu thereof does not make available plans providing at least comparable benefits; or (iv) the Company takes action which adversely affects the Executive's participation in, or eligibility for, or materially reduces the Executive's benefits under, any of the plans described in (iii) above, or deprives the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or fails to provide the Executive with the number of paid vacation days to which the Executive was entitled in accordance with the Company's normal vacation policy immediately prior to the Change in Control; or (v) the Company requires the Executive to be based at any office or location other than one within a 50-mile radius of the office or location at which the Executive was based immediately prior to the Change in Control; or (vi) the Company purports to terminate the Executive's employment otherwise than as expressly permitted by this Agreement; or (vii) the Company fails to comply with and satisfy paragraph 5 hereof, provided that such successor has received prior written notice from the Company or from the Executive of the requirements of paragraph 5 hereof. The Executive shall have the sole right to determine, in good faith, whether any of the above events has occurred. e. The Company may terminate the Executive's employment at any time without Cause. f. In the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Company shall pay the Executive a severance benefit, payable in twenty-four equal monthly installments, equal to two years' base salary at the rate in effect as of the date of termination, plus the greater of (i) two times the most recent annual bonus paid to the Executive under the Corporation's Annual Officers Incentive Compensation Plan (the "OICP") or any similar annual bonus plan (excluding the pro rata bonus referred to in the next sentence) or (ii) two times the average annual bonus paid to the Executive for the three prior years under the OICP or such similar plan (excluding the pro rata annual bonus referred to in the next sentence). If one hundred eighty (180) days or more have elapsed in the Company's fiscal year in which such termination occurs, the Company shall also pay the Executive in a lump sum, within ninety (90) days after the end of such fiscal year, a pro rata portion of Executive's annual bonus in an amount equal to (A) the bonus which would have been payable to Executive under OICP or any similar plan for the fiscal year in which Executive's termination occurs, multiplied by (B) a fraction, the numerator of which is the number of days in the fiscal year in which the termination occurs through the termination date and the denominator of which is three hundred sixty-five (365). For purposes of the first sentence of this subparagraph 4f., there shall be taken into account as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the sum of (x) cash payments with respect to Restricted Stock Units (and related Dividend Equivalents) granted to the Executive under the Corporation's 1995 Stock Incentive Plan and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the Corporation's 1995 Stock Incentive Plan by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997, there shall be taken into account for purposes of the first sentence of this subparagraph 4f. as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the Corporation's 1995 Stock Incentive Plan. If the termination of the Executive's employment occurs prior to December 31, 1997 and prior to a Change in Control, the amount of any adjustments to the severance benefit required as a result of the preceding two sentences of this subparagraph 4f. shall be paid to the Executive in a lump sum no later than March 15, 1998. In addition, in the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Executive shall be entitled to continue participation in the Company's employee benefit plans (other than its qualified and non-qualified retirement plans) for a two-year period from the date of termination, provided, however, that if Executive cannot continue to participate in any of the benefit plans, the Company shall otherwise provide equivalent benefits to the Executive and his dependents on the same after-tax basis as of continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes employed by another employer and becomes eligible to participate in an employee benefit plan of such employer, the benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides any additional benefits necessary to give Executive the benefits provided hereunder. g. Upon termination pursuant to subparagraphs 4a., b., c., d., or e. above, the Company shall pay the Executive or the Executive's estate any base salary earned and unpaid to the date of termination, and any outstanding funds advanced by the Company to or on behalf of the Executive shall become immediately due and payable. h. The parties intend that no severance benefits hereunder shall be paid to the extent that such benefits (either alone or when aggregated with other benefits contingent on a Change in Control and paid to or for benefit of the Executive) constitute "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, under the circumstances set forth below, severance benefits payable under this Agreement shall be subject to the following reduction notwithstanding anything in this Agreement to the contrary. If the aggregate present value (as determined pursuant to Section 280G of the Code) of severance benefits payable under this Agreement which, together with all other payments by the Company to the Executive or for the Executive's benefit, would be "parachute payments" within the meaning of Section 280G of the Code, the payments pursuant to this Agreement shall be reduced (reducing first the severance benefit provided in the first sentence of subparagraph 4f. hereof) to the largest amount as will result in no portion of such payments being treated as excess parachute payments. i. The determination of whether and to what extent the payments shall be reduced under this Agreement, pursuant to the foregoing subparagraph h., including apportionment among specific payments and benefits, shall be made by the Executive in good faith, and such determination shall be conclusive and binding on the Company. The Company shall make the calculations referred to in subparagraph h. above within thirty days following the termination of the Executive's employment and shall provide such calculations and the basis therefor to the Executive within such period. In the event a reduction is required, the Executive shall give notice to the Company, within 20 days of the Executive's receipt of such calculations and related information, of the Executive's determination of the reduction. j. Upon the occurrence of a Change in Control the Company shall pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably thereafter incur as a result of any contest, litigation or arbitration (regardless of the outcome thereof) by the Company, or by the Executive of the validity of, or liability under, this Agreement or the SERP (including any contest by the Executive about the amount of any payment pursuant to this Agreement or pursuant to the SERP), plus in each case interest on any delayed payment at the rate of 150% of the Prime Rate posted by the Chase Manhattan Bank, N.A. or its successor, provided, however, that the Company shall not be liable for the Executive's legal fees and expenses if the Executive's position in such contest, litigation or arbitration is found by the neutral decision-maker to be frivolous. 5. Successor Liability. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform. As used in this Agreement, "Company" shall mean the company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 6. Confidential Information. The Executive agrees to keep secret and retain in the strictest confidence all confidential matters which relate to the Company, its subsidiaries and affiliates, including, without limitation, customer lists, client lists, trade secrets, pricing policies and other business affairs of the Company, its subsidiaries and affiliates learned by him from the Company or any such subsidiary or affiliate or otherwise before or after the date of this Agreement, and not to disclose any such confidential matter to anyone outside the Company or any of its subsidiaries or affiliates, whether during or after his period of service with the Company, except (i) as such disclosure may be required or appropriate in connection with his work as an employee of the Company or (ii) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information. The Executive agrees to give the Company advance written notice of any disclosure pursuant to clause (ii) of the preceding sentence and to cooperate with any efforts by the Company to limit the extent of such disclosure. Upon request by the Company, the Executive agrees to deliver promptly to the Company upon termination of his services for the Company, or at any time thereafter as the Company may request, all Company subsidiary or affiliate memoranda, notes, records, reports, manuals, drawings, designs, computer file in any media and other documents (and all copies thereof) relating to the Company's or any subsidiary's or affiliate's business and all property of the Company or any subsidiary or affiliate associated therewith, which he may then possess or have under his direct control, other than personal notes, diaries, Rolodexes and correspondence. 7. Non-Compete and Non-Solicitation. During the Executive's employment by the Company and for a period of one year following the termination thereof for any reason, the Executive covenants and agrees that he will not for himself or on behalf of any other person, partnership, company or corporation, directly or indirectly, acquire any financial or beneficial interest in (except as provided in the next sentence), provide consulting services to, be employed by, or own, manage, operate or control any business which is in competition with a business engaged in by the Company or any of its subsidiaries or affiliates in any state of the United States in which any of them are engaged in business at the time of such termination of employment for as long as they carry on a business therein. Notwithstanding the preceding sentence, the Executive shall not be prohibited from owning less than five (5%) percent of any publicly traded corporation, whether or not such corporation is in competition with the Company. The Executive hereby covenants and agrees that, at all times during the period of his employment and for a period of one year immediately following the termination thereof for any reason, the Executive shall not employ or seek to employ any person employed at that time by the Company or any of its subsidiaries, or otherwise encourage or entice such person or entity to leave such employment. It is the intention of the parties hereto that the restrictions contained in this Section be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. Specifically, if any court of competent jurisdiction should hold that any portion of the foregoing description is overly broad as to one or more states of the United States, then that state or states shall be eliminated from the territory to which the restrictions of paragraph (a) of this Section applies and the restrictions shall remain applicable in all other states of the United States. 8. No Mitigation. The Executive shall not be required to mitigate the amount of any payments or benefits provided for in Section 4f. hereof by seeking other employment or otherwise and no amounts earned by the Executive shall be used to reduce or offset the amounts payable hereunder, except as otherwise provided in Section 4f. 9. Ownership of Work Product. Any and all improvements, inventions, discoveries, formulae, processes, methods, know-how, confidential data, trade secrets and other proprietary information (collectively, "Work Products") within the scope of any business of the Company or any Affiliate which the Executive may conceive or make or have conceived or made during the Executive's employment with the Company shall be and are the sole and exclusive property of the Company, and that the Executive, whenever requested to do so by the Company, at its expense, shall execute and sign any and all applications, assignments or other instruments and do all other things which the Company may deem necessary or appropriate (i) to apply for, obtain, maintain, enforce, or defend letters patent of the United States or any foreign country for any Work Product, or (ii) to assign, transfer, convey or otherwise make available to the Company the sole and exclusive right, title and interest in and to any Work Product. 10. Arbitration. Any dispute or controversy between the parties relating to this Agreement (except any dispute relating to paragraphs 6 or 7 hereof) or relating to or arising out of the Executive's employment with the Company, shall be settled by binding arbitration in the City of Syracuse, State of New York, pursuant to the Employment Dispute Resolution Rules of the American Arbitration Association and shall be subject to the provisions of Article 75 of the New York Civil Practice Law and Rules. Judgment upon the award may be entered in any court of competent jurisdiction. Notwithstanding anything herein to the contrary, if any dispute arises between the parties under paragraphs 6 or 7 hereof, or if the Company makes any claim under paragraphs 6 or 7, the Company shall not be required to arbitrate such dispute or claim but shall have the right to institute judicial proceedings in any court of competent jurisdiction with respect to such dispute or claim. If such judicial proceedings are instituted, the parties agree that such proceedings shall not be stayed or delayed pending the outcome of any arbitration proceedings hereunder. 