-----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, E1FWprL7HP+Qn9/JAPwFKB2If2YilZpbV+FTX6ixyle/WjP9NHXVidE7y9YMcu2i 2a0b5SbZF2eAjhVnkj8MGg== 0000891836-98-000507.txt : 19980727 0000891836-98-000507.hdr.sgml : 19980727 ACCESSION NUMBER: 0000891836-98-000507 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19980724 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: U-1/A SEC ACT: SEC FILE NUMBER: 070-09339 FILM NUMBER: 98670574 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 U-1/A 1 FORM U-1/AMENDMENT #1 UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 Niagara Mohawk Holdings, Inc. 300 Erie Boulevard Syracuse, New York 13202 Paul J. Kaleta, Esq. Terence A. Burke, Esq. c/o Niagara Mohawk Holdings, Inc 300 Erie Boulevard Syracuse, New York 13202 Telephone: (315) 428-6717 Copies to: Steven J. Agresta, Esq. Swidler & Berlin, Chartered 3000 K Street, N.W. Washington, D.C. 20007 Telephone: (202) 424-7757 Janet Geldzahler, Esq. Sullivan & Cromwell 125 Broad Street New York, New York 10004 Telephone: (212) 558-4000 ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION. A. Introduction ------------ Niagara Mohawk Holdings, Inc., a New York corporation ("Holdings"), seeks authorization from the Securities and Exchange Commission ("Commission") under Sections 3(a)(1), 9(a)(2) and 10 of the Public Utility Holding Company Act of 1935 (the "1935 Act" or "Act"), in connection with the proposed corporate reorganization of Niagara Mohawk Power Corporation ("Niagara Mohawk" or the "Company"), a New York electric and gas utility company. The reorganization is being proposed in order to implement a comprehensive rate and restructuring plan for Niagara Mohawk that was recently approved by the New York State Public Service Commission ("PSC"), hereinafter referred to as the "Settlement Agreement" or "PowerChoice", a copy of which is filed as Exhibit 1 hereto. A copy of the PSC Order approving the Settlement Agreement in Opinion 98-8, Opinion and Order Adopting Terms of Settlement Agreement Subject to Modifications and Conditions (March 20, 1998) is filed as Exhibit 2 hereto. Specifically, Holdings applies for the approval of the Commission pursuant to Section 9(a)(2) of the 1935 Act (i) to acquire all of the outstanding shares of common stock of Niagara Mohawk ("Niagara Mohawk Common Stock") pursuant to an Agreement and Plan of Exchange 2 ("Exchange Agreement"), a copy of which is filed as Exhibit 3 hereto, which will result in Holdings owning or controlling all of the outstanding Niagara Mohawk Common Stock, and, indirectly, 86% of the outstanding common stock of Beebee Island Corporation ("Beebee Island"), a New York corporation, indirectly 67% of the outstanding common stock of Moreau Manufacturing Corporation ("Moreau"), a New York corporation, and indirectly 50% of Canadian Niagara Power Company Limited ("CNP"), a Canadian corporation, each of which is an "electric utility company" for purposes of the 1935 Act. In addition, Holdings hereby applies pursuant to Section 3(a)(1) of the 1935 Act for an order exempting Holdings and each of its subsidiary companies from all provisions of the 1935 Act (except for Section 9(a)(2) thereof). The holders of Niagara Mohawk Common Stock ("common shareholders") approved the Exchange Agreement at their Annual Meeting held on June 29, 1998. The Exchange Agreement is anticipated to be implemented as soon as practicable after all regulatory approvals are obtained. Thus, the applicant requests that the Commission issue an order in this matter by October 15, 1998. The share exchange (the exchange of the outstanding Niagara Mohawk Common Stock ("Common Stock") on a share-for-share basis for shares of common stock of Holdings ("Holdings Common Stock")) pursuant to the Exchange Agreement will become effective immediately following the close of business on the date of the filing with the New York Department of State of a certificate of exchange pursuant to Section 913(d) of the New York Business Corporation Law or at such later time and date as may be stated in such certificate("Effective Time"). 3 Niagara Mohawk believes that share exchange described herein will result in the most efficient and effective corporate structure. B. Other Regulatory Filings ------------------------ The Federal Energy Regulatory Commission ("FERC") has held that the transfer of common stock of a public utility company, such as Niagara Mohawk, from its existing stockholders to a holding company in a transaction such as the share exchange constitutes a transfer of the "ownership and control" of the facilities of such utility, and is thus a "disposition of facilities" subject to FERC review and approval under Section 203 of the Federal Power Act. Niagara Mohawk has concurrently applied for such approval. A provision in the Atomic Energy Act requires Nuclear Regulatory Commission ("NRC") consent for the transfer of control of NRC licenses. The NRC staff has in the past asserted that this provision applies to the creation of a holding company over an NRC-licensed utility company in a transaction such as the share exchange. Niagara Mohawk has concurrently applied for NRC approval under the Atomic Energy Act for the transfer of control, resulting from the share exchange, of its two licenses, for Nine Mile Point 1 and Nine Mile Point 2, respectively. 4 The New York Public Service Law ("NYPSL") requires approval from the PSC in order to undertake the reorganization represented by the formation of the holding company structure. The NYPSL also requires PSC approval for a holding company to acquire the stock of a utility company pursuant to a share exchange. The company has obtained PSC approval of the holding company concept and will make appropriate additional filings with respect to the formation of a holding company. C. Proposed Reorganization ----------------------- 1. Description of Niagara Mohawk ----------------------------- Niagara Mohawk is a regulated public utility incorporated under the laws of the State of New York. It is engaged principally in the business of generating, purchasing, transmitting and distributing electricity, in areas of eastern, central, northern and western New York State having a total population of approximately 3.5 million, including the cities of Buffalo, Syracuse, Albany, Utica, Schenectady, Niagara Falls, Watertown and Troy and purchasing, transporting and distributing natural gas to the public in areas of eastern, central, and northern New York State. A map of Niagara Mohawk's service territory is attached hereto as Exhibit 4. Niagara Mohawk's service territory will not change as a result of the proposed corporate reorganization. In providing this service, Niagara Mohawk is subject to regulation by the PSC under the NYPSL with respect to retail electric and gas rates and to regulation by FERC with respect to wholesale electric and electric transmission rates. Niagara Mohawk is currently exempt from registration as 5 a holding company under Section 3(a)(2) of the 1935 Act because it is predominantly a public utility company whose operations as such are confined to New York State. Niagara Mohawk Power Corp. 51 S.E.C. Docket 1269 (1992). In addition to its utility operations, Niagara Mohawk owns an unregulated subsidiary, Opinac North America, Inc. ("Opinac NA"), which, in turn, owns Opinac Energy Corporation1/, Plum Street Enterprises, Inc. and Plum Street Energy Marketing, Inc. (a subsidiary of Plum Street Enterprises, Inc.) (collectively, the "non-utility subsidiaries"), which participate principally in energy-related services. CNP is owned 50% by Opinac Energy Corporation. CNP owns a 99.99% interest in Canadian Niagara Wind Power Company, Inc. and Cowley Ridge Partnership, respectively, which together operate a wind power joint venture in the Province of Alberta, Canada. Niagara Mohawk also has several other subsidiaries including NM Uranium Inc., NM Holdings, Inc., Moreau Manufacturing Corp., Beebee Island Corp., and NM Receivables Corp. II. Three of these subsidiaries are "public utilities" under the 1935 Act. Brief descriptions of each public utility are provided below. None of the other subsidiaries contribute alone or in the aggregate a material amount of revenue to the consolidated enterprise. - ----------------- 1/ Opinac Energy Corporation is an exempt holding company under Section 3(a)(5) of the Public Utility Holding Company Act of 1935. Opinac Energy Corporation, 52 S.E.C. Docket 1475 (1992). 6 BEEBEE ISLAND CORP. Beebee Island operates a 7.7 megawatt hydroelectric generating station located on the Black River in New York State. Beebee Island is a majority-owned subsidiary of Niagara Mohawk which owns 5,799 shares of Beebee Island's common stock and leases an additional 217 shares from another party. The remaining 984 shares of common stock outstanding are owned by Ahlstrom Filtration, Inc. Beebee Island has contractual arrangements with both owners to sell to them 100% of its power output in accordance with their ownership percentages. The contracts provide that Beebee Island be allowed to charge a price for the power sold that enables Beebee Island to earn a predetermined return on rate base. Beebee Island is more than 50% directly owned by Niagara Mohawk and is currently contractually committed to sell power generated by Beebee Island to, among others, Niagara Mohawk on a wholesale basis. Beebee Island is not an "exempt wholesale generator," nor is it a "qualifying small producer" as those terms are defined by FERC regulation. As a result, Beebee Island has been viewed by FERC as an electric utility under the Federal Power Act ("FPA"), the premise being that Beebee Island sells electric energy at wholesale. CANADIAN NIAGARA POWER COMPANY CNP generates electricity at the William B. Rankine Generating Station located in the city of Niagara Falls, Ontario and distributes electricity to residential, commercial and industrial customers in the city of Niagara Falls and the Town of Fort Erie, Ontario. CNP is 50% owned by 7 Opinac Energy Corporation, a Canadian wholly-owned subsidiary of Opinac North America, a wholly-owned U.S. subsidiary of Niagara Mohawk. The other 50% equity is owned by Fortis, Inc. CNP has an international electric interconnection with Niagara Mohawk and both sells and purchases power to Niagara Mohawk at wholesale at this interconnection, but otherwise conducts its business wholly within Canada. MOREAU MANUFACTURING CORP. Moreau operates a 5.0 megawatt hydroelectric generating station located on the Hudson River in New York State. Moreau is a majority-owned subsidiary of Niagara Mohawk, which owns 1,684 shares of Moreau's common stock. The remaining 842 shares of common stock outstanding are owned by Finch, Pruyn and Company. Moreau has contractual arrangements with both owners to sell to them 100% of its power output in accordance with their ownership percentages. The contracts provide that Moreau be allowed to charge a price for the power sold that enables Moreau to earn a predetermined return on rate base. Moreau is more than 50% directly owned by Niagara Mohawk and is currently contractually committed to sell power generated by Moreau to, among others, Niagara Mohawk on a wholesale basis. Moreau is not an "exempt wholesale generator," nor is it a "qualifying small producer" as those terms are defined by FERC regulation. As a result, Moreau has been viewed by FERC as an electric utility under the FPA the premise being that Moreau sells electric energy at wholesale. 8 2. The Exchange Agreement ---------------------- Niagara Mohawk has caused Holdings to be incorporated under the laws of the State of New York for the purpose of carrying out the proposed transactions described in this application. Holdings is currently a direct, wholly-owned subsidiary of Niagara Mohawk. Holdings owns no utility assets and is not currently a "public utility company" or a "holding company" for purposes of the 1935 Act. The Exchange Agreement has been unanimously adopted by the Board of Directors of Niagara Mohawk and was adopted by the Niagara Mohawk common shareholders on June 29, 1998. In the share exchange: (1) each share of Niagara Mohawk Common Stock outstanding immediately prior to the Effective Time of the share exchange will be exchanged for one new share of Holdings common stock; (2) Holdings will become the owner of all outstanding Niagara Mohawk Common Stock; and (3) the shares of Holdings common stock held by Niagara Mohawk immediately prior to the Effective Time will be canceled. As a result, upon completion of the share exchange, Holdings will become a holding company, Niagara Mohawk will become a subsidiary of Holdings, and all of Holdings' common stock outstanding immediately after the share exchange will be owned by the former holders of Niagara Mohawk Common Stock outstanding immediately prior to the share exchange. 9 Following the share exchange certain of Niagara Mohawk's existing non-utility subsidiaries will be transferred to Holdings and become subsidiaries of Holdings. Niagara Mohawk's principal non-utility subsidiaries participate in real estate development of property formerly owned by Niagara Mohawk (NM Holdings), and in energy-related services (Opinac NA and its subsidiaries). In addition, Niagara Mohawk holds a single-purpose subsidiary, NM Receivables Corp. II, established to facilitate the sale of an undivided interest in a designated pool of customer receivables. The corporate structure immediately prior to and after the reorganization is shown in Exhibit 5 attached to this application. After the share exchange occurs, Holdings will have no material assets other than its ownership of stock of its subsidiaries, which initially will consist of all of the outstanding Niagara Mohawk Common Stock and thereafter the common stock of certain of Niagara Mohawk's existing non-utility subsidiaries. Given its financial condition and contractual restrictions, Niagara Mohawk does not foresee Holdings making substantial investments in unregulated businesses in the near future. However, under the terms of the Settlement Agreement, Niagara Mohawk has a one-year window in which it can adopt the holding company structure. The current indebtedness of Niagara Mohawk will continue to be obligations of Niagara Mohawk and will be neither assumed nor guaranteed by Holdings in connection with the share 10 exchange. Niagara Mohawk's first mortgage bonds will continue to be secured by first mortgage liens on all of the properties of Niagara Mohawk that are currently subject to such liens. Such indebtedness will be neither assumed nor guaranteed by Holdings in connection with the share exchange. The decision to have the indebtedness of Niagara Mohawk continue as obligations of Niagara Mohawk is based upon a desire not to alter, or potentially alter, the nature of the investment represented by such fixed income obligations, namely a direct investment in a regulated utility. Shares of Niagara Mohawk preferred stock will not be exchanged in the share exchange but will continue as shares of preferred stock of Niagara Mohawk. Therefore, holders of Niagara Mohawk preferred stock will not become holders of Holdings preferred or common stock as a result of the share exchange. Except as discussed under this caption, the share exchange and the holding company structure will not change the rights of holders of the outstanding shares of Niagara Mohawk preferred stock. Niagara Mohawk preferred stock will continue to rank senior to Niagara Mohawk Common Stock as to dividends and as to the distribution of Niagara Mohawk's assets upon a liquidation. The restructuring is not expected to affect adversely the holders of Niagara Mohawk preferred stock. Dividends on Niagara Mohawk preferred stock will continue to be paid as before, depending upon the earnings, financial condition, and other relevant factors affecting 11 Niagara Mohawk. However, the assets or earnings of Holdings' subsidiaries other than Niagara Mohawk will not be available to pay dividends on Niagara Mohawk preferred stock or to make distributions with respect to such preferred stock in the event of a liquidation if the share exchange is consummated. Appraisal rights under the New York Business Corporation Law are not available to holders of Niagara Mohawk preferred stock inasmuch as that preferred stock is not being exchanged for Holdings stock and will continue as Niagara Mohawk preferred stock after the holding company restructuring. The Board of Directors' decision to exchange Niagara Mohawk Common Stock for Holdings common stock was primarily based on the Board's desire to confer the expected benefits of the share exchange on those investors who are best placed to enjoy such benefits, namely the holders of Niagara Mohawk Common Stock. The Board's decision not to exchange Niagara Mohawk preferred stock in the share exchange was primarily based on the Board's desire not to alter, or potentially alter, the nature of the investment decision represented by the Niagara Mohawk preferred stock (namely, a direct investment in a regulated utility) and the priority position of the Niagara Mohawk preferred stockholders with respect to dividends and assets on liquidation. The consolidated assets and liabilities of Niagara Mohawk and its subsidiaries before the Effective Time will be the same as the consolidated assets and liabilities of Holdings and its subsidiaries after the Effective Time. All the business and operations conducted before the Effective Time by Niagara Mohawk and its subsidiaries will continue to be conducted after the Effective Time by Niagara Mohawk and such subsidiaries, as subsidiaries of Holdings. 12 Though Niagara Mohawk expects to sell or liquidate its majority interests in two of its generation subsidiaries, Beebee Island and Moreau, before or shortly after the share exchange, Holdings will retain an indirect 50% interest in CNP, which does not contribute a material part of its income.2/ Niagara Mohawk will continue to be subject to regulation by the PSC after the share exchange. Niagara Mohawk's utility retail sales, which include sales of gas transportation and balancing services, will continue to be made primarily under rate schedules and tariffs filed with and subject to the jurisdiction of the PSC. In addition, Niagara Mohawk will continue to be subject to regulation by the PSC, as it has been in the past, regarding issuances of securities, capital ratio maintenance, and the maintenance of its books and records. Niagara Mohawk also will continue to be subject to regulation by the FERC and the NRC. FERC will continue to regulate the terms and conditions of Niagara Mohawk's transmission of electricity, along with transmission interconnections and ancillary services, as well as the terms and conditions of its sales of electric energy for resale. The NRC will continue to review and regulate Niagara Mohawk's operation of the two Nine Mile Point nuclear units. _____________________ 2/ See Exhibit 13. 13 Under the PowerChoice Agreement, Niagara Mohawk is prohibited from making loans to, or providing guarantees or other credit support for the obligations of, Holdings or any other subsidiary of Holdings. Likewise, Niagara Mohawk may not pledge its assets for the obligations of any other entity, including Holdings or any other subsidiary of Holdings. (See Section 9.2.6, p. 98 of Ex. 1.) PowerChoice generally prohibits any transaction between Niagara Mohawk and Holdings or any other subsidiary of Holdings, except for the provision of certain corporate administrative services, certain "grandfathered" transactions as listed therein, transactions permitted as a matter of generic policy by the PSC, and tariffed transactions. In addition, Holdings and its subsidiaries are required by PowerChoice to operate as separate entities. (See Section 9.2.1.1, p. 93 of Ex. 1) Finally, PowerChoice sets out guidelines for the allocation of costs among Holdings, Niagara Mohawk and the other subsidiaries of Holdings. (See Section 9.2.1.3, p. 94 of Ex. 1.) In order to address concerns regarding the possible diversion of the attention of Niagara Mohawk's management away from the utility business, as well as to avoid potential conflicts of interest with the management of Holdings, PowerChoice contains restrictions regarding the composition of the Boards and managements of Niagara Mohawk and Holdings and other subsidiaries of Holdings. Niagara Mohawk's Board of Directors must include at least a majority of outside directors (i.e., individuals who are neither an officer or director of Holdings or any of 14 its unregulated affiliates). (See Section 9.2.1.2, p. 93 of Ex. 1.) Niagara Mohawk and the unregulated subsidiaries of holdings will have separate operating employees and operating officers. (See Section 9.2.5.1, p. 96 of Ex. 1.) Officers of Holdings may be officers of either Niagara Mohawk or an unregulated affiliate. Niagara Mohawk will remain a reporting company under the Securities Exchange Act of 1934, as amended ("1934 Act"). Prior to the share exchange, Holdings will apply to have its common stock listed on the New York Stock Exchange, Inc. ("NYSE"). It is anticipated that Holdings common stock will be listed and traded on such stock exchange upon consummation of the share exchange, whereupon Holdings will be required to file reports with the Commission pursuant to Section 13(a) of the 1934 Act. The Niagara Mohawk Common Stock will cease to be listed on the NYSE following the share exchange. The share exchange is subject to the satisfaction of the following conditions (in addition to approval of the Exchange Agreement by the holders of Niagara Mohawk Common Stock which occurred on June 29, 1998): (i) all necessary orders, authorizations, approvals, or waivers from the PSC and all other regulatory bodies, boards, or agencies have been received, remain in full force and effect, and do not include, in the sole judgement of the Board of Directors of Niagara Mohawk, unacceptable conditions; and (ii) shares of Holdings common stock to be 15 issued in connection with the exchange have been listed, subject to official notice of issuance, by the NYSE. Holdings has filed with the Commission a Registration Statement on Form S-4 ("Registration Statement") under the Securities Act of 1933, as amended. The Prospectus/Proxy Statement contained in the Registration Statement, a copy of which is included with this application as Exhibit 6, was filed for the purpose of (i) registering the shares of Holdings common stock to be issued in exchange for the Niagara Mohawk Common Stock pursuant to the share exchange and (ii) complying with the requirements of the 1934 Act in connection with the solicitation of proxies of the common shareholders. D. Purpose and Anticipated Effects of the Reorganization ----------------------------------------------------- 1. Purpose ------- As indicated above, the reorganization is an integral part of implementation of the Settlement Agreement (Ex. 1). PowerChoice is intended to further the PSC's stated goals in restructuring the utility industry in New York State into a competitive energy marketplace. See PSC Opinion No. 96-12 in Case 94-E-0952 issued May 20, 1996 (168 P.U.R. 4th 515). The proposed holding company structure is intended to provide Niagara Mohawk and its subsidiaries with the financial and regulatory flexibility to compete more effectively in an increasingly 16 competitive energy industry by providing a structure that can accommodate both regulated and unregulated lines of business. The holding company structure separates the operations of regulated and unregulated businesses. As a result, it provides a better structure for regulators to assure that there is no cross-subsidization of costs or transfer of business risk from unregulated to regulated lines of business. A holding company structure also is preferred by the investment community because it makes it easier to analyze and value individual lines of business. Moreover, the use of a holding company structure provides legal protection against the imposition of liability on regulated utilities for the results of unregulated business activities. In short, the holding company structure is a highly desirable form for conducting regulated and unregulated businesses within the same corporate group. More generally, the holding company structure will enable Holdings to engage in unregulated businesses without obtaining the prior approval of the PSC, thereby enabling Holdings to pursue unregulated business opportunities in a timely manner. Under the new corporate structure, financing of unregulated activities of Holdings and its non-utility subsidiaries will not require PSC approval. In addition, the capital structure of each non-utility subsidiary may be appropriately tailored to suit its individual business. Also, under the holding company structure, Holdings would not need PSC approval to issue debt or equity securities to 17 finance the acquisition of the stock or assets of other companies. The ability to raise capital for acquisitions without prior PSC approval should allow competition on a level basis with other potential acquirors, some of which are already holding companies. Under a holding company structure, the issuance of debt or equity securities by Holdings to finance the acquisition of the stock or assets of another company should not adversely affect Niagara Mohawk's capital devoted to and available for regulated utility operations. 2. Anticipated Effects ------------------- The consummation of the reorganization will have no significant effect on the common shareholders since their interest and investment in the business of Niagara Mohawk will be changed only in form and not in substance. The consolidated assets and liabilities of Niagara Mohawk and its subsidiaries before the Effective Time will be the same as the consolidated assets and liabilities of Holdings and its subsidiaries after the Effective Time. All the business and operations conducted before the Effective Time by Niagara Mohawk and its subsidiaries will continue to be conducted after the Effective Time by Niagara Mohawk and such subsidiaries as subsidiaries of Holdings. The reorganization will have no adverse effect upon the electric and natural gas utility operations of Niagara Mohawk. 18 PowerChoice also provides that Niagara Mohawk will conduct an auction sale of its non-nuclear generation assets in accordance with the terms of PowerChoice. Neither Holdings nor any of its subsidiaries, including Niagara Mohawk, may participate in the auction as a bidder. The auction is estimated to be completed and resulting transactions closed in the first half of 1999. The holding company structure is a well-established form of organization for companies conducting multiple lines of business. It is a common form of organization for unregulated companies and for those regulated companies, such as telephone utilities and water utilities, which are not subject to the 1935 Act. In addition, it is utilized by many electric companies which are involved in unregulated activities. Niagara Mohawk wishes to take advantage of this opportunity, and desires to do so by utilizing the most efficient and effective corporate structure. For the reasons stated above, Niagara Mohawk believes that the reorganization will have no adverse effect on Niagara Mohawk, Niagara Mohawk customers, the common shareholders, or the holders of Niagara Mohawk Preferred Stock or Niagara Mohawk's debt securities. 19 E. Additional Information ---------------------- No associate company or affiliate of Holdings or Niagara Mohawk, nor any affiliate of any associate company of Holdings or Niagara Mohawk, has any direct or indirect material interest in the proposed transactions except as stated herein. For further information, reference is made to the financial statements and other information in Exhibits 6 through 15 hereto. ITEM 2. FEES, COMMISSIONS AND EXPENSES. The estimated fees, commissions and expenses paid or incurred, or to be paid or incurred, directly or indirectly, in connection with the reorganization, by the applicant or any associate company of the applicant, will be set forth in Exhibit 16 hereto, to be filed by amendment. ITEM 3. APPLICABLE STATUTORY PROVISIONS. Sections 3(a)(1), 9(a)(2) and 10 of the 1935 Act are applicable to the reorganization. Section 9(a)(2) of the 1935 Act requires Commission approval before any person may become an affiliate within the meaning of Section 2(a)(11)(A) of more than one "public utility company." Consummation of the reorganization will result in Holdings owning all or a significant percentage of the outstanding voting securities of more than one "public utility company," that is, Niagara Mohawk, Moreau, Beebee Island, and CNP. Thus, the reorganization will require Commission approval under Sections 9(a)(2) and 10. In addition, upon consummation of the 20 reorganization, Holdings will be a holding company within the meaning of Section 2(a)(7) of the 1935 Act and will be required to register unless it can qualify for an exemption. Accordingly, Holdings requests an order under Section 3(a)(1), exempting it from all provisions of the Act except Section 9(a)(2). The reorganization is an internal corporate restructuring of the type that the 1995 Report of the Division of Investment Management on The Regulation of Public Utility Holding Companies ("1995 Report") expressly recommended, for exemption from sections 9(a) and 10." See 1995 Report at 76. The basis for this recommendation was a concern that the Commission not unduly impede the work of other energy regulators. The reorganization follows years of careful negotiation in a multi-party collaborative process, overseen by the PSC, which culminated in the Settlement Agreement. The reorganization is subject to approval by the PSC, in addition to the FERC and the NRC. Although the Commission has not yet adopted a rule exempting internal reorganizations, the policy considerations that gave rise to the Division's recommendation in the 1995 Report should apply to the Commission's decision in this matter. The Commission has previously approved numerous matters involving the formation of a holding company over existing utility properties. See, e.g., Atlanta Gas Light Co., Holding Co. 21 Act Release No. 26482 (March 5, 1996); SIGCORP, Holding Co. Act Release No. 26431 (Dec. 14, 1995); Providence Energy Corporation, Holding Co. Act Release No. 26420 (Nov. 30, 1995); PP&L Resources, Inc., Holding Co. Act Release No. 26248 (March 10, 1995); WPS Resources Corporation, Holding Co. Act Release No. 26101 (Aug. 10, 1994); Unicom Corporation, Holding Co. Act Release No. 26090 (July 22, 1994); Illinova Corporation, Holding Co. Act Release No. 26054 (May 18, 1994); KU Energy Corporation, Holding Co. Act Release No. 25409 (Nov. 13, 1991). Further, the Commission has also approved the corporate "unbundling" of utility operations where appropriate to protect the interests of utility consumers. See Entergy Corporation, Holding Co. Act Release No. 25136 (August 27, 1990), aff'd in part and remanded in part sub nom. City of New Orleans v. SEC, 969 F.2d 1163 (D.C. Cir. 1992), on remand, Entergy Corporation, Holding Co. Act Release No. 26410 (November 17, 1995). For the reasons explained below, the Commission should grant approval of the reorganization pursuant to Section 9(a)(2) of the 1935 Act based upon the transaction's compliance with the applicable standards of Section 10. In addition, for the reasons described below, the Commission should by order grant Holdings an exemption pursuant to Section 3(a)(1) from all of the provisions of the 1935 Act (except for Section 9(a)(2)). 22 A. Approval of the Reorganization under Section 9(a)(2) ---------------------------------------------------- The standards for approval are contained in Sections 10(b), 10(c) and 10(f) of the Act. The reorganization should be found to meet these standards. 1. Section 10(b) ------------- Section 10(b) requires the Commission to approve the reorganization pursuant to Section 9(a)(2) unless the Commission finds that: (1) such acquisition will tend towards interlocking relations or the concentration of control of public utility companies, of a kind or to an extent detrimental to the public interest or the interest of investors or consumers; (2) in case of the acquisition of securities or utility assets, the consideration, including all fees, commissions, and other remuneration, to whomsoever paid, to be given, directly or indirectly, in connection with such acquisition is not reasonable or does not bear a fair relation to the sums invested in or the earning capacity of the utility assets to be acquired or the utility assets underlying the securities to be acquired; or 23 (3) such acquisition will unduly complicate the capital structure of the holding company system of the applicant or will be detrimental to the public interest or the interest of investors or consumers or the proper functioning of such holding company system. Holdings respectfully submits that no adverse finding should be made under any of these paragraphs. a. Detrimental "Interlocking Relations" or "Concentration of Control" ------------------------------------------------------------------ The reorganization merely involves an internal corporate reorganization which will result in the imposition of Holdings, a holding company within the meaning of the 1935 Act, over Niagara Mohawk, Moreau, Beebee Island, and CNP. No other "public utility company" will be involved in the reorganization. The consolidated assets and liabilities of Niagara Mohawk and its subsidiaries before the Effective Time will be the same as the consolidated assets and liabilities of Holdings and its subsidiaries after the Effective Time. All the business and operations conducted before the Effective Time by Niagara Mohawk and its subsidiaries will continue to be conducted after the Effective Time by Niagara Mohawk and such subsidiaries as subsidiaries of Holdings. The reorganization will not involve the acquisition of any utility assets not already owned directly or indirectly by Niagara Mohawk and consequently, the 24 reorganization should not be deemed to "tend towards interlocking relations ... of public utility companies, of a kind or to an extent detrimental to the public interest or the interest of investors or consumers" within the meaning of Section 10(b)(1). For the same reasons, the reorganization should not, within the meaning of Section 10(b)(1), be deemed to tend toward any "concentration of control of public utility companies" that might be detrimental to the public interest, consumers, or investors. The reorganization will not involve the acquisition of any utility assets not already owned directly or indirectly by Niagara Mohawk and "will therefore have no effect on the concentration of control of public utility companies." Wisconsin Energy Corp., Holding Co. Act Release No. 24267, 37 SEC Docket 296, 300 (1986). In addition, the competitive impact of the reorganization will be fully considered by the FERC. A detailed explanation of the reasons why the reorganization will not adversely affect competition is set forth in the FERC application filed as Exhibit 20 hereto. The Commission may appropriately look to FERC in such matters. See City of Holyoke v. SEC, 972 F.2d 358, 363-64, quoting Wisconsin's Environmental Decade v. SEC, 882 F.2d 523, 527 (D.C. Cir. 1989). b. Fairness of Consideration and Fees ---------------------------------- Section 10(b)(2) of the 1935 Act requires the Commission to determine whether the consideration to be given in connection with a proposed acquisition of securities is reasonable 25 and bears a fair relation to the investment in and earning capacity of the utility assets underlying the securities being acquired. As discussed above, the share exchange involves the exchange of each share of Niagara Mohawk Common Stock for a share of Holdings common stock. Because the proportion of each common shareholder's ownership will be unchanged, the consideration is fair and reasonable. See Wisconsin Energy Corp., 37 SEC Docket at 300. As stated in Item 2 above, an estimate of the fees and expenses to be paid in connection with the reorganization is attached as Exhibit 19 hereto. Such fees and expenses will be reasonable and customary for a transaction of this kind and will not be material when measured against Niagara Mohawk's consolidated book value or the earning capacity of its assets. c. Complication of Capital Structure --------------------------------- Section 10(b)(3) of the 1935 Act requires the Commission to determine if the transaction will unduly complicate the capital structure of the holding company, or will be detrimental to the public, investors or consumers. No such effect will result from the reorganization. The reorganization will not involve the creation of any ownership interests other than those necessary to maintain the basic corporate relationships of the holding company system to be established. Pursuant to the reorganization, Holdings will acquire all of the Niagara Mohawk 26 Common Stock. No minority common stock interest in Niagara Mohawk will remain and the rights of the existing debt and preferred equity securities holders of Niagara Mohawk will be unaffected. The consolidated assets and liabilities of Niagara Mohawk and its subsidiaries before the Effective Time will be the same as the consolidated assets and liabilities of Holdings and its subsidiaries after the Effective Time. All the business and operations conducted before the Effective Time by Niagara Mohawk and its subsidiaries will continue to be conducted after the Effective Time by Niagara Mohawk and such subsidiaries, as subsidiaries of Holdings. Moreover, control of the system will remain in the hands of Niagara Mohawk common shareholders, who will become the holders of Holdings Common Stock. Consequently, as the Commission has found in similar circumstances, the reorganization will not result in any complexity of capital structure contrary to Section 10(b)(3). See, e.g., CIPSCO, Inc., Holding Co. Act Release No. 25152 (Sept. 18, 1990); Wisconsin Energy Corp., Holding Co. Act Release No. 24267 (Dec. 18, 1986). The reorganization will have no material effect on the rights of the common shareholders, with the exception that, after the share exchange, the holders of Holdings common stock will have certain rights which differ from the rights of Niagara Mohawk common shareholders.3/ - -------------------- 3/ Certain differences between the rights of holders of Holdings common stock and those of holders of Niagara Mohawk Common Stock are summarized below. (footnote continued on next page) 27 2. Section 10(c) ------------- The relevant provisions of Section 10(c) of the 1935 Act state that the Commission shall not approve: (1) an acquisition of securities or utility assets, or of any other interest, which is unlawful under the provisions of section 8 or is detrimental to the carrying out of the provisions of section 11; or (2) the acquisition of securities or utility assets of a public utility or holding company unless the Commission finds that such acquisition will serve the - ------------------- (footnote continued)............... Voting Requirements for Significant Transactions: As a result of a recent change in the BCL, the necessary vote for significant transactions involving Holdings, such as mergers, consolidations, share exchanges and dissolution, will be a majority vote, rather than the two-thirds vote applicable to Niagara Mohawk. The Board of Directors believes this lower vote requirement will facilitate any transactions deemed to be in the best interests of Holdings and its shareholders. Purpose Clause: The corporate purposes for which Niagara Mohawk may engage in business are generally those related to rendering electric or gas service and related activities. Holdings is authorized to engage in any and all lawful acts and activities. Authorized Shares: Authorized Holdings and Niagara Mohawk common stock is 300,000,000 and 250,000 shares, respectively. Up to approximately 187 million shares of Holdings common stock may be issued in the share exchange. The additional authorized but unissued shares of Holding common stock will be available for issuance under the Dividend Reinvestment and Stock Purchase Plan and the Option Plan, as well as possibly for stock splits, stock dividends, equity financings, and for other general corporate purposes (including, possibly, acquisitions)(none of which is under current consideration). 28 public interest by tending towards the economical and the efficient development of an integrated public utility system. Holdings respectfully submits that the requirements of Section 10(c) are satisfied. Neither Section 8 nor Section 11, by their terms, apply to nonregistered entities. Thus, the Commission's analysis should focus on the standards of Section 10(c)(2), particularly the requirement that an acquisition tend towards the economical and the efficient development of an integrated public utility system. (a) Economies and Efficiencies -------------------------- In the context of the formation of a new holding company over an existing public utility, the Commission has held that the structural change must result in significant benefits to the holding company system. CIPSCO Inc., Holding Co. Act Release No. 25152. As discussed above in Item 1, the holding company structure resulting from the reorganization will yield significant benefits. A number of economies and efficiencies would result from the use of a holding company structure. As the Commission has found in analogous cases, a holding company structure permits adjustments of a utility's capital ratios to appropriate 29 levels through dividends to, or equity investments from, the holding company. See, e.g., WPL Holdings, Inc., Holding Co. Act Release No. 25377 (1991). This ability to adjust the components of the utility's capital structure would also increase general financial flexibility, allowing Niagara Mohawk to take advantage of more attractive financing opportunities that might not otherwise be available. See CIPSCO Inc., supra. The reorganization should also help to broaden the holding company system's financial base and its investment appeal by reducing the system's dependence on its utility operations. This diversity should also increase financing alternatives and efficiencies, since financing may be tailored to the specific needs and circumstances of the individual utility and non-utility businesses. As the Commission has noted in similar circumstances, "(l)ower-cost financing can enhance efficient utility operations and benefit ratepayers and senior security holders." KU Energy Corp., Holding Co. Act Release No. 25409 (Nov. 13, 1991). The Commission has noted in analogous cases that these kinds of financial and organizational advantages satisfy Section 10(c)(2). See WPL Holdings, Inc., supra. Moreover, a Commission finding of "efficiencies and economies" may be based "on the potential for economies presented by the acquisition even where these are not precisely quantifiable." American Electric Power Co., 46 SEC 1299, 1322 (1978). Accord, Centerior Energy Corp., Holding Co. Act Release No. 24073 (April 29, 1986) ("specific dollar forecasts of future savings 30 are not necessarily required; a demonstrated potential for economies will suffice even when these are not precisely quantifiable"). In this case, Holdings believes that the reorganization will provide significant financial and organizational advantages and the resulting substantial potential economies and efficiencies should be found to meet the standard of Section 10(c)(2). (b) Integrated Public Utility System -------------------------------- The Commission has held that the economical and efficient development of an existing integrated system satisfies the requirements of Section 10(c)(2) of the 1935 Act. See WPL Holdings, Inc., supra. The electric utility system and the gas utility system of Niagara Mohawk currently constitute an integrated electric utility system and an integrated gas utility system within the meaning of Section 2(a)(29)(A) and (B) of the 1935 Act, respectively, and would remain so after the reorganization. Niagara Mohawk's service territory is not expected to change as a result of the proposed corporate reorganization. Consequently, the standards of Section 10(c)(2) are satisfied. 3. Section 10(f) ------------- Section 10(f) provides that: The Commission shall not approve any acquisition . . . under this section unless it appears to the satisfaction of the Commission that such State laws as may apply in respect of such acquisition have been complied with, except where the 31 Commission finds that compliance with such State laws would be detrimental to the carrying out of the provisions of section 11. As indicated in Item 1, the reorganization implements the Settlement Agreement, which has been approved by the PSC, and the reorganization itself will be approved by the PSC. In addition, the reorganization will be consummated in compliance with all other applicable New York laws. B. The Exemption under Section 3(a)(1) ----------------------------------- Holdings does not intend to register as a holding company under the 1935 Act. As demonstrated below, Holdings respectfully submits that it should be granted, by Commission order, an exemption under Section 3(a)(1) of the 1935 Act. Section 3(a)(1) of the 1935 Act makes available an exemption from all of the provisions of the 1935 Act (except for Section 9(a)(2) thereof) to a "holding company" if: such holding company, and every subsidiary company thereof which is a public-utility company from which such holding company derives, directly or indirectly, any material part of its income, are predominately intrastate in character and carry on their business substantially in a single State in which such holding company and every such subsidiary company thereof are organized. 32 Holdings will satisfy such requirements. Holdings, Niagara Mohawk, Moreau, and Beebee Island all are organized and carry on their business substantially in New York State, and neither Niagara Mohawk, Holdings, Moreau, nor Beebee Island will derive any material part of its income from a utility company that carries on its business and/or is organized outside of New York State.4/ CNP operates in the Town of Fort Erie, Ontario, Canada, but its income is not a material part of Niagara Mohawk's income, nor would it be a material part of Holdings' income.5/ Information describing the properties of Niagara Mohawk Holdings, Inc. and its subsidiaries as required by form U-3A-2 are incorporated in Exhibit 17. Section 3(a) of the 1935 Act provides that, if an applicant satisfies the objective requirements for an exemption, the applicant shall be granted the exemption, "unless and except insofar as [the Commission] finds the exemption detrimental to the public interest or the interest of investors or consumers." In assessing whether a proposed exemption is "detrimental," the Commission has focused upon the presence of state regulation, establishing that federal - ---------------- 4/ None of Niagara Mohawk's other current subsidiaries, Opinac North America, Opinac Energy Inc., NM Uranium, Inc., NM Holdings, Inc., NM Receivables Corp. II, or Plum Street, or PSEM qualify as public utility companies and thus they are not examined for purposes of the 3(a)(1) test. 5/ See Footnote 2 supra 33 intervention is unnecessary when state control is adequate. See, e.g., KU Energy Corp., supra; CIPSCO Inc., supra.6/ The Commission should find that sufficient safeguards exist under state law to ensure that no potential adverse consequences would occur as a result of the reorganization. As discussed above, the reorganization implements PowerChoice, which was approved by the PSC, and the reorganization has been submitted for approval to the PSC, which will review it pursuant to its jurisdiction under New York law. The Commission has relied in the past upon the public policy decisions of state public utility commissions when granting approval of restructuring transactions. See, e.g., KU Energy Corp., supra; CIPSCO Inc., supra. In addition, as discussed above, Niagara Mohawk will continue to be regulated under the utility laws of the State of New York and will continue to be subject to FERC jurisdiction. ITEM 4. REGULATORY APPROVAL. In addition to approval by the SEC, the proposed corporate restructuring requires the approval of the PSC, the FERC, and the NRC. PowerChoice, which includes a description of the corporate restructuring, has been approved by the PSC. (See Ex. 2). Concurrent with the filing of this application, Niagara Mohawk is filing applications with the NRC and the FERC for approval - ----------------- 6/ Furthermore, the Commission Staff has stated its support for greater flexibility in the administration of existing exemptions in consultation and cooperation with state regulators. See 1995 Report at 119-20. 34 to effect the proposed corporate restructuring. Additionally, a compliance filing with the PSC will be required consistent with PowerChoice and the PSC order approving it. A copy of the PSC Petition is filed as Exhibit 18 hereto, and a copy of the PSC's Order pursuant thereto will be filed as Exhibit 19 by amendment hereto. The FERC has held that the transfer of common stock of a public utility company, such as Niagara Mohawk, from its existing shareholders to a holding company in a transaction such as the share exchange, constitutes a transfer of the "ownership and control" of the facilities of such utility, and is thus a "disposition of facilities" subject to FERC review and approval under Section 203 of the Federal Power Act. Niagara Mohawk has applied for such approval and for the transfer of certain power sales contracts and a tariff associated with certain of its generation assets. A copy of the FERC application under Section 203 of the Federal Power Act is filed as Exhibit 20 hereto, and a copy of the FERC order pursuant thereto will be filed as Exhibit 21 by amendment hereto. A provision in the Atomic Energy Act requires NRC consent for the transfer of control of NRC licenses. The NRC staff has in the past asserted that this provision applies to the creation of a holding company over an NRC-licensed utility company in a transaction such as the share exchange. Niagara Mohawk has applied for NRC approval under the Atomic Energy Act for the transfer of control, resulting from the share exchange involving its two licenses, for Nine Mile 35 Point 1 and Nine Mile Point 2, respectively. A copy of the NRC application under the Atomic Energy Act is filed as Exhibit 22 hereto, and a copy of the NRC order pursuant thereto will be filed as Exhibit 23 by amendment hereto. No other state or federal commission has jurisdiction over the reorganization, thus, no other similar application is required to be filed with any other state or federal regulatory body. ITEM 5. PROCEDURE. The reorganization is anticipated to be implemented as soon as practicable. To facilitate this schedule, Holdings respectfully requests the Commission to issue and publish promptly the requisite notice under Rule 23 with respect to the filing of this application to provide for the filing of comments in a time frame that permits the Commission to enter an order granting and permitting this application to become effective by October 15, 1998. A form of notice suitable for publication in the Federal Register is attached hereto as Exhibit 24. Holdings does not believe that there should be a recommended decision by a hearing officer or any other responsible officer of the Commission or that there should be a 30-day waiting period between the issuance of the Commission's order and the date on which it is to become effective. Holdings requests that the Commission's order become effective immediately upon the entry thereof. Holdings consents to the Division of Investment Management assisting 36 in the preparation of the Commission's decision or order in this matter, unless such Division opposes this application. ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
EDGAR SUBMISSION EXHIBIT # DESCRIPTION FILING METHOD NUMBER 1 PowerChoice Settlement Agreement Incorporated by reference, -- filed with Niagara Mohawk Form 8K, October 17, 1997, Exhibit 99-1 2 PSC Order Approving PowerChoice Incorporated by reference, -- Agreement filed with Niagara Mohawk Form 10K/A Amendment 2, dated May 29, 1998, Exhibit 10-13 3 Agreement and Plan of Exchange Incorporated by reference, -- filed with Niagara Mohawk Form S-4 and Amendments filed May 29, 1998 at Exhibit A-1- A-4 4 Map of Niagara Mohawk Service Filed herewith 99.1 Territory 5 Corporate Structure Before and Incorporated by reference, -- After Reorganization filed with Niagara Mohawk Form S-4 and Amendments filed May 29, 1998, pp 2-3 6 Form S-4 and Amendments Incorporated by reference, -- filed May 29, 1998 7 Niagara Mohawk 1997 10-K and Incorporated by reference, -- Amendments filed 1998 8 Preliminary Opinion of Counsel Filed herewith 8 to SEC 9 Past-Tense Opinion of Counsel To be filed when appropriate -- 10 Niagara Mohawk Holdings Inc. Filed herewith 99.2 Unaudited Pro Forma Consolidated Balance Sheet and Statement as of March 31, 1998 11 Niagara Mohawk Holdings Inc. Filed herewith 99.3 Unaudited Consolidated Statement of Income and Retained Earnings for the Twelve Months Ended March 31, 1998 12 Niagara Mohawk Holdings Inc. Filed herewith 99.4 Statement of Material Changes Not in the Ordinary Course of Business Since 3/31/98 37 13 Income Statement of Canadian Filed herewith 99.5 Niagara Power Company 14 Certificate of Incorporation and Incorporated by reference, -- By-Laws of Niagara Mohawk filed with Niagara Mohawk Holdings Inc. Form S-4 and Amendments filed May 29, 1998 at Exhibits B & C 15 Certificate of Incorporation and Incorporated by reference -- By-Laws of Niagara Mohawk Certificate of Incorporation, filed with Annual Report on Form 10K for the year and December 31, 1994, and the By-Laws of Niagara Mohawk amended as of April 23, 1998 filed in NMPC Form 10 Q/A for the quarterly period ended March 31, 1998, both filed May 29, 1998 16 Fees, Commissions, etc. in To be filed when appropriate -- Connection with Reorganization 17 Description of Properties of Incorporated by reference, -- Niagara Mohawk Holdings, Inc. and filed with Niagara Mohawk its Subsidiaries Form U-3A-2/A for the year ended December 31, 1997, filed on June 24, 1998, at pp 3-8 18 PSC Application for Approval of Filed herewith 99.6 Reorganization 19 PSC Compliance Order To be filed when available 20 FERC Application Under Section 203 Filed herewith 99.7 FPA 21 FERC Order of Approval To be filed when available -- 22 NRC Application under Atomic Energy Filed herewith 99.8 Act 23 NRC Order To be filed when available -- 24 Federal Register Notice Form Filed herewith 99.9
38 ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS. Holdings does not believe that the reorganization would involve a "major federal action" nor would it "significantly affect the quality of the human environment" as those terms are used in Section 102(2)(c) of the National Environmental Policy Act. The only federal actions related to the reorganization pertain to the Commission's declaration of the effectiveness of the Registration Statement, the Commission's approval of this application and granting of the exemption requested herein, FERC's authorization pursuant to Section 203 of the Federal Power Act, and the NRC's consent under Section 184 of the Atomic Energy Act. The reorganization would not result in changes in the operations of Niagara Mohawk that would have any impact on the environment. No Federal agency has prepared or is preparing an environmental impact statement with respect to the reorganization. 39 SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned company has duly caused this statement to be signed on its behalf by the undersigned thereunto duly authorized. Niagara Mohawk Holdings, Inc. Date: ___________, 1998 By: EX-99.1 2 MAP OF NIAGARA MOHAWK SERVICE TERRITORY [GRAPHIC] A map showing the service territory of Niagara Mohawk including all of the localities for which the Company has franchises in the State of New York, as more particularly listed in Exhibit 19 at Exhibit K thereto. EX-8 3 PRELIMINARY OPINION OF COUNSEL TO SEC SULLIVAN & CROMWELL NEW YORK TELEPHONE: (212) 558-4000 TELEX: 62694 (INTERNATIONAL) 127816 (DOMESTIC) 125 Broad Street, New York 10004-2498 CABLE ADDRESS: LADYCOURT, NEW YORK __________ FACSIMILE: (212) 558-3588 (125 Broad Street) 1701 PENNSYLVANIA AVE, N.W., WASHINGTON, D.C. 20006-5805 444 SOUTH FLOWER STREET, LOS ANGELES 90071-2901 8, PLACE VENDOME, 75001 PARIS ST. OLAVE'S HOUSE, 9a IRONMONGER LANE, LONDON EC2V 8EY 101 COLLINS STREET, MELBOURNE 3000 2-1, MARUNOUCHI 1-CHOME, CHIYODA-KU, TOKYO 100 NINE QUEEN'S ROAD, CENTRAL, HONG KONG OBERLINDAU 54-56, 60323 FRANKFURT AM MAIN
July 22, 1998 Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Dear Sirs: We have acted as corporate counsel to Niagara Mohawk Holdings, Inc., a New York corporation ("Holdings"), in connection with the Agreement and Plan of Exchange, dated as of May 14, 1998 (the "Exchange Agreement"), between Holdings and Niagara Mohawk Power Corporation, a New York corporation ("Niagara Mohawk") and the corporation whose shares will be acquired in the binding share exchange (the "Exchange") contemplated by the Exchange Agreement. This opinion is delivered to you in connection with Holdings' Application on Form U-1, as amended from time to time ("Application"), filed with the Securities and Exchange Commission ("Commission") under the Public Utility Holding Company Act of 1935, as amended ("1935 Act"). In connection therewith, we have examined such corporate records, certificates and other documents, and such questions of law, as we have considered necessary or appropriate for the purposes of this opinion. Upon the basis of such examination, it is our opinion that: 1. Holdings has been duly incorporated and is an existing corporation in good standing under the laws of the State of New York. Securities and Exchange Commission -2- 2. Upon the effectiveness of the Exchange in accordance with the terms of the Exchange Agreement, the Holdings Common Stock will have been duly authorized and validly issued and will be fully paid and nonassessable, and the holders thereof will be entitled to the rights and privileges appertaining thereto set forth in the Certificate of Incorporation of Holdings, as such may be amended from time to time. 3. Upon the effectiveness of the Exchange in accordance with the terms of the Exchange Agreement, all laws of the State of New York applicable to the Exchange will have been complied with. 4. Upon the effectiveness of the Exchange in accordance with the terms of the Exchange Agreement, Holdings will legally acquire Niagara Mohawk Common Stock. 5. The effectiveness of the Exchange will not violate the legal rights of the holders of any securities issued by Holdings, Niagara Mohawk or any associate company thereof. The foregoing opinions are limited to the laws of the State of New York and we are expressing no opinion as to the effect of the laws of any other jurisdiction. In rendering the foregoing opinions, we have relied as to certain matters on information obtained from the public officials, officers of Niagara Mohawk and other sources believed by us to be responsible, and we have assumed that the signatures on all documents examined by us are genuine, assumptions which we have not independently verified. Securities and Exchange Commission -3- We hereby consent to the filing of this opinion as Exhibit 8 to the Application. Very truly yours, /s/ SULLIVAN & CROMWELL SULLIVAN & CROMWELL EX-99.2 4 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET EXHIBIT 10 Niagara Mohawk Holding, Inc.'s balance sheet dated March 31, 1998 and a statement of income and surplus for the 12 months ended March 31, 1998 (both per books and pro forma basis) and Niagara Mohawk Holdings, Inc. consolidated balance sheet dated March 31, 1998 and consolidated statement of income and surplus for the 12 months ended March 31, 1998 on a pro forma basis.
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 1998 (IN THOUSANDS OF DOLLARS) EXHIBIT 10 PRO FORMA ADJUSTMENTS NIAGARA CONSOLIDATED NIAGARA NIAGARA MOHAWK MOHAWK HOLDINGS, MOHAWK POWER ASSETS HOLDINGS, INC. INC. CORPORATION UTILITY PLANT: Electric plant $ 8,751,846 Nuclear fuel 583,639 Gas plant 1,131,482 Common plant 319,146 Construction work in progress 420,299 ----------------- -------------------- ------------------- TOTAL UTILITY PLANT 11,206,412 Less: Accumulated depreciation and amortization (4,308,748 ) ----------------- -------------------- ------------------- NET UTILITY PLANT 6,897,664 ----------------- -------------------- ------------------- OTHER PROPERTY AND INVESTMENTS: Investment in subsidiary companies - consolidated 2,739,957 Investment 281,299 ----------------- -------------------- ------------------- 2,739,957 281,299 ----------------- -------------------- ------------------- CURRENT ASSETS: Cash, including temporary cash investments of $379,920 323,518 Accounts receivable 624,625 Less - Allowance for doubtful accounts (64,500) Materials and supplies, at average cost: Coal and oil for production of electricity 22,440 Gas storage 14,367 Other 124,923 Prepaid taxes 78,921 Other 10,720 ----------------- -------------------- ------------------- 1,135,014 ----------------- -------------------- ------------------- REGULATORY ASSETS: Regulatory tax asset 405,624 Deferred finance charges 239,880 Deferred environmental restoration costs 220,000 Unamortized debt expense 55,314 Postretirement benefits other than pensions 55,524 Other 198,228 ----------------- -------------------- ------------------- 1,174,570 ----------------- -------------------- ------------------- OTHER ASSETS: 72,245 ----------------- -------------------- ------------------- $2,739,957 $9,560,792 ================= ==================== ===================
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 1998 (IN THOUSANDS OF DOLLARS) (continued . . . ) EXHIBIT 10 PRO FORMA FINANCIAL STATEMENTS CONSOLIDATED CONSOLIDATED OPINAC NORTH INTER-COMPANY NIAGARA MOHAWK ASSETS AMERICA, INC. ELIMINATIONS HOLDINGS, INC. UTILITY PLANT: Electric plant $ $ $ 8,751,846 Nuclear fuel 583,639 Gas plant 1,131,482 Common plant 319,146 Construction work in progress 420,299 ----------------- ---------------- ------------------ TOTAL UTILITY PLANT 11,206,412 Less: Accumulated depreciation and amortization (4,308,748) ----------------- ---------------- ------------------ NET UTILITY PLANT 6,897,664 ----------------- ---------------- ------------------ OTHER PROPERTY AND INVESTMENTS: Investment in subsidiary companies - consolidated (2,739,957) Investment 15,677 296,976 ----------------- ---------------- ------------------ 15,677 (2,739,957 296,976 ----------------- ---------------- ------------------ CURRENT ASSETS: Cash, including temporary cash investments of $379,920 112,738 436,256 Accounts receivable 18,231 132 642,988 Less - Allowance for doubtful accounts (64,500) Materials and supplies, at average cost: Coal and oil for production of electricity 22,440 Gas storage 14,367 Other 124,923 Prepaid taxes 78,921 Other 13 10,733 ----------------- ---------------- ------------------ 130,982 132 1,266,128 ----------------- ---------------- ------------------ REGULATORY ASSETS: Regulatory tax asset 405,624 Deferred finance charges 239,880 Deferred environmental restoration costs 220,000 Unamortized debt expense 55,314 Postretirement benefits other than pensions 55,524 Other 198,228 ----------------- ---------------- ------------------ 1,174,570 ----------------- ---------------- ------------------ OTHER ASSETS: 72,245 ----------------- ---------------- ------------------ $146,659 ($2,739,825) $9,707,583 ================= ================ ==================
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 1998 (IN THOUSANDS OF DOLLARS) EXHIBIT 10 NIAGARA PRO FORMA ADJUSTMENTS CONSOLIDATED NIAGARA MOHAWK NIAGARA MOHAWK MOHAWK POWER CAPITALIZATION AND LIABILITIES HOLDINGS, INC. HOLDINGS, INC. CORPORATION CAPITALIZATION: Common stockholders' equity: Common stock - $.01 par value; authorized 300,000,000 shares: issued 144,419,351 shares $ $1,444 $144,419 Capital stock premium and expense 1,923,953 1,780,978 Retained earnings 814,560 684,834 ----------------- ----------------------- -------------------- 2,739,957 2,610,231 ----------------- ----------------------- -------------------- Cumulative preferred stock - $100 par value; authorized 3,400,000 shares; issued 2,322,000 shares: Optionally redeemable 210,000 Mandatorily redeemable 20,400 Cumulative preferred stock - $25 par value; authorized 19,600,000 shares; issued 11,781,204 shares: Optionally redeemable 230,000 Mandatorily redeemable 56,210 Cumulative preference stock - $25 par value; authorized 8,000,000 shares; issued none Long-term debt 3,418,299 ----------------- ----------------------- -------------------- TOTAL CAPITALIZATION 2,739,957 6,545,140 ----------------- ----------------------- -------------------- CURRENT LIABILITIES: Long-term debt due within one year 67,065 Sinking fund requirements on redeemable preferred stock 10,120 Accounts payable 210,461 Payable on outstanding bank checks 17,380 Customers' deposits 18,689 Accrued taxes 39,055 Accrued interest 76,573 Accrued vacation pay 37,081 Other 119,562 ----------------- ----------------------- -------------------- 595,986 ----------------- ----------------------- -------------------- REGULATORY LIABILITIES: Deferred finance charges 239,880 ----------------- ----------------------- -------------------- OTHER LIABILITIES: Accumulated deferred income taxes 1,449,025 Employee pension and other benefits 240,526 Deferred pension settlement gain 10,142 Unbilled revenues 28,881 Other 231,212 ----------------- ----------------------- -------------------- COMMITMENTS AND CONTINGENCIES: 1,959,786 Liability for environmental restoration 220,000 ----------------- ----------------------- -------------------- $ $2,739,957 $9,560,792 ================= ======================= ====================
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 1998 (IN THOUSANDS OF DOLLARS) EXHIBIT 10 (continued . . .) PRO FORMA FINANCIAL STATEMENTS CONSOLIDATED CONSOLIDATED OPINAC NORTH INTER-COMPANY NIAGARA MOHAWK CAPITALIZATION AND LIABILITIES AMERICA, INC. ELIMINATIONS HOLDINGS, INC. CAPITALIZATION: Common stockholders' equity: Common stock - $.01 par value; authorized 300,000,000 shares: issued 144,419,351 shares 1 ($144,420) $1,444 Capital stock premium and expense 134,576 (1,915,554) 1,923,953 Retained earnings (4,851) (679,983) 814,560 ------------------- ----------------- ------------------ 129,726 (2,739,957) 2,739,957 ------------------- ----------------- ------------------ Cumulative preferred stock - $100 par value; authorized 3,400,000 shares; issued 2,322,000 shares: Optionally redeemable 210,000 Mandatorily redeemable 20,400 Cumulative preferred stock - $25 par value; authorized 19,600,000 shares; issued 11,781,204 shares: Optionally redeemable 230,000 Mandatorily redeemable ` 56,210 Cumulative preference stock - $25 par value; authorized 8,000,000 shares; issued none Long-term debt 3,418,299 ------------------- ----------------- ------------------ TOTAL CAPITALIZATION 129,726 (2,739,957) 6,674,866 ------------------- ----------------- ------------------ CURRENT LIABILITIES: Long-term debt due within one year 67,065 Sinking fund requirements on redeemable preferred stock 10,120 Accounts payable 16,971 132 227,564 Payable on outstanding bank checks 17,380 Customers' deposits 18,689 Accrued taxes 39,055 Accrued interest 76,573 Accrued vacation pay 37,081 Other 435 119,997 ------------------- ----------------- ------------------ 17,406 132 613,524 ------------------- ----------------- ------------------ REGULATORY LIABILITIES: Deferred finance charges 239,880 ------------------- ----------------- ------------------ OTHER LIABILITIES: Accumulated deferred income taxes (625) 1,448,400 Employee pension and other benefits 240,526 Deferred pension settlement gain 10,142 Unbilled revenues 28,881 Other 152 231,364 ------------------- ----------------- ------------------ COMMITMENTS AND CONTINGENCIES: (473) 1,959,313 Liability for environmental restoration 220,000 ------------------- ----------------- ------------------ $146,659 ($2,739,825) $9,707,583 =================== ================= ==================
NIAGARA MOHAWK HOLDINGS, INC. ACCOUNTING ENTRY TO RECORD THE REORGANIZATION BALANCE SHEET AT MARCH 31, 1998 (IN THOUSANDS OF DOLLARS) EXHIBIT 10 COMPANY LINE DESCRIPTION DEBIT CREDIT Niagara Mohawk Holdings, Inc. Investment in subsidiary companies - consolidated 2,739,957 Niagara Mohawk Holdings, Inc. Common stock 144,419 Niagara Mohawk Holdings, Inc. Capital stock premium and expense 1,780,978 Niagara Mohawk Holdings, Inc. Retained Earnings 814,560 To record Niagara Mohawk Holdings, lnc.'s investment in subsidiaries. Remaining entry represents normal consolidating eliminating entries.