11. Notices. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered personally or sent by certified mail, postage prepaid, or overnight delivery addressed as follows: If to the Company: Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, New York 13202 ATTN: Corporate Secretary If to the Executive: 245 Whitestone Circle Syracuse, NY 13215 or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt. 12. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto, and supersedes, and is in full substitution for any and all prior understandings or agreements, oral or written, with respect to the Executive's employment. 13. Amendment. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 14. Miscellaneous. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Company (except to an Affiliate) or by the Executive without the prior written consent of the other party. 15. Severability. If any provision of this Agreement, or portion thereof, is so broad, in scope or duration, so as to be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflicts of law. 17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 18. Performance Covenant. The Executive represents and warrants to the Company that the Executive is not party to any agreement which would prohibit the Executive from entering into this Agreement or performing fully the Executive's obligations hereunder. 19. Survival of Covenants. The obligations of the Executive set forth in paragraphs 6, 7, 9 and 10 represent independent covenants by which the Executive is and will remain bound notwithstanding any breach by the Company, and shall survive the termination of this Agreement. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. _________________________ NIAGARA MOHAWK POWER CORPORATION Darlene D. Kerr By:______________________________ DAVID J. ARRINGTON Senior Vice President - Human Resources SCHEDULE A Modifications in Respect of Darlene D. Kerr ("Executive") to the Supplemental Executive Retirement Plan ("SERP") of the Niagara Mohawk Power Corporation ("Company") I. Subsection 1.8 of Section I of the SERP is hereby modified to provide that the term "Earnings" shall mean the sum of the (i) Executive's base annual salary, whether or not deferred and including any elective before-tax contributions made by the Executive to a plan qualified under Section 401(k) of the Internal Revenue Code, averaged over the final 36 months of the Executive's employment with the Company and (ii) the average of the annual bonus earned by the Executive under the Corporation's Annual Officers Incentive Compensation Plan ("OICP"), whether or not deferred, in respect of the final 36 months of the Executive's employment with the Company. If (A) the Executive is an employee of the Company on December 31, 1997 or (B) prior to December 31, 1997 the Executive's employment is terminated and the Executive is entitled to payment under Article 9 of the Corporation's 1995 Stock Incentive Plan ("SIP") for all or a portion of the Stock Units and Stock Appreciation Rights granted to the Executive under SIP, there shall be taken into account for purposes of the preceding sentence as an annual bonus under the OICP, the sum of (x) cash payments made with respect to Stock Units (and related Dividend Equivalents) granted to the Executive under the SIP and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the SIP, prorated if applicable to Article 9 of the SIP, by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997 (and, if applicable, prior to the Executive's termination of employment), there shall be taken into account for purposes of the first sentence hereof as an annual bonus under the OICP the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the SIP. II. Subsection 2.1 of Section II of the SERP is hereby modified to provide that full SERP benefits are vested following eight (8) years of continuous service with the Company. III. Subsection 4.3 of Section IV of the SERP is hereby modified to provide that in the event of (x) the Executive's involuntary termination of employment by the Company, at any time, other than for Cause, (y) the termination of this Agreement on account of the Executive's Disability or (z) the Executive's termination of employment for Good Reason within the 36 full calendar month period following a Change in Control (as defined in Schedule B of this Agreement), the Executive shall be 100% vested in his full SERP benefit (i.e., 60% of Earnings (as modified above)) regardless of the Executive's years of continuous service with the Company. If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive benefits commencing no earlier than age 55, calculated pursuant to Section III of the SERP. IV. Except as provided above, the provisions of the SERP shall apply and control participation therein and the payment of benefits thereunder. SCHEDULE B For purposes of this Agreement, the term "Change in Control" shall mean: (1) The acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subparagraph (3) of this Schedule B are satisfied; or (2) Individuals who, as of the date hereof, constitute the Company's Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (4) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. EX-10.21 7 EXHIBIT 10-21 EMPLOYMENT AGREEMENT Agreement made as of the 1st day of July, 1996, between NIAGARA MOHAWK POWER CORPORATION (the "Company"), and Gary J. Lavine (the "Executive"). WHEREAS, the Company desires to employ the Executive, and the Executive desires to accept/continue employment with the Company, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereby agree as follows: 1. Term of Agreement. The Company shall employ the Executive, and the Executive shall serve the Company, for the period beginning July 1, 1996 and expiring on June 30, 1999, subject to earlier termination as provided under paragraph 4 hereof. This Agreement shall be extended automatically by one year commencing on July 1, 1997 and on July 1st of each year thereafter, unless either party notifies the other to the contrary not later than sixty (60) days prior to such date. Notwithstanding any such notice by the Company, this Agreement shall remain in effect for a period of thirty-six months from the date of a "Change in Control" (as that term is defined in Schedule B hereto, unless such notice was given at least 18 months prior to the date of the Change in Control). 2. Duties. The Executive shall serve the Company as its Senior Vice President - Legal and Corporate Relations. During the term of this Agreement, the Executive shall, except during vacation or sick leave, devote the whole of the Executive's time, attention and skill to the business of the Company during usual business hours (and outside those hours when reasonably necessary to the Executive's duties hereunder); faithfully and diligently perform such duties and exercise such powers as may be from time to time assigned to or vested in the Executive by the Company's Board of Directors (the "Board") or by any officer of the Company superior to the Executive; obey the directions of the Board and of any officer of the Company superior to the Executive; and use the Executive's best efforts to promote the interests of the Company. The Executive may be required in pursuance of the Executive's duties hereunder to perform services for any company controlling, controlled by or under common control with the Company (such companies hereinafter collectively called "Affiliates") and to accept such offices in any Affiliates as the Board may require. The Executive shall obey all policies of the Company and applicable policies of its Affiliates. 3. Compensation. During the term of this Agreement: a. The Company shall pay the Executive a base salary at an annual rate of $191,500, which shall be payable periodically in accordance with the Company's then prevailing payroll practices, or such greater amount as the Company may from time to time determine; b. The Executive shall be entitled to participate in the Company's Supplemental Executive Retirement Plan ("SERP") according to its terms, as modified by Schedule A hereto; c. The Executive shall be entitled to participate in the Company's Officers Incentive Compensation Plan, Stock Option Plan and Performance Share Unit Plan, and any successors thereto, in accordance with the terms thereof; and d. The Executive shall be entitled to such expense accounts, vacation time, sick leave, perquisites of office, fringe benefits, insurance coverage, and other terms and conditions of employment as the Company generally provides to its employees having rank and seniority at the Company comparable to the Executive. 4. Termination. The Company shall continue to employ the Executive, and the Executive shall continue to work for the Company, during the term of this Agreement, unless the Agreement is terminated in accordance with the following provisions: a. This Agreement shall terminate automatically upon the death of the Executive. Any right or benefit accrued on behalf of the Executive or to which the Executive became entitled under the terms of this Agreement prior to death (other than payment of base salary in respect of the period following the Executive's death), and any obligation of the Company to the Executive in respect of any such right or benefit, shall not be extinguished by reason of the Executive's death. Any base salary earned and unpaid as of the date of the Executive's death shall be paid to the Executive's estate in accordance with paragraph 4g. below. b. By notice to the Executive, the Company may terminate this Agreement upon the "Disability" of the Executive. The Executive shall be deemed to incur a Disability when (i) a physician selected by the Company advises the Company that the Executive's physical or mental condition has rendered the Executive unable to perform the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation and will continue to render him unable to perform the essential functions of the Executive's position in such manner, for a period exceeding 12 consecutive months, or (ii) due to a physical or mental condition, the Executive has not performed the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation, for a period of 12 consecutive months. Following termination of this Agreement pursuant to clause (i) of the preceding sentence of this subparagraph, the Executive shall continue to receive his base salary under paragraph 3a. hereof for a period of 12 months from the date of his Disability, reduced by any benefits payable during such period under the Company's short-term disability plan and long-term disability plan. Thereafter, or in the event of termination of this Agreement pursuant to clause (ii) of the preceding sentence, the Executive shall receive benefits under the Company's long-term disability plan in lieu of any further base salary under paragraph 3a. hereof. c. By notice to the Executive, the Company may terminate the Executive's employment at any time for "Cause". The Company must deliver such notice within ninety (90) days after the Board both (i) has or should have had knowledge of conduct or an event allegedly constituting Cause, and (ii) has reason to believe that such conduct or event could be grounds for Cause. For purposes of this Agreement "Cause" shall mean (i) the Executive is convicted of, or has plead guilty or nolo contendere to, a felony; (ii) the willful and continued failure by the Executive to perform substantially his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Executive by the Company which specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; (iii) the Executive engages in conduct that constitutes gross neglect or willful misconduct in carrying out his duties under this Agreement involving material economic harm to the Company or any of its subsidiaries; or (iv) the Executive has engaged in a material breach of Section 6 or 7 of this Agreement. In the event the termination notice is based on clause (ii) of the preceding sentence, the Executive shall have ten (10) business days following receipt of the notice of termination to cure his conduct, to the extent such cure is possible, and if the Executive does not cure within the ten (10) business day period, his termination of employment in accordance with such termination notice shall be deemed to be for Cause. The determination of Cause shall be made by the Board upon the recommendation of the Compensation and Succession Committee of the Board. Following a Change in Control, such determination shall be made in a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4) of the membership of the Board, excluding members who are employees of the Company, at a meeting called for the purpose of determining that Executive has engaged in conduct which constitutes Cause (and at which Executive had a reasonable opportunity, together with his counsel, to be heard before the Board prior to such vote). The Executive shall not be entitled to the payment of any additional compensation from the Company, except to the extent provided in paragraph 4g. hereof, in the event of the termination of his employment for Cause. d. If any of the following events, any of which shall constitute "Good Reason", occurs within thirty-six months after a Change in Control, the Executive, by notice of the Company, may voluntarily terminate the Executive's employment for Good Reason within ninety (90) days after the Executive both (i) has or should