EX-99.3 5 INCOME AND RETAINED EARNINGS
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE TWELVE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS OF DOLLARS) EXHIBIT 11 PRO FORMA NIAGARA ADJUSTMENTS CONSOLIDATED MOHAWK NIAGARA MOHAWK NIAGARA MOHAWK HOLDINGS, INC. HOLDINGS, INC. POWER CORPORATION OPERATING REVENUES: Electric $3,295,241 Gas 605,735 --------------- ------------------ ----------------- 3,900,976 --------------- ------------------ ----------------- OPERATING EXPENSES: Fuel for electric generation 189,188 Electricity purchased 1,231,655 Gas purchased 312,431 Other operation and maintenance 893,316 Depreciation and amortization 343,369 Other taxes 472,155 --------------- ------------------ ----------------- 3,442,114 --------------- ------------------ ----------------- OPERATING INCOME 458,862 Other income 24,459 --------------- ------------------ ----------------- - INCOME BEFORE INTEREST CHARGES 483,321 INTEREST CHARGES 271,958 EQUITY IN EARNINGS OF SUBSIDIARY 100,676 PREFERRED DIVIDEND REQUIREMENT OF SUBSIDIARY (37,221) --------------- ------------------ ----------------- INCOME BEFORE FEDERAL AND FOREIGN INCOME TAXES 63,455 211,363 FEDERAL AND FOREIGN INCOME TAXES 110,687 --------------- ------------------ ----------------- NET INCOME (LOSS) 63,455 100,676 DIVIDENDS ON PREFERRED STOCK 37,221 --------------- ------------------ ----------------- BALANCE AVAILABLE FOR COMMON STOCK 63,455 63,455 RETAINED EARNINGS, MARCH 31, 1997 751,105 DIVIDEND OF SUBSIDIARY AT MARCH 31, 1998 (129,726) --------------- ------------------ ----------------- RETAINED EARNINGS, MARCH 31, 1998 $63,455 $684,834 =============== ================== ================= AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (IN THOUSANDS) BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE TWELVE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS OF DOLLARS) EXHIBIT 11 (continued . . .) PRO FORMA FINANCIAL STATEMENTS CONSOLIDATED CONSOLIDATED OPINAC NORTH INTER-COMPANY NIAGARA MOHAWK AMERICA, INC. ELIMINATIONS HOLDINGS, INC. OPERATING REVENUES: Electric $3,295,241 Gas 605,735 ---------------- -------------- ------------------ 3,900,976 ---------------- -------------- ------------------ OPERATING EXPENSES: Fuel for electric generation 189,188 Electricity purchased 1,231,655 Gas purchased 312,431 Other operation and maintenance (2,337) 890,979 Depreciation and amortization 343,369 Other taxes 472,155 ---------------- -------------- ------------------ (2,337) 3,439,777 ---------------- -------------- ------------------ OPERATING INCOME 2,337 461,199 Other income (2,337) 22,122 ---------------- -------------- -------------------- INCOME BEFORE INTEREST CHARGES 483,321 INTEREST CHARGES 271,958 EQUITY IN EARNINGS OF SUBSIDIARY (100,676) PREFERRED DIVIDEND REQUIREMENT OF SUBSIDIARY 37,221 ---------------- -------------- ------------------ INCOME BEFORE FEDERAL AND FOREIGN INCOME TAXES (63,455) 211,363 FEDERAL AND FOREIGN INCOME TAXES 110,687 ---------------- -------------- ------------------ NET INCOME (LOSS) (63,455) 100,676 DIVIDENDS ON PREFERRED STOCK 37,221 ---------------- -------------- ------------------ BALANCE AVAILABLE FOR COMMON STOCK (63,455) 63,455 RETAINED EARNINGS, MARCH 31, 1997 751,105 DIVIDEND OF SUBSIDIARY AT MARCH 31, 1998 (4,851) 134,577 ---------------- -------------- ------------------ RETAINED EARNINGS, MARCH 31, 1998 ($4,851) $71,122 $814,560 ================ ============== ================== AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (IN THOUSANDS) 144,412 BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK $0.44
EX-99.4 6 MATERIAL CHANGES SEC EXHIBIT 12 NIAGARA MOHAWK HOLDINGS, INC. STATEMENT OF MATERIAL CHANGES, NOT IN THE ORDINARY COURSE OF BUSINESS SINCE MARCH 31,1998 On June 30, 1998, Niagara Mohawk Power Corporation completed the consummation of the Master Restructuring Agreement terminating, restating or amending purchase power contracts with 14 Independent Power Producers under 27 purchase power agreements in exchange for approximately $3.6 million in cash and approximately 42.9 million shares of common stock. See Exhibit 6, Niagara Mohawk Holdings, Inc. Form S-4 Registration Statement No. 333-49769 (and amendments thereto) for further information regarding this transaction including its pro forma effects on the financial statements of Niagara Mohawk Power Corporation. EX-99.5 7 INCOME STATEMENT OF CANADIAN NIAGARA POWER EXHIBIT 13 Income statement of Canadian Niagara Power Company, Limited showing contribution to the income of Niagara Mohawk Power Corporation and consolidated subsidiaries for the 12 months ended March 31, 1998. Exhibit 13 CANADIAN NIAGARA POWER COMPANY, LIMITED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED MARCH 31, 1998 (Canadian Dollars) Operating Revenue C$33,113,135 Expenses: Operation and Maintenance 11,929,352 Other Taxes 2,662,112 Depreciation and amortization 932,861 ----------- 15,524,325 ----------- Operating income 17,588,810 Other income 886,774 ----------- Income before interest charges 18,475,584 ----------- Interest charges 2,386,233 ----------- Income before income taxes 16,089,351 ----------- Income taxes 6,976,475 ----------- Net income C$9,112,876 =========== Niagara Mohawk Ownership Share - 50% C$4,556,438 Weighted Average Exchange Rate 0.7137048 In U.S. Dollars $3,251,952 =========== Note: The earnings of Canadian Niagara Power Company, Limited are accounted for using the equity method. EX-99.6 8 PSC APPLICATION FOR APPROVAL OF REORGANIZATION NIAGARA MOHAWK POWER CORPORATION 300 Erie Boulevard West Syracuse, N.Y. 13202 (315) 428-6871 Paul J. Kaleta Vice President-Law and General Counsel July 22, 1998 Hon. John C. Crary, Secretary NYS Department of Public Service Three Empire State Plaza Albany, New York 12223 Re: NIAGARA MOHAWK POWER CORPORATION CASES 94-E-0098 AND 94-E-0099 HOLDING COMPANY FORMATION Dear Secretary Crary: INTRODUCTION - ------------ Niagara Mohawk Power Corporation (Niagara Mohawk, Company) hereby notifies the Commission of its intention to form a holding company to separate its regulated businesses from its unregulated businesses. It is the Company's belief, as discussed in detail below, that the Settlement Agreement that it executed, along with nineteen other parties, filed on October 10, 1997 and the Commission approved in Opinion 98-8, Opinion and Order Adopting Terms of Settlement Agreement Subject to Modifications and Conditions (March 20, 1998) in this proceeding, authorizes the creation of this holding company corporate structure. The Company, therefore, requests that the Commission treat this filing as a compliance filing and approve it at its next public session. STATE ADMINISTRATIVE PROCEDURE ACT - ---------------------------------- Because this filing merely implements the formation of the holding company corporate structure which, as discussed below, the Commission previously has approved in full compliance with the State Administrative Procedure Act (SAPA), the Company requests that the Commission approve this filing at its next public session. Should the Hon. John C. Crary, Secretary July 22, 1998 Page 2 Commission believe additional SAPA notice is necessary, the Company requests that the Commission approve this filing at its next public session on an emergency basis. Expedited action is required because the Company seeks to complete the holding company formation no later than December 31, 1999. However, as discussed below, several other regulatory bodies also must review and approve the Company's applications for authorization to do so. As a rule, these regulators look first to the State regulator's decision for guidance. An expedited Commission approval will assist those other regulators in reaching timely decisions on the applications before them. If, however, the Commission were to set this matter for additional notice and comment under SAPA, the benefits of an early Commission decision will be lost. No party will be prejudiced by such expedited review because all issues related to the formation of a holding company for Niagara Mohawk were subject to full public notice and comment when the Settlement Agreement was under consideration by the Commission. DESCRIPTION OF HOLDING COMPANY STRUCTURE - ---------------------------------------- Under the proposed holding company structure, Niagara Mohawk will become a wholly-owned subsidiary of a new holding company, Niagara Mohawk Holdings, Inc. (Holdings), a New York corporation. Pursuant to the Agreement and Plan of Exchange (Exchange Agreement), dated as of May 14, 1998, and unanimously adopted by the Board of Directors of Niagara Mohawk, the present equity owners of Niagara Mohawk will become the equity owners of Holdings through a share exchange. In the share exchange: 1. each share of Niagara Mohawk common stock outstanding immediately prior to the effective time of the share exchange will be exchanged for one new share of Holdings common stock; 2. Holdings will become the owner of all outstanding Niagara Mohawk common stock; and Hon. John C. Crary, Secretary July 22, 1998 Page 3 3. the shares of Holdings common stock held by Niagara Mohawk immediately prior to the share exchange will be canceled. The corporate restructuring will result in a change in the identity of the direct holder of Niagara Mohawk's equity, but no change in the beneficial owners of that equity, who will merely exchange their Niagara Mohawk shares for shares in Holdings. The corporate restructuring is more fully described in an excerpt from the Form S-4 Registration Statement for Holdings, dated May 29, 1998, a copy of which is attached hereto as Appendix A. A copy of the Exchange Agreement, which provides for the exchange of the outstanding shares of Niagara Mohawk common stock on a share-for-share basis for shares of Holdings common stock, is included in Appendix A as Exhibit A to the S-4 Registration Statement. On June 29, 1998, Niagara Mohawk common shareholders approved the corporate restructuring. DESCRIPTION OF COMPLIANCE FILING - -------------------------------- In determining that it was required to submit a compliance filing to effectuate the corporate structure section of the Settlement Agreement, the Company relied on the terms of the Settlement Agreement itself, and on the Commission's interpretation of those terms as expressed in Opinion No. 98-8. The parties' agreement regarding the Company's corporate structure during the settlement term is reflected in Section 9.1 of the Settlement Agreement. Section 9.1 states: Niagara Mohawk shall separate its existing operations, as indicated below or as described in any petition filed by Niagara Mohawk within one year of the approval of this settlement proposing the formation of a holding company in substantially the same structure described below: Hon. John C. Crary, Secretary July 22, 1998 Page 4 HOLDCO: The HoldCo may be, at the Company's - ------ option, a legally distinct entity that directly owns no state or federal jurisdictional assets and, therefore, is unregulated or a functionally separate unit serving the same purposes of a holding company. REGCO: RegCo shall be a wholly owned subsidiary - ----- of HoldCo or a utility parent owning in whole or in part one or more regulated and/or unregulated subsidiaries. The RegCo shall carry on the full range of Niagara Mohawk's regulated transmission and electric and gas distribution services. To the extent not carried on through a statewide nuclear operating company and subject to the other provisions of this settlement regarding nuclear assets, Niagara Mohawk's nuclear operations may remain a part of RegCo. PLUM STREET ENTERPRISES/ UNREGULATED AFFILIATES: Niagara Mohawk may form unregulated or - ---------------------- lightly regulated affiliates, which may be owned, in whole or in part, by HoldCo or may be a subsidiary of a utility parent under either proposed corporate structure. If Niagara Mohawk seeks to form subsidiaries of RegCo, it will be subject to all applicable regulatory requirements including Section 107 and 69 of the Public Service Law. TRANSITION GENCO: Niagara Mohawk may form all subsidiaries - ---------------- necessary to effectuate the fossil and hydro asset auction contemplated in this settlement. Prior to that auction, Niagara Mohawk may maintain its current functional unbundling of its fossil and hydro generation business. The intent of the first paragraph of that section that states "Niagara Mohawk shall separate its existing operations, as indicated below," is to set forth the parties' agreement as to the corporate structure the Company could implement without additional Commission Hon. John C. Crary, Secretary July 22, 1998 Page 5 approval. If, instead, the Company chooses to deviate from that corporate structure, it may do so "in any petition filed . . . within one year of the approval of this settlement." In Opinion No. 98-8 (mimeo at 10), the Commission described the Settlement Agreement. With respect to the corporate structure provisions, the Commission declared that "it allows the company to operate as a holding Company ... ." The Commission then approved Section 9.1 of the Settlement Agreement without modification. See Opinion No. 98-8, mimeo at 75. The Company's compliance filing, therefore, fulfills the requirements of both the Settlement Agreement and Opinion No. 98-8. The Company requests that the Commission approve this compliance filing on that basis at its next public session. Alternatively, if the Commission believes that additional review is necessary, the Company requests that this filing (including all attachments) be deemed a Petition for authority under Public Service Law Sections 70, 107, 108, and 110 to form a holding company. Attached as Appendix B is the Petition of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation for Authority to Form a Holding Company Structure to Engage in Certain Related Transactions. FILINGS MADE WITH OTHER JURISDICTIONAL AGENCIES - ------------------------------------------------ The Company also is filing, concurrently with this submittal, petitions for requisite authority from the United States Securities and Exchange Commission, the Federal Energy Regulatory Commission, and the Nuclear Regulatory Commission. SERVICE ON PARTIES TO CASES 94-E-0098 AND 94-E-0099 - --------------------------------------------------- The Company is serving a copy of this letter on all parties to these proceedings. Because the attachments to this filing are voluminous, they are not included in the service Hon. John C. Crary, Secretary July 22, 1998 Page 6 copies. However, any party who wishes to review the attachments may arrange to do so at the Company's offices in Syracuse or Albany, or may request a copy of the attachments, by calling William M. Marinelli at (315) 428-5915. An original and twenty-five copies of the entire filing is included herewith. Kindly acknowledge receipt and filing of the enclosures by date-stamping the enclosed copy of this letter and returning it in the postage-paid envelope provided for your convenience. Yours truly, /s/ Paul J. Kaleta Paul J. Kaleta Vice President - Law and General Counsel /tjb BY OVERNIGHT COURIER - -------------------- c w/o enclosures: All Parties on Attached Service List BY U.S. MAIL - ------------ Appendix A : Excerpt from S-4 Registration Statement for Holdings, including Agreement and Plan of Exchange Appendix B: Petition of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation for Authority to Form a Holding Company Structure to Engage in Certain Related Transactions NIAGARA MOHAWK POWER CORPORATION CASES 94-E-0098 AND 94-E-0099 HOLDING COMPANY FORMATION - COMPLIANCE FILING APPENDIX A AS FILED WITH SECURITIES AND EXCHANGE COMMISSION ON MAY 29,1998 REGISTRATION NO. 333-49769 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ AMENDMENT NO 2 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ NIAGARA MOHAWK HOLDINGS, INC. (Exact name of registrant as specified in charter) NEW YORK 4931 16-1549726 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation) Classification Code Number) Identification No.) WILLIAM E. EDWARDS CHIEF FINANCIAL OFFICER NIAGARA MOHAWK HOLDINGS, INC. 300 ERIE BOULEVARD WEST 300 ERIE BOULEVARD WEST SYRACUSE, NEW YORK 13202 SYRACUSE, NEW YORK 13202 (315) 474-1511 (315) 474-1511 -------------------------- ------------------------------- (Address, including zip code, and (Name, address, including zip code, telephone number, including area and telephone number, including code, of registrant's principal area code, of agent for service) executive offices) -------------------------- ------------------------------- COPIES TO: Janet T. Geldzahler, Esq. Sullivan & Cromwell 125 Broad Street New York, New York 10004 (212) 558-4000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement has become effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. |_| THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ THE BOARD OF DIRECTORS RECOMMENDS THAT THE HOLDERS OF COMMON STOCK VOTE IN FAVOR OF APPROVAL OF PROPOSAL NO. 3. - -------------------------------------------------------------------------------- PROPOSAL 4: HOLDING COMPANY AND ADOPTION OF THE EXCHANGE AGREEMENT - -------------------------------------------------------------------------------- The Board of Directors of Niagara Mohawk unanimously believes that it is in the best interests of Niagara Mohawk and its shareholders to restructure Niagara Mohawk so that it will become a separate subsidiary of a new parent holding company, with the present holders of Common Stock becoming the holders of the common stock of the new parent. To carry out such restructuring, Niagara Mohawk has caused to be incorporated a New York corporation, Holdings, which now has a nominal amount of stock outstanding and no present business or properties of its own. All of the currently outstanding shares of Holdings common stock are owned by Niagara Mohawk. The Board of Directors of each of Niagara Mohawk and Holdings has adopted the Exchange Agreement under which, subject to adoption by Niagara Mohawk's shareholders and the satisfaction of other conditions, Niagara Mohawk will become a subsidiary of Holdings through the exchange of the outstanding shares of Niagara Mohawk Common Stock on a share-for-share basis for shares of Holdings common stock (referred to in this Prospectus/Proxy Statement as the "share exchange" or the "exchange"). Following the share exchange, certain of Niagara Mohawk's existing subsidiaries involved in non-utility operations will be transferred to Holdings and become subsidiaries of Holdings. See "--The Share Exchange--Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings". The Exchange Agreement is attached to this Prospectus/Proxy Statement as Exhibit A and is incorporated herein by reference. Niagara Mohawk is subject to regulation by the PSC under the New York Public Service Law (the "Public Service Law"). The PowerChoice Agreement approved the holding company restructuring and the terms with which Niagara Mohawk and Holdings have agreed to comply in their on-going relationships and activities. REASONS FOR THE HOLDING COMPANY STRUCTURE AND SHARE EXCHANGE General The proposed holding company structure is intended to provide Niagara Mohawk and its subsidiaries with the financial and regulatory flexibility to compete more effectively in an increasingly competitive energy industry by providing a structure that can accommodate both regulated and unregulated lines of business. Niagara Mohawk currently operates under the regulatory constraints of the PSC that were generally designed to discourage electric utilities from participating in unregulated businesses and that limit (i) the total amount of the incremental investment in its unregulated operations, (ii) the amount that can be invested annually, (iii) the cumulative amount that can be invested in any single line of business and (iv) the debt-equity ratios of its subsidiaries. Under current regulations, any time Niagara Mohawk wishes to allocate funds to new unregulated ventures, it must seek PSC approval. The approval process itself leads to long delays, forces the Company to reveal its plans to competitors, and gives competitors the opportunity to intervene in the regulatory approval process and attempt to gain competitive advantage by seeking restrictions that would handicap Niagara Mohawk. The holding company structure proposed here largely would eliminate many of these regulatory constraints that would otherwise severely limit or handicap Niagara Mohawk's ability to participate in unregulated business opportunities as the industry evolves. In approving PowerChoice, the PSC has given the Company 12 months in which to form a holding company. The holding company structure is a well-established form of organization for companies conducting multiple lines of business. It is a common form of organization for unregulated companies and for those regulated companies, such as telephone utilities and water utilities, which are not subject to the Holding 59 Company Act. In addition, it is utilized by many electric companies which are involved in unregulated activities. Niagara Mohawk wishes to take advantage of this opportunity, and desires to do so by utilizing the most efficient and effective corporate structure. More generally, the holding company structure will enable Holdings to engage in unregulated businesses without obtaining the prior approval of the PSC, thereby enabling Holdings to pursue unregulated business opportunities in a timely manner. Under the new corporate structure financing of unregulated activities of Holdings and its non-utility subsidiaries will not require PSC approval. In addition, the capital structure of each non-utility subsidiary may be appropriately tailored to suit its individual business. Also, under the holding company structure, Holdings would not need PSC approval to issue debt or equity securities to finance the acquisition of the stock or assets of other companies. The ability to raise capital for acquisitions without prior PSC approval should allow competition on a level basis with other potential acquirors, some of which are already holding companies. Under a holding company structure, the issuance of debt or equity securities by Holdings to finance the acquisition of the stock or assets of another company should not adversely affect Niagara Mohawk's capital devoted to and available for regulated utility operations. The holding company structure separates the operations of regulated and unregulated businesses. As a result, it provides a better structure for regulators to assure that there is no cross-subsidization of costs or transfer of business risk from unregulated to regulated lines of business. A holding company structure also is preferred by the investment community because it makes it easier to analyze and value individual lines of business. Moreover, the use of a holding company structure provides legal protection against the imposition of liability on regulated utilities for the results of unregulated business activities. In short, the holding company structure is a highly desirable form of conducting regulated and unregulated businesses within the same corporate group. As discussed below under "--The Share Exchange--Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings," as part of the holding company restructuring, certain of the current non-utility subsidiaries of Niagara Mohawk will be transferred to and become, or become owned through, separate subsidiaries of Holdings following the share exchange. Niagara Mohawk needs the financial and regulatory flexibility provided by this holding company structure to operate in a changing environment and successfully address the new levels of competition. Opportunities in the new competitive environment could take many forms, including joint ventures and strategic alliances in addition to direct investments in new businesses. All of these opportunities will be easier to pursue under a holding company structure than they would be under the current structure. Strategic alliances with unregulated third party participants and/or diversification into unrelated fields may also help protect against the market and financial risks to which Niagara Mohawk is now, and increasingly will be, exposed. Thus, Holdings may wish to increase its investment in unregulated energy-related businesses, whether through additional "ground floor " investment, the acquisition of existing energy and energy services providers, or the formation of strategic alliances with industry partners. Holdings will continue to seek to invest in the current lines of business and, through its subsidiaries, will engage in energy marketing and other energy-related activities. Although Holdings has not identified other specific business opportunities, it believes that such activities would likely include areas with which Niagara Mohawk is already familiar, such as information systems, environmental services, engineering services, financial services, meter reading, and billing and collection services. Under a holding company structure, Holdings should be able to take advantage of opportunities in a timely fashion and compete more effectively against other energy companies. Except for the restrictions set forth in the PowerChoice Agreement and discussed in "--The Share Exchange--The PowerChoice Agreement", Holdings believes it should not otherwise be required to obtain PSC approval for investments in non-utility businesses, would not be subject to the limitations imposed under certain provisions of New York law applicable to Niagara 60 Mohawk, and thus should be able to compete more effectively against other entities not subject to similar constraints. Given its financial condition and contractual restrictions, the Company does not foresee Holdings making substantial investments in unregulated businesses in the near future. However, under the terms of the PowerChoice Agreement, Niagara Mohawk has a one-year window in which it can adopt the holding company structure. CERTAIN CONSIDERATIONS Future Performance of Holdings Common Stock Cannot Be Assured. The purpose of the share exchange is to establish a holding company structure that will enhance the ability to take advantage of business opportunities outside of Niagara Mohawk's present markets . The Board of Directors believes the share exchange and holding company structure to be in the best interests of Niagara Mohawk and its shareholders. Nevertheless, the success of Holdings in realizing its goals and the future performance of Holdings common stock cannot be assured. Dividends on Holdings Common Stock Will Initially Depend on Common Stock Dividends Paid by Niagara Mohawk. Holdings does not now, nor will it immediately after the share exchange, conduct directly any business operations from which it will derive any revenues. Holdings plans to obtain funds for its own operations from dividends paid to Holdings by its subsidiaries, and from sales of securities or debt incurred by Holdings. Dividends on Holdings common stock will initially depend upon the earnings, financial condition and capital requirements of Niagara Mohawk, and the dividends that Niagara Mohawk pays to Holdings. Niagara Mohawk suspended the common stock dividend in 1996 to help stabilize its financial condition. In making future dividend decisions with respect to Niagara Mohawk or Holdings, the applicable board would evaluate, along with standard business considerations, the entity's financial condition, contractual and regulatory restrictions, competitive pressure on prices, available cash flow and retained earnings and other strategic considerations. In the future, dividends from Holdings' subsidiaries other than Niagara Mohawk may also be a source of funds for dividend payments by Holdings. Payment of Niagara Mohawk dividends to Holdings will be subject to the prior rights of holders of Niagara Mohawk preferred stock, First Mortgage Bonds and other long-term debt. In addition, although it has no present intention to do so, Niagara Mohawk may issue additional preferred stock in the future to meet its capital requirements. Such additional preferred stock will also have preferential dividend rights. The PowerChoice Agreement also imposes the following limitations on the dividends that Niagara Mohawk may pay to Holdings after the share exchange: net income available for common dividends plus in each of the following years: 1998: $50 million, 1999: $75 million, 2000, 2001 and 2002: $100 million, 2003: $80 million, 2004: $60 million, 2005: $40 million, 2006: $20 million, thereafter: $0. If the Company files a rate case for any year from 2003 to 2007, this dividend limitation will be reassessed in the rate filing. The Indenture to be entered into with respect to the Senior Notes will also contain limitations on the amount of dividends payable with respect to the Common Stock. Non-Utility Businesses Will Not Be Available as Sources for Dividends on Niagara Mohawk Preferred Stock. Following consummation of the share exchange, certain of Niagara Mohawk's non-utility subsidiaries will be transferred to Holdings, and will not be available to the holders of Niagara Mohawk preferred stock as a source of cash for the payment of dividends or other amounts. Non-Utility Businesses. Niagara Mohawk's principal non-utility subsidiaries that will be transferred to Holdings participate in energy marketing and brokering, energy services and Canadian electricity generation and distribution. It is the current intention of Holdings for these non-utility subsidiaries to engage primarily in energy-related businesses which will not be regulated by state or federal agencies which regulate public utilities. Such businesses may encounter competitive and other factors not previously experienced by Niagara 61 Mohawk, and may have different, and perhaps greater, investment risks than those involved in the regulated utility business of Niagara Mohawk. There can be no assurance that such businesses will be successful or, if unsuccessful, that they will not have a direct or indirect adverse effect on Holdings. As is the case now, any losses incurred by such businesses will not be recoverable in utility rates of Niagara Mohawk. As Holdings engages in more such business activities, the market price of Holdings' stock will be affected to a lesser extent by the performance of Niagara Mohawk. Comparable earnings from Niagara Mohawk's unregulated businesses were $(4.7) million, or (3.3) cents per share in 1997, $23.2 million, or 16.1 cents per share in 1996, and $10.3 million, or 7.1 cents per share in 1995. Niagara Mohawk's total investment in these businesses, computed in accordance with PSC specifications as a percentage of consolidated capitalization, was 2.5%, 2.6% and 2.1% as of December 31, 1997, 1996 and 1995, respectively. Holdings will obtain funds to invest in non-utility subsidiaries and other businesses from dividends it receives from Niagara Mohawk, borrowings and other financings, and dividends Holdings may in the future receive from any non-utility subsidiaries. There can be no assurance that non-utility subsidiaries will have earnings or pay any dividends to Holdings in the foreseeable future. Implementation of the Rate Plan. The new rate plan contained in the PowerChoice Agreement will take effect upon the closing of the MRA and will continue to govern utility rates and charges of Niagara Mohawk even if common shareholders of Niagara Mohawk do not approve the holding company proposal and adopt the Exchange Agreement. In that event, Niagara Mohawk will not be able to realize the benefits it expects from a holding company structure, which Niagara Mohawk believes is important in the future deregulated competitive environment of the energy industry. See also "--The Share Exchange--The PowerChoice Agreement" below. Certain Restrictions in the PSC Order. As summarized above, the PowerChoice Agreement imposes certain limitations on the dividends that Niagara Mohawk may pay to Holdings after the share exchange. See also "--The Share Exchange--Dividend Policy". The PowerChoice Agreement also contains restrictions on transactions between Niagara Mohawk and Holdings or any other subsidiary of Holdings, loans, guarantees or pledges by Niagara Mohawk for the benefit of Holdings or any other subsidiary of Holdings, and Board and managerial interlocks between Niagara Mohawk and Holdings or any other subsidiary of Holdings. See "--The Share Exchange--Regulatory Approvals" and "--Management--Restriction on Board and Management Interlocks between Holdings and Niagara Mohawk". There can be no assurance as to the effect, if any, that such restrictions will have on the business or operations of Holdings, Niagara Mohawk or the non-utility subsidiaries. 