have had knowledge of conduct or an event allegedly constituting Good Reason, and (ii) has reason to believe that such conduct or event could be grounds for Good Reason. In such event, the Executive shall be entitled to the severance benefits set forth in subparagraph 4f. below. (i) the Company assigns any duties to the Executive which are materially inconsistent in any adverse respect with the Executive's position, duties, offices, responsibilities or reporting requirements immediately prior to a Change in Control, including any diminution of such duties or responsibilities; or (ii) the Company reduces the Executive's base salary, including salary deferrals, as in effect immediately prior to a Change in Control; or (iii) the Company discontinues any bonus or other compensation plan or any other benefit, retirement plan (including the SERP), stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health plan, disability plan or similar plan (as the same existed immediately prior to the Change in Control) in which the Executive participated or was eligible to participate in immediately prior to the Change in Control and in lieu thereof does not make available plans providing at least comparable benefits; or (iv) the Company takes action which adversely affects the Executive's participation in, or eligibility for, or materially reduces the Executive's benefits under, any of the plans described in (iii) above, or deprives the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or fails to provide the Executive with the number of paid vacation days to which the Executive was entitled in accordance with the Company's normal vacation policy immediately prior to the Change in Control; or (v) the Company requires the Executive to be based at any office or location other than one within a 50-mile radius of the office or location at which the Executive was based immediately prior to the Change in Control; or (vi) the Company purports to terminate the Executive's employment otherwise than as expressly permitted by this Agreement; or (vii) the Company fails to comply with and satisfy paragraph 5 hereof, provided that such successor has received prior written notice from the Company or from the Executive of the requirements of paragraph 5 hereof. The Executive shall have the sole right to determine, in good faith, whether any of the above events has occurred. e. The Company may terminate the Executive's employment at any time without Cause. f. In the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Company shall pay the Executive a severance benefit, payable in twenty-four equal monthly installments, equal to two years' base salary at the rate in effect as of the date of termination, plus the greater of (i) two times the most recent annual bonus paid to the Executive under the Corporation's Annual Officers Incentive Compensation Plan (the "OICP") or any similar annual bonus plan (excluding the pro rata bonus referred to in the next sentence) or (ii) two times the average annual bonus paid to the Executive for the three prior years under the OICP or such similar plan (excluding the pro rata annual bonus referred to in the next sentence). If one hundred eighty (180) days or more have elapsed in the Company's fiscal year in which such termination occurs, the Company shall also pay the Executive in a lump sum, within ninety (90) days after the end of such fiscal year, a pro rata portion of Executive's annual bonus in an amount equal to (A) the bonus which would have been payable to Executive under OICP or any similar plan for the fiscal year in which Executive's termination occurs, multiplied by (B) a fraction, the numerator of which is the number of days in the fiscal year in which the termination occurs through the termination date and the denominator of which is three hundred sixty-five (365). For purposes of the first sentence of this subparagraph 4f., there shall be taken into account as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the sum of (x) cash payments with respect to Restricted Stock Units (and related Dividend Equivalents) granted to the Executive under the Corporation's 1995 Stock Incentive Plan and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the Corporation's 1995 Stock Incentive Plan by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997, there shall be taken into account for purposes of the first sentence of this subparagraph 4f. as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the Corporation's 1995 Stock Incentive Plan. If the termination of the Executive's employment occurs prior to December 31, 1997 and prior to a Change in Control, the amount of any adjustments to the severance benefit required as a result of the preceding two sentences of this subparagraph 4f. shall be paid to the Executive in a lump sum no later than March 15, 1998. In addition, in the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Executive shall be entitled to continue participation in the Company's employee benefit plans (other than its qualified and non-qualified retirement plans) for a two-year period from the date of termination, provided, however, that if Executive cannot continue to participate in any of the benefit plans, the Company shall otherwise provide equivalent benefits to the Executive and his dependents on the same after-tax basis as of continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes employed by another employer and becomes eligible to participate in an employee benefit plan of such employer, the benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides anyadditional benefits necessary to give Executive the benefits provided hereunder. g. Upon termination pursuant to subparagraphs 4a., b., c., d., or e. above, the Company shall pay the Executive or the Executive's estate any base salary earned and unpaid to the date of termination, and any outstanding funds advanced by the Company to or on behalf of the Executive shall become immediately due and payable. h. The parties intend that no severance benefits hereunder shall be paid to the extent that such benefits (either alone or when aggregated with other benefits contingent on a Change in Control and paid to or for benefit of the Executive) constitute "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, under the circumstances set forth below, severance benefits payable under this Agreement shall be subject to the following reduction notwithstanding anything in this Agreement to the contrary. If the aggregate present value (as determined pursuant to Section 280G of the Code) of severance benefits payable under this Agreement which, together with all other payments by the Company to the Executive or for the Executive's benefit, would be "parachute payments" within the meaning of Section 280G of the Code, the payments pursuant to this Agreement shall be reduced (reducing first the severance benefit provided in the first sentence of subparagraph 4f. hereof) to the largest amount as will result in no portion of such payments being treated as excess parachute payments. i. The determination of whether and to what extent the payments shall be reduced under this Agreement, pursuant to the foregoing subparagraph h., including apportionment among specific payments and benefits, shall be made by the Executive in good faith, and such determination shall be conclusive and binding on the Company. The Company shall make the calculations referred to in subparagraph h. above within thirty days following the termination of the Executive's employment and shall provide such calculations and the basis therefor to the Executive within such period. In the event a reduction is required, the Executive shall give notice to the Company, within 20 days of the Executive's receipt of such calculations and related information, of the Executive's determination of the reduction. j. Upon the occurrence of a Change in Control the Company shall pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably thereafter incur as a result of any contest, litigation or arbitration (regardless of the outcome thereof) by the Company, or by the Executive of the validity of, or liability under, this Agreement or the SERP (including any contest by the Executive about the amount of any payment pursuant to this Agreement or pursuant to the SERP), plus in each case interest on any delayed payment at the rate of 150% of the Prime Rate posted by the Chase Manhattan Bank, N.A. or its successor, provided, however, that the Company shall not be liable for the Executive's legal fees and expenses if the Executive's position in such contest, litigation or arbitration is found by the neutral decision-maker to be frivolous. 5. Successor Liability. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform. As used in this Agreement, "Company" shall mean the company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 6. Confidential Information. The Executive agrees to keep secret and retain in the strictest confidence all confidential matters which relate to the Company, its subsidiaries and affiliates, including, without limitation, customer lists, client lists, trade secrets, pricing policies and other business affairs of the Company, its subsidiaries and affiliates learned by him from the Company or any such subsidiary or affiliate or otherwise before or after the date of this Agreement, and not to disclose any such confidential matter to anyone outside the Company or any of its subsidiaries or affiliates, whether during or after his period of service with the Company, except (i) as such disclosure may be required or appropriate in connection with his work as an employee of the Company or (ii) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information. The Executive agrees to give the Company advance written notice of any disclosure pursuant to clause (ii) of the preceding sentence and to cooperate with any efforts by the Company to limit the extent of such disclosure. Upon request by the Company, the Executive agrees to deliver promptly to the Company upon termination of his services for the Company, or at any time thereafter as the Company may request, all Company subsidiary or affiliate memoranda, notes, records, reports, manuals, drawings, designs, computer file in any media and other documents (and all copies thereof) relating to the Company's or any subsidiary's or affiliate's business and all property of the Company or any subsidiary or affiliate associated therewith, which he may then possess or have under his direct control, other than personal notes, diaries, Rolodexes and correspondence. 7. Non-Compete and Non-Solicitation. During the Executive's employment by the Company and for a period of one year following the termination thereof for any reason, the Executive covenants and agrees that he will not for himself or on behalf of any other person, partnership, company or corporation, directly or indirectly, acquire any financial or beneficial interest in (except as provided in the next sentence), provide consulting services to, be employed by, or own, manage, operate or control any business which is in competition with a business engaged in by the Company or any of its subsidiaries or affiliates in any state of the United States in which any of them are engaged in business at the time of such termination of employment for as long as they carry on a business therein. Notwithstanding the preceding sentence, the Executive shall not be prohibited from owning less than five (5%) percent of any publicly traded corporation, whether or not such corporation is in competition with the Company. The Executive hereby covenants and agrees that, at all times during the period of his employment and for a period of one year immediately following the termination thereof for any reason, the Executive shall not employ or seek to employ any person employed at that time by the Company or any of its subsidiaries, or otherwise encourage or entice such person or entity to leave such employment. It is the intention of the parties hereto that the restrictions contained in this Section be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. Specifically, if any court of competent jurisdiction should hold that any portion of the foregoing description is overly broad as to one or more states of the United States, then that state or states shall be eliminated from the territory to which the restrictions of paragraph (a) of this Section applies and the restrictions shall remain applicable in all other states of the United States. 8. No Mitigation. The Executive shall not be required to mitigate the amount of any payments or benefits provided for in Section 4f. hereof by seeking other employment or otherwise and no amounts earned by the Executive shall be used to reduce or offset the amounts payable hereunder, except as otherwise provided in Section 4f. 9. Ownership of Work Product. Any and all improvements, inventions, discoveries, formulae, processes, methods, know-how, confidential data, trade secrets and other proprietary information (collectively, "Work Products") within the scope of any business of the Company or any Affiliate which the Executive may conceive or make or have conceived or made during the Executive's employment with the Company shall be and are thesole and exclusive property of the Company, and that the Executive, whenever requested to do so by the Company, at its expense, shall execute and sign any and all applications, assignments or other instruments and do all other things which the Company may deem necessary or appropriate (i) to apply for, obtain, maintain, enforce, or defend letters patent of the United States or any foreign country for any Work Product, or (ii) to assign, transfer, convey or otherwise make available to the Company the sole and exclusive right, title and interest in and to any Work Product. 