62 A. THE SHARE EXCHANGE EXCHANGE AGREEMENT The Exchange Agreement has been unanimously adopted by the Boards of Directors of Niagara Mohawk and Holdings and is subject to adoption by the holders of at least two-thirds of the outstanding shares of Niagara Mohawk Common Stock. See "--Vote Required" below. In the share exchange: (1) each share of Niagara Mohawk Common Stock outstanding immediately prior to the effective time of the share exchange will be exchanged for one new share of Holdings common stock; (2) Holdings will become the owner of all outstanding Niagara Mohawk Common Stock; and (3) the shares of Holdings common stock held by Niagara Mohawk immediately prior to the share exchange will be canceled. As a result, upon completion of the share exchange, Holdings will become a holding company, Niagara Mohawk will become a subsidiary of Holdings, and all of Holdings common stock outstanding immediately after the share exchange will be owned by the former holders of Niagara Mohawk Common Stock outstanding immediately prior to the share exchange. Following the share exchange, certain of Niagara Mohawk's existing non-utility subsidiaries will be transferred to Holdings and become subsidiaries of Holdings. See "--Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings". The Exchange Agreement is attached to this Prospectus/Proxy Statement as Exhibit A and is incorporated herein by reference. Niagara Mohawk's outstanding preferred stock will not be exchanged in the share exchange but will continue as shares of Niagara Mohawk preferred stock. The share exchange will not change the rights of the holders of such shares as currently provided in Niagara Mohawk's Amended Certificate of Incorporation. Debt of Niagara Mohawk will remain unchanged and will continue as outstanding obligations of Niagara Mohawk after the share exchange. REGULATORY APPROVALS FEDERAL POWER ACT The FERC has held that the transfer of common stock of a public utility company, such as the Company, from its existing stockholders to a holding company in a transaction such as the share exchange constitutes a transfer of the "ownership and control" of the facilities of such utility, and is thus a "disposition of facilities" subject to FERC review and approval under Section 203 of the Federal Power Act. The Company will apply for such approval and for approval of the transfer of certain power sales contracts and a tariff associated with certain of its generation assets. ATOMIC ENERGY ACT A provision in the Atomic Energy Act requires Nuclear Regulatory Commission ("NRC") consent for the transfer of control of NRC licenses. The NRC Staff has in the past asserted that this provision applies to the creation of a holding company over an NRC-licensed utility company in a transaction such as the share exchange. The Company will apply for NRC approval under the Atomic Energy Act for the transfer of control resulting from the Share Exchange of its two licenses, for Nine Mile Point 1 and Nine Mile Point 2, respectively. PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 The Company is currently exempt from the Public Utility Holding Company Act of 1935 under Section 3(a)(2) thereof. Holdings will own 100% of the common stock of the Company, majority interests in Beebee Island Corporation and Moreau Manufacturing Corporation and 50% of CNP, all of which are public utility companies for purposes of the Holding Company Act. Section 9(a)(2) of the Act requires the 63 prior approval of the SEC under Section 10 of the Holding Company Act for any person to become an affiliate of more than one public utility company. Holdings will apply for such approval. Holdings will also apply to the Commission for an order exempting Holdings from all provisions of the Holding Company Act, except Section 9(a)(2) thereof, pursuant to the exemption provided by Section 3(a)(1) thereof. The basis for such exemption is that the holding company, and every subsidiary company thereof which is a public-utility company from which the holding company derives any material part of its income, are predominantly intrastate in character and are organized in the same state. PUBLIC SERVICE LAW The New York Public Service Law ("NYPSL") requires approval from the PSC in order to undertake the reorganization represented by the formation of the holding company structure. The NYPSL also requires PSC approval for a holding company to acquire the stock of a utility pursuant to a share exchange. The Company has obtained PSC approval of the holding company concept and will make appropriate additional filings with respect to the formation of a holding company. CONDITIONS TO EFFECTIVENESS OF THE SHARE EXCHANGE The share exchange is subject to the satisfaction of the following conditions (in addition to adoption of the Exchange Agreement by the holders of Niagara Mohawk Common Stock): (i) all necessary orders, authorizations, approvals or waivers from the PSC and all other jurisdictive regulatory bodies, boards or agencies have been received, remain in full force and effect, and do not include, in the sole judgment of the Board of Directors of Niagara Mohawk, unacceptable conditions; and (ii) shares of Holdings common stock to be issued in connection with the exchange have been listed, subject to official notice of issuance, by the New York Stock Exchange. Following satisfaction of these conditions, the share exchange will become effective immediately following the close of business on the date of filing with the New York Department of State of a certificate of exchange pursuant to Section 913(d) of the New York Business Corporation Law. Niagara Mohawk cannot predict when all conditions will be satisfied, but expects that the share exchange will become effective in the first quarter of calendar 1999. EXCHANGE OF STOCK CERTIFICATES If the share exchange is effected, it will not be necessary for holders of Niagara Mohawk Common Stock to physically exchange their existing stock certificates for certificates of Holdings common stock. The certificates which represent shares of Niagara Mohawk Common Stock outstanding immediately prior to the effective time of the share exchange will automatically represent an equal number of shares of Holdings common stock immediately after the effective time and will no longer represent Niagara Mohawk Common Stock. New certificates bearing the name of Holdings will be issued after the share exchange, if and as certificates representing shares of Niagara Mohawk Common Stock outstanding immediately prior to the share exchange are presented for exchange or transfer. Niagara Mohawk preferred stock will not be exchanged but will continue as shares of Niagara Mohawk preferred stock. The share exchange will not change the rights of the holders of such shares as provided in Niagara Mohawk's Amended Certificate of Incorporation. Debt of Niagara Mohawk will remain unchanged and will continue as outstanding obligations of Niagara Mohawk after the share exchange. TRANSFER OF NIAGARA MOHAWK'S NON-UTILITY SUBSIDIARIES TO HOLDINGS Other than for the transfer of the subsidiaries described under "Certain Considerations--Non-Utility Businesses" and other de minimis non-utility investments, and except for dividends or other distributions with respect to Niagara Mohawk Common Stock held by Holdings, it is expected that Niagara Mohawk will 64 not transfer at less than a fair consideration any of its other assets to Holdings or any Holdings subsidiaries. Niagara Mohawk will develop accounting and other procedures to the extent determined to be necessary or appropriate to insure separation of utility and non-utility businesses. See "--The PowerChoice Agreement" below. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Shares of Niagara Mohawk Common Stock held in its Dividend Reinvestment and Common Stock Purchase Plan (including uncertificated whole and fractional shares) will automatically become a like number of shares of Holdings common stock at the effective time of the share exchange. At the effective time, Holdings will succeed to the Plan as in effect immediately prior to the effective time, and shares of Holdings common stock will be issued under the Plan on and after the effective time. Holdings will file a post-effective amendment to Niagara Mohawk's registration statement on Form S-3 for the Plan shortly after the effective time of the exchange. AMENDMENT OR TERMINATION OF THE EXCHANGE AGREEMENT The Boards of Directors of Niagara Mohawk and Holdings may amend any of the terms of the Exchange Agreement at any time before or after its adoption by the holders of Niagara Mohawk Common Stock and prior to the effective time, but no such amendment may, in the sole judgment of the Board of Directors of Niagara Mohawk, materially and adversely affect the rights of Niagara Mohawk's shareholders. The Exchange Agreement may be terminated and the share exchange abandoned at any time before or after the shareholders of Niagara Mohawk adopt the Exchange Agreement, and prior to the effective time, if the Board of Directors of Niagara Mohawk determines, in its sole judgment that consummation of the exchange would, for any reason, be inadvisable or not be in the best interests of Niagara Mohawk or its shareholders. LISTING OF HOLDINGS COMMON STOCK Holdings is applying to have its common stock listed on the New York Stock Exchange. It is expected that such listing will become effective at the effective time of the share exchange. The stock exchange ticker symbol of Holdings common stock will be "NMK", and quotations will be carried in newspapers as they have been for Niagara Mohawk Common Stock. Following the share exchange, Niagara Mohawk Common Stock will no longer trade and will be delisted and no longer registered pursuant to Section 12 of the Securities Exchange Act of 1934. NIAGARA MOHAWK COMMON STOCK MARKET PRICES AND DIVIDENDS Niagara Mohawk Common Stock is listed and principally traded on the New York Stock Exchange. The table below sets forth the high and low sales prices of Niagara Mohawk Common Stock for the fiscal 65 periods indicated as reported in The Wall Street Journal as New York Stock Exchange Composite Transactions. No dividends were paid on the Common Stock during such period. PRICE RANGE ---------------------- HIGH LOW ------- ------- ($) ($) Calendar 1996 First Quarter........................ 10 1/8 6 1/2 Second Quarter....................... 8 5/8 6 1/2 Third Quarter........................ 8 7/8 6 3/4 Fourth Quarter....................... 10 7 5/8 Calendar 1997 First Quarter........................ 11 1/8 8 1/8 Second Quarter....................... 9 7 7/8 Third Quarter........................ 10 1/16 8 1/4 Fourth Quarter....................... 10 9/16 9 1/16 Calendar 1998 First Quarter........................ 13 9/16 10 1/8 Second Quarter (through May 28, 1998) 13 11 The closing price of Niagara Mohawk Common Stock on May 28, 1998 was reported to have been $12 3/16. DIVIDEND POLICY Holdings does not now, nor will it immediately after the share exchange, conduct directly any business operations from which it will derive any revenues. Holdings plans to obtain funds for its own operations from dividends paid to Holdings on the stock of its subsidiaries, and from sales of securities or debt incurred by Holdings. Dividends on Holdings common stock will initially depend upon the earnings, financial condition and capital requirements of Niagara Mohawk, and the dividends paid by Niagara Mohawk to Holdings. In the future, dividends from Holdings' subsidiaries other than Niagara Mohawk may also be a source of funds for dividend payments by Holdings. Payment of dividends on Niagara Mohawk Common Stock will continue to be subject to the prior rights of holders of Niagara Mohawk preferred stock. Niagara Mohawk suspended the common stock dividend in 1996 to help stabilize its financial condition. In making future dividend decisions with respect to Niagara Mohawk or Holdings, the applicable board would evaluate, along with standard business considerations, the entity's financial condition, contractual restrictions and regulatory restrictions, competitive pressure on prices, available cash flow and retained earnings and other strategic considerations. In addition, as set forth above under "Certain Considerations" the PowerChoice Agreement contains restrictions on the dividends Niagara Mohawk can pay Holdings. See "Certain Considerations--Dividends on Holdings Common Stock Will Initially Depend on Common Stock Dividends Paid by Niagara Mohawk". CERTAIN FEDERAL INCOME TAX CONSEQUENCES Niagara Mohawk and Holdings have received advice from Bryan Cave LLP, their special tax counsel, that the principal federal income tax consequences of the share exchange are as summarized below. Tax Implications to Niagara Mohawk Shareholders. Under section 351 of the Code, no gain or loss will be recognized by a holder of Niagara Mohawk Common Stock as a result of the exchange of such holder's Niagara Mohawk Common Stock solely for Holdings common stock. The tax basis of the Holdings common stock received in the share exchange will be the same as the exchanging shareholder's basis in the 66 Niagara Mohawk Common Stock surrendered. The holding period of the Holdings common stock received by each exchanging shareholder will include the holding period during which such shareholder held the Niagara Mohawk Common Stock surrendered, provided that such stock was held as a capital asset on the date of the share exchange. No federal income tax consequences will result from the share exchange to holders of Niagara Mohawk preferred stock in respect of such stock. Tax Implications to Niagara Mohawk and Holdings. No gain or loss will be recognized by Niagara Mohawk or Holdings as a result of the share exchange. The basis of the Niagara Mohawk Common Stock received by Holdings will be the same as the aggregate tax basis that the holders of Niagara Mohawk Common Stock had in such stock immediately prior to the share exchange. Holdings' holding period in the Niagara Mohawk Common Stock received in the share exchange will include the period during which such stock was held by the holders of Niagara Mohawk Common Stock. Continuation of Affiliated Group. Consummation of the share exchange will not result in a termination of the existence of the affiliated group of corporations of which Niagara Mohawk has been the common parent. Niagara Mohawk will be included in such affiliated group of corporations of which Holdings will become the new common parent. Reporting Requirements. Pursuant to applicable Treasury regulations, shareholders of Niagara Mohawk Common Stock will be required to attach to their federal income tax returns a complete statement of all facts pertinent to the share exchange, including the shareholder's basis in the shares of Niagara Mohawk Common Stock transferred TO Holdings and the type, number and value of shares of Holdings common Stock received in the share exchange. In addition, such shareholders will be required to keep permanent records of any information relating to the share exchange that is required to be filed with their income tax returns. The Bryan Cave opinion is based on certain factual representations received from Niagara Mohawk and Holdings, and upon the firm's review and analysis of relevant and currently applicable Code provisions, Treasury regulations, other administrative pronouncements and judicial decisions. Such opinion is not binding upon either the Internal Revenue Service or the courts. Authorities relied upon in the Bryan Cave opinion could be repealed, revoked or modified, possibly with retroactive effect, so as to result in federal income tax consequences different from those indicated. THE FOREGOING FEDERAL INCOME TAX DISCUSSION IS INTENDED TO PROVIDE ONLY A GENERAL SUMMARY. IT DOES NOT PURPORT TO ADDRESS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO THE SHARE EXCHANGE, INCLUDING TAX CONSEQUENCES WHICH MAY VARY DEPENDENT ON THE PARTICULAR CIRCUMSTANCES OR SPECIAL TAX STATUS OF CERTAIN NIAGARA MOHAWK SHAREHOLDERS. NOR DOES IT, OR THE BRYAN CAVE OPINION, ADDRESS THE CONSEQUENCES OR EFFECT OF ANY APPLICABLE STATE, LOCAL OR FOREIGN TAX LAWS, OR ANY ESTATE, INHERITANCE OR GIFT TAX LAWS. EACH HOLDER OF NIAGARA MOHAWK COMMON STOCK IS STRONGLY URGED TO CONSULT WITH SUCH HOLDER'S OWN TAX ADVISOR REGARDING FEDERAL OR OTHER POSSIBLE TAX CONSEQUENCES ARISING OUT OF THAT HOLDER'S PARTICIPATION IN THE SHARE EXCHANGE. NIAGARA MOHAWK EMPLOYEE PLANS The Exchange Agreement provides that Niagara Mohawk's Employee Savings fund Plans for Represented and Non-Represented Employees, Dividend Reinvestment and Common Stock Purchase Plan and 1992 Stock Option Plan (together, the "Niagara Mohawk Stock Plans"), along with other employee benefit plans maintained by Niagara Mohawk (collectively with the Niagara Mohawk Stock Plans, the "Niagara Mohawk Employee Plans"), such as the pension plans, health plans and disability plans, will be amended to provide for Holdings taking over responsibility for such Plans upon consummation of the share exchange. The Niagara Mohawk 1992 Stock Option Plan (the "Option Plan") was previously approved by Niagara Mohawk shareholders. 67 Stock Based Plans If the share exchange is consummated, shares of Niagara Mohawk Common Stock then held under the Niagara Mohawk Stock Plans will automatically become a like number of shares of Holdings common stock. Upon consummation of the share exchange, all outstanding stock options under Niagara Mohawk's Option Plan will be converted into options to acquire, on the same terms and conditions as were applicable under such stock options immediately prior to the share exchange, such number of shares of Holdings common stock as the holders of such options would have been entitled to receive pursuant to the share exchange had such holders exercised such stock options in full immediately prior to the share exchange, at a price per share of Holdings common stock equal to the per share option price of Niagara Mohawk Common Stock. Also, a vote in favor of the share exchange will also constitute approval, under the Option Plan, as then amended, for shares of Holdings common stock, instead of Niagara Mohawk Common Stock, to be issued and delivered in the future under such Plan. Holdings may issue future options on its common stock under such Plan. In addition, performance shares granted and to be granted under such Plan will be treated in a comparable manner. Holdings will file post-effective amendments to Niagara Mohawk's registration statements on Form S-8 for the amended Niagara Mohawk Stock Plans shortly after the effective time of the share exchange. Non-Stock Based Plans Upon consummation of the share exchange, Holdings will take over responsibility for all of Niagara Mohawk's retirement and other employee benefit plans, such as the pension plans, health plans and disability plans. Benefits provided for in these non-stock based plans will not be changed as a result of the holding company restructuring and share exchange. TREATMENT OF NIAGARA MOHAWK PREFERRED STOCK Shares of Niagara Mohawk preferred stock will not be exchanged in the share exchange but will continue as shares of preferred stock of Niagara Mohawk. Therefore, holders of Niagara Mohawk preferred stock will not become holders of Holdings preferred or common stock as a result of the share exchange. Except as discussed under this caption, the share exchange and the holding company structure will not change the rights of holders of the outstanding shares of Niagara Mohawk preferred stock. Niagara Mohawk preferred stock will continue to rank senior to Niagara Mohawk Common Stock as to dividends and as to the distribution of Niagara Mohawk's assets upon any liquidation. The restructuring is not expected to affect adversely the holders of Niagara Mohawk preferred stock. Dividends on Niagara Mohawk preferred stock will continue to be paid as before, depending upon the earnings, financial condition and other relevant factors affecting Niagara Mohawk. However, the assets or earnings of Holdings' subsidiaries other than Niagara Mohawk will not be available to pay dividends on Niagara Mohawk preferred stock or to make distributions with respect to such preferred stock in the event of a liquidation if the share exchange is consummated. See "--Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings" above. Appraisal rights under the New York Business Corporation Law are not available to holders of Niagara Mohawk preferred stock inasmuch as that preferred stock is not being exchanged for Holdings stock and will continue as Niagara Mohawk preferred stock after the holding company restructuring. After the share exchange, Niagara Mohawk will continue to be subject to the periodic reporting requirements of the Securities Exchange Act of 1934. The Board of Directors considered the effects on the holders of the Niagara Mohawk Common Stock and the holders of Niagara Mohawk preferred stock in determining that the share exchange should only involve the Niagara Mohawk Common Stock. The Board's decision to exchange Niagara Mohawk 68 Common Stock for Holdings common stock was primarily based on the Board's desire to confer the expected benefits of the share exchange on those investors who are best placed to enjoy such benefits, namely the holders of Niagara Mohawk Common Stock. Even if the Niagara Mohawk preferred stock were to be exchanged for preferred stock of Holdings, investors in such preferred stock would continue to receive fixed dividend payments in respect of their investment. The expected benefits of the share exchange include those discussed above, such as increased flexibility in operating Holdings' unregulated businesses and enhanced ability to take advantage of the new business opportunities in a timely manner. The Board's decision not to exchange Niagara Mohawk preferred stock, in the share exchange was primarily based on the Board's desire not to alter, or potentially alter, the nature of the investment decision represented by the Niagara Mohawk preferred stock (namely, a direct investment in a regulated utility) and the priority position of the holders of Niagara Mohawk preferred stock with respect to dividends and assets on liquidation. As to holders of Niagara Mohawk preferred stock, the benefits of continuing as investors in Niagara Mohawk's regulated utility business outweigh any loss of access to the return on future investments made by the unregulated businesses of Holdings. In that regard, investors in priority position securities, such as the holders of Niagara Mohawk preferred stock, benefit to the extent that such securities have been issued by the corporate entity that holds directly and/or has unrestricted access to the principal assets of the enterprise. As discussed above under the caption "Certain Considerations", the funds required to pay dividends on Holdings common stock for a period of time following the share exchange are expected to be derived predominately from dividends paid by Niagara Mohawk. If the Niagara Mohawk preferred stock also were to be exchanged pursuant to the share exchange and become preferred stock of Holdings, the funds required to pay dividends on that preferred stock would also be derived predominately from dividends paid by Niagara Mohawk. Although it has no present intention to do so, it is expected that Niagara Mohawk may need to issue preferred stock in the future to meet its capital requirements. The preferred stock that would be issued by Niagara Mohawk would have preference over the Common Stock as to the payment of dividends and, therefore, would reduce the amount of funds available to Niagara Mohawk for the payment of dividends to Holdings. As a result, the conversion of the Niagara Mohawk preferred stock to Holdings preferred stock would result in the dividend payments and distributions upon liquidation with respect to those shares being subordinated to the dividend and distribution rights of any newly created preferred stock of Niagara Mohawk. TREATMENT OF NIAGARA MOHAWK DEBT, ASSETS AND LIABILITIES, AND BUSINESS The current indebtedness of Niagara Mohawk will continue to be obligations of Niagara Mohawk and will be neither assumed nor guaranteed by Holdings in connection with the share exchange. Niagara Mohawk's first mortgage bonds will continue to be secured by first mortgage liens on all of the properties of Niagara Mohawk that are currently subject to such liens. Such indebtedness will be neither assumed nor guaranteed by Holdings in connection with the share exchange. The decision to have the indebtedness of Niagara Mohawk continue as obligations of Niagara Mohawk is based upon a desire not to alter, or potentially alter, the nature of the investment represented by such fixed income obligations, namely a direct investment in a regulated utility. The consolidated assets and liabilities of Niagara Mohawk and its subsidiaries immediately before the Effective Time will be the same as the consolidated assets and liabilities of Holdings and its subsidiaries immediately after the Effective Time. All the business and operations conducted immediately before the Effective Time by Niagara Mohawk and its subsidiaries will continue to be conducted immediately after the Effective Time by Niagara Mohawk and such subsidiaries as subsidiaries of Holdings. HOLDINGS CAPITAL STOCK Holdings' certificate of incorporation and by-laws will govern certain rights of Holdings' shareholders after the share exchange as discussed under this caption and under "--Comparative Shareholders' Rights" below. 69 The following statements with respect to Holdings common stock are based on certain provisions of Holdings' certificate of incorporation and by-laws and on New York law. Holdings' certificate of incorporation is attached as Exhibit B hereto and is incorporated herein by reference and Holdings' by-laws are attached as Exhibit C hereto and are incorporated herein by reference. Holdings is authorized to issue 300,000,000 shares of common stock and 50,000,000 shares of preferred stock. Holdings preferred stock may be issued from time to time in series as Holdings' Board of Directors may determine, and the respective dividend rates, redemption terms (if any), amounts payable on liquidation, voting rights (if any), number of votes per share, conversion rights (if any), and other terms will be fixed by Holdings' Board of Directors with respect to any such series prior to issuance. When issued in the share exchange, shares of Holdings common stock will be fully paid and nonassessable. Holders of Holdings common stock and preferred stock are not entitled to preemptive rights. Dividends Subject to prior rights of Holdings preferred stock (if any should become outstanding), Holdings common stock is entitled to such dividends as may be declared by Holdings' Board of Directors, and Holdings may purchase or otherwise acquire outstanding shares of common stock, out of funds legally available therefor. As noted above, the PowerChoice Agreement and the terms of Niagara Mohawk's debt imposes certain limitations on the dividends that Niagara Mohawk may pay to Holdings after the share exchange. At least initially after the exchange, dividends on Holdings common stock will depend on dividends paid by Niagara Mohawk on its Common Stock owned by Holdings. Liquidation Rights Upon liquidation of Holdings, any net assets remaining after payment to the holders (if any) of Holdings preferred stock of the full amounts to which they are entitled to receive are distributable pro rata to the holders of Holdings common stock. Voting Rights Holders of Holdings common stock are entitled to one vote per share. There are no cumulative voting rights. Holdings' Board of Directors is divided into three classes, with directors elected generally to serve for terms of three years. Transfer Agent and Registrar The transfer agent and registrar for Holdings common stock will be The Bank of New York of New York, NY. Indemnification and Limitation of Liability As do the Niagara Mohawk By-Laws, the Holdings by-laws will provide that Holdings shall indemnify to the full extent permitted by law any person made, or threatened to be made, a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person or such person's testator or intestate is or was a director, officer or employee of Holdings, or serves at the request of Holdings with any other enterprise as a director, officer or employee; expenses incurred by any such person in defending any such action, suit or proceeding will be paid or reimbursed by Holdings promptly upon receipt by it of an undertaking of such person to repay such expenses if it shall ultimately be determined that such person is not entitled to be indemnified by Holdings. No amendment of 70 this by-law provision will impair the rights of any person arising at any time with respect to events occurring prior to such amendment. As does Niagara Mohawk's Certificate of Incorporation, Holdings' certificate of incorporation provides that a director shall not be personally liable to Holdings or its shareholders for damages for any breach of duty in such capacity, except to the extent that such exemption is not permitted under the BCL (presently, such exemption is not permitted for acts or omissions in bad faith or involving intentional misconduct or a knowing violation of law, or if the director personally gained in fact a financial profit or other advantage to which the director was not legally entitled or if such act violated Section 719 of the BCL). Any amendment, modification or repeal of such liability limitation provision may not apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment, modification or repeal. Possible Effect of Certain Holdings Provisions and the BCL It is not the intention of the Board of Directors to discourage legitimate offers to enhance shareholder value. However, certain provisions of Holdings' certificate of incorporation and by-laws may have the effect of discouraging unilateral tender offers or other attempts to take over and acquire the business of Holdings. These provisions, all of which are already contained in Niagara Mohawk's Certificate of Incorporation or By-Laws or otherwise apply to Niagara Mohawk, might discourage a potentially interested purchaser from attempting a unilateral takeover bid for Holdings on terms which some shareholders might favor. If they discourage potential takeover bids, these provisions might limit the opportunity for Holdings' shareholders to sell their shares at a premium over then prevailing market prices. Non-Cumulative Voting. Neither Niagara Mohawk nor Holdings provides for cumulative voting in the election of directors. The procedure known as cumulative voting permits shareholders to multiply the number of votes to which they may be entitled by the total number of directors to be elected in the same election by the holders of the class or classes of shares of which their shares are a part and to cast their whole number of votes for one candidate or to distribute them among any two or more candidates. Under cumulative voting, it is possible for representation on the Board of Directors to be obtained by an individual or group of individuals who own less than a majority of the voting stock. Such a shareholder or group may have interests and goals which are not consistent with, and indeed might be in conflict with, those of a majority of the shareholders. The Board of Directors believes that each director should represent all shareholders, rather than the interests of any special constituency, and that the presence on Holdings' Board of one or more directors representing such a constituency could disrupt and impair the efficient management of Holdings. The lack of cumulative voting could discourage the accumulation of blocks of Holdings common stock and therefore could tend to make temporary increases in the market price of Holdings common stock, which could result therefrom, less likely to occur. Therefore, in these limited instances, shareholders may not be able to sell their shares of Holdings common stock at a market price temporarily influenced by this type of activity. Advance Notice of Business to be Brought Before Shareholder Meetings. As under Niagara Mohawk's By-Laws, under Holdings' by-laws shareholders must provide Holdings prior written notice of any business to be brought before an annual or special meeting (including the nomination of directors) in order for it to be considered. With respect to any annual meeting, such by-laws require the written notice to be received by the Secretary of Holdings no earlier than 90 days nor later than 60 days prior to the date of the annual meeting, except that if the date of the annual meeting is first publicly announced less than 70 days prior to the date of the meeting, such by-laws require the written notice to be received by the Secretary of Holdings not more than 10 days after such public announcement. These by-law provisions provide a more orderly procedure for conducting shareholder meetings and provide the Board of Directors with a meaningful opportunity prior to shareholder meetings to inform shareholders, to the extent deemed necessary or desirable by the Board of Directors, of any business proposed to be conducted at such meetings, together 71 with any recommendation of the Board of Directors. Also, by requiring advance notice of nominations by shareholders, these by-law provisions afford the Board of Directors a meaningful opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Board of Directors, to inform shareholders about such qualifications. On the other hand, these by-law provisions may provide sufficient time for Holdings to institute litigation or take other steps to respond to such business, or to prevent such business from being acted upon, if such response or prevention is thought to be necessary or desirable. With respect to the election of directors, these by-law provisions may tend to inhibit shareholders who do not have any intention of controlling Holdings or its Board of Directors from participating in the nomination process; such provisions may also provide sufficient time for Holdings to institute litigation or take other steps to prevent the nominee from being elected or serving if such prevention is thought to be necessary or desirable. "Blank-Check" Preferred Stock. Holdings' certificate of incorporation will authorize the issuance of 50,000,000 shares of Holdings preferred stock. In addition, after giving effect to the share exchange, approximately 113 million shares of Holdings common stock will be authorized but unissued and not reserved for issuance. An effect of the existence of unissued Holdings common stock and preferred stock may be to enable the Holdings Board of Directors to render more difficult or discourage a transaction to obtain control of Holdings. Such shares might be issued by the Board of Directors without shareholder approval in transactions that might prevent or render more difficult or costly the completion of a takeover transaction, as by diluting voting or other rights of the proposed acquiror. In this regard, Holdings' certificate of incorporation (as does Niagara Mohawk's) will grant the Board of Directors broad power to establish the rights and preferences of the authorized and unissued preferred stock, one or more classes or series of which could be issued entitling holders to vote separately as a class on any proposed merger or consolidation, to convert such stock into shares of Holdings common stock or possibly other securities, to demand redemption at a specified price under prescribed circumstances related to a change of control, or to exercise other rights designed to impede a takeover. Section 912 of the New York Business Corporation Law. Section 912 of the BCL would prohibit a "business combination" (as defined in Section 912, generally including mergers, sales and leases of assets, issuances of securities and similar transactions) by Holdings or a subsidiary with an "interested shareholder" (as defined in Section 912, generally the beneficial owner of 20 percent or more of Holdings' voting stock) within five years after the person or entity becomes an interested shareholder, unless (i) prior to the person or entity becoming an interested shareholder, the business combination or the transaction pursuant to which such person or entity became an interested shareholder shall have been approved by Holdings' Board of Directors, or (ii) the business combination is approved by the holders of a majority of the outstanding voting stock of Holdings, excluding shares held by the interested shareholder, at a meeting called for such purpose not earlier than five years after such interested shareholder's stock acquisition date, or pursuant to a stringent "fair price" formula. Section 70 of the New York Public Service Law. Under Section 70 of the Public Service Law, unless authorized by the PSC, no gas corporation or electric corporation may