10. Arbitration. Any dispute or controversy between the parties relating to this Agreement (except any dispute relating to paragraphs 6 or 7 hereof) or relating to or arising out of the Executive's employment with the Company, shall be settled by binding arbitration in the City of Syracuse, State of New York, pursuant to the Employment Dispute Resolution Rules of the American Arbitration Association and shall be subject to the provisions of Article 75 of the New York Civil Practice Law and Rules. Judgment upon the award may be entered in any court of competent jurisdiction. Notwithstanding anything herein to the contrary, if any dispute arises between the parties under paragraphs 6 or 7 hereof, or if the Company makes any claim under paragraphs 6 or 7, the Company shall not be required to arbitrate such dispute or claim but shall have the right to institute judicial proceedings in any court of competent jurisdiction with respect to such dispute or claim. If such judicial proceedings are instituted, the parties agree that such proceedings shall not be stayed or delayed pending the outcome of any arbitration proceedings hereunder. 11. Notices. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered personally or sent by certified mail, postage prepaid, or overnight delivery addressed as follows: If to the Company: Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, New York 13202 ATTN: Corporate Secretary If to the Executive: 111 Holliston Circle Fayetteville, NY 13066 or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt. 12. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto, and supersedes, and is in full substitution for any and all prior understandings or agreements, oral or written, with respect to the Executive's employment. 13. Amendment. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 14. Miscellaneous. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Company (except to an Affiliate) or by the Executive without the prior written consent of the other party. 15. Severability. If any provision of this Agreement, or portion thereof, is so broad, in scope or duration, so as to be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflicts of law. 17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 18. Performance Covenant. The Executive represents and warrants to the Company that the Executive is not party to any agreement which would prohibit the Executive from entering into this Agreement or performing fully the Executive's obligations hereunder. 19. Survival of Covenants. The obligations of the Executive set forth in paragraphs 6, 7, 9 and 10 represent independent covenants by which the Executive is and will remain bound notwithstanding any breach by the Company, and shall survive the termination of this Agreement. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. _______________________ NIAGARA MOHAWK POWER CORPORATION Gary J. Lavine By:______________________________ DAVID J. ARRINGTON Senior Vice President - Human Resources SCHEDULE A Modifications in Respect of Gary J. Lavine ("Executive") to the Supplemental Executive Retirement Plan ("SERP") of the Niagara Mohawk Power Corporation ("Company") I. Subsection 1.8 of Section I of the SERP is hereby modified to provide that the term "Earnings" shall mean the sum of the (i) Executive's base annual salary, whether or not deferred and including any elective before-tax contributions made by the Executive to a plan qualified under Section 401(k) of the Internal Revenue Code, averaged over the final 36 months of the Executive's employment with the Company and (ii) the average of the annual bonus earned by the Executive under the Corporation's Annual Officers Incentive Compensation Plan ("OICP"), whether or not deferred, in respect of the final 36 months of the Executive's employment with the Company. If (A) the Executive is an employee of the Company on December 31, 1997 or (B) prior to December 31, 1997 the Executive's employment is terminated and the Executive is entitled to payment under Article 9 of the Corporation's 1995 Stock Incentive Plan ("SIP") for all or a portion of the Stock Units and Stock Appreciation Rights granted to the Executive under SIP, there shall be taken into account for purposes of the preceding sentence as an annual bonus under the OICP, the sum of (x) cash payments made with respect to Stock Units (and related Dividend Equivalents) granted to the Executive under the SIP and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the SIP, prorated if applicable to Article 9 of the SIP, by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997 (and, if applicable, prior to the Executive's termination of employment), there shall be taken into account for purposes of the first sentence hereof as an annual bonus under the OICP the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the SIP. II. Subsection 2.1 of Section II of the SERP is hereby modified to provide that full SERP benefits are vested following eight (8) years of continuous service with the Company. III. Subsection 4.3 of Section IV of the SERP is hereby modified to provide that in the event of (x) the Executive's involuntary termination of employment by the Company, at any time, other than for Cause, (y) the termination of this Agreement on account of the Executive's Disability or (z) the Executive's termination of employment for Good Reason within the 36 full calendar month period following a Change in Control (as defined in Schedule B of this Agreement), the Executive shall be 100% vested in his full SERP benefit (i.e., 60% of Earnings (as modified above)) regardless of the Executive's years of continuous service with the Company. If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive benefits commencing no earlier than age 55, calculated pursuant to Section III of the SERP. IV. Except as provided above, the provisions of the SERP shall apply and control participation therein and the payment of benefits thereunder. SCHEDULE B For purposes of this Agreement, the term "Change in Control" shall mean: (1) The acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subparagraph (3) of this Schedule B are satisfied; or (2) Individuals who, as of the date hereof, constitute the Company's Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (4) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. EX-10.22 8 Exhibit 10-22 EMPLOYMENT AGREEMENT Agreement made as of the 1st day of July, 1996, between NIAGARA MOHAWK POWER CORPORATION (the "Company"), and John W. Powers (the "Executive"). WHEREAS, the Company desires to employ the Executive, and the Executive desires to accept/continue employment with the Company, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereby agree as follows: 1. Term of Agreement. The Company shall employ the Executive, and the Executive shall serve the Company, for the period beginning July 1, 1996 and expiring on June 30, 1999, subject to earlier termination as provided under paragraph 4 hereof. This Agreement shall be extended automatically by one year commencing on July 1, 1997 and on July 1st of each year thereafter, unless either party notifies the other to the contrary not later than sixty (60) days prior to such date. Notwithstanding any such notice by the Company, this Agreement shall remain in effect for a period of thirty-six months from the date of a "Change in Control" (as that term is defined in Schedule B hereto, unless such notice was given at least 18 months prior to the date of the Change in Control). 2. Duties. The Executive shall serve the Company as its Senior Vice President and Chief Financial Officer. During the term of this Agreement, the Executive shall, except during vacation or sick leave, devote the whole of the Executive's time, attention and skill to the business of the Company during usual business hours (and outside those hours when reasonably necessary to the Executive's duties hereunder); faithfully and diligently perform such duties and exercise such powers as may be from time to time assigned to or vested in the Executive by the Company's Board of Directors (the "Board") or by any officer of the Company superior to the Executive; obey the directions of the Board and of any officer of the Company superior to the Executive; and use the Executive's best efforts to promote the interests of the Company. The Executive may be required in pursuance of the Executive's duties hereunder to perform services for any company controlling, controlled by or under common control with the Company (such companies hereinafter collectively called "Affiliates") and to accept such offices in any Affiliates as the Board may require. The Executive shall obey all policies of the Company and applicable policies of its Affiliates. 3. Compensation. During the term of this Agreement: a. The Company shall pay the Executive a base salary at an annual rate of $211,000, which shall be payable periodically in accordance with the Company's then prevailing payroll practices, or such greater amount as the Company may from time to time determine; b. The Executive shall be entitled to participate in the Company's Supplemental Executive Retirement Plan ("SERP") according to its terms, as modified by Schedule A hereto; c. The Executive shall be entitled to participate in the Company's Officers Incentive Compensation Plan, Stock Option Plan and Performance Share Unit Plan, and any successors thereto, in accordance with the terms thereof; and d. The Executive shall be entitled to such expense accounts, vacation time, sick leave, perquisites of office, fringe benefits, insurance coverage, and other terms and conditions of employment as the Company generally provides to its employees having rank and seniority at the Company comparable to the Executive. 4. Termination. The Company shall continue to employ the Executive, and the Executive shall continue to work for the Company, during the term of this Agreement, unless the Agreement is terminated in accordance with the following provisions: a. This Agreement shall terminate automatically upon the death of the Executive. Any right or benefit accrued on behalf of the Executive or to which the Executive became entitled under the terms of this Agreement prior to death (other than payment of base salary in respect of the period following the Executive's death), and any obligation of the Company to the Executive in respect of any such right or benefit, shall not be extinguished by reason of the Executive's death. Any base salary earned and unpaid as of the date of the Executive's death shall be paid to the Executive's estate in accordance with paragraph 4g. below. b. By notice to the Executive, the Company may terminate this Agreement upon the "Disability" of the Executive. The Executive shall be deemed to incur a Disability when (i) a physician selected by the Company advises the Company that the Executive's physical or mental condition has rendered the Executive unable to perform the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation and will continue to render him unable to perform the essential functions of the Executive's position in such manner, for a period exceeding 12 consecutive months, or (ii) due to a physical or mental condition, the Executive has not performed the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation, for a period of 12 consecutive months. Following termination of this Agreement pursuant to clause (i) of the preceding sentence of this subparagraph, the Executive shall continue to receive his base salary under paragraph 3a. hereof for a period of 12 months from the date of his Disability, reduced by any benefits payable during such period under the Company's short-term disability plan and long-term disability plan. Thereafter, or in the event of termination of this Agreement pursuant to clause (ii) of the preceding sentence, the Executive shall receive benefits under the Company's long-term disability plan in lieu of any further base salary under paragraph 3a. hereof. c. By notice to the Executive, the Company may terminate the Executive's employment at any time for "Cause". The Company must deliver such notice within ninety (90) days after the Board both (i) has or should have had knowledge of conduct or an event allegedly constituting Cause, and (ii) has reason to believe that such conduct or event could be grounds for Cause. For purposes of this Agreement "Cause" shall mean (i) the Executive is convicted of, or has plead guilty or nolo contendere to, a felony; (ii) the willful and continued failure by the Executive to perform substantially his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Executive by the Company which specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; (iii) the Executive engages in conduct that constitutes gross neglect or willful misconduct in carrying out his duties under this Agreement involving material economic harm to the Company or any of its subsidiaries; or (iv) the Executive has engaged in a material breach of Section 6 or 7 of this Agreement. In the event the termination notice is based on clause (ii) of the preceding sentence, the Executive shall have ten (10) business days following receipt of the notice of termination to cure his conduct, to the extent such cure is possible, and if the Executive does not cure within the ten (10) business day period, his termination of employment in accordance with such termination notice shall be deemed