directly or indirectly acquire the stock or bonds of any other corporation incorporated for, or engaged in, the same or a similar business, or proposing to operate or operating under a franchise from New York State or any other state or any other municipality. In general, no stock corporation other than a gas corporation or electric corporation or street railroad corporation may purchase or acquire, take or hold, more than ten percent (10%) of the voting capital stock of any gas corporation or electric corporation organized or existing under or by virtue of the laws of New York unless with the consent of, and subject to the terms and conditions set by, the PSC. No consent may be given by the PSC to any such acquisition unless it has been shown that such acquisition is in the public interest. Any contract, assignment, transfer or agreement for transfer of any stock in violation of Section 70 will be void and of no effect, and no such transfer or assignment may be made upon the books of any such gas corporation or electric corporation, or will be recognized as effective for any purpose. An 72 "electric corporation" is defined to generally include any corporation, company, partnership and person owning, operating or managing any electric plant for use by others than itself and its tenants, or except where electricity is generated solely from co-generation, small buyers or alternative energy production facilities or distributed from such facilities to users located near such a facility. Other Provisions. Some other provisions of Holdings' certificate of incorporation and by-laws may also tend to discourage potential offers to take over and acquire the business of Holdings. Holdings' Board of Directors will be divided into three classes, with directors in each class generally being elected to serve a three-year term. Also, special shareholder meetings may be called only by the Chairman of the Board of Directors or by the Board pursuant to a resolution adopted by a majority of the entire Board. Holdings' certificate of incorporation also provides that directors may not be removed without cause by the shareholders, except in the case of a director elected by the holders of any class or series of stock (other than Holdings common stock), voting as a class or series, when so entitled by the applicable provisions of Holdings' certificate of incorporation. Finally, certain provisions (relating to, for example, limitation on director liabilities, the ability to call special meetings of shareholders, presiding at meetings of shareholders, classified Board of Directors, election and removal of directors, advance notice requirements for shareholder proposals and nomination of directors at shareholder meetings, and indemnification) may only be amended by the affirmative vote of not less than two-thirds of the shares entitled to vote at a shareholder meeting or, with respect to By-Law amendments affecting such provisions, two-thirds of the entire Board. Niagara Mohawk's Certificate of Incorporation and By-Laws presently contain a number of these provisions. COMPARATIVE SHAREHOLDERS' RIGHTS Niagara Mohawk and Holdings are both New York corporations. When the share exchange becomes effective, holders of Niagara Mohawk Common Stock will become holders of Holdings common stock, and their rights will be governed by Holdings' certificate of incorporation and by-laws instead of those of Niagara Mohawk. Certain differences between the rights of holders of Holdings common stock and those of holders of Niagara Mohawk Common Stock are summarized below. Such summary is qualified in its entirety by reference to the information included in the exhibits hereto, in exhibits to the Registration Statement of which this Prospectus/Proxy Statement is a part, and in materials incorporated herein by reference. Voting Requirements for Significant Transactions. As a result of a recent change in the BCL, the necessary vote for significant transactions involving Holdings, such as mergers, consolidations, share exchanges and dissolution, will be a majority vote, rather than the two-thirds vote applicable to Niagara Mohawk. The Board of Directors believes this lower vote requirement will facilitate any transactions deemed to be in the best interests of Holdings and its shareholders. Purpose Clause. The corporate purposes for which Niagara Mohawk may engage in business are generally those related to rendering electric or gas service and related activities. Holdings is authorized to engage in any and all lawful acts and activities. Authorized Shares. Authorized Holdings and Niagara Mohawk Common Stock is 300,000,000 and 185,000,000, subject to increase to 250,000,000 shares if Proposal 3 is adopted, shares, respectively. As of the record date for the Annual Meeting, there were 144,419,351 shares of Niagara Mohawk Common Stock issued and outstanding. Up to approximately 187 million shares of Holdings common stock may be issued in the share exchange. The additional authorized but unissued shares of Holdings common stock will be available for issuance under the Dividend Reinvestment and Stock Purchase Plan and the Option Plan, as well as possibly for stock splits, stock dividends, equity financings, and for other general corporate purposes (including, possibly, acquisitions) (none of which is under current consideration). In addition, as of the record date, there were 3,400,000 shares of Cumulative Preferred Stock, par value $100 per share, of which 2,322,000 shares were issued and outstanding, and 19,600,000 shares of 73 Cumulative Preferred Stock, par value $25 per share, of which 11,681,204 shares were issued and outstanding. There will be 50,000,000 authorized shares of Holdings preferred stock, all of which are unissued. Preferred Stock. The respective Boards of Directors of Holdings and Niagara Mohawk are authorized to issue preferred stock in series. The voting rights and certain preferences of the Niagara Mohawk preferred stock are determined in Niagara Mohawk's certificate of incorporation. Niagara Mohawk preferred stock is generally not entitled to vote but only has limited voting rights as required by law and as set out in the Niagara Mohawk's certificate of incorporation, which rights generally arise only in the event of certain arrearages in payment of dividends and certain corporate transactions affecting Niagara Mohawk preferred stock. Niagara Mohawk preferred stock is subject to redemption and sinking fund provisions. After the share exchange, outstanding Niagara Mohawk preferred stock will continue as equity securities of Niagara Mohawk with the same preferences, designations, relative rights, privileges and powers, and subject to the same restrictions, limitations and qualifications, as were applicable to outstanding Niagara Mohawk preferred stock prior to the share exchange. Holdings' certificate of incorporation will not establish voting rights, preferences or other rights with respect to Holdings preferred stock. Holdings' Board of Directors is given full authority to establish and designate each particular series of preferred stock and to fix the rights, preferences and limitations of each particular series, and the relative rights, preferences and limitations between series, as follows: (i) the serial designation; (ii) the number of shares in such series; (iii) the dividend rate or rates and the date or dates upon which such dividends shall be payable; (iv) whether dividends on such series will be cumulative, and, if so, from which date or dates; (v) liquidation preferences; (vi) redemption terms, if any; (vii) provisions relating to sinking or other similar funds; (viii) provisions relating to the conversion or exchange of shares of such series into shares of any class of stock (except that conversion or exchange may not be made into shares having superior dividend or liquidation preferences); (ix) the voting rights, if any, in addition to those required by law and the number of votes per share; and (x) any other relative rights, preferences or limitations of such series not inconsistent with the Holdings' certificate of incorporation or with applicable law. Management believes that the ability to issue Holdings preferred stock will provide important flexibility to Holdings. Par Value. The par value of Holdings preferred stock differs from those of Niagara Mohawk preferred stocks. A designated par value is not required under the BCL and in modern corporate practice par value does not serve any useful purpose. It is anticipated that the difference in par values will not affect the market value of Holdings preferred stock. The par value per share of Holdings common stock, $0.01, was reduced from the $1.00 par value per share of Niagara Mohawk Common Stock to save on filing fees in New York. Classified Board. As is the case with Niagara Mohawk, Holdings' certificate of incorporation and bylaws will provide (i) for the Board to determine the number of directors; and (ii) for the division of the Board into three classes with directors in each class generally being elected for a three-year term. See "--Management" below. Other Provisions. Holdings' certificate of incorporation will provide that directors may not be removed without cause by the shareholders, except in the case of a director elected by the holders of any class or series of stock (other than Holdings common stock), voting as a class or series, when so entitled by the applicable provisions of Holdings' restated certificate of incorporation. Also, certain provisions (relating to, for example, preferred stock, limitation on director liabilities, the ability to call special meetings of shareholders, classified Board of Directors, election and removal of directors, advance notice requirements for shareholder proposals and nomination of directors at shareholder meetings) may only be amended by the affirmative vote of not less than two-thirds of the shares then entitled to vote at 74 shareholder meetings. Other provisions of Holdings' certificate of incorporation or by-laws may be amended, repealed or adopted by a vote of the shareholders of Holdings at the time entitled to vote at any shareholder meeting or, in the case of the Holdings by-laws, by the Board of Directors of Holdings. See also "--Holdings Capital Stock". BUSINESS Niagara Mohawk is engaged in the generation, purchase, transmission, distribution and sale of electricity and the purchase, distribution, sale and transportation of natural gas in New York State. Niagara Mohawk provides electric service to its customers in areas of central, northern and western New York having a total population of approximately 3.5 million, including the cities of Buffalo, Syracuse, Albany, Utica, Schenectady, Niagara Falls, Watertown and Troy. Niagara Mohawk sells, distributes and transports natural gas in areas of central, northern and eastern New York contained within its electric service territory having a total population of approximately 1.7 million. Niagara Mohawk owns or has a significant ownership interest in seven principal fossil and nuclear electric generating facilities providing it with a total capacity of approximately 5,299 megawatts of electricity. Niagara Mohawk's principal non-utility subsidiaries participate in real estate development of property formerly owned by Niagara Mohawk and energy-related services. In addition, Niagara Mohawk holds a single-purpose subsidiary established to facilitate the sale of an undivided interest in a designated pool of customer receivables. Certain of these subsidiaries will be transferred to and therefor become separate subsidiaries of Holdings after the share exchange. After the share exchange occurs, Holdings will have no material assets other than its ownership of stock of its subsidiaries, which initially will consist of all of Niagara Mohawk's outstanding common stock and thereafter the common stock of certain Niagara Mohawk's existing non-utility subsidiaries. See "--Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings". It is expected that, in the future, Holdings will expand into some other businesses and ventures. REGULATION OF HOLDINGS AND NIAGARA MOHAWK Regulation of Holdings. Holdings must comply with the PowerChoice Agreement. As discussed and referred to above under "--The PowerChoice Agreement", there are restrictions on transactions between Niagara Mohawk and Holdings and other Holdings subsidiaries, restrictions on loans, guarantees or pledges for the benefit of Holdings and other Holdings subsidiaries, and restrictions on Board and managerial interlocks between Niagara Mohawk and Holdings and other Holdings subsidiaries. As a result of the share exchange, Holdings will become a "public utility holding company" under the Holding Company Act. Though Niagara Mohawk expects to sell or liquidate its majority interests in two of its generation subsidiaries, Beebee Island Corporation and Moreau Manufacturing Corporation, Holdings will retain an indirect 50% interest in CNP which does not contribute a material part of its income. In 1994 the SEC issued a release soliciting the views of interested parties on a study being conducted by its staff to develop recommendations regarding certain Congressional concerns and the needs of those affected by regulation under the Holding Company Act. In June 1995 the staff completed its study and issued a report which concluded that significant changes were needed in the current regulatory scheme. The SEC staff report viewed the Holding Company Act as unnecessarily restrictive in many regards which could prevent companies from responding effectively to changes now occurring in the utility industry. Among the staff report's recommendations were three legislative options for the SEC to offer to Congress--repeal of the Holding Company Act with legislation to continue federal protection of consumers, unconditional repeal of the Holding Company Act, or a broadening of the SEC's authority to exempt holding companies where state regulation was adequate. Pending legislative action, the staff report recommended that the SEC act administratively to modernize and simplify holding company regulation, reduce delays in current administration, and minimize regulatory overlap, including rulemaking proposals 75 and significant changes in the SEC's past interpretations under the Act. One of these proposals was a rule to exempt most energy-related diversification within investment limitations. Niagara Mohawk cannot predict whether Congress will take any action to significantly modify or repeal the Holding Company Act, or whether the SEC will take action to revise or modify significantly its Holding Company Act rules, decisions and interpretations. Regulation of Niagara Mohawk. Niagara Mohawk will continue to be subject to regulation by the PSC after the share exchange. Niagara Mohawk's utility retail sales, which include sales of gas, transportation and balancing services, will continue to be made primarily under rate schedules and tariffs filed with and subject to the jurisdiction of the PSC. See "--The PowerChoice Agreement" below. In addition, Niagara Mohawk will continue to be subject to regulation by the PSC, as it has been in the past, regarding issuances of securities, capital ratio maintenance, and the maintenance of its books and records. Niagara Mohawk also will continue to be subject to regulation by the FERC and the NRC. FERC will continue to regulate the terms and conditions of Niagara Mohawk's transmission of electricity, along with transmission interconnections and ancillary services, as well as the terms and conditions of its sales of electric energy for resale. FERC will also continue to regulate Niagara Mohawk's disposition of any capacity on interstate gas pipelines to which it has rights under firm contracts. The NRC will continue to review and regulate Niagara Mohawk's operation of the two Nine Mile Point nuclear units. THE POWERCHOICE AGREEMENT Prohibitions of Affiliate Loans, Guarantees and Pledges. Under the PowerChoice Agreement, Niagara Mohawk is prohibited from making loans to, or providing guarantees or other credit support for the obligations of, Holdings or any other subsidiary of Holdings. Likewise, Niagara Mohawk may not pledge its assets for the obligations of any other entity, including Holdings or any other subsidiary of Holdings. Prohibitions of Affiliate Transactions and Other Restrictions. The PowerChoice Agreement generally prohibits any transaction between Niagara Mohawk and Holdings or any other subsidiary of Holdings, except for the provision of certain corporate administrative services, certain "grandfathered" transactions as listed therein, transactions permitted as a matter of generic policy by the PSC, and tariffed transactions. In addition, Holdings and its subsidiaries are required by the PowerChoice Agreement to operate as separate entities, and the PowerChoice Agreement prescribes capital ratio maintenance requirements for Niagara Mohawk. Finally, the PowerChoice Agreement sets out guidelines for the allocation of costs among Holdings, Niagara Mohawk and the other subsidiaries of Holdings. Restrictions on Board and Management Interlocks. In order to address concerns regarding the possible diversion of the attention of Niagara Mohawk's management away from the utility business, as well as to avoid potential conflicts of interest with the management of Holdings, the PowerChoice Agreement contains restrictions regarding the composition of the Boards and managements of Niagara Mohawk and Holdings and other subsidiaries of Holdings. See "--Management--Restrictions on Board and Management Interlocks between Holdings and Niagara Mohawk". The PowerChoice Agreement will continue to govern Niagara Mohawk's utility rates and charges even if common shareholders do not approve the holding company proposal and adopt the Exchange Agreement at Niagara Mohawk's Annual Meeting. In that event, Niagara Mohawk will not be able to realize the benefits it expects from a holding company structure, which it believes is necessary in the future deregulated competitive environment of the energy industry. STATUTORY APPRAISAL RIGHTS Holders of shares of Niagara Mohawk Common Stock are not entitled to appraisal rights under the BCL as a result of the exchange. 76 B. MANAGEMENT DIRECTORS AND OFFICERS OF HOLDINGS Holdings' certificate of incorporation and by-laws divides Holdings' Board of Directors into three classes, which will become effective prior to the share exchange, with directors in each class generally being elected for a three-year term. Holdings' by-laws will permit the Board of Directors to fix from time to time the number of directors, and the Board has fixed its initial size at 3, to be increased to 14, effective as of the effective time of the share exchange. A vote in favor of the share exchange will also constitute ratification of the make-up of Holdings' Board of Directors. Presently William E. Davis, Albert J. Budney, Jr. and William F. Edwards are the directors of Holdings. Immediately prior to the effective time of the share exchange, Mr. Edwards will resign and Niagara Mohawk, as such sole shareholder, will elect all of the then current Niagara Mohawk directors to the Board of Holdings in the same classes as they presently serve. As of the effective time of the share exchange, Mr. Budney will resign from the Board of Niagara Mohawk, Mr. Davis will serve on the Boards of Directors of both Holdings and Niagara Mohawk and the remaining Niagara Mohawk directors will be Darlene D. Kerr and John H. Mueller. After completion of the share exchange, Holdings' Board vacancies may be filled by action of Holdings' Board of Directors. Holdings also contemplates amending the certificate of incorporation and by-laws of Niagara Mohawk following the share exchange to reflect more appropriate provisions for a subsidiary. The following individuals are officers of Holdings: William E. Davis Chairman and Chief Executive Officer Albert J. Budney, Jr. President William F Edwards Chief Financial Officer Kapua A. Rice Secretary In addition, prior to the share exchange, Gary J. Lavine will become Chief Legal Officer and Steven W. Tasker will become Chief Accounting Officer. For further information concerning persons to become directors or officers of Holdings, see "Proposal 1: Nomination and Election of Directors--Nominees for Class I Directors", "--Continuing Class II Directors", "--Continuing Class III Directors" and "--Security Ownership of Directors and Executive Officers". RESTRICTIONS ON BOARD AND MANAGEMENT INTERLOCKS BETWEEN HOLDINGS AND NIAGARA MOHAWK In order to address concerns regarding the possible diversion of the attention of Niagara Mohawk's management away from the utility business, as well as to avoid potential conflicts of interest with the Board and management of Holdings, the PowerChoice Agreement sets forth the following restrictions regarding the composition of the managements of Niagara Mohawk and Holdings. Composition of the Boards of Directors. Niagara Mohawk's Board of Directors must include at least a majority of outside directors (i.e., not an officer of either Holdings or any of its unregulated affiliates). Separation of Employees and Officers. Niagara Mohawk and the unregulated subsidiaries of Holdings will have separate operating employees and operating officers. Officers of Holdings may be officers of either Niagara Mohawk or an unregulated affiliate. 77 C. OTHER INFORMATION VALIDITY OF HOLDINGS COMMON STOCK The validity of the shares of Holdings common stock to be issued in the share exchange will be passed upon by Sullivan & Cromwell, general counsel to Niagara Mohawk and Holdings, 125 Broad Street, New York, New York 10004. EXPERTS The consolidated financial statements incorporated by reference herein have been audited by Price Waterhouse LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. COSTS The Board of Directors considered the financial cost to Niagara Mohawk of implementing the share exchange, including the expenses associated with obtaining required approvals, the costs of this proxy solicitation and the other expenses incurred in connection with registering the Holdings common stock with the Commission. In the Board's view, these expenses, although in some cases significant, are acceptable in light of the benefits to Niagara Mohawk of the share exchange. AGREEMENT AND PLAN OF EXCHANGE This AGREEMENT AND PLAN OF EXCHANGE (the "Agreement"), dated as of May 14,1998, is between Niagara Mohawk Power Corporation, a New York corporation and the corporation whose shares of Common Stock, par value $1.00 per share, will be acquired pursuant to the "Exchange" provided for in this Agreement (the "Subject Corporation"), and Niagara Mohawk Holdings, Inc., a New York corporation and the corporation which will acquire the foregoing shares of Common Stock of the Subject Corporation (the "Acquiring Corporation"). The Subject Corporation and the Acquiring Corporation are hereinafter referred to, collectively, as the "Corporations". WITNESSETH: WHEREAS, the authorized capital of the Subject Corporation is $1,215,000,000, consisting of (a) 185,000,000 shares of Common Stock, par value $1.00 per share ("Subject Corporation Common Stock"), of which 144,419,351 shares are issued and outstanding (which number of issued and outstanding shares is subject to change prior to the Effective Time (as hereinafter defined) of the Exchange pursuant to the Dividend Reinvestment and Common Stock Purchase Plan ("DRIP") and the Employee Savings Fund Plans for Represented and Non-Represented Employees (each an "Employee Plan" and collectively the "Employee Plans") of the Subject Corporation and the issuance of Subject Corporation Common Stock pursuant to the Master Restructuring Agreement of the Subject Corporation, dated as of July 9, 1997, as amended, (b) 3,400,000 shares of Cumulative Preferred Stock, par value $100 per share ("Subject Corporation $100 Preferred Stock"), of which 2,322,000 shares are issued and outstanding, (c) 19,600,000 shares of Cumulative Preferred Stock, par value $25 per share ("Subject Corporation $25 Preferred Stock"), of which 11,681,204 shares are issued and outstanding and (d) 8,000,000 shares of Preference Stock, par value $25 per share ("Preference Stock"), no shares of which are outstanding. WHEREAS, the Acquiring Corporation is a wholly-owned subsidiary of the Subject Corporation with authorized capital stock consisting of 300,000,000 shares of Common Stock, par value $0.01 per share ("Acquiring Corporation Common Stock"), of which 100 shares are issued and outstanding and owned by the Subject Corporation and 50,000,000 shares of Preferred Stock, par value $0.01 per share, no shares of which are outstanding. WHEREAS, the Boards of Directors of the Corporations deem it desirable and in the best interests of the Corporations and the shareholders of the Subject Corporation that, at the Effective Time, (a) the Acquiring Corporation acquire and become the owner and holder of each share of Subject Corporation Common Stock issued and outstanding at the Effective Time, (b) each share of Subject Corporation Common Stock issued and outstanding immediately prior to the Effective Time be automatically exchanged for one share of Acquiring Corporation Common Stock, and (c) each holder of shares of Subject Corporation Common Stock issued and outstanding immediately prior to the Effective Time becomes the holder of a like number of shares of Acquiring Corporation Common Stock, all on the terms and conditions hereinafter set forth; and WHEREAS, the Boards of Directors of the Corporations have each approved and adopted this Agreement, and the Board of Directors of the Subject Corporation has recommended that the shareholders of the Subject Corporation approve and adopt the Exchange and this Agreement pursuant to Section 913 of the New York Business Corporation Law (the "BCL"). NOW, THEREFORE, the Corporations hereby agree as follows: A-1 ARTICLE I The Exchange and this Agreement shall be submitted to the holders of Subject Corporation Common Stock for approval and adoption as provided by Section 913 of the BCL. The affirmative vote of the holders of at least two-thirds of the issued and outstanding Subject Corporation Common Stock shall be necessary to approve and adopt the Exchange and this Agreement. ARTICLE II Subject to the terms and conditions of this Agreement, the Exchange shall become effective immediately following the close of business on the date of filing with the New York Department of State (the "Department of State") of a certificate of exchange pursuant to Section 913(d) of the BCL ("Certificate"), or at such later time and date as may be stated in the Certificate (the time and date at and on which the Exchange becomes effective being referred to herein as the "Effective Time"). ARTICLE III A. At the Effective Time: (1) each share of Subject Corporation Common Stock issued and outstanding immediately prior to the Effective Time shall be automatically exchanged for one share of Acquiring Corporation Common Stock, which shares shall be fully paid and nonassessable by the Acquiring Corporation; (2) the Acquiring Corporation shall acquire and become the owner and holder of each issued and outstanding share of Subject Corporation Common Stock so exchanged; (3) each share of Acquiring Corporation Common Stock issued and outstanding immediately prior to the Effective Time shall be cancelled and shall thereupon constitute an authorized and unissued share of Acquiring Corporation Common Stock; (4) each share of Subject Corporation Common Stock held under the DRIP or an Employee Plan (including fractional and uncertificated shares) immediately prior to the Effective Time shall be automatically exchanged for a like number of shares (including fractional and uncertificated shares) of Acquiring Corporation Common Stock, which shares shall be held under and pursuant to the DRIP or be issued under such Employee Plan, as the case may be, as hereinafter provided; (5) each unexpired and unexercised option to purchase Subject Corporation Common Stock ("Subject Corporation Stock Option") under the 1992 Stock Option Plan (the "Option Plan"), whether vested or unvested, will be automatically converted into an option (a "Substitute Option") to purchase a number of shares of Acquiring Corporation Common Stock equal to the number of shares of Subject Corporation Common Stock that could have been purchased immediately prior to the Effective Time (assuming full vesting) under such Subject Corporation Stock Option, at a price per share of Acquiring Corporation Common Stock equal to the per share option exercise price specified in such Subject Corporation Stock Option. In accordance with Section 424(a) of the Internal Revenue Code of 1986, as amended, each Substitute Option shall provide the option holder with rights and benefits that are no less and no more favorable to him than were provided under the Subject Corporation Stock Option; and (6) the former holders of Subject Corporation Common Stock shall be entitled only to receive shares of Acquiring Corporation Common Stock in exchange therefor as provided in this Agreement. B. Shares of Subject Corporation $100 Preferred Stock, Subject Corporation $25 Preferred Stock and Subject Corporation Preference Stock shall not be exchanged or otherwise affected by or in connection with the Exchange. Each share of Subject Corporation $100 Preferred Stock issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding following the Exchange and shall continue to be one share of Subject Corporation $100 Preferred Stock of the A-2 applicable series designation. Each share of Subject Corporation $25 Preferred Stock issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding following the Exchange and shall continue to be one share of Subject Corporation $25 Preferred Stock of the applicable series designation. C. As of the Effective Time, the Acquiring Corporation shall succeed to the DRIP as in effect immediately prior to the Effective Time, and the DRIP shall be appropriately modified to provide for the issuance or delivery of Acquiring Corporation Common Stock on and after the Effective Time pursuant thereto. D. As of the Effective Time, (1) the Employee Plans shall be appropriately amended to provide for the issuance or delivery of Acquiring Corporation Common Stock, and the Acquiring Corporation shall agree to issue or deliver Acquiring Corporation Common Stock, and (2) the Option Plan shall also be appropriately amended to provide for the issuance of options by the Acquiring Corporation to purchase Acquiring Corporation Common Stock, in each case on and after the Effective Time pursuant thereto. ARTICLE IV A. The filing of the Certificate with the Department of State and the consummation of the Exchange shall be subject to satisfaction of the following conditions at or prior to the Effective Time: (1) the affirmative vote of the holders of Subject Corporation Common Stock provided for in Article I of this Agreement shall have been received; (2) such orders, authorizations, approvals or waivers from the New York Public Service Commission and all other jurisdictive regulatory bodies, boards or agencies required to consummate the Exchange and related transactions shall have been received, shall remain in full force and effect, and shall not include, in the sole judgment of the Board of Directors of the Subject Corporation, unacceptable conditions; and (3) the Acquiring Corporation Common Stock to be issued in connection with the Exchange shall have been listed, subject to official notice of issuance, by the New York Stock Exchange. ARTICLE V Following the Effective Time, each holder of an outstanding certificate or certificates theretofore representing shares of Subject Corporation Common Stock may, but shall not be required to, surrender the same to the Acquiring Corporation's Transfer Agent for cancellation and reissuance of a new certificate or certificates in such holder's name or for cancellation and transfer, and each such holder or transferee shall be entitled to receive a certificate or certificates representing the same number of shares of Acquiring Corporation Common Stock as the shares of Subject Corporation Common Stock previously represented by the certificate or certificates surrendered. Until so surrendered or presented for exchange or transfer, each outstanding certificate which, immediately prior to the Effective Time, represents Subject Corporation Common Stock shall be deemed and shall be treated for all purposes to represent the ownership of the same number of shares of Acquiring Corporation Common Stock as though such surrender or exchange or transfer had taken place. The holders of Subject Corporation Common Stock at the Effective Time shall have no right at and after the Effective Time to have their shares of Subject Corporation Common Stock transferred on the stock transfer books of the Subject Corporation (such stock transfer books being deemed closed for this purpose at the Effective Time), and at and after the Effective Time such stock transfer books may be deemed to be the stock transfer books of the Acquiring Corporation. A-3 ARTICLE VI A. This Agreement may be amended, modified or supplemented, or compliance with any provision hereof may be waived, at any time prior to the Effective Time (including, without limitation, after receipt of the affirmative vote of holders of Subject Corporation Common Stock as provided in Article IV(I) hereof), by the mutual consent of the Boards of Directors of the Subject Corporation and the Acquiring Corporation at any time prior to the Effective Time; provided, however, that no such amendment, modification, supplement or waiver shall be made or effected if such amendment, modification, supplement or waiver would, in the sole judgment of the Board of Directors of the Subject Corporation, materially and adversely affect the shareholders of the Subject Corporation. B. This Agreement may be terminated and the Exchange and related transactions abandoned, at any time prior to the Effective Time (including, without limitation, after receipt of the affirmative vote of holders of Subject Corporation Common Stock as provided in Article IV(1) hereof, if the Board of Directors of the Subject Corporation determines, in its sole judgment, that consummation of the Exchange would for any reason be inadvisable or not in the best interests of the Subject Corporation or its shareholders. IN WITNESS WHEREOF, each of the Corporations, pursuant to authorization and approval given by its Board of Directors, has caused this Agreement to be executed as of the date first above written. Niagara Mohawk Power Corporation By: William E. Davis --------------------------------------- William E. Davis Chairman of the Board and Chief Financial Officer Niagara Mohawk Holdings, Inc. By: William E Edwards --------------------------------------- William F Edwards Chief Financial Officer A-4 NIAGARA MOHAWK POWER CORPORATION CASES 94-E-0098 AND 94-E-0099 HOLDING COMPANY FORMATION - COMPLIANCE FILING APPENDIX B STATE OF NEW YORK PUBLIC SERVICE COMMISSION - ------------------------------------------------------- IN THE MATTER OF THE APPLICATION OF NIAGARA MOHAWK HOLDINGS, INC. AND NIAGARA MOHAWK POWER CORPORATION FOR CASE 98- AUTHORITY UNDER SECTIONS 70, 107, 108 AND 110 OF THE PUBLIC SERVICE LAW TO FORM A HOLDING COMPANY STRUCTURE TO ENGAGE IN CERTAIN RELATED TRANSACTIONS. - ------------------------------------------------------- PETITION OF NIAGARA MOHAWK HOLDINGS, INC. AND NIAGARA MOHAWK POWER CORPORATION FOR AUTHORITY TO FORM A HOLDING COMPANY STRUCTURE TO ENGAGE IN CERTAIN RELATED TRANSACTIONS NIAGARA MOHAWK POWER CORPORATION 300 ERIE BOULEVARD WEST SYRACUSE, NEW YORK 13202 (315) 428-6593 PAUL J. KALETA, ESQ., VICE PRESIDENT - LAW AND GENERAL COUNSEL M. MARGARET FABIC, ESQ., CHIEF COUNSEL - ENERGY DELIVERY ADAMS, DAYTER & SHEEHAN, LLP 39 N. PEARL STREET ALBANY, NEW YORK 12207 (518) 463-3385 TIMOTHY P. SHEEHAN, ESQ. OF COUNSEL SWIDLER & BERLIN, CHARTERED 3000 K STREET, NW SUITE 300 WASHINGTON, DC 20007 (202) 424-7500 STEVEN J. AGRESTA, ESQ. J. PHILLIP JORDAN, ESQ. OF COUNSEL DATED: JULY 20, 1998 TABLE OF CONTENTS INTRODUCTION DESCRIPTION OF THE CORPORATE RESTRUCTURING A. Description of Share Exchange B. Description of Ratepayer Protections CONDITIONS TO THE FORMATION OF HOLDCO Exhibit A - Holdings' Certificate of Incorporation Exhibit B - Holdings' By-Laws Exhibit C - Statement of Financial Condition Exhibit D - Agreement and Plan of Exchange Exhibit E - Proposed Corporate Structure Chart 1 STATE OF NEW YORK PUBLIC SERVICE COMMISSION - ------------------------------------------------------- IN THE MATTER OF THE APPLICATION OF NIAGARA MOHAWK HOLDINGS, INC. AND NIAGARA MOHAWK POWER CORPORATION FOR CASE 98- AUTHORITY UNDER SECTIONS 70, 107, 108 AND 110 OF THE PUBLIC SERVICE LAW TO FORM A HOLDING COMPANY STRUCTURE PETITION TO ENGAGE IN CERTAIN RELATED TRANSACTIONS. - ------------------------------------------------------- TO THE PUBLIC SERVICE COMMISSION OF THE STATE OF NEW YORK: INTRODUCTION Niagara Mohawk Holdings, Inc. (Holdings) and Niagara Mohawk Power Corporation (Niagara Mohawk), Petitioners herein, hereby apply for authority under Sections 70, 107, 108 and 110 of the Public Service Law and the associated Regulations (16 NYCRR Parts 39 and 56) to form a holding company structure to engage in certain related transactions, and in support thereof, respectfully show: 1. Holdings is a corporation duly organized and existing under the laws of the State of New York, having its principal office in the City of Syracuse, County of Onondaga, State of New York. The name Niagara Mohawk Holdings, Inc. may be changed prior to the Effective Time of the share exchange (as described below) at the discretion of the Board of Directors of Holdings. Holdings has been incorporated for the purpose of carrying out the proposed transactions described in this Petition. Holdings currently is a direct, wholly-owned subsidiary of Niagara Mohawk. 