to be for Cause. The determination of Cause shall be made by the Board upon the recommendation of the Compensation and Succession Committee of the Board. Following a Change in Control, such determination shall be made in a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4) of the membership of the Board, excluding members who are employees of the Company, at a meeting called for the purpose of determining that Executive has engaged in conduct which constitutes Cause (and at which Executive had a reasonable opportunity, together with his counsel, to be heard before the Board prior to such vote). The Executive shall not be entitled to the payment of any additional compensation from the Company, except to the extent provided in paragraph 4g. hereof, in the event of the termination of his employment for Cause. d. If any of the following events, any of which shall constitute "Good Reason", occurs within thirty-six months after a Change in Control, the Executive, by notice of the Company, may voluntarily terminate the Executive's employment for Good Reason within ninety (90) days after the Executive both (i) has or should have had knowledge of conduct or an event allegedly constituting Good Reason, and (ii) has reason to believe that such conduct or event could be grounds for Good Reason. In such event, the Executive shall be entitled to the severance benefits set forth in subparagraph 4f. below. (i) the Company assigns any duties to the Executive which are materially inconsistent in any adverse respect with the Executive's position, duties, offices, responsibilities or reporting requirements immediately prior to a Change in Control, including any diminution of such duties or responsibilities; or (ii) the Company reduces the Executive's base salary, including salary deferrals, as in effect immediately prior to a Change in Control; or (iii) the Company discontinues any bonus or other compensation plan or any other benefit, retirement plan (including the SERP), stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health plan, disability plan or similar plan (as the same existed immediately prior to the Change in Control) in which the Executive participated or was eligible to participate in immediately prior to the Change in Control and in lieu thereof does not make available plans providing at least comparable benefits; or (iv) the Company takes action which adversely affects the Executive's participation in, or eligibility for, or materially reduces the Executive's benefits under, any of the plans described in (iii) above, or deprives the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or fails to provide the Executive with the number of paid vacation days to which the Executive was entitled in accordance with the Company's normal vacation policy immediately prior to the Change in Control; or (v) the Company requires the Executive to be based at any office or location other than one within a 50-mile radius of the office or location at which the Executive was based immediately prior to the Change in Control; or (vi) the Company purports to terminate the Executive's employment otherwise than as expressly permitted by this Agreement; or (vii) the Company fails to comply with and satisfy paragraph 5 hereof, provided that such successor has received prior written notice from the Company or from the Executive of the requirements of paragraph 5 hereof. The Executive shall have the sole right to determine, in good faith, whether any of the above events has occurred. e. The Company may terminate the Executive's employment at any time without Cause. f. In the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Company shall pay the Executive a severance benefit, payable in twenty-four equal monthly installments, equal to two years' base salary at the rate in effect as of the date of termination, plus the greater of (i) two times the most recent annual bonus paid to the Executive under the Corporation's Annual Officers Incentive Compensation Plan (the "OICP") or any similar annual bonus plan (excluding the pro rata bonus referred to in the next sentence) or (ii) two times the average annual bonus paid to the Executive for the three prior years under the OICP or such similar plan (excluding the pro rata annual bonus referred to in the next sentence). If one hundred eighty (180) days or more have elapsed in the Company's fiscal year in which such termination occurs, the Company shall also pay the Executive in a lump sum, within ninety (90) days after the end of such fiscal year, a pro rata portion of Executive's annual bonus in an amount equal to (A) the bonus which would have been payable to Executive under OICP or any similar plan for the fiscal year in which Executive's termination occurs, multiplied by (B) a fraction, the numerator of which is the number of days in the fiscal year in which the termination occurs through the termination date and the denominator of which is three hundred sixty-five (365). For purposes of the first sentence of this subparagraph 4f., there shall be taken into account as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the sum of (x) cash payments with respect to Restricted Stock Units (and related Dividend Equivalents) granted to the Executive under the Corporation's 1995 Stock Incentive Plan and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the Corporation's 1995 Stock Incentive Plan by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997, there shall be taken into account for purposes of the first sentence of this subparagraph 4f. as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the Corporation's 1995 Stock Incentive Plan. If the termination of the Executive's employment occurs prior to December 31, 1997 and prior to a Change in Control, the amount of any adjustments to the severance benefit required as a result of the preceding two sentences of this subparagraph 4f. shall be paid to the Executive in a lump sum no later than March 15, 1998. In addition, in the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Executive shall be entitled to continue participation in the Company's employee benefit plans (other than its qualified and non-qualified retirement plans) for a two-year period from the date of termination, provided, however, that if Executive cannot continue to participate in any of the benefit plans, the Company shall otherwise provide equivalent benefits to the Executive and his dependents on the same after-tax basis as of continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes employed by another employer and becomes eligible to participate in an employee benefit plan of such employer, the benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides any additional benefits necessary to give Executive the benefits provided hereunder. g. Upon termination pursuant to subparagraphs 4a., b., c., d., or e. above, the Company shall pay the Executive or the Executive's estate any base salary earned and unpaid to the date of termination, and any outstanding funds advanced by the Company to or on behalf of the Executive shall become immediately due and payable. h. The parties intend that no severance benefits hereunder shall be paid to the extent that such benefits (either alone or when aggregated with other benefits contingent on a Change in Control and paid to or for benefit of the Executive) constitute "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, under the circumstances set forth below, severance benefits payable under this Agreement shall be subject to the following reduction notwithstanding anything in this Agreement to the contrary. If the aggregate present value (as determined pursuant to Section 280G of the Code) of severance benefits payable under this Agreement which, together with all other payments by the Company to the Executive or for the Executive's benefit, would be "parachute payments" within the meaning of Section 280G of the Code, the payments pursuant to this Agreement shall be reduced (reducing first the severance benefit provided in the first sentence of subparagraph 4f. hereof) to the largest amount as will result in no portion of such payments being treated as excess parachute payments. i. The determination of whether and to what extent the payments shall be reduced under this Agreement, pursuant to the foregoing subparagraph h., including apportionment among specific payments and benefits, shall be made by the Executive in good faith, and such determination shall be conclusive and binding on the Company. The Company shall make the calculations referred to in subparagraph h. above within thirty days following the termination of the Executive's employment and shall provide such calculations and the basis therefor to the Executive within such period. In the event a reduction is required, the Executive shall give notice to the Company, within 20 days of the Executive's receipt of such calculations and related information, of the Executive's determination of the reduction. j. Upon the occurrence of a Change in Control the Company shall pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably thereafter incur as a result of any contest, litigation or arbitration (regardless of the outcome thereof) by the Company, or by the Executive of the validity of, or liability under, this Agreement or the SERP (including any contest by the Executive about the amount of any payment pursuant to this Agreement or pursuant to the SERP), plus in each case interest on any delayed payment at the rate of 150% of the Prime Rate posted by the Chase Manhattan Bank, N.A. or its successor, provided, however, that the Company shall not be liable for the Executive's legal fees and expenses if the Executive's position in such contest, litigation or arbitration is found by the neutral decision-maker to be frivolous. 5. Successor Liability. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform. As used in this Agreement, "Company" shall mean the company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 6. Confidential Information. The Executive agrees to keep secret and retain in the strictest confidence all confidential matters which relate to the Company, its subsidiaries and affiliates, including, without limitation, customer lists, client lists, trade secrets, pricing policies and other business affairs of the Company, its subsidiaries and affiliates learned by him from the Company or any such subsidiary or affiliate or otherwise before or after the date of this Agreement, and not to disclose any such confidential matter to anyone outside the Company or any of its subsidiaries or affiliates, whether during or after his period of service with the Company, except (i) as such disclosure may be required or appropriate in connection with his work as an employee of the Company or (ii) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information. The Executive agrees to give the Company advance written notice of any disclosure pursuant to clause (ii) of the preceding sentence and to cooperate with any efforts by the Company to limit the extent of such disclosure. Upon request by the Company, the Executive agrees to deliver promptly to the Company upon termination of his services for the Company, or at any time thereafter as the Company may request, all Company subsidiary or affiliate memoranda, notes, records, reports, manuals, drawings, designs, computer file in any media and other documents (and all copies thereof) relating to the Company's or any subsidiary's or affiliate's business and all property of the Company or any subsidiary or affiliate associated therewith, which he may then possess or have under his direct control, other than personal notes, diaries, Rolodexes and correspondence. 7. Non-Compete and Non-Solicitation. During the Executive's employment by the Company and for a period of one year following the termination thereof for any reason, the Executive covenants and agrees that he will not for himself or on behalf of any other person, partnership, company or corporation, directly or indirectly, acquire any financial or beneficial interest in (except as provided in the next sentence), provide consulting services to, be employed by, or own, manage, operate or control any business which is in competition with a business engaged in by the Company or any of its subsidiaries or affiliates in any state of the United States in which any of them are engaged in business at the time of such termination of employment for as long as they carry on a business therein. Notwithstanding the preceding sentence, the Executive shall not be prohibited from owning less than five (5%) percent of any publicly traded corporation, whether or not such corporation is in competition with the Company. The Executive hereby covenants and agrees that, at all times during the period of his employment and for a period of one year immediately following the termination thereof for any reason, the Executive shall not employ or seek to employ any person employed at that time by the Company or any of its subsidiaries, or otherwise encourage or entice such person or entity to leave such employment. It is the intention of the parties hereto that the restrictions contained in this Section be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. Specifically, if any court of competent jurisdiction should hold that any portion of the foregoing description is overly broad as to one or more states of the United States, then that state or states shall be eliminated from the territory to which the restrictions of paragraph (a) of this Section applies and the restrictions shall remain applicable in all other states of the United States. 