2 2. Niagara Mohawk is a corporation duly organized and existing under the Transportation Corporations Law of the State of New York, having its principal office in the City of Syracuse, County of Onondaga, State of New York. Niagara Mohawk is engaged principally in the generation, purchase, transmission, and distribution of electricity, and the purchase, transportation and distribution of natural gas for light, heat, and power in the State of New York. In addition to its utility operations, Niagara Mohawk owns an unregulated subsidiary, Opinac North America, Inc. (Opinac NA), which, in turn, owns Opinac Energy Corporation,1/ Plum Street Enterprises, Inc. and Plum Street Energy Marketing, Inc. (a subsidiary of Plum Street Enterprises, Inc.) (PSEM) (collectively, the non-utility subsidiaries, which participate principally in energy-related services. CNP is owned 50% by Opinac Energy Corporation. CNP owns a 99.99% interest in Canadian Niagara Wind Power Company, Inc. and Cowley Ridge Partnership, respectively, which together operate a wind power joint venture in the Province of Alberta, Canada. Niagara Mohawk also has several other subsidiaries including NM Uranium Inc., NM Holdings, Inc., Moreau Manufacturing Corp. (Moreau), Beebee Island Corp. (Beebee), and NM Receivables Corp. II. Although Niagara Mohawk is not the acquirer of securities and therefore not the petitioner as described in Section 39.1 of the Public Service Commission's (Commission) Regulations (16 NYCRR ss.39.1), Niagara Mohawk joins Holdings in presenting this petition to the Commission as an integral participant in the transaction. 3. A certified copy of Niagara Mohawk's Certificate of Incorporation was duly filed with the Commission in proceedings designated as Case No. 12733. All other amendments to the Certificate of Incorporation have been filed in other numbered - ------------- 1/ Opinac Energy Corporation is an exempt holding company under Section 3(a)(5) of the Public Utility Holding Company Act of 1935. Opinac Energy Corporation, 52 S.E.C. Docket 1475 (1992). 3 proceedings. A certified copy of Holdings' Certificate of Incorporation is filed with this Petition as Exhibit A. Holdings' By-Laws are filed herewith as Exhibit B. 4. A Statement of Financial Condition of Niagara Mohawk at June 30, 1997, the most recent period available, is filed with this Petition as Exhibit C. Additional financial data from the Niagara Mohawk 1997 PSC Annual Report is incorporated herein by reference. 5. Petitioners are filing this Petition in order to separate Niagara Mohawk's businesses that are regulated by the Commission from Niagara Mohawk's businesses that are not so regulated, by creating a new holding company to own both the shares of Niagara Mohawk and the shares of the corporations in which the unregulated businesses are housed. Niagara Mohawk and the other parties to the Settlement Agreement reached in Cases 94-E-0098 and 94-E-0099 (PowerChoice) agreed to the formation of the holding company. The Commission also indicated its approval of the holding company structure in its Opinion 98-8. Niagara Mohawk Power Corp., Cases 94-E-0098 and 94-E-0099, Opinion and Order Adopting Terms of Settlement Agreement Subject to Modifications and Conditions (March 20, 1998). 6. Pursuant to the provisions of Section 913 of the Business Corporation Law, Petitioners propose to reorganize their operation by forming a holding company structure pursuant to an Agreement and Plan of Exchange (Exchange Agreement). The Exchange Agreement has been unanimously adopted by the Board of Directors of Niagara Mohawk and was adopted by the Niagara Mohawk common shareholders on June 29, 1998. A copy of the Exchange Agreement is filed herewith as Exhibit D. 4 7. Petitioners believe that a holding company structure offers important protections to ratepayers from the risks associated with the introduction of competition. Such protections are described below. 8. Petitioners seek Commission consent, permission and authority under Sections 70, 107, 108 and 110 of the Public Service Law to take such steps as are necessary to form a holding company structure, and permission and authority under those sections and such other statutory and regulatory provisions as may be required to permit the consummation of the transactions described in this Petition. DESCRIPTION OF THE CORPORATE RESTRUCTURING A. DESCRIPTION OF SHARE EXCHANGE 9. Upon Commission approval of this Petition, and the receipt of necessary stockholder and other regulatory approvals described below, Petitioners propose to reorganize their operations by forming a holding company structure pursuant to the Exchange Agreement. Under the terms of the Exchange Agreement, all of the shares of outstanding Holdings common stock, which will then be owned by Niagara Mohawk, will be canceled and all outstanding shares of Niagara Mohawk common stock will be exchanged on a share-for-share basis for Holdings common stock (the Exchange), subject to the rights of the holders of Niagara Mohawk common stock to exercise their appraisal rights. Upon consummation of the Exchange, each person who owned Niagara Mohawk common stock immediately prior to the Exchange (other than stockholders who exercise their appraisal rights) will own a corresponding number of shares and percentage of the 5 outstanding Holdings common stock, and Holdings will own all of the outstanding shares of Niagara Mohawk common stock. 10. At or before the effective date of the Exchange (the Effective Time), the following events shall have occurred or conditions have been satisfied, except as otherwise agreed to in writing by Niagara Mohawk: - Issuance of a final (and non-appealable) Commission order granting Niagara Mohawk the authority sought by this Petition upon the terms and conditions set forth herein. - Issuance of final (and non-appealable) orders from the United States Securities and Exchange Commission (SEC), Federal Energy Regulatory Commission (FERC), and Nuclear Regulatory Commission (NRC) regarding the transactions contemplated by the Petition. - Petitioners' acceptance of the aforesaid orders, and corporate and stockholder approval of, and receipt of any required consents under any agreement to which Petitioners are a party in connection with, the Exchange and the transactions contemplated by this Petition. 11. As a result, upon completion of the Exchange, Holdings will become a holding company, Niagara Mohawk will become a regulated, wholly-owned subsidiary of Holdings, and all of Holdings' common stock outstanding immediately after the Exchange will be owned by the former holders of Niagara Mohawk common stock outstanding immediately prior to the Exchange. Following the Exchange, certain of Niagara Mohawk's existing non-utility subsidiaries will be transferred to Holdings and become subsidiaries of Holdings. Niagara Mohawk's principal non-utility subsidiaries participate in real estate development of property formerly owned by Niagara Mohawk, (NM Holdings) and in 6 energy-related services (Opinac NA and its subsidiaries). In addition, Niagara Mohawk holds a single-purpose subsidiary, NM Receivables, established to facilitate the sale of an undivided interest in a designated pool of customer receivables. Certain of these subsidiaries will be transferred to, and therefore become separate subsidiaries of, Holdings after the Exchange. Though Niagara Mohawk expects to sell or liquidate its majority interests in two of its generation subsidiaries, Beebee Island and Moreau, before or shortly after the share exchange, Holdings will retain an indirect 50% interest in CNP. 12. A chart of the proposed corporate structure before and after the Effective Time is attached hereto as Exhibit E. 13. The Exchange will not result in any change in the outstanding Preferred Stock or debt securities of Niagara Mohawk, which will continue to be securities and obligations of Niagara Mohawk after the Exchange. 14. In connection with Holding's commencement of operations, pursuant to the PowerChoice Settlement Agreement, Niagara Mohawk may lease office space to Holdings at fair market value and transfer to Holdings at fair market value office furniture, equipment, and other non-generation assets. 15. In addition to the Commission's approval, consummation of the proposed reorganization will require the approval of the SEC, the FERC, and the NRC. Petitioners are filing applications with the SEC, FERC, and the NRC concurrently with this filing. 16. Holdings will also file for an exemption from the registration requirements of the Public Utility Holding Company Act of 1935 (1935 Act), to the extent necessary. It is 7 contemplated that Holdings will qualify for an exemption from registration under the 1935 Act as a "predominantly intrastate" public utility holding company, under Section 3(a)(1) of the 1935 Act. 17. The approval of the holders of the Niagara Mohawk common stock is required to effect the transactions described herein. Niagara Mohawk received stockholder approval at the June 29, 1998 Annual Meeting of Stockholders. B. DESCRIPTION OF RATEPAYER PROTECTIONS 18. The proposed separation of regulated and unregulated businesses protects Niagara Mohawk's ratepayers in several respects. Niagara Mohawk and the unregulated affiliates would maintain separate books and records and thereby provide a better structure for regulators to assure that there is no cross-subsidization of costs or transfer of business risk from unregulated to regulated businesses. The proposed holding company structure will ensure that Niagara Mohawk is insulated from any losses and profits resulting from unregulated activities and that such losses or profits will flow to the stockholders of Holdings so that Niagara Mohawk and its ratepayers would not be harmed by unregulated activities. The proposed holding company structure will help to streamline the regulatory process and thereby further the Commission's goals by permitting the Commission to devote its finite resources to the regulatory needs of ratepayers. 19. Because the operations of Holdings' unregulated subsidiaries will be structurally separate from Niagara Mohawk's operations under a holding company structure, any change in the financial results of the unregulated businesses would have no effect on Niagara Mohawk or Niagara Mohawk's credit. Under the holding company 8 structure, Niagara Mohawk's access to the debt and equity markets would be based on Niagara Mohawk's operating and financial results alone, and the debt/equity ratios of Holding's unregulated subsidiaries would have no adverse impact on the credit quality of Niagara Mohawk. 20. Niagara Mohawk and its ratepayers, creditors, and other stakeholders would be structurally insulated from the obligations and liabilities of the unregulated businesses under New York corporate law. 21. A holding company structure will facilitate the management of the capitalization ratios of Niagara Mohawk so that ratepayers would not be harmed by a capital structure which was not tailored to the needs of a regulated business. A holding company structure also will permit the use of financing techniques that are more directly suited to the particular requirements, characteristics, and risks of unregulated operations without affecting the capital structure or creditworthiness of Niagara Mohawk and will increase financial flexibility by allowing the design and implementation of the capitalization ratios appropriate for the capital and business requirements of each subsidiary. 22. To compete effectively in the emerging competitive energy marketplace, Niagara Mohawk must have the same degree of flexibility in doing business that is enjoyed by its current and potential competitors. Niagara Mohawk must not be unduly burdened by excessive constraints and conditions, particularly when such constraints are not shared by its competitors, many of whom are large, aggressive and well-capitalized affiliates of out-of-state utility and industrial companies. 9 23. As discussed above, the holding company structure protects ratepayers from the risks of the unregulated businesses by separating the operations of regulated businesses from the unregulated businesses. In addition, the Commission already possesses a broad array of regulatory mechanisms to ensure that ratepayers are adequately protected. The Commission has authority under the Public Service Law with respect to setting utility rates (Sections 65, 66, and 72), the issuance of securities (Section 69), transfers of assets (Section 70), loans to stockholders (Section 106), the use of utility revenues (Section 107), approval of certificates of merger and certain certificates of amendment (Section 108), affiliate transactions (Section 110) and other matters to sufficiently safeguard the ratepayers' interests. Niagara Mohawk believes that the Commission can protect ratepayers and prevent Holdings and its affiliates from gaining any unfair competitive advantage without imposing additional unduly burdensome operating constraints on Holdings and its affiliates, including Niagara Mohawk. 24. The circumstances surrounding Niagara Mohawk's proposed reorganization differ from the circumstances surrounding prior occasions where the Commission has imposed conditions on utilities seeking to establish unregulated affiliates. While such conditions may have been appropriate under the old regulatory regime and under the specific circumstances surrounding such prior occasions, such conditions are not appropriate in the emerging competitive energy marketplace. The constraints included in Section 9 of the PowerChoice Settlement Agreement previously filed and approved by the Commission in this proceeding, along with the existing statutory tools of the Commission and FERC and the federal and state anti-trust laws, will be adequate to protect ratepayers and ensure that robust competition develops. 10 OTHER MATTERS 25. Petitioners reserve the right to amend and withdraw this Petition at any time prior to its acceptance of an order of the Commission with respect to the Petition. Petitioners further request that any such order by its terms permit Petitioners (even after unconditionally accepting such order) to decide not to consummate the transactions described herein if, in Petitioners' opinion, consummation would not result in material benefit, or would result in material detriment, to Petitioners. 26. All communications and notices in connection with this proceeding should be addressed to: Paul J. Kaleta, Esq. M. Margaret Fabic, Esq. 300 Erie Boulevard West Syracuse, New York 13202 (315) 428-6593 WHEREFORE, Petitioners, Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation, respectfully request Commission consent, permission, and authority under Sections 70, 107, 108, and 110 of the Public Service Law to take such steps as are necessary to form a holding company structure; and Commission consent, permission, and authority under such other statutory and regulatory provisions as may be required to permit the consummation of the transactions contemplated herein. NIAGARA MOHAWK POWER CORPORATION BY:________________________________________ PAUL J. KALETA VICE PRESIDENT - LAW AND GENERAL COUNSEL DATED: JULY 20, 1998 11 STATE OF NEW YORK ) ) SS: COUNTY OF ONONDAGA ) William F. Edwards, being duly sworn, deposes and says that he is Senior Vice President and Chief Financial Officer of Niagara Mohawk Power Corporation and that he is _______________________________________ of Niagara Mohawk Holdings, Inc., the Petitioners herein named; that he has read the foregoing application and knows the contents thereof; that the same is true of his own knowledge except as to those matters therein stated to be alleged upon information and belief, and that has to those matters he believes them to be true. --------------------------------------------- WILLIAM F. EDWARDS SUBSCRIBED AND SWORN TO BEFORE ME THIS______ DAY OF_________________, 1998. - ----------------------------------------- NOTARY PUBLIC 12 STATE OF NEW YORK PUBLIC SERVICE COMMISSION - -------------------------------------------------- In the Matter of the Application of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation for Authority Under Sections 70, 107, Case 98- 108 and 110 of the Public Service Law to Form a Holding Company Structure to Engage in Certain Related Transactions. - -------------------------------------------------- PETITION OF NIAGARA MOHAWK HOLDINGS, INC. and NIAGARA MOHAWK POWER CORPORATION FOR AUTHORITY TO FORM A HOLDING COMPANY STRUCTURE TO ENGAGE IN CERTAIN RELATED TRANSACTIONS EXHIBIT A NIAGARA MOHAWK POWER CORPORATION I, KAPUA A. RICE, Secretary of Niagara Mohawk Power Corporation, HEREBY CERTIFY that the attached is a true and complete copy of the Certificate of Incorporation of Niagara Mohawk Holdings, Inc. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of the Niagara Mohawk Power Corporation this 17th day of July, 1998. /s/ Kapua A. Rice -------------------------- Kapua A. Rice Secretary CERTIFICATE OF INCORPORATION OF NIAGARA MOHAWK HOLDINGS, INC. UNDER SECTION 402 OF THE BUSINESS CORPORATION LAW FIRST. The name of the corporation is Niagara Mohawk Holdings, Inc. (the "Corporation"). SECOND. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law of the State of New York, provided that any act or activity requiring the consent or approval of any State official, department, board, agency or other body shall not be engaged in without such consent or approval first being obtained. THIRD. The office of the Corporation within the State of New York is to be located in the City of Syracuse, County of Onondaga. FOURTH. The aggregate number of shares which the Corporation shall have authority to issue is (a) three hundred million (300,000,000) shares of common shares with a par value of $0.01 per share (the "Common Stock") and fifty million (50,000,000) shares of Preferred Stock, with a par value of $0.01 per share (the "Preferred Stock"). The designations, relative rights, preferences and limitations of the shares of such classes of stock are as follows: A. The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more series of Preferred Stock, and the Board of Directors is expressly authorized, prior to issuance, in the resolution or resolutions providing for the issue of shares of each particular series, to establish and designate each particular series and to fix the rights, preferences and limitations of each particular series, and the relative rights, preferences and limitations between series, as follows: (i) The distinctive serial designation of such series which shall distinguish it from other series; (ii) The number of shares included in such series, which number (except where otherwise provided by the Board of Directors in creating such series) may be increased (but not above the total number of authorized shares of Preferred Stock) or decreased (but not below the number of the outstanding shares of such series) from time to time by the Board of Directors; provided that if the number of shares is decreased, the shares constituting such decrease shall be restored to the status of authorized but unissued shares of Preferred Stock; (iii) The annual or other dividend rate or rates (or method of determining such rate or rates) for shares of such series and the date or dates upon which such dividends shall be payable; (iv) Whether dividends on the shares of such series shall be cumulative, and, in the case of shares of any series having cumulative dividend rights, the date or dates (or method for determining such date or dates) from which dividends on the shares of such series shall be cumulative; (v) The amount or amounts per share which shall be paid out of the assets of the Corporation to the holders of the shares of such series upon voluntary or involuntary liquidation, dissolution, or winding up of the Corporation; B-1 (vi) The price or prices (cash or otherwise) at which, the period or periods within which and the terms and conditions upon which, if any, the shares of such series may be purchased, redeemed or acquired (by exchange or otherwise), in whole or in part; (vii) Provision or provisions, if any, for the Corporation to purchase, redeem or acquire (by exchange or otherwise), in whole or in part, shares of such series pursuant to a sinking or other similar fund, and the price or prices (cash or otherwise) at which, the period or periods within which and the terms and conditions upon which the shares of such series shall be so purchased, redeemed or acquired, in whole or in part, pursuant to such provision or provisions; (viii) The period or periods within which and the terms and conditions, including the price or prices or the rate or rates of conversion or exchange and the terms and conditions of any adjustments thereof, upon which, if any, the shares of such series shall be convertible or exchangeable, in whole or in part, at the option of the holder, the Corporation or another person into shares of any class of stock or into shares of any series of any class or cash, other property, indebtedness or other securities of the Corporation or another corporation; (ix) The voting rights, if any, of the shares of such series in addition to those required by law, including the number of votes per share (which may be fractional or more or less than one); and (x) Any other relative rights, preferences or limitations of the shares of such series not inconsistent with applicable law. B. Except as may from time to time be required by law and except as otherwise may be provided by the Board of Directors in accordance with paragraph A of this Article 4 in respect of any particular series of Preferred Stock, all voting rights of the Corporation shall be vested exclusively in the holders of the Common Stock who shall be entitled to one vote per share on all matters. FIFTH. The Secretary of State of the State of New York is designated as agent of the Corporation upon whom process in any action or proceeding against it may be served. The address to which the Secretary of State shall mail a copy of any process against the Corporation served upon him is 300 Erie Boulevard West, Syracuse, New York 13202, Attn: Corporate Secretary. SIXTH. Subject to the voting provisions of Article 10, By-laws of the Corporation may be adopted, amended or repealed by the Board of Directors of the Corporation by the vote of a majority of the directors present at a meeting of the board at which a quorum is present. SEVENTH. No holder of shares of the Corporation of any class, now or hereafter authorized, shall have any preferential or preemptive right to subscribe for, purchase or receive any shares of the corporation of any class, now or hereafter authorized, or any options or warrants for such shares, or any rights to subscribe for or purchase such shares, or any securities convertible into or exchangeable for such shares, which may at any time be issued, sold or offered for sale by the Corporation. EIGHTH. Subject to the rights, if any, of holders of any class or series of Preferred Stock, now or hereafter authorized, special meetings of shareholders may be called only by the Chairman of the Board or by the Board of Directors pursuant to resolution adopted by a majority of the total number of directors which the Corporation would have if there were no vacancies. NINTH. The following provisions shall relate to the Board of Directors of the Corporation: A. The size of the Board of Directors shall be fixed by or pursuant to the By-Laws. The Board of Directors shall be divided into three classes designated Class I, Class II and Class III. Such classes shall be as nearly equal in number as the then total number of directors constituting the entire Board permits. At the first annual meeting of shareholders, or any special meeting in lieu thereof, Class I, Class II and Class III directors shall be elected for terms expiring at the next succeeding annual meeting, the second succeeding annual meeting and the third succeeding annual meeting, respectively, B-2 and until their respective successors are elected and qualified. At each annual meeting of shareholders after such first annual (or special) meeting of shareholders, the directors chosen to succeed those in the class whose terms then expire shall be elected by shareholders for terms expiring at the third succeeding annual meeting after election, or for such lesser term for which one or more may be nominated in a particular case in order to assure that the number of directors in each class shall be appropriately constituted and until their respective successors are elected and qualified. Newly created directorships or any decrease in directorships resulting from increases or decreases in the number of directors shall be so apportioned among the classes of directors as to make all the classes as nearly equal in number as possible. Vacancies on the Board of Directors at any time for any reason except the removal of directors without cause may be filled by a majority of the directors then in office, although less than a quorum. If the number of directors is increased by the Board of Directors and any newly created directorships are filled by the Board, there shall, to the extent required by New York law, be no classification of the additional directors until the next annual meeting of shareholders. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock, now or hereafter authorized, shall have the right, voting separately or by class or series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by any provisions of the Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into one or more classes pursuant to this Article 9A unless expressly provided by such provisions. B. Directors may be removed for cause by a vote of shareholders entitled to vote thereon. Directors shall not be removed without cause by shareholders, except in the case of a director elected by the holders of any class or series of Preferred Stock, now or hereafter authorized, voting as a class or series, when so entitled by the provisions of the Certificate of Incorporation applicable thereto. TENTH. In addition to any vote that may be required by law or in the Certificate of Incorporation in respect of any class or series of Preferred Stock, now or hereafter authorized, the provisions of Articles 6, 7, 8, 9, 10, 11 and 12 of the Certificate of Incorporation shall not be amended or repealed, or a new provision adopted inconsistent therewith, without the affirmative vote of not less than two-thirds of the shares entitled to vote thereon at such annual or special meeting of shareholders at which any such action is proposed. ELEVENTH. Except as otherwise provided in the Certificate of Incorporation in respect of any class or series of Preferred Stock, now or hereafter authorized, the By-laws of the corporation may be amended or repealed, or new By-Laws may be adopted, either (a) by a vote of shareholders entitled to vote at any annual or special meeting of shareholders, or (b) by a vote of the majority of the entire Board of Directors at any regular or special meeting of directors; provided, however, that any amendment or repeal of, or the adoption of any new By-Law or provision inconsistent with, Article I (Sections 1.2, 1.13 or 1.14), Article II (Sections 2.2, 2.3, or 2.7) or Article VI (Sections 6.6 or 6.7) of the By-Laws, if by action of such shareholders, shall be only upon the affirmative vote of not less than two-thirds of the shares entitled to vote thereon at such annual or special meeting of shareholders at which any such action is proposed and, if by action of the Board of Directors, shall be only upon the approval of not less than two-thirds of the entire Board of Directors at any regular or special meeting of directors. TWELFTH. Except as may be provided by the Board of Directors in accordance with paragraph A of Article 4 in respect of any particular series of Preferred Stock, any action required or permitted to be taken by the shareholders of the corporation must be taken at a duly called annual or special meeting of such holders and may not be taken by any consent in writing by such holders. Except as otherwise provided for herein or required by law, special meetings of shareholders of the corporation for any purpose or purposes may be called only by the Chairman of the Board, the President or the Board of Directors pursuant to a resolution stating the purpose or purposes thereof, and any power of shareholders to call a special meeting is specifically denied. B-3 THIRTEENTH. A director of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for any breach of duty as a director, except to the extent that such exemption from liability or limitation thereof is not permitted under the Business Corporation Law as currently in effect or as it may hereafter be amended. No amendment, modification or repeal of this Article THIRTEENTH shall adversely affect any right or protection of a director that exists at the time of such amendment, modification or repeal. B-4 STATE OF NEW YORK PUBLIC SERVICE COMMISSION - -------------------------------------------------- In the Matter of the Application of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation for Authority Under Sections 70, 107, Case 98- 108 and 110 of the Public Service Law to Form a Holding Company Structure to Engage in Certain Related Transactions. - -------------------------------------------------- PETITION OF NIAGARA MOHAWK HOLDINGS, INC. and NIAGARA MOHAWK POWER CORPORATION FOR AUTHORITY TO FORM A HOLDING COMPANY STRUCTURE TO ENGAGE IN CERTAIN RELATED TRANSACTIONS EXHIBIT B BY-LAWS OF NIAGARA MOHAWK HOLDINGS, INC. ARTICLE I SHAREHOLDERS Section 1.1. Annual Meeting. A meeting of shareholders shall be held annually for the election of directors at such date and time as may be designated by the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting. Section 1.2. Special Meetings. Special meetings of the shareholders may be called by the Chairman of the Board or by the Board of Directors pursuant to resolution adopted by a majority of the total number of directors which the Corporation would have if there were no vacancies, to be held at such date and time as may be stated in the notice of the meeting. At any special meeting only such business may be transacted which is related to the purpose or purposes set forth in the notice of such special meeting given pursuant to Section 1.4 of these By-laws. Section 1.3. Place of Meetings. Meetings of shareholders shall be held at such place, within or without the State of New York, as may be fixed by the Board of Directors. If no place is so fixed, such meetings shall be held at the principal office of the Corporation in the State of New York. Section 1.4. Notice of Meetings. Written notice of each meeting of shareholders shall be given stating the place, date and hour of the meeting. Notice of a special meeting of shareholders shall indicate that it is being issued by or at the direction of the person or persons calling the meeting and shall state the purpose or purposes for which the meeting is called. If, at any meeting of shareholders, action is proposed to be taken which would, if taken, entitle objecting shareholders to receive payment for their shares, the notice of such meeting shall include a statement of that purpose and to that effect and shall be accompanied by a copy of Section 623 of the New York Business Corporation Law as then in effect or an outline of its material terms. A copy of the notice of each meeting of shareholders shall be given, personally or by first class mail, not fewer than ten nor more than sixty days before the date of the meeting, or shall be given by third class mail not less than twenty-four nor more than sixty days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at his or her address as it appears on the record of shareholders, or, if he or she shall have filed with the Secretary of the Corporation a written request that notices to him or her be mailed to some other address, then directed to him or her at such other address. When a meeting of shareholders is adjourned to another time or place, it shall not be necessary to give any notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and at the adjourned meeting any business may be transacted that might have been transacted on the original date of the meeting. However, if after the adjournment the Board of Directors fixes a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record on the new record date entitled to notice under this Section 1.4. Section 1.5. Waiver of Notice. Notice of meeting need not be given to any shareholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him or her. C-1 Section 1.6. Inspectors. Voting at meetings of shareholders shall be conducted by inspectors. The Board of Directors, in advance of any shareholders' meeting, shall appoint one or more inspectors to act at the meeting or any adjournment thereof. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his or her ability. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Section 1.7. List of Shareholders at Meetings. A list of shareholders as of the record date, certified by the Secretary or any Assistant Secretary or by a transfer agent, shall be produced at any meeting of shareholders upon the request thereat or prior thereto of any shareholder. If the right to vote at any meeting is challenged, the inspectors, or person presiding thereat, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting. Section 1.8. Qualification of Voters. Every shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his or her name on the record of shareholders, unless otherwise provided in the certificate of incorporation. If the certificate of incorporation provides for more or less than one vote for any share on any matter, every reference in these by-laws to a majority or other proportion of shares shall be construed to refer to such majority or other proportion of the votes of such shares. Treasury shares as of the record date and shares held as of the record date by another domestic or foreign corporation of any type or kind, if a majority of the shares entitled to vote in the election of directors of such other corporation is held as of the record date by the Corporation, shall not be shares entitled to vote or to be counted in determining the total number of outstanding shares. Shares held by an administrator, executor, guardian, conservator, committee or other fiduciary, except a trustee, may be voted by him or her or it, either in person or by proxy, without transfer of such shares into his or her or its name. Shares held by a trustee may be voted by him or her or it, either in person or by proxy, only after the shares have been transferred into his or her or its name as trustee or into the name of his or her or its nominee. Shares standing in the name of another domestic or foreign corporation of any type or kind may be voted by such officer, agent or proxy as the by-laws of such corporation may provide, or, in the absence of such provision, as the board of directors of such corporation may determine. A shareholder shall not sell his or her vote or issue a proxy to vote to any person for any sum of money or anything of value except as permitted by law. Section 1.9. Quorum of Shareholders. The holders of a majority of the votes of shares entitled to vote thereat shall constitute a quorum at a meeting of shareholders for the transaction of any business, provided that when a specified item of business is required to be voted on by a class or series, voting as a class, the holders of a majority of the votes of shares of such class or series shall constitute a quorum for the transaction of such specified item of business. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any shareholders. The shareholders present in person or by proxy and entitled to vote may, by a majority of the votes cast, adjourn the meeting despite the absence of a quorum. Section 1.10. Proxies. Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for him or her by proxy. No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise C-2 provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except as otherwise provided by law. The authority of the holder of a proxy to act shall not be revoked by the incompetence or death of the shareholder who executed the proxy unless, before the authority is exercised, written notice of an adjudication of such incompetence or of such death is received by the Secretary or any Assistant Secretary. Section 1.11. Vote or Consent of Shareholders. Directors shall, except as otherwise required by law or by the certificate of incorporation, be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. Whenever any corporate action, other than the election of directors, is to be taken by vote of the shareholders, it shall, except as otherwise required by law or by the certificate of incorporation, be authorized by a majority of the votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon. Whenever shareholders are required or permitted to take any action by vote, such action may be taken without a meeting on written consent, setting forth the action so taken, signed by the holders of all outstanding shares entitled to vote thereon. Written consent thus given by the holders of all outstanding shares entitled to vote shall have the same effect as a unanimous vote of shareholders. Section 1.12. Fixing Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than fifty nor less than ten days before the date of such meeting, nor more than fifty days prior to any other action. If no record date is fixed: (1) the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if no notice is given, the day on which the meeting is held; and (2) the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the resolution of the Board of Directors relating thereto is adopted. When a determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof, unless the Board of Directors fixes a new record date for the adjourned meeting. Section 1.13. Advance Notice of Shareholder Proposals. At any annual or special meeting of shareholders, proposals by shareholders and persons nominated for election as directors by shareholders shall be considered only if advance notice thereof has been timely given as provided herein and such proposals or nominations are 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 shareholder or of the name of any person to be nominated by any shareholder for election as a director of the Corporation at any meeting of shareholders shall be delivered to the Secretary of the Corporation at its principal executive office not less than 60 nor more than 90 days prior to the date of the meeting; provided, however, that if the date of the meeting is first publicly announced or disclosed (in a public filing or otherwise) less than 70 days prior to the date of the meeting, such advance 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 70 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 determines to hold the meeting on a different date. Any shareholder 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 shareholder favors the proposal and setting forth such shareholder's name and address, the number and class of all shares of each class of stock of the Corporation beneficially owned by such shareholder and any material interest of such shareholder in the proposal (other than as a shareholder). Any shareholder 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 C-3 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 shareholder's name and address and the number and class of all shares of each class of stock of the Corporation beneficially owned by such shareholder. 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, options 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 given. Section 1.14. Organization. Meetings of shareholders shall be presided over by the Chairman of the Board, if any, or in the absence of the Chairman of the Board by the President, or in the absence of the President by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary, or in the absence of the Secretary an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary the chairman of the meeting may appoint any person to act as secretary of the meeting. The order of business at each such meeting shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the opening and closing of the voting polls. ARTICLE II BOARD OF DIRECTORS Section 2.1. Power of Board and Qualification of Directors. The business of the Corporation shall be managed under the direction of the Board of Directors. Each director shall be at least eighteen years of age. No person who has reached age 70 by January 1 in the year such director would otherwise stand for election shall, following their initial election, stand for reelection as a director. Section 2.2. Number of Directors. The number of directors constituting the entire Board of Directors shall be the number, not less than three, fixed from time to time by a majority of the total number of directors which the Corporation would have, prior to any increase or decrease, if there were no vacancies, provided that no decrease shall shorten the term of any incumbent director. Section 2.3. Election, Terms and Vacancies. The Board of Directors shall be divided into three classes designated Class I, Class II and Class III. Such classes shall be as nearly equal in number as the then total number of directors constituting the entire Board permits. At the first annual meeting of shareholders, or any special meeting in lieu thereof, Class I, Class II and Class III directors shall be elected for terms expiring at the next succeeding annual meeting, the second succeeding annual meeting and the third succeeding annual meeting, respectively, and until their respective successors are elected and qualified. At each annual meeting of shareholders after such first annual (or special) meeting shareholders, the directors chosen to succeed those in the class whose terms then expire shall be elected by shareholders for C-4 terms expiring at the third succeeding annual meeting after election, or for such lesser term for which one or more may be nominated in a particular case in order to assure that the number of directors in each class shall be appropriately constituted and until their respective successors are elected and qualified. Newly created directorships or any decrease in directorships resulting from increases or decreases in the number of directors shall be so apportioned among the classes of directors as to make all the classes as nearly equal in number as possible. Vacancies on the Board of Directors at any time for any reason except the removal of directors without cause may be filled by a majority of the directors then in office, although less than a quorum. If the number of directors is increased by the Board of Directors and any newly created directorships are filled by the Board, there shall, to the extent required by New York law, be no classification of the additional directors until the next annual meeting of shareholders. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock, now or hereafter authorized, shall have the right, voting separately or by class or series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by any provisions of the Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into one or more classes pursuant to this Section 2.3 unless expressly provided by such provisions. Section 2.4. Quorum of Directors and Action by the Board. Unless a greater proportion is required by law or by the certificate of incorporation, one third of the entire Board of Directors shall constitute a majority for the transaction of business or of any specified item of business. Except where otherwise provided by law or in the certificate of incorporation or these by-laws, the vote of a majority of the directors present at a meeting at the time of such vote, if a quorum is then present, shall be the act of the Board. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents by the members of the Board shall be filed with the minutes of the proceedings of the Board. Except as otherwise provided by law, all corporate action to be taken by the Board of Directors shall be taken at a meeting of the Board or by unanimous written consent. Any one or more members of the Board of Directors may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time, and participation by such means shall constitute presence in person at such meeting. Section 2.5. Meetings of the Board. An annual meeting of the Board of Directors shall be held in each year as soon as practicable after the annual meeting of shareholders. Regular meetings of the Board shall be held at such times as may be fixed by the Board. Special meetings of the Board may be held at any time whenever called by the Chairman of the Board, if any, the President or any two directors. Meetings of the Board of Directors shall be held at such places within or without the State of New York as may be fixed by the Board for annual and regular meetings and in the notice of meeting for special meetings. If no place is so fixed, meetings of the Board shall be held at the principal office of the Corporation. No notice need be given of annual or regular meetings of the Board of Directors. Notice of each special meetings of the Board shall be given to each director either by mail not later than the third business day prior to the meeting or by telegram, by facsimile transmission, by written message or orally to the director not later than noon, New York time, on the day prior to the meeting. Notices shall be deemed to have been given by mail when deposited in the United States mail, by telegram at the time of filing, by facsimile transmission upon confirmation of receipt, and by messenger at the time of delivery by the messenger. Notices by mail, telegram, facsimile transmission or messenger shall be sent to each director at the address or facsimile number designated by him or her for that purpose, or, if none has been so designated, at his or her last known residence or business address. Notice of a meeting of the Board of Directors need not be given to any director who submits a signed waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him or her. A notice or waiver of notice need not specify the purpose of any meeting of the Board of Directors. A C-5 majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. Notice of any adjournment of a meeting to another time or place shall be given in the manner described above to the directors who were not present at the time of the adjournment and, unless such time and place are announced at the meeting, to the other directors. Section 2.6. Resignation. Any director of the Corporation may resign at any time by giving written notice to the Board of Directors or to the Chairman of the Board, if any, or the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. Section 2.7. Removal of Directors. Directors may be removed for cause by a vote of shareholders entitled to vote thereon. Directors shall not be removed without cause by shareholders, except in the case of a director elected by the holders of any class or series of Preferred Stock, now or hereafter authorized, voting as a class or series, when so entitled by the provisions of the Certificate of Incorporation applicable thereto. Section 2.8. Compensation of Directors. The Board of Directors shall have authority to fix the compensation of directors for services in any capacity, which shall be a charge to be paid by the Corporation. The Board of Directors may elect or appoint members of the Board as officers, members of committees, or agents of the Corporation, may assign duties to be performed and may fix the amount of the respective salaries, fees or other compensation therefor, and the amount so fixed shall be a charge to be paid by the Corporation. In addition to any other compensation provided pursuant to these by-laws, each director shall be entitled to receive a fee, in amount as fixed from time to time by resolution of the Board of Directors, for attendance at any meeting of the Board, or of any committee of the Board, together with his expenses of attendance, if any. ARTICLE III EXECUTIVE AND OTHER COMMITTEES Section 3.1. Executive and Other Committees of Directors. The Board of Directors, by resolution adopted by a majority of the entire Board, shall designate from among its members an Executive Committee, an Audit Committee and a Finance Committee and may designate such other committees, each consisting of one or more directors, and each of which, to the extent provided in the resolution, shall have all the authority of the Board, except that no such committee shall have authority as to (1) the submission to shareholders of any action that needs shareholders' approval; (2) the filling of vacancies in the Board or in any committee thereof, (3) the fixing of compensation of the directors for serving on the Board or on any committee thereof; (4) the amendment or repeal of the by-laws, or the adoption of new by-laws; or (5) the amendment or repeal of any resolution of the Board which, by its terms, shall not be so amendable or repealable. The Board of Directors may designate one or more directors as alternate members of any such committee, who may replace any absent member or members at any meeting of such committee. Unless the Board of Directors otherwise provides, each committee designated by the Board may adopt, amend and repeal rules for the conduct of its business. In the absence of a provision by the Board or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the time of such vote if a quorum is then present or the unanimous written consent of all members thereof shall be the act of such committee, any one or more members of such committee may participate in a meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time and participation by such means shall constitute presence in person at such meeting, and in other respects each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these by-laws. Each such committee shall serve at the pleasure of the Board of Directors. C-6 Section 3.2. 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 3.1. 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 3.3. 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 3.4. 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 of 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. ARTICLE IV OFFICERS Section 4.1. 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 4.2. 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. C-7 Section 4.3. 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 4.4. 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 4.5. 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 4.6. 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 4.7. 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 C-8 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 4.8. 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 4.9. 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 4.10. 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 4.11. 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 4.12. 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 4.13. 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 C-9 shall be fixed by the Chairman of the Board or by the President in accordance with the Salary Administration Program. Section 4.14. 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 V FORMS OF CERTIFICATES AND LOSS AND TRANSFER OF SHARES Section 5.1. Forms of Share Certificates. The shares of the Corporation shall be represented by certificates, in such forms as the Board of Directors may prescribe, signed by the Chairman of the Board or the President or a Vice-President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee or if the shares are listed on a national securities exchange. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer at the date of issue. If the Corporation is authorized to issue shares of more than one class, each certificate representing shares issued by the Corporation shall set forth upon the face or back of the certificate, or shall state that the Corporation will furnish to any shareholder upon request and without charge, a full statement of the designation, relative rights, preferences and limitations of the shares of each class authorized to be issued and the designation, relative rights, preferences and limitations of each series of any class of preferred shares authorized to be issued in series so far as the same have been fixed and the authority of the Board of Directors to designate and fix the relative rights, preferences and limitations of other series. Each certificate representing shares shall state upon the face thereof (1) that the Corporation is formed under the laws of the State of New York; (2) the name of the person or persons to whom issued; and (3) the number and class of shares, and the designation of the series, if any, which such certificate represents. Section 5.2. Transfers of Shares. Shares of the Corporation shall be transferable on the record of shareholders upon presentation to the Corporation or a transfer agent of a certificate or certificates representing the shares requested to be transferred, with proper endorsement on the certificate or on a separate accompanying document, together with such evidence of the payment of transfer taxes and compliance with other provisions of law as the Corporation or its transfer agent may require. Section 5.3. Lost, Stolen or Destroyed Share Certificates. The Corporation may issue a new certificate for shares in place of any certificate theretofore issued by it, alleged to have been lost or destroyed, and the Corporation may require the owner of the lost or destroyed certificate, or such owner's legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss or destruction of any such certificate or the issuance of any such new certificate. ARTICLE VI OTHER MATTERS Section 6.1. Corporate Seal. The Board of Directors may adopt a corporate seal, alter such seal at pleasure, and authorize it to be used by causing it or a facsimile to be affixed or impressed or reproduced in any other manner. Section 6.2. Fiscal Year. The fiscal year of the Corporation shall be fixed by the Board of Directors. C-10 Section 6.3. When Notice or Lapse of Time Unnecessary. Whenever for any reason the Corporation or the Board of Directors or any committee thereof is authorized to take any action after notice to any person or persons or after the lapse of a prescribed period of time, such action may be taken without notice and without the lapse of such period of time if at any time before or after such action is completed the person or person s entitled to such notice or entitled to participate in the action to be taken or, in the case of a shareholder, his or her attorney-in-fact, submit a signed waiver of notice of such requirements. Section 6.4. Books to be Kept. The Corporation shall keep (a) correct and complete books and records of account, (b) minutes of the proceedings of the shareholders, Board of Directors and each committee and (c) a current list of the directors and officers and their residence addresses; and the Corporation shall also keep at its office located in the county of Onondaga in the State of New York or at the office of its transfer agent or registrar in the State of New York, if any, a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. Any of the foregoing books, minutes or records may be in written form or in any other form capable of being converted into written form within a reasonable time. Section 6.5. Interest of Directors and Officers in Transactions. In the absence of fraud, no contract or other transaction between the Corporation and one or more of its directors, or between the Corporation and any other Corporation, firm, association or other entity in which one or more of its directors are directors or officers, or have a substantial financial interest, shall be either void or voidable, irrespective of whether such interested director or directors are present at the meeting of the Board of Directors, or of a committee thereof, which approves such contract or transaction and irrespective of whether his, her or their votes are counted for such purpose: (1) If the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the Board of Directors, or a committee thereof, and the Board or committee approves such contract or transaction by a vote sufficient for such purpose without counting the vote of such interested director or, if the votes of the disinterested directors are insufficient to constitute an act of the Board under Section 2.4 of these by-laws, by unanimous vote of the disinterested directors; or (2) If the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the shareholders entitled to vote thereon, and such contract or transaction is approved by vote of such shareholders. If a contract or other transaction between the Corporation and one or more of its directors, or between the Corporation and any other Corporation, firm, association or other entity in which one or more of its directors are directors or officers or have a substantial financial interest, is not so approved, the Corporation may avoid the contract or transaction unless the party or parties thereto shall establish affirmatively that the contract or transaction was fair and reasonable as to the Corporation at the time it was approved by the Board, a committee or the shareholders. Notwithstanding the foregoing, no loan, except advances in connection with indemnification, shall be made by the Corporation to any director unless it is authorized by vote of the shareholders. For this purpose, shares of the director who would be the borrower shall not be shares entitled to vote. Section 6.6. Indemnification of Directors, Officers and Employees. The Corporation shall indemnify to the full extent permitted by law any person made or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person or such person's testator or intestate is or was a director, officer or employee of the Corporation or serves or served at the request of the Corporation any other enterprise as a director, officer or employee. Expenses incurred by any such person in defending any such action, suit or proceeding shall be paid or reimbursed by the Corporation promptly upon receipt by it of an undertaking of such person to repay such expenses if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation. The C-11 rights provided to any person by this by-law shall be enforceable against the Corporation by such person who shall be presumed to have relied upon it in serving or continuing to serve as a director, officer or employee as provided above. No amendment of this by-law shall impair the rights of any person arising at any time with respect to events occurring prior to such amendment. For purposes of this by-law, the term "Corporation" shall include any predecessor of the Corporation and any constituent Corporation (including any constituent of a constituent) absorbed by the Corporation in a consolidation or merger; the term "other enterprise" shall include any Corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; service "at the request of the Corporation" shall include service as a director, officer or employee of the Corporation which imposes duties on, or involves services by, such director, officer or employee with respect to an employee benefit plan, its participants or beneficiaries; any excise taxes assessed on a person with respect to an employee benefit plan shall be deemed to be indemnifiable expenses; and action taken or omitted by a person with respect to an employee benefit plan which such person reasonably believes to be in the interest of the participants and beneficiaries of such plan shall be deemed to be action not opposed to the best interests of the Corporation. Section 6.7. Amendments. Except as otherwise provided in the Certificate of Incorporation in respect of any class or series of Preferred Stock, now or hereafter authorized, the By-Laws of the Corporation may be amended or repealed, or new By-Laws may be adopted, either (a) by a vote of shareholders entitled to vote at any annual or special meeting of shareholders, or (b) by a vote of the majority of the entire Board of Directors at any regular or special meeting of directors; provided, however, that any amendment or repeal of, or the adoption of any new By-Law or provision inconsistent with, Article I (Sections 1.2, 1.13 or 1.14), Article II (Sections 2.2, 2.3, or 2.7) or Article VI (Sections 6.6 or 6.7) of these By-Laws, if by action of such shareholders, shall be only upon the affirmative vote of not less than two-thirds of the shares entitled to vote thereon at such annual or special meeting of shareholders at which any such action is proposed and, if by action of the Board of Directors, shall be only upon the approval of not less than two thirds of the entire Board of Directors at any regular or special meeting of directors. C-12 STATE OF NEW YORK PUBLIC SERVICE COMMISSION - -------------------------------------------------- In the Matter of the Application of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation for Authority Under Sections 70, 107, Case 98- 108 and 110 of the Service Law to Form a Holding Company Structure to Engage in Certain Related Transactions. - -------------------------------------------------- PETITION OF NIAGARA MOHAWK HOLDINGS, INC. and NIAGARA MOHAWK POWER CORPORATION FOR AUTHORITY TO FORM A HOLDING COMPANY STRUCTURE TO ENGAGE IN CERTAIN RELATED TRANSACTIONS EXHIBIT C Index to Exhibits (A) Statement of financial condition of Niagara Mohawk Power Corporation as of June 30, 1997, as prescribed by the Commission's Rules (16 NYCRR 3.1). (B) Statement in explanation of changes in specific accounts between December 31, 1996 and June 30, 1997. (C) Summary of changes in utility plant and depreciation reserve accounts for the period December 31, 1996 through June 30, 1997. (D) Analysis of adjustments to utility plant for the period December 31, 1996 through June 30, 1997. (E) Analysis of adjustments to depreciation reserve for the period December 31, 1996 through June 30, 1997. (F) Explanation of changes in non-utility property for the period December 31, 1996 through June 30, 3997. (G) Reimbursement margin from December 31, 1996 through June 30, 1997. (H) Construction budget for the years 1997 through 2001. Exhibit A Sheet 1 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 1. CAPITAL STOCK AUTHORIZED BY CERTIFICATE OF INCORPORATION, AS LAST AMENDED: Preferred Stock with a par value of one hundred dollars ($100 each), 3,400,000 shares Preferred Stock with a par value of twenty five dollars ($25 each), 19,600,000 shares Preference Stock with a par value of twenty five dollars ($25 each), 8,000,000 shares Common Stock with $1 par value, 185,000,000 shares 2&3. CAPITAL STOCK AUTHORIZED BY THE COMMISSION AND ISSUED BY THE COMPANY:
Authorized $ $ Case Date of and Issued Outstanding Par Value $ Class Number Order Series Shares Shares Value Received Premium - --------- ------ ----- ------ ---------- ----------- ----- -------- ------- PREFERRED (09-29-48 3.40% 200,000 200,000 100 20,030,000 30,000 Note A 12733 (amended 3.60% 350,000 350,000 100 35,497,000 497,000 Note B (09-20-49 3.90% 240,000 240,000 100 24,554,000 554,000 Note C 16720 05-04-54 4.10% 210,000 210,000 100 21,000,000 18346 05-13-57 5.25% 200,000 200,000 100 20,000,000 18737 02-17-58 4.85% 250,000 250,000 100 25,000,000 24455 08-02-67 6.10% 250,000 250,000 100 25,000,000 26290 08-01-72 7.72% 400,000 400,000 100 40,154,800 154,800 26438 06-12-73 7.45% 330,000 222,000 100 33,000,000 (09-24-74 26770 (amended 10.60% 60,000 - 100 6,000,000 (10-22-74 26864 08-07-75 11.75% 300,000 - 100 30,000,000 27044 09-14-76 9.75% 1,200,000 - 25 30,000,000 27252 01-17-78 8.375% 1,600,000 100,000 25 40,000,000 27660 02-19-80 9.75% 1,020,000 - 25 25,500,000 27769 03-26-81 12.25% 700,000 - 25 17,500,000 27769 03-26-81 12.50% 620,000 - 25 15,500,000 27923 04-22-81 12.75% 250,000 - 100 25,000,000 28149 04-21-82 15.00% 800,000 - 25 20,000,000 28202 01-12-83 (a) 1,200,000 1,200,000 25 30,000,000 28454 ( 28455 (06-29-83 10.75% 1,600,000 - 25 40,000,000 25650 10.13% 250,000 - 100 25,000,000 28651 )12-21-83 10.13% 1,000,000 - 25 25,000,000 28784 ( 28785 (05-30-84 (b) 2,000,000 1,750,000 25 50,000,000 28834 01-30-85 12.75% 1,000,000 - 25 25,000,000 28835 ) 28836 01-30-85 (c) 2,000,000 2,000,000 25 50,000,000 28837 ( 28894 (12-17-86 8.75% 3,000,000 - 25 75,000,000 29273 07-15-87 8.70% 1,000,000 - 25 25,000,000 89-M-079 07-11-91 7.85% 914,005 914,005 25 22,850,125 93-M-0981 05-16-94 9.50% 6,000,000 6,000,000 25 150,000,000 PREFERENCE: 27318 05-09-78 7.75% 1,360,000 - 25 34,000,000 (a) Adjustable rate, Series A (b) Adjustable rate, Series B (c) Adjustable rate, Series C
Exhibit A Sheet 2 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) 2&3. CAPITAL STOCK AUTHORIZED BY THE COMMISSION AND ISSUED BY THE COMPANY: (Cont'd)