8. No Mitigation. The Executive shall not be required to mitigate the amount of any payments or benefits provided for in Section 4f. hereof by seeking other employment or otherwise and no amounts earned by the Executive shall be used to reduce or offset the amounts payable hereunder, except as otherwise provided in Section 4f. 9. Ownership of Work Product. Any and all improvements, inventions, discoveries, formulae, processes, methods, know-how, confidential data, trade secrets and other proprietary information (collectively, "Work Products") within the scope of any business of the Company or any Affiliate which the Executive may conceive or make or have conceived or made during the Executive's employment with the Company shall be and are the sole and exclusive property of the Company, and that the Executive, whenever requested to do so by the Company, at its expense, shall execute and sign any and all applications, assignments or other instruments and do all other things which the Company may deem necessary or appropriate (i) to apply for, obtain, maintain, enforce, or defend letters patent of the United States or any foreign country for any Work Product, or (ii) to assign, transfer, convey or otherwise make available to the Company the sole and exclusive right, title and interest in and to any Work Product. 10. Arbitration. Any dispute or controversy between the parties relating to this Agreement (except any dispute relating to paragraphs 6 or 7 hereof) or relating to or arising out of the Executive's employment with the Company, shall be settled by binding arbitration in the City of Syracuse, State of New York, pursuant to the Employment Dispute Resolution Rules of the American Arbitration Association and shall be subject to the provisions of Article 75 of the New York Civil Practice Law and Rules. Judgment upon the award may be entered in any court of competent jurisdiction. Notwithstanding anything herein to the contrary, if any dispute arises between the parties under paragraphs 6 or 7 hereof, or if the Company makes any claim under paragraphs 6 or 7, the Company shall not be required to arbitrate such dispute or claim but shall have the right to institute judicial proceedings in any court of competent jurisdiction with respect to such dispute or claim. If such judicial proceedings are instituted, the parties agree that such proceedings shall not be stayed or delayed pending the outcome of any arbitration proceedings hereunder. 11. Notices. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered personally or sent by certified mail, postage prepaid, or overnight delivery addressed as follows: If to the Company: Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, New York 13202 ATTN: Corporate Secretary If to the Executive: 112 Wooded Heights Drive Camillus, NY 13031 or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt. 12. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto, and supersedes, and is in full substitution for any and all prior understandings or agreements, oral or written, with respect to the Executive's employment. 13. Amendment. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 14. Miscellaneous. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Company (except to an Affiliate) or by the Executive without the prior written consent of the other party. 15. Severability. If any provision of this Agreement, or portion thereof, is so broad, in scope or duration, so as to be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflicts of law. 17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 18. Performance Covenant. The Executive represents and warrants to the Company that the Executive is not party to any agreement which would prohibit the Executive from entering into this Agreement or performing fully the Executive's obligations hereunder. 19. Survival of Covenants. The obligations of the Executive set forth in paragraphs 6, 7, 9 and 10 represent independent covenants by which the Executive is and will remain bound notwithstanding any breach by the Company, and shall survive the termination of this Agreement. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. _________________________ NIAGARA MOHAWK POWER CORPORATION John W. Powers By:______________________________ DAVID J. ARRINGTON Senior Vice President - Human Resources SCHEDULE A Modifications in Respect of John W. Powers ("Executive") to the Supplemental Executive Retirement Plan ("SERP") of the Niagara Mohawk Power Corporation ("Company") I. Subsection 1.8 of Section I of the SERP is hereby modified to provide that the term "Earnings" shall mean the sum of the (i) Executive's base annual salary, whether or not deferred and including any elective before-tax contributions made by the Executive to a plan qualified under Section 401(k) of the Internal Revenue Code, averaged over the final 36 months of the Executive's employment with the Company and (ii) the average of the annual bonus earned by the Executive under the Corporation's Annual Officers Incentive Compensation Plan ("OICP"), whether or not deferred, in respect of the final 36 months of the Executive's employment with the Company. If (A) the Executive is an employee of the Company on December 31, 1997 or (B) prior to December 31, 1997 the Executive's employment is terminated and the Executive is entitled to payment under Article 9 of the Corporation's 1995 Stock Incentive Plan ("SIP") for all or a portion of the Stock Units and Stock Appreciation Rights granted to the Executive under SIP, there shall be taken into account for purposes of the preceding sentence as an annual bonus under the OICP, the sum of (x) cash payments made with respect to Stock Units (and related Dividend Equivalents) granted to the Executive under the SIP and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the SIP, prorated if applicable to Article 9 of the SIP, by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997 (and, if applicable, prior to the Executive's termination of employment), there shall be taken into account for purposes of the first sentence hereof as an annual bonus under the OICP the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the SIP. II. Subsection 2.1 of Section II of the SERP is hereby modified to provide that full SERP benefits are vested following eight (8) years of continuous service with the Company. III. Subsection 4.3 of Section IV of the SERP is hereby modified to provide that in the event of (x) the Executive's involuntary termination of employment by the Company, at any time, other than for Cause, (y) the termination of this Agreement on account of the Executive's Disability or (z) the Executive's termination of employment for Good Reason within the 36 full calendar month period following a Change in Control (as defined in Schedule B of this Agreement), the Executive shall be 100% vested in his full SERP benefit (i.e., 60% of Earnings (as modified above)) regardless of the Executive's years of continuous service with the Company. If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive benefits commencing no earlier than age 55, calculated pursuant to Section III of the SERP. IV. Except as provided above, the provisions of the SERP shall apply and control participation therein and the payment of benefits thereunder. SCHEDULE B For purposes of this Agreement, the term "Change in Control" shall mean: (1) The acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subparagraph (3) of this Schedule B are satisfied; or (2) Individuals who, as of the date hereof, constitute the Company's Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (4) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. EX-10.23 9 Exhibit 10-23 EMPLOYMENT AGREEMENT Agreement made as of the 1st day of July, 1996, between NIAGARA MOHAWK POWER CORPORATION (the "Company"), and B. Ralph Sylvia (the "Executive"). WHEREAS, the Company desires to employ the Executive, and the Executive desires to accept/continue employment with the Company, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereby agree as follows: 1. Term of Agreement. The Company shall employ the Executive, and the Executive shall serve the Company, for the period beginning July 1, 1996 and expiring on June 30, 1999, subject to earlier termination as provided under paragraph 4 hereof. This Agreement shall be extended automatically by one year commencing on July 1, 1997 and on July 1st of each year thereafter, unless either party notifies the other to the contrary not later than sixty (60) days prior to such date. Notwithstanding any such notice by the Company, this Agreement shall remain in effect for a period of thirty-six months from the date of a "Change in Control" (as that term is defined in Schedule B hereto, unless such notice was given at least 18 months prior to the date of the Change in Control). 2. Duties. The Executive shall serve the Company as its Executive Vice President - Electric Generation and Chief Nuclear Officer. During the term of this Agreement, the Executive shall, except during vacation or sick leave, devote the whole of the Executive's time, attention and skill to the business of the Company during usual business hours (and outside those hours when reasonably necessary to the Executive's duties hereunder); faithfully and diligently perform such duties and exercise such powers as may be from time to time assigned to or vested in the Executive by the Company's Board of Directors (the "Board") or by any officer of the Company superior to the Executive; obey the directions of the Board and of any officer of the Company superior to the Executive; and use the Executive's best efforts to promote the interests of the Company. The Executive may be required in pursuance of the Executive's duties hereunder to perform services for any company controlling, controlled by or under common control with the Company (such companies hereinafter collectively called "Affiliates") and to accept such offices in any Affiliates as the Board may require. The Executive shall obey all policies of the Company and applicable policies of its Affiliates. 3. Compensation. During the term of this Agreement: a. The Company shall pay the Executive a base salary at an annual rate of $295,000, which shall be payable periodically in accordance with the Company's then prevailing payroll practices, or such greater amount as the Company may from time to time determine; b. The Executive shall be entitled to participate in the Company's Supplemental Executive Retirement Plan ("SERP") according to its terms, as modified by Schedule A hereto; c. The Executive shall be entitled to participate in the Company's Officers Incentive Compensation Plan, Stock Option Plan and Performance Share Unit Plan, and any successors thereto, in accordance with the terms thereof; and d. The Executive shall be entitled to such expense accounts, vacation time, sick leave, perquisites of office, fringe benefits, insurance coverage, and other terms and conditions of employment as the Company generally provides to its employees having rank and seniority at the Company comparable to the Executive. 4. Termination. The Company shall continue to employ the Executive, and the Executive shall continue to work for the Company, during the term of this Agreement, unless the Agreement is terminated in accordance with the following provisions: a. This Agreement shall terminate automatically upon the death of the Executive. Any right or benefit accrued on behalf of the Executive or to which the Executive became entitled under the terms of this Agreement prior to death (other than payment of base salary in respect of the period following the Executive's death), and any obligation of the Company to the Executive in respect of any such right or benefit, shall not be extinguished by reason of the Executive's death. Any base salary earned and unpaid as of the date of the Executive's death shall be paid to the Executive's estate in accordance with paragraph 4g. below. b. By notice to the Executive, the Company may terminate this Agreement upon the "Disability" of the Executive. The Executive shall be deemed to incur a Disability when (i) a physician selected by the Company advises the Company that the Executive's physical or mental condition has rendered the Executive unable to perform the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation and will continue to render him unable to perform the essential functions of the Executive's position in such manner, for a period exceeding 12 consecutive months, or (ii) due to a physical or mental condition, the Executive has not performed the essential functions of the Executive's position in a reasonable manner, with or without reasonable accommodation, for a period of 12 consecutive months. Following termination of this Agreement pursuant to clause (i) of the preceding sentence of this subparagraph, the Executive shall continue to receive his base salary under paragraph 3a. hereof for a period of 12 months from the date of his Disability, reduced by any benefits payable during such period under the Company's short-term disability plan and long-term disability plan. Thereafter, or in the event of termination of this Agreement pursuant to clause (ii) of the preceding sentence, the Executive shall receive benefits under the Company's long-term disability plan in lieu of any further base salary under paragraph 3a. hereof. c. By notice to the Executive, the Company may terminate the Executive's employment at any time for "Cause". The Company must deliver such notice within ninety (90) days after the Board both (i) has or should have had knowledge of conduct or an event allegedly constituting Cause, and (ii) has reason to believe that such conduct or event could be grounds for Cause. For purposes of this Agreement "Cause" shall mean (i) the Executive is convicted of, or has plead guilty or nolo contendere to, a felony; (ii) the willful and continued failure by the Executive to perform substantially his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Executive by the Company which specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; (iii) the Executive engages in conduct that constitutes gross neglect or willful misconduct in carrying out his duties under this Agreement involving material economic harm to the Company or any of its subsidiaries; or (iv) the Executive has engaged in a material breach of Section 6 or 7 of this Agreement. In the event the termination notice is based on clause (ii) of the preceding sentence, the Executive shall have ten (10) business days following receipt of the notice of termination to cure his conduct, to the extent such cure is possible, and if the Executive does not cure within the ten (10) business day period, his termination of employment in accordance with such termination notice shall be deemed to be for Cause. The determination of Cause shall be made by the Board upon the recommendation of the Compensation and Succession Committee of the Board. Following a Change in Control, such determination shall be made in a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4) of the membership of the Board, excluding members who are employees of the Company, at a meeting called for the purpose of determining that Executive has engaged in conduct which constitutes Cause (and at which Executive had a reasonable opportunity, together with his counsel, to be heard before the Board prior to such vote). The Executive shall not be entitled to the payment of any additional compensation from the Company, except to the extent provided in paragraph 4g. hereof, in the event of the termination of his employment for Cause. d. If any of the following events, any of which shall constitute "Good Reason", occurs within thirty-six months after a Change in Control, the Executive, by notice of the Company, may voluntarily terminate the Executive's employment for Good Reason within ninety (90) days after the Executive both (i) has or should have had knowledge of conduct or an event allegedly constituting Good Reason, and (ii) has reason to believe that such conduct or event could be grounds for Good Reason. In such event, the Executive shall be entitled to the severance benefits set forth in subparagraph 4f. below. (i) the Company assigns any duties to the Executive which are materially inconsistent in any adverse respect with the Executive's position, duties, offices, responsibilities or reporting requirements immediately prior to a Change in Control, including any diminution of such duties or responsibilities; or (ii) the Company reduces the Executive's base salary, including salary deferrals, as in effect immediately prior to a Change in Control; or (iii) the Company discontinues any bonus or other compensation plan or any other benefit, retirement plan (including the SERP), stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health plan, disability plan or similar plan (as the same existed immediately prior to the Change in Control) in which the Executive participated or was eligible to participate in immediately prior to the Change in Control and in lieu thereof does not make available plans providing at least comparable benefits; or (iv) the Company takes action which adversely affects the Executive's participation in, or eligibility for, or materially reduces the Executive's benefits under, any of the plans described in (iii) above, or deprives the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or fails to provide the Executive with the number of paid vacation days to which the Executive was entitled in accordance with the Company's normal vacation policy immediately prior to the Change in Control; or (v) the Company requires the Executive to be based at any office or location other than one within a 50-mile radius of the office or location at which the Executive was based immediately prior to the Change in Control; or (vi) the Company purports to terminate the Executive's employment otherwise than as expressly permitted by this Agreement; or (vii) the Company fails to comply with and satisfy paragraph 5 hereof, provided that such successor has received prior written notice from the Company or from the Executive of the requirements of paragraph 5 hereof. The Executive shall have the sole right to determine, in good faith, whether any of the above events has occurred. e. The Company may terminate the Executive's employment at any time without Cause. f. In the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Company shall pay the Executive a severance benefit, payable in twenty-four equal monthly installments, equal to two years' base salary at the rate in effect as of the date of termination, plus the greater of (i) two times the most recent annual bonus paid to the Executive under the Corporation's Annual Officers Incentive Compensation Plan (the "OICP") or any similar annual bonus plan (excluding the pro rata bonus referred to in the next sentence) or (ii) two times the average annual bonus paid to the Executive for the three prior years under the OICP or such similar plan (excluding the pro rata annual bonus referred to in the next sentence). If one hundred eighty (180) days or more have elapsed in the Company's fiscal year in which such termination occurs, the Company shall also pay the Executive in a lump sum, within ninety (90) days after the end of such fiscal year, a pro rata portion of Executive's annual bonus in an amount equal to (A) the bonus which would have been payable to Executive under OICP or any similar plan for the fiscal year in which Executive's termination occurs, multiplied by (B) a fraction, the numerator of which is the number of days in the fiscal year in which the termination occurs through the termination date and the denominator of which is three hundred sixty-five (365). For purposes of the first sentence of this subparagraph 4f., there shall be taken into account as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the sum of (x) cash payments with respect to Restricted Stock Units (and related Dividend Equivalents) granted to the Executive under the Corporation's 1995 Stock Incentive Plan and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the Corporation's 1995 Stock Incentive Plan by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997, there shall be taken into account for purposes of the first sentence of this subparagraph 4f. as bonus paid to the Executive for each of the years 1996 and 1997 under the OICP one-half of the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the Corporation's 1995 Stock Incentive Plan. If the termination of the Executive's employment occurs prior to December 31, 1997 and prior to a Change in Control, the amount of any adjustments to the severance benefit required as a result of the preceding two sentences of this subparagraph 4f. shall be paid to the Executive in a lump sum no later than March 15, 1998. In addition, in the event that the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason following a Change in Control, the Executive shall be entitled to continue participation in the Company's employee benefit plans (other than its qualified and non-qualified retirement plans) for a two-year period from the date of termination, provided, however, that if Executive cannot continue to participate in any of the benefit plans, the Company shall otherwise provide equivalent benefits to the Executive and his dependents on the same after-tax basis as of continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes employed by another employer and becomes eligible to participate in an employee benefit plan of such employer, the benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides any additional benefits necessary to give Executive the benefits provided hereunder. g. Upon termination pursuant to subparagraphs 4a., b., c., d., or e. above, the Company shall pay the Executive or the Executive's estate any base salary earned and unpaid to the date of termination, and any outstanding funds advanced by the Company to or on behalf of the Executive shall become immediately due and payable. h. The parties intend that no severance benefits hereunder shall be paid to the extent that such benefits (either alone or when aggregated with other benefits contingent on a Change in Control and paid to or for benefit of the Executive) constitute "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, under the circumstances set forth below, severance benefits payable under this Agreement shall be subject to the following reduction notwithstanding anything in this Agreement to the contrary. If the aggregate present value (as determined pursuant to Section 280G of the Code) of severance benefits payable under this Agreement which, together with all other payments by the Company to the Executive or for the Executive's benefit, would be "parachute payments" within the meaning of Section 280G of the Code, the payments pursuant to this Agreement shall be reduced (reducing first the severance benefit provided in the first sentence of subparagraph 4f. hereof) to the largest amount as will result in no portion of such payments being treated as excess parachute payments. i. The determination of whether and to what extent the payments shall be reduced under this Agreement, pursuant to the foregoing subparagraph h., including apportionment among specific payments and benefits, shall be made by the Executive in good faith, and such determination shall be conclusive and binding on the Company. The Company shall make the calculations referred to in subparagraph h. above within thirty days following the termination of the Executive's employment and shall provide such calculations and the basis therefor to the Executive within such period. In the event a reduction is required, the Executive shall give notice to the Company, within 20 days of the Executive's receipt of such calculations and related information, of the Executive's determination of the reduction. j. Upon the occurrence of a Change in Control the Company shall pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably thereafter incur as a result of any contest, litigation or arbitration (regardless of the outcome thereof) by the Company, or by the Executive of the validity of, or liability under, this Agreement or the SERP (including any contest by the Executive about the amount of any payment pursuant to this Agreement or pursuant to the SERP), plus in each case interest on any delayed payment at the rate of 150% of the Prime Rate posted by the Chase Manhattan Bank, N.A. or its successor, provided, however, that the Company shall not be liable for the Executive's legal fees and expenses if the Executive's position in such contest, litigation or arbitration is found by the neutral decision-maker to be frivolous. 5. Successor Liability. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform. As used in this Agreement, "Company" shall mean the company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 6. Confidential Information. The Executive agrees to keep secret and retain in the strictest confidence all confidential matters which relate to the Company, its subsidiaries and affiliates, including, without limitation, customer lists, client lists, trade secrets, pricing policies and other business affairs of the Company, its subsidiaries and affiliates learned by him from the Company or any such subsidiary or affiliate or otherwise before or after the date of this Agreement, and not to disclose any such confidential matter to anyone outside the Company or any of its subsidiaries or affiliates, whether during or after his period of service with the Company, except (i) as such disclosure may be required or appropriate in connection with his work as an employee of the Company or (ii) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information. The Executive agrees to give the Company advance written notice of any disclosure pursuant to clause (ii) of the preceding sentence and to cooperate with any efforts by the Company to limit the extent of such disclosure. Upon request by the Company, the Executive agrees to deliver promptly to the Company upon termination of his services for the Company, or at any time thereafter as the Company may request, all Company subsidiary or affiliate memoranda, notes, records, reports, manuals, drawings, designs, computer file in any media and other documents (and all copies thereof) relating to the Company's or any subsidiary's or affiliate's business and all property of the Company or any subsidiary or affiliate associated therewith, which he may then possess or have under his direct control, other than personal notes, diaries, Rolodexes and correspondence. 