$ Par Value $ Case Order Authorized or Issued Value $ Class Number Dated Shares Stated Value Shares Received Premium - ----- ------ ----- ---------- ------------ ------ -------- ------- Common: ( 9,580,989 10 9,580,989 Note D (9-29-48 1,928,627 No-Class A 1,928,627 Note E 12733 (amended 7,473,172 No 7,473,172 Note E (9-20-49 2,121,490 No 2,082,864.3 Note F 15593 12-18-51 1,000,000 No 1,000,000 22,643,000 16083 2-10-53 1,000,000 No 1,000,000 26,939,000 18134 1-07-57 1,454,680 No 1,414,368 Note G 18714 3-25-58 9,936 No 9,936 Note H 21886 10-10-61 700,000 No 700,000 31,343,900 23554 3-19-65 27,360,680 8 27,360,680 Note I 23754 10-19-65 41,750 8 41,750 Note J 751,500 23957 3-29-66 1,400,000 8 1,400,000 31,722,600 20,522,600 24401 8-02-67 39,372 8 39,3728 Note K3 536,444 24984 1-21-69 14,628 8 14,628 Note L 285,975 25021 2-18-69 8,250 8 8,250 Note M 25748 8-18-70 2,886,468 8 2,886,468 37,235,268 14,143,524 25977 1-26-71 2,000,000 8 2,000,000 35,160,000 19,160,000 26373 3-06-73 3,000,000 8 3,000,000 43,905,000 19,905,000 26511 11-20-73 3,500,000 8 3,500,000 44,100,000 16,100,000 26628 5-24-74 3,500,000 8 3,300,000 29,964,000 3,564,000 (12-10-74 3,600,000 8 3,000,000 30,585,000 6,585,000 26770 (amended 500,000 (a) 1 500,000 6,258,477 5,758,477 (6-11-75 900,000 (b) 1 900,000 11,172,879 10,272,879 )8-07-75 3,000,000 3,000,000 31,950,000 28,950,000 26864 )amended 500,000 (c) 1 (275,886 (b) 3,790,894 3,515,008 )10-28-75 (224,114 (a) 3,041,167 2,817,053 27011 8-10-76 750,000 (c) 1 )491,000 (b) 7,357,523 6,866,523 )259,000 (a) 3,763,377 3,504,377 27023 7-07-76 4,000,000 1 4,000,000 51,580,000 47,580,000 27128 3-15-77 1,500,000 (c) 1 (796,970 (b) 12,159,874 11,362,904 (703,030 (a) 10,815,587 10,112,557 27226 10-13-77 65,000 (d) 1 47,595 735,363 687,768 27343 5-24-78 3,500,000 1 3,500,000 48,265,000 44,765,000 27368 6-19-78 1,500,000 (c) 1 (784,306 (b) 11,124,249 10,339,943 (715,694 (a) 14,919,718 14,204,024 27456 3-06-79 2,250,000 (c) 1 )1,258,454 (b) 12,272,886 11,014,432 )991,546 (a) 11,523,270 10,531,724 27569 8-22-79 3,500,000 1 3,500,000 44,730,000 41,230,000 27649 6-11-80 4,000,000 1 4,000,000 54,460,000 50,460,000 27661 3-05-80 4,500,000 1 (2,335,340 (a) 27,659,391 25,324,051 (2,164,660 (b) 26,154,127 23,989,467 27802 8-29-80 200,000 (d) 1 200,000 2,462,618 2,262,618 27924 6-18-81 5,000,000 1 5,000,000 57,500,000 52,500,000 27999 7-01-81 3,000,000 1 3,000,000 (a) 39,474,671 36,474,671 28000 7-01-81 3,000,000 1 3,000,000 (b) 40,899,688 37,899,688 28150 6-23-82 5,000,000 1 5,000,000 76,000,000 71,000,000 28151 (7-14-82 1,000,000 1 1,000,000 17,122,526 16,122,526 (amended (1-26-83 28262 8-11-82 1,000,000 1 1,000,000 (d) 15,686,480 14,686,480 28294 9-22-82 5,000,000 1 5,000,000 (a) 78,152,135 73,152,135 28318 11-04-82 4,000,000 1 3,616,720 (b)(1) 55,914,099 52,297,379 28449 5-18-83 2,000,000 1 2,000,000 33,240,000 31,240,000 28460 5-18-83 2,000,000 1 2,000,000 35,180,000 33,180,000 28461 8-17-83 1,000,000 1 1,000,000 14,695,294 13,695,294 28462 11-22-83 1,000,000 1 1,000,000 13,685,000 12,685,000 28652 3-28-84 2,000,000 1 2,000,000 25,370,000 23,370,000 28653 10-03-84 2,000,000 1 2,000,000 32,940,008 30,940,008 28737 5-02-84 4,000,000 1 4,000,000 (a) 67,127,550 63,127,550 28786 8-15-84 1,000,000 1 1,000,000 15,479,768 14,479,768 28878 9-05-84 1,500,000 1 500,000 (d) 8,820,255 8,320,255 28787 10-03-84 1,000,000 1 1,000,000 18,401,846 17,401,846 28943 1-03-85 5,000,000 (b) 1 1,612,131 (1) 29,913,189 28,301,058 28985 2-20-85 2,000,000 1 2,000,000 33,350,000 31,350,000 28986 5-29-85 1,000,000 1 1,000,000 20,288,071 19,288,071 29034 6-13-85 6,000,000 1 5,920,437 (a) 91,160,486 85,240,049 29140 9-19-85 1,000,000 1 234,226 (d)(1) 4,274,624 4,040,398 29079 8-14-85 2,000,000 1 60,354 (1) 1,433,408 1,373,054 29558-29562 8-19-87 5,000,000 1 (3,757,381 (b) 50,780,176 47,022,795 (1,200,001 (d) 16,327,932 15,127,931 88-M-218 1-12-89 6,000,000 1 0 (1) 89-M-253 2-27-89 6,000,000 1 0 (1) 91-M-1310 3-11-92 7,000,000 1 (1,238,566 (b) 20,802,353 19,563,787 (2,141,802 (a) 39,074,848 36,933,046 91-M-0948 4-29-92 356,460 1 416,597 Note N 92-M-1089 2-19-93 4,494,000 1 4,494,000 99,991,500 95,497,500 (a) Sold through Automatic Dividend Reinvestment Plan (DRIP) (b) Sold through Employees Savings Fund Plan (ESFP) (c) Sold through DRIP and ESFP (d) Sold through Employee Stock Ownership Plan (1) PSC Case Expired
Exhibit A Sheet 3 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) 2&3. CAPITAL STOCK AUTHORIZED BY THE COMMISSION AND ISSUED BY THE COMPANY: (Cont'd) Notes: A. Shares were exchanged for like amount and series of Central New York Power Corporation stock. B. Shares were exchanged for like amount and series of Buffalo Niagara Electric Corporation stock. C. Shares were exchanged for like amount and series of New York Power and Light Corporation stock. D. Shares were issued to Niagara Hudson Power Corporation in exchange for the following no par common stock: 1,586,358 shares of Central New York Power Corporation 1,400,000 shares of New York Power and Light Corporation 3,000,000 shares of Buffalo Niagara Electric Corporation E. Shares were issued to Niagara Hudson Power Corporation in exchange for 9,580,989 shares of Niagara Mohawk Power Corporation $10 stated value common stock. F. Shares issued to meet the conversion privilege of its Class A stock. G. Shares issued upon conversion of $45,066,400 principal amount of Convertible Debentures (cash amounting to $184,403.76 paid in lieu of 5,056.94 fractional shares). H. Shares were exchanged for 3,312 shares of Cazenovia Electric Company common stock (subsequently merged into the Company). I. Shares were issued in place of 13,680,340 common shares (2 for 1 split). J. Shares were issued upon acquisition of 12,500 shares of capital stock of the Paul Smith's Electric Light and Power and Railroad Company (subsequently merged into the Company). K. Shares were issued upon acquisition of 2,316 shares of capital stock of the Adams Electric Light Company (subsequently merged into the Company). L. Shares were issued upon acquisition of 1,488 shares of capital stock of the Canton Electric Light and Power Company (subsequently merged into the Company). M. Shares were issued upon acquisition of 50 shares of capital stock of the Ellicottville Electric Light Company (subsequently merged into the Company). N. Shares were issued upon acquisition of 200 shares of capital stock of N.M. Suburban Gas, which in turn acquired Syracuse Suburban Gas Company, including subsequent common stock issuances in accordance with the acquisition agreement. Exhibit A Sheet 4 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) 4. TERMS OF PREFERENCE Preferred Stock 3.40% SERIES - $100 par value This series is designated as Preferred Stock, 3.40% Series, and provides for a dividend rate of 3.40% per annum. Upon voluntary dissolution, the holders are entitled to $103.50 per share plus an amount equal to dividends accrued and unpaid on each share, whether or not earned or declared. This series is redeemable in whole or in part at the option of the Company at $103.50 per share plus an amount equal to dividends accrued and unpaid on each share, whether or not earned or declared. 3.60% SERIES - $100 par value This series is designated as Preferred Stock, 3.60% Series, and provides for a dividend rate of 3.60% per annum. Upon voluntary dissolution, the holders are entitled to $104.85 per share plus an amount equal to dividends accrued and unpaid on each share whether or not earned or declared. This series is redeemable in whole or in part at the option of the Company at $104.85 per share plus an amount equal to dividends accrued and unpaid on each share, whether or not earned or declared. 3.90% SERIES - $100 par value This series is designated as Preferred Stock, 3.90% Series, and provides for a dividend rate of 3.90% per annum. Upon voluntary dissolution, the holders are entitled to $106 per share plus an amount equal to dividends accrued and unpaid on each share, whether or not earned or declared. This series is redeemable in whole or in part at the option of the Company at $106 per share plus an amount equal to dividends accrued and unpaid on each share, whether or not earned or declared. 4.10% SERIES - $100 par value This series is designated as Preferred Stock, 4.10% Series, and provides for a dividend rate of 4.10% per annum. Upon voluntary dissolution, the holders are entitled to an amount equal to $102 per share plus accrued dividends. This series is redeemable in whole or in part at the option of the Company at $102 per share plus accrued dividends. 4.85% SERIES - $100 par value This series is designated as Preferred Stock, 4.85% Series, and provides for a dividend rate of 4.85% per annum. Upon voluntary dissolution, the holders are entitled to an amount equal to $102 per share plus accrued dividends. This series is redeemable in whole or in part at the option of the Company at $102 per share plus accrued dividends. 5.25% SERIES - $100 par value This series is designated as Preferred Stock, 5.25% Series, and provides for a dividend rate of 5.25% per annum. Upon voluntary dissolution, the holders are entitled to an amount equal to $102 per share plus accrued dividends. This series is redeemable in whole or in part at the option of the Company at $102 per share plus accrued dividends. 6.10% SERIES - $100 par value This series is designated as Preferred Stock, 6.10% Series, and provides for a dividend rate of 6.10% per annum. Upon voluntary dissolution, the holders are entitled to an amount equal to $101 per share plus accrued dividends. This series is redeemable in whole or in part at the option of the Company at $101 per share plus accrued dividends. 7.45 % SERIES - $100 par value This series is designated as Preferred Stock, 7.45% Series, and provides a dividend rate of 7.45% per annum. Upon voluntary dissolution, the holders are entitled to the redemption price at the time applicable, plus dividends accrued and unpaid on each share, whether or not earned or declared. This series is redeemable in whole or in part at the option of the Company at the redemption price of $101.69 per share through June 30, 1998, at $101.45 per share thereafter and through June 30, 1999, at $101.21 per share thereafter and through June 30, 2000, at $100.97 per share thereafter and through June 30, 2001, at $100.73 per share thereafter and through June 30, 2002, at $100.49 per share thereafter and through June 30, 2003, at $100.25 per share thereafter and through June 30, 2004, and at $100.00 per share thereafter, in each case plus an amount equal to dividends accrued and unpaid on each share, whether or not earned or declared. As a mandatory sinking fund the Company will call for redemption and retire on each June 30, 1977 through June 30, 2008, 18,000 shares, and on June 30, 2009 the balance of the shares outstanding, in each case at a redemption price of $100 per share, plus an amount equal to the dividends accrued and unpaid, whether or not earned or declared. 7.72% SERIES - $100 per value This series is designated as Preferred Stock, 7.72% Series, and provides for a dividend rate of 7.72% per annum. Upon voluntary dissolution, the holders are entitled to an amount equal to $102.36 per share plus accrued dividends. This series is redeemable in whole or in part at the option of the Company at $102.36 per share plus accrued dividends. Exhibit A Sheet 5 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) 7.85% SERIES - $25 par value This series is designated as Preferred Stock, 7.85% Series and provides a dividend rate of 7.85% per annum. Upon voluntary dissolution, the holders are entitled to the redemption price at the time applicable, plus dividends accrued and unpaid on each share, whether or not earned or declared. This series is redeemable in whole or in part at the option of the Company at the redemption price of $25.56 per share through September 30, 1997, at $25.28 per share thereafter and through September 30, 1998, and at $25.00 per share thereafter in each case plus an amount equal to dividends accrued and unpaid on each share, whether or not earned or declared. As a mandatory sinking fund the Company will call for redemption and retire on September 30, 1997, 182,801 shares, and on each September 30 thereafter through September 30, 2001, in each case at $25.00 per share plus accumulated dividends. 8.375% SERIES - $25 par value This series is designated as Preferred Stock, 8.375% Series, and provides a dividend rate of 8.375% per annum. Upon voluntary dissolution, the holders are entitled to an amount equal to the redemption price at the time applicable, plus accrued dividends. As a mandatory sinking fund, the Company will call for the redemption and retire on April 1, 1983 and on each April 1 thereafter to and including April 1, 1997, 100,000 shares and on April 1, 1998 the balance of shares outstanding, in each case at a redemption price of $25 per share plus an amount equal to the dividends accrued and unpaid on such shares, whether or not earned or declared. 9.50% Series - $25 par value This series is designated as Preferred Stock, 9.50% Series and provides a dividend rate of 9.50% per annum. Upon voluntary dissolution, the holders are entitled to an amount equal to the redemption price at the time applicable, plus accrued dividends. This series is redeemable in whole or in part at the option of the Company at any time on or after September 30, 1999 at $25.00 per share, in each case plus an amount equal to the dividends accrued and unpaid on each share, whether or not earned or declared. Adjustable Rate Series A - $25 par value The series is designated as Preferred Stock, Series A and provides a dividend rate of not less than 6.50% per annum or greater than 13.50% per annum. The annual dividend per share was 10.00% of par value for the initial dividend period ended March 31, 1983 and is computed at 1.60% below the applicable rate in effect for each subsequent period. The applicable rate for any dividend period will be the highest of (1) the Treasury Bill Rate (2) the ten year constant maturity rate and (3) the twenty year constant maturity rate for such dividend period. The amount of dividends per share payable for each dividend period shall be computed by dividing the dividend rate for such dividend period by four and applying such rate against the par value. The dividend rate with respect to each dividend period will be calculated as promptly as practicable by the Company, confirmed in writing by independent accountants and published in a newspaper of general circulation in New York City prior to the new dividend period. Upon voluntary dissolution, the holders are entitled to receive $25.00 per share plus accrued dividends. Adjustable Rate Series B - $25 par value This series is designated as Preferred Stock, Series B and provides a dividend rate of not less than 7.50% per annum or greater than 16.50% per annum. The dividend rate for the initial dividend period ending December 31, 1984 was 13.375% per annum. For each quarterly period thereafter, dividend will be .625% above the applicable rate. The applicable rate for each dividend period, determined in advance of such period, will be the highest of the per annum three-month U.S. Treasury bill rate, the U.S. Treasury ten year constant maturity rate and the U.S. Treasury twenty year constant maturity rate. The amount of dividends per share payable for each dividend period shall be computed by dividing the dividend rate for such dividend period by four and applying such rate against the par value per share. The dividend rate with respect to each dividend period will be calculated as promptly as practical by the Company, confirmed in writing by independent accountants and published in a newspaper of general circulation in New York City prior to the new dividend period. Upon voluntary dissolution, the holders are entitled to receive $25.00 per share plus accrued dividends. This series is redeemable in whole or in part at the option of the Company at $25.00 per share, plus accrued dividends. As a sinking fund, the Company will call for the redemption and retire on September 30, 1993 and each September 30, thereafter to and including September 30, 2023, 50,000 shares and on August 15, 2024, 450,000 shares, in each case at $25.00 per share plus accrued dividends. Adjustable Rate Series C - $25 par value This series is designated as Preferred Stock, Series C and provides an annual dividend rate of 12.12% for the initial dividend period ending June 30, 1985 and at .40% above the Applicable Rate in effect for each subsequent period. The dividend rate for any dividend period shall in no event be less than 7% per annum or greater than 15.50% per annum. The applicable rate for each dividend period, determined in advance of such period, will be the highest of the arithmetic average of the two most recent weekly per annum Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate. The amount of dividends per share payable for each dividend period shall be computed by dividing the dividend rate for such dividend period by four and applying such rate against the par value. The dividend rate with respect to each dividend period will be calculated as promptly as practicable by the Company, confirmed in writing by independent accountants and published in a newspaper of general circulation in New York City prior to the new dividend period. Upon voluntary dissolution, the holders are entitled to receive $25.00 per share plus accrued dividends. This series is redeemable in whole or in part at the option of the Company at $25.00 per share, plus accrued dividends. Exhibit A Sheet 6 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) ALL SERIES Accruals of dividends shall not bear interest. Not convertible or exchangeable for other securities of the corporation. Upon involuntary dissolution, the holders are entitled to the par value per share plus an amount equal to each share, whether or not earned or declared. No voting rights except upon default in payment of dividends in an aggregate amount equivalent to four full quarterly dividends on all shares of preferred stock outstanding. Upon such a default and until all dividends on all shares of preferred stock at time of default shall have been paid or declared or set apart for payment, the holders of the preferred stock, voting separately as a class and regardless of series, shall be entitled to elect a majority of the Board of Directors. No preemptive rights to subscribe for, purchase or receive any part of the unissued stock of the Company or any stock of the Company to be issued by reason of any increase in the authorized capital stock of the Company. Until dividends declared or set apart for payment for all series of preferred stock, no dividend to be paid or set apart for payment on the preference and common stock. Upon dissolution, voluntary or involuntary, holders of preferred stock of each series then outstanding entitled to receive the sums per share fixed for the respective series before any distribution to holders of the preference and common stock. If assets distributable upon dissolution, voluntary or involuntary, are insufficient to permit payment to holders of preferred stock in full, then assets to be distributed ratably among the holders of respective series of preferred stock in proportion to sums which would be payable if assets were sufficient. Legal rights of the Company to purchase or otherwise acquire shares of preferred stock not limited. So long as any shares of the preferred stock of any series are outstanding, the Company is not permitted to do certain things without the consent of the holders of preferred stock which are set out in subdivisions (E), (F) and (G) of paragraph (5) of part D of the Article IV of the Certificate of Consolidation and Certification of Amendment both dated and filed January 5, 1950. Preference Stock No preference stock is currently outstanding. ALL SERIES Accruals of dividends shall not bear interest. Not convertible or exchangeable for other securities of the Company. Upon involuntary dissolution, the holders are entitled to the par value per share plus an amount equal to dividends accrued and unpaid on each share, whether or not earned or declared. No voting rights except upon default in payment of dividends in an aggregate amount equivalent to six full quarterly dividends on all shares of preference stock outstanding. Upon such a default and until all dividends on all shares of preference stock at time of default shall have been paid or declared or set apart for payment, the holders of the preference stock, voting separately as a class and regardless of series, shall be entitled to elect two members of the Board of Directors. No preemptive rights to subscribe for, purchase or receive any part of the unissued stock of the Company or any stock of the Company to be issued by reason of any increase in the authorized capital stock of the Company. Dividend payable on last day of March, June, September and December in each year. Until dividends declared or set apart for payment for all series of preference stock, no dividend to be paid or set apart for payment on the common stock. Upon dissolution, voluntary or involuntary, holders of preference stock of each series then outstanding entitled to receive the sums per share fixed for the respective series before any distribution to holders of the common stock. If assets distributable upon dissolution, voluntary or involuntary, are insufficient to permit payments to holders of preference stock in full, then assets to be distributed ratably among the holders of respective series of preference stock in proportion to sums which would be payable if assets were sufficient. Legal rights of Company to purchase or otherwise acquire shares of preference stock not limited. So long as any shares of the preference stock of any series are outstanding, the Company is not permitted to do certain things without the consent of the holders of the preference stock which are set out in subdivisions (D) and (E) of paragraph (7) of Part D of the Article IV of the Certificate of Consolidation and Certification of Amendment both dated and filed January 5, 1950. Exhibit A Sheet 7 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) 5. TRANSFERS FROM SURPLUS OR OTHER ACCOUNTS TO NON-PAR STOCK ACCOUNTS: NONE 6&8. BONDS, ETC. AUTHORIZED BY THE COMMISSION AND ISSUED/OUTSTANDING BY THE COMPANY: (A) First Mortgage Bonds issued by Niagara Mohawk Power Corporation and secured by mortgage referred to under 7(a) below:
Face Value of Bonds Case Date of Authorized Amount Date of Interest Date of Number Order and Issued Outstanding Issue Rate % Maturity - ------ ------- ---------- ----------- -------- -------- -------- 14626 01/17/50 $40,000,000 (1) 01/01/50 2.75 01/01/80 15062 11/09/50 40,000,000 (1) 10/01/50 2.875 10/01/80 15593 12/19/51 15,000,000 (1) 12/01/51 3.375 12/01181 16083 02/10153 25,000,000 (1) 02/01/53 3.50 02/01/83 16459 10/16/53 40,000,000 (1) 10/01/53 3.25 10/01/83 16888 08/16/54 25,000,000 (1) 08/01/54 3.125 08/01/84 17797 04/24/56 30,000,000 (1) 05/01/56 3.625 05/01/86 18507 08/27/57 50,000,000 (1) 09/01/57 4.875 09/01/87 18984 05/26/58 50,000,000 (1) 06/01/58 3.875 06/01/88 21118 03/22/60 50,000,000 (1) 04/01/60 4.75 04/01/90 21886 10/10/61 40,000,000 (1) 11/01/61 4.50 11/01/91 23405 10/10/64 40,000,000 (1) 12/01/64 4.625 12/01/94 24135 10/11166 45,000,000 (1) 11/01/66 5.875 11/01/96 24455 08/02/67 40,000,000 40,000,000 08/01/67 6.25 08/01/97 24790 07/16/68 60,000,000 60,000,000 08/01/68 6.50 08/01/98 25354 11/12/69 75,000,000 (4) 12/01/69 9.125 12/01/99 25977 01/26/71 65,000,000 (4) 02/01/71 7.375 02/01/01 26204 01/18/72 80,000,000 (4) 02/01/72 7.625 02/01/02 26290 08/01/72 80,000,000 (4) 08/01/72 7.75 08/01/02 26511 11/20/73 80,000,000 (4) 12/01/73 8.25 12/01/03 26726 09/24/74 125,000,000 (1) 10/01/74 12.60 10/01/81 26770 12/10/74 50,000,000 (4) 03/01/75 10.20 03/01/05 26864 08/07/75 50,000,000 (1) 09/01/75 10.625 09/01/85 27185 08/04/77 75,000,000 (4) 08/01/77 8.35 08/01/07 27267 12/20/77 50,000,000 (4) 12/01/77 8.625 12/01/07 27442 12/14/78 50,000,000 (4) 12/01/78 9.50 12/01/03 27569 08/22/79 100,000,000 (4) 09/01/79 9.95 09/01/04 27771 09/24/80 66,350,000 (4) 10/01/80 12.95 10/01/00 27772 02/11/81 13,650,000 (4) 03/01/81 15.00 03/01/91 27773 09/24/80 25,000,000 (4) 03/03/81 12.95 10/01/00 27925 )08/07/81 25,000,000 (4) 08/11/81 14.875 08/11/88 27925 )08/07/81 25,000,000 (4) 09/11/81 14.875 08/11/88 27926 10/01/81 50,000,000 (4) 03/12/82 15.50 03/01/92 27927 03/09/82 30,000,000 (4) 04/01/82 13.50 04/01/12 27928 (06/09/82 75,000,000 (4) 06/17/82 15.75 06/01/92 27930 ( 27929 (08/11/82 75,000,000 (4) 08/23/82 16.00 08/01/12 27931 ) 28255 (10/26/82 100,000,000 (4) 11/30/82 12.875 11/01/12 28256 ( 28353 )02/09/83 100,000,000 (4) 03/02/83 12.875 03/01/13 28354 ) 28456 04/06/83 50,000,000 (4) 05/09/83 11.00 05/01/93 28457 06/15/83 50,000,000 (4) 06/24/83 12.50 06/15/13 28463 ( 20,000,000 (1) 04/09/84 12.00 03/01/89 28464 (04/06/83 13,000,000 (4) 04/09/84 12.50 03/01194 ( 17,000,000 (4) 04/09184 12.625 03/01/99 28458 ) 28468 )02/27/84 100,000,000 (4) 05/02/84 14.75 05/01/91 28648 ) 28788 ( 28789 (06/13/84 100,000,000 (4) 08/08/84 11.25 07/01/14 28790 ( 28830 )09/05/84 56,250,000 (4) 10/30/84 11.375 10/01/14 28831 )09/05/84 13,000,000 (1) 10/30/84 9.125 10/01/89 28905 (11/20/84 30,000,000 (1) 01/31185 13.06 02/01/92 ( 20,000,000 (1) 02/28/85 13.06 02/01/92 28906 )12/19/84 20,000,000 (1) 01/31/85 12.73 02/01/92 ) 10,000,000 (1) 02/20/85 12.73 02/20/92 ) 20,000,000 (1) 02/28/85 12.68 02/28/92 28646 ( 28833 ( 28907 (10/30/85 75,000,000 75,000,000 11/20/85 8.875 11/01/25 29043 ( 29042 ) 29044 ) 29269 )03/18/86 150,000,000 (4) 06/16/86 10.00 06/01/16 29270 )
Exhibit A Sheet 8 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D)
6&8. BONDS, ETC. AUTHORIZED BY THE COMMISSION AND ISSUED/OUTSTANDING BY THE COMPANY (CONT'D) Face Value of Bonds Case Date of Authorized Amount Date of Interest Date of Number Order and Issued Outstanding Issue Rate % Maturity - ------ ------- ---------- ----------- -------- -------- -------- 29271 ( 29272 (05/28/86 150,000,000 (1) 08/5/86 8.875 08/01/94 29308 ( 29309 ( 29310 ( 29354 07/23/86 100,000000 (4) 10/07/86 9.125 10/01/96 29350 07/23/86 100,000,000 (4) 11/20/86 10.0 29476 (04/08/87 100,000,000 (4) 07/15/87 9.625 11/01/16 29477 ( 07/01/97 29553 )04/27/88 200,000,000 (4) 05/12/88 9.875 05/01/98 29557 ( 88-M-182 ( 88-M-183 (11/16/88 100,000,000 (4) 02/21/89 10.25 02/01/99 88-M-184 ( 88-M-254 )03/13/89 100,000,000 (4) 04/12/89 10.375 04/01/99 88-M-255 ( 88-M-072 (04/07/89 100,000,000 100,000,000 10/20/89 9.25 88-M-073 ( 10/01/01 89-M-074 ( 89-M-075 ( 89-M-110 (05/10/90 150,000,000 150,000,000 06/21/90 9.50 06/01/00 89-M-110 ( 89-M-110 (05/10/90 150,000,000 150,000,000 11/28/90 9.75 11/01/05 89-M-111 ( 90-M-688 ( 90-M-689 (12/14/90 150,000,000 150,000,000 03/07/91 9.50 03/01/21 90-M-690 ( 90-M-691 (12/11/91 150,000,000 150,000,000 04/14/92 8.75 04/01/22 90-M-692 ( 90-M-693 ( 91-M-0614 09/26/91 45,600,000 45,600,000 10/29/91 6.625 10/01/13 91-M-0640 08/20/92 115,705,000 115,705,000 07/07/94 7.20 07/01/29 92-M-0152 05/14/92 300,000,000 300,000,000 06/10/92 8.00 06/01/04 92-M-0152 165,000,000 165,000,000 07/23/92 8.50 07/01/23 92-M-0152 220,000,000 220,000,000 08/26/92 7.375 08/01/03 93-M-0110 )03/31/93 85,000,000 85,000,000 04/07/93 6.875 04/01/03 93-M-0110 ) 210,000,000 210,000,000 04/07/93 7.875 04/01/24 93-M-0110 )03/31/93 110,000,000 110,000,000 07/07/93 6.625 07/01/05 93-M-0246 (08/05/93 230,000,000 230,000,000 09/15/93 5.875 09/01/02 93-M-0246 ( 210,000,000 210,000,000 03/04/94 6.875 03/01/01 93-M-0981 05/16/94 275,000,000 275,000,000 05/23/95 7.75 05/15/06
(B) First Mortgage Bonds issued by Central New York Power Corporation: 11642 11/15/44 48,000,000 (1) 10/01/44 3.0 10/01/74
(C) First Mortgage Bonds issued by Buffalo Niagara Electric Corporation: 11748 12/11/45 56,929,000 (1) 11/01/45 2.75 11/01/75
(D) First Mortgage Bonds issued by New York Power and Light Corporation: 11618 04/10/45 50,000,000 (1) 03/01/45 2.75 03/01/75
(E) First Mortgage Bonds issued by Paul Smith's Electric Light and Power and Railroad Company 14515 03/20/50 1,100,000 (1) 04/01/50 3.375 04/01/75 (09/15/53 16400 (03/22/54 450,000 (1) 07/01/54 4.50 07/01/79 21302 09/13/60 450,000 (1) 05/01/60 5.50 5/01/85
(F) Unsecured Convertible Debentures issued by Niagara Mohawk Power Corporation: 18134 01/07/57 46,224,200 (2) 2/01/57 4.625 02/01/72
(G) Promissory notes issued by Niagara Mohawk Power Corporation: 26630 06/11/74 46,600,000 (4) 06/01/74 8.0 06/01/04 28020 08/19/81 50,000,000 (4) 09/23/81 18.0 09/15/89 28020 08/19/81 17,000,000 (4) 09/23/81 10.0 09/15/89 28981 ) 28982 )06/26/85 100,000,000 100,000,000 09/05/85 Various 07/01/15 28983 ) 28646 ( 28833 (10/30/85 75,000,000 75,000,000 12/23/85 Various 12/01/25
Exhibit A Sheet 9 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D)
6&8. BONDS, ETC. AUTHORIZED BY THE COMMISSION AND ISSUED/OUTSTANDING BY THE COMPANY (CONT'D) Face Value of Bonds Case Date of Authorized Amount Date of Interest Date of Number Order and Issued Outstanding Issue Rate % Maturity - ------ ------- ---------- ----------- -------- -------- -------- 28907 29043 29357 )09/10/86 50,000,000 50,000,000 12/18/86 Various 12/01/26 29352 29353 (12/17/86 100,000,000 (1) Various Various Various 29415 29474 29475 )04/08/87 100,000,000 (1) Various Various Various 29478 88M-256 ( 88M-257 (05/03/89 100,000,000 20,000,000 Various Various Various
(H) New York State Energy Research And Development Authority (NYSERDA) Unsecured Promissory Note: 28015 10/14/81 9,600,000 (1) Various Various 07/14/82
(I) NYSERDA Tax Exempt Revenue Notes: 28465 28466 )06/29/83 56,000,000 (1) Various Various Various 28467 29416 (12/17/86 25,760,000 25,760,000 03/26/87 Various 03/01/27 29417 29512 29513 )04/08/87 93,200,000 93,200,000 07/16/87 Various 07/01/27 88-M-078 ( 88-M-079 (09/28/88 69,800,000 69,800,000 12/28/88 Various 12/01/23
(J) Revolving Credit and Term Loan Agreement: (commercial paper notes) 27753 07/09/80 50,000,000 (1) Various Various Various
(K) Revolving Credit Agreement - Oswego Facilities Trust: 27493 09/21/83 100,000,000 (4) Various Various Various
(L) Liability for Nuclear Fuel Disposal Costs: 28525 03/20/84 111,440,548 111,440,548 03/20/84 Various 1998
(M) Unsecured Promissory Notes: 28465 05/30/84 20,000,000 (1) 07/31/84 15.02% 07/31/90 28465 05/30/84 30,000,000 (1) 08/27/84 15.02% 08/27/90
(N) Swiss Franc Bonds issued by Niagara Mohawk Power Corporation: 28980 08/14/85 50,000,000 (1) 11/14/85 5.50% 12/15/95
(0) Obligation Under Capital Leases - Noncurrent: - - - - 27,949,088 Various Various Various
(P) Revolving Credit and Loan Agreement: 28875 09/19/84 25,000,000 (1) 12/31/86 Various Various 93-M-0981 05/16/96 200,000,000 (1) Various Various Various
(Q) NUG Contract Termination Liability - - - - 11,600,000 Various Various Various
(R) Senior Debt Facility: 12733 12/13/95 105,000,000 105,000,000 Various Various 06/30/99 (1) Repaid on date of maturity. (2) Converted into 1,414,368 shares of common stock at $31.75 per share (cash paid in lieu of 5,056.94 fractional shares) $45,066,400 Redeemed for cash on 10/01 /59 616,1 00 shares Redeemed for cash on 09/19/60 541,700 shares Conversion privilege - 02/01/57 - 09/19/60 (3) Partially redeemed through sinking fund requirements and/or other options under the mortgage agreements. (4) Partial or full repayment prior to maturity.
Sheet 10 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) DESCRIPTION OF MORTGAGES: (A) The original Mortgage Trust Indenture of Central New York Power Corporation (name changed to Niagara Mohawk Power Corporation) dated October 1, 1937, and supplemental indentures dated as of the following dates: December 1, 1938, April 15, 1939, July 1, 1940, January 1, 1942, October 1, 1944, June 1, 1945, August 17, 1948, December 31, 1949, January 1, 1950, October 1, 1950, October 19, 1950, December 1, 1951, February 1, 1953, February 20, 1953, October 1, 1953, August 1, 1954, April 25, 1956, May 1, 1956, September 1, 1957, June 1, 1958, March 15, 1960, April 1, 1960, November 1, 1961, December 1, 1964, October 1, 1966, July 15, 1967, August 1, 1967, August 1, 1968, December 1, 1969, February 1, 1971, February 1, 1972, August 1, 1972, December 1, 1973, October 1, 1974, March 1, 1975, August 1, 1975, March 15, 1977, August 1, 1977, December 1, 1977, March 1, 1978, December 1, 1978, September 1, 1979, October 1, 1979, June 15, 1980, September 1, 1980, March 1, 1981, August 1, 1981, March 1, 1982, April 1, 1982, June 1, 1982, August 1, 1982, November 1, 1982, March 1, 1983, May 1, 1983, June 15, 1983, March 1, 1984, May 1, 1984, July 1, 1984, October 1, 1984, January 31, 1985, February 1, 1985, February 15, 1985, November 1, 1985, June 1, 1986, August 1, 1986, October 1, 1986, November 1, 1986, July 1, 1987, May 1, 1988, February 1, 1989, April 1, 1989, October 1, 1989, June 1, 1990, November 1, 1990, March 1, 1991 and October 1, 1991, April 1, 1992, June 1, 1992, July 1, 1992, August 1, 1992, April 1, 1993, July 1, 1993, September 1, 1993, March 1, 1994, July 1, 1994, May 1, 1995 and March 20, 1996 were given by Niagara Mohawk Power Corporation (Central New York Power Corporation prior to January 5, 1950) to the Marine Midland Trust Company of New York (Now Marine Midland Bank) as Trustee. Marine Midland Bank was replaced as Trustee by Bankers Trust Company as of March 19, 1996. The amount of the indebtedness authorized to be secured thereby is unlimited. The amount of indebtedness actually incurred by Niagara Mohawk Power Corporation was $6,340,555,000 (for Niagara Mohawk Power Corporation and its prior companies, the amount of indebtedness actually incurred was $6,497,484,000) and the amount presently outstanding is $2,841,305,000. This mortgage covers all major properties of Niagara Mohawk Power Corporation. Exhibit A Sheet 11 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) 9. AFFILIATED INTEREST: NONE 10. OTHER INDEBTEDNESS: Notes Payable $ -- Other current and accrued liabilities 699,231,602 Total $699,231,602 11. INTEREST ACCRUED FROM DECEMBER 31, 1996 TO JUNE 30, 1997: Interest on Mortgage Bonds @ 6-5/8% $ 3,643,750 Interest on Mortgage Bonds @ 5-7/8% 6,756,250 Interest on Mortgage Bonds @ 6-1/4% 1,250,000 Interest on Mortgage Bonds @ 6-1/2% 1,950,000 Interest on Mortgage Bonds @ 6-7/8% 2,921,875 Interest on Mortgage Bonds @ 6-5/8% 1,510,500 Interest on Mortgage Bonds @ 7-7/8% 8,268,750 Interest on Mortgage Bonds @ 9-1/4% 4,625,000 Interest on Mortgage Bonds @ 9-1/2% 7,125,000 Interest on Mortgage Bonds @ 9-3/4% 7,312,500 Interest on Mortgage Bonds @ 9-1/2% 7,125,000 Interest on Mortgage Bonds @ 8-7/8% 3,328,125 Interest on Mortgage Bonds @ 8-3/4% 6,562,500 Interest on Mortgage Bonds @ 8-1/2% 7,012,500 Interest on Mortgage Bonds @ 8.00% 12,000,000 Interest on Mortgage Bonds @ 7-3/8% 8,112,500 Interest on Mortgage Bonds @ 7.20% 4,165,380 Interest on Mortgage Bonds @ 6-7/8% 7,218,750 Interest on Mortgage Bonds @ 7-3/4% 10,656,250 Interest on NYSERDA Notes @ Various 8,550,283 Interest on Medium Term Notes Series C 997,000 Interest on Senior Debt Facility @ Various 3,928,932 Interest on Nuclear Fuel Disposal Costs 1,790,680 ------------ Total interest on long-term debt $126,811,525 ============ EXHIBIT A SHEET 12 OF 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) 11. INTEREST ACCRUED FROM DECEMBER 31, 1996 TO JUNE 30, 1997: Interest on Customer Deposits $ 436,838 Interest on Suppliers Refunds 8,616 Interest on Refunds Due to Incorrect Charges on Customer Bills 84,602 Interest on Nine Mile 2 Co-Tenancy Inventory Carrying Cost 1,137,762 Interest on Salina Meadows and various leases 130,271 Interest on late payments to unregulated generators (166,471) Interest on tax assessments 23,236 Interest on gas contingency reserve balance 510,486 Interest on early payment of gas supplier invoices (316,641) Interest on municipal street lighting audits 263,972 Interest on cogeneration settlement (Indeck-Yerkes) 60,060 --------- Total Other Interest Expense 2,172,731 ========= Exhibit A Sheet 13 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) DIVIDENDS DECLARED AND PAID FROM JANUARY 1, 1991 TO DECEMBER 31, 1991: Preferred Stock: 3.40% Series ($ 3.40 per share) $ 680,000 3.60% Series ($ 3.60 per share) 1,260,000 3.90% Series ($ 3.90 per share) 936,005 4.10% Series ($ 4.10 per share) 861,001 4.85% Series ($ 4.85 per share) 1,212,503 5