7. Non-Compete and Non-Solicitation. During the Executive's employment by the Company and for a period of one year following the termination thereof for any reason, the Executive covenants and agrees that he will not for himself or on behalf of any other person, partnership, company or corporation, directly or indirectly, acquire any financial or beneficial interest in (except as provided in the next sentence), provide consulting services to, be employed by, or own, manage, operate or control any business which is in competition with a business engaged in by the Company or any of its subsidiaries or affiliates in any state of the United States in which any of them are engaged in business at the time of such termination of employment for as long as they carry on a business therein. Notwithstanding the preceding sentence, the Executive shall not be prohibited from owning less than five (5%) percent of any publicly traded corporation, whether or not such corporation is in competition with the Company. The Executive hereby covenants and agrees that, at all times during the period of his employment and for a period of one year immediately following the termination thereof for any reason, the Executive shall not employ or seek to employ any person employed at that time by the Company or any of its subsidiaries, or otherwise encourage or entice such person or entity to leave such employment. It is the intention of the parties hereto that the restrictions contained in this Section be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. Specifically, if any court of competent jurisdiction should hold that any portion of the foregoing description is overly broad as to one or more states of the United States, then that state or states shall be eliminated from the territory to which the restrictions of paragraph (a) of this Section applies and the restrictions shall remain applicable in all other states of the United States. 8. No Mitigation. The Executive shall not be required to mitigate the amount of any payments or benefits provided for in Section 4f. hereof by seeking other employment or otherwise and no amounts earned by the Executive shall be used to reduce or offset the amounts payable hereunder, except as otherwise provided in Section 4f. 9. Ownership of Work Product. Any and all improvements, inventions, discoveries, formulae, processes, methods, know-how, confidential data, trade secrets and other proprietary information (collectively, "Work Products") within the scope of any business of the Company or any Affiliate which the Executive may conceive or make or have conceived or made during the Executive's employment with the Company shall be and are the sole and exclusive property of the Company, and that the Executive, whenever requested to do so by the Company, at its expense, shall execute and sign any and all applications, assignments or other instruments and do all other things which the Company may deem necessary or appropriate (i) to apply for, obtain, maintain, enforce, or defend letters patent of the United States or any foreign country for any Work Product, or (ii) to assign, transfer, convey or otherwise make available to the Company the sole and exclusive right, title and interest in and to any Work Product. 10. Arbitration. Any dispute or controversy between the parties relating to this Agreement (except any dispute relating to paragraphs 6 or 7 hereof) or relating to or arising out of the Executive's employment with the Company, shall be settled by binding arbitration in the City of Syracuse, State of New York, pursuant to the Employment Dispute Resolution Rules of the American Arbitration Association and shall be subject to the provisions of Article 75 of the New York Civil Practice Law and Rules. Judgment upon the award may be entered in any court of competent jurisdiction. Notwithstanding anything herein to the contrary, if any dispute arises between the parties under paragraphs 6 or 7 hereof, or if the Company makes any claim under paragraphs 6 or 7, the Company shall not be required to arbitrate such dispute or claim but shall have the right to institute judicial proceedings in any court of competent jurisdiction with respect to such dispute or claim. If such judicial proceedings are instituted, the parties agree that such proceedings shall not be stayed or delayed pending the outcome of any arbitration proceedings hereunder. 11. Notices. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered personally or sent by certified mail, postage prepaid, or overnight delivery addressed as follows: If to the Company: Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, New York 13202 ATTN: Corporate Secretary If to the Executive: 124 Coachmans Whip Baldwinsville, NY 13027 or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt. 12. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto, and supersedes, and is in full substitution for any and all prior understandings or agreements, oral or written, with respect to the Executive's employment. 13. Amendment. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 14. Miscellaneous. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Company (except to an Affiliate) or by the Executive without the prior written consent of the other party. 15. Severability. If any provision of this Agreement, or portion thereof, is so broad, in scope or duration, so as to be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflicts of law. 17. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 18. Performance Covenant. The Executive represents and warrants to the Company that the Executive is not party to any agreement which would prohibit the Executive from entering into this Agreement or performing fully the Executive's obligations hereunder. 19. Survival of Covenants. The obligations of the Executive set forth in paragraphs 6, 7, 9 and 10 represent independent covenants by which the Executive is and will remain bound notwithstanding any breach by the Company, and shall survive the termination of this Agreement. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. ________________________ NIAGARA MOHAWK POWER CORPORATION B. Ralph Sylvia By:______________________________ DAVID J. ARRINGTON Senior Vice President - Human Resources SCHEDULE A Modifications in Respect of B. Ralph Sylvia ("Executive") to the Supplemental Executive Retirement Plan ("SERP") of the Niagara Mohawk Power Corporation ("Company") I. Subsection 1.8 of Section I of the SERP is hereby modified to provide that the term "Earnings" shall mean the sum of the (i) Executive's base annual salary, whether or not deferred and including any elective before-tax contributions made by the Executive to a plan qualified under Section 401(k) of the Internal Revenue Code, averaged over the final 36 months of the Executive's employment with the Company and (ii) the average of the annual bonus earned by the Executive under the Corporation's Annual Officers Incentive Compensation Plan ("OICP"), whether or not deferred, in respect of the final 36 months of the Executive's employment with the Company. If (A) the Executive is an employee of the Company on December 31, 1997 or (B) prior to December 31, 1997 the Executive's employment is terminated and the Executive is entitled to payment under Article 9 of the Corporation's 1995 Stock Incentive Plan ("SIP") for all or a portion of the Stock Units and Stock Appreciation Rights granted to the Executive under SIP, there shall be taken into account for purposes of the preceding sentence as an annual bonus under the OICP, the sum of (x) cash payments made with respect to Stock Units (and related Dividend Equivalents) granted to the Executive under the SIP and (y) the result of multiplying the number of Stock Appreciation Rights granted to the Executive under the SIP, prorated if applicable to Article 9 of the SIP, by the difference between (1) the value of one share of the Corporation's common stock on December 31, 1997 and (2) the Base Value ($10.75). Notwithstanding the preceding sentence, if a Change in Control occurs prior to December 31, 1997 (and, if applicable, prior to the Executive's termination of employment), there shall be taken into account for purposes of the first sentence hereof as an annual bonus under the OICP the cash payments with respect to Stock Units (and related Dividend Equivalents) and Stock Appreciation Rights which are payable to the Executive pursuant to Article 13 of the SIP. II. Subsection 2.1 of Section II of the SERP is hereby modified to provide that full SERP benefits are vested following eight (8) years of continuous service with the Company. III. Subsection 4.3 of Section IV of the SERP is hereby modified to provide that in the event of (x) the Executive's involuntary termination of employment by the Company, at any time, other than for Cause, (y) the termination of this Agreement on account of the Executive's Disability or (z) the Executive's termination of employment for Good Reason within the 36 full calendar month period following a Change in Control (as defined in Schedule B of this Agreement), the Executive shall be 100% vested in his full SERP benefit (i.e., 60% of Earnings (as modified above)) regardless of the Executive's years of continuous service with the Company. If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive benefits commencing no earlier than age 55, calculated pursuant to Section III of the SERP. IV. Except as provided above, the provisions of the SERP shall apply and control participation therein and the payment of benefits thereunder. SCHEDULE B For purposes of this Agreement, the term "Change in Control" shall mean: (1) The acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subparagraph (3) of this Schedule B are satisfied; or (2) Individuals who, as of the date hereof, constitute the Company's Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as aresult of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (4) Approval by the shareholders of the Company of (I) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. EX-11 10 EXHIBIT 11 FOR 10Q
EXHIBIT 11 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- Computation of the Average Number of Shares of Common Stock Outstanding For the Three Months and Nine Months Ended September 30, 1996 and 1995 (4) Average Number of Shares Outstanding as Shown on Consolidated Statement (1) (2) (3) of Income Shares of Number Share (3 divided by Common of Days Days Number of Days Stock Outstanding (2 X 1) in Period) --------- ----------- ------- -------------- FOR THE THREE MONTHS ENDED SEPTEMBER 30: JULY 1 - SEPTEMBER 30, 1996 144,349,839 92 13,280,185,188 SHARES ISSUED - ACQUISITION - SYRACUSE SUBURBAN GAS COMPANY, INC. - 15,375 83 1,276,125 ----------- -------------- 144,365,214 13,281,461,313 144,363,710 =========== ============== =========== July 1 - September 30, 1995 144,330,482 92 13,278,404,344 144,330,482 =========== ============== =========== FOR THE NINE MONTHS ENDED SEPTEMBER 30: JANUARY 1 - SEPTEMBER 30, 1996 144,332,123 274 39,547,001,702 SHARES ISSUED AT VARIOUS TIMES DURING THE PERIOD - ACQUISITION - SYRACUSE SUBURBAN GAS COMPANY, INC. - 33,091 * 3,353,281 ----------- -------------- 144,365,214 39,550,354,983 144,344,361 =========== ============== =========== January 1 - September 30, 1995 144,311,466 273 39,397,030,218 Shares issued at various times during the period - Dividend Reinvestment Plan 19,016 * 4,620,888 ----------- -------------- 144,330,482 39,401,651,106 144,328,392 =========== ============== =========== NOTE: Earnings per share calculated on both a primary and fully diluted basis are the same due to the effects of rounding. * Number of days outstanding not shown as shares represent an accumulation of weekly, monthly or quarterly issues throughout the period. Share days for shares issued are based on the total number of days each share was outstanding during the period.
EXHIBIT 12 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- Statement Showing Computation of Ratio of Earnings to Fixed Charges, Ratio of Earnings to Fixed Charges without AFC and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends for the Twelve Months Ended September 30, 1996 (In thousands of dollars) A. Net Income $ 164,072 B. Taxes Based on Income or Profits 89,584 --------- C. Earnings, Before Income Taxes 253,656 D. Fixed Charges (a) 311,217 --------- E. Earnings Before Income Taxes and Fixed Charges 564,873 F. Allowance for Funds Used During Construction (AFC) 5,610 --------- G. Earnings Before Income Taxes and Fixed Charges without AFC $ 559,263 ========= PREFERRED DIVIDEND FACTOR: H. Preferred Dividend Requirements $ 38,404 --------- I. Ratio of Pre-tax Income to Net Income (C/A) 1.546 --------- J. Preferred Dividend Factor (HxI) $ 59,373 K. Fixed Charges as Above (D) 311,217 --------- L. Fixed Charges and Preferred Dividends Combined $ 370,590 ========= M. Ratio of Earnings to Fixed Charges (E/D) 1.82 ========= N. Ratio of Earnings to Fixed Charges without AFC (G/D) 1.80 ========= O. Ratio of Earnings to Fixed Charges and Preferred Dividends Combined (E/L) 1.52 ========= (a) Includes a portion of rentals deemed representative of the interest factor ($26,872).
EXHIBIT 15 - ---------- November 13, 1996 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Dear Sirs: We are aware that Niagara Mohawk Power Corporation has included our report dated November 13, 1996 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) in the Registration Statements on Form S-8 (Nos. 33-36189, 33-42771 and 333-13781) and in the Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 33-45898, 33-50703, 33-51073, 33-54827 and 33- 55546). We are also aware of our responsibilities under the Securities Act of 1933. Yours very truly, /s/ Price Waterhouse LLP - ------------------------ EX-27 11
OPUR1 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 9-MOS DEC-31-1996 SEP-30-1996 PER-BOOK 6953147 207910 993318 1245868 76741 9476984 144365 1784473 692811 2621649 86730 440000 3476926 0 0 0 93083 12470 0 0 2746126 9476984 3019547 79728 2615041 2694769 324778 20635 345413 209215 136198 28760 107438 0 0 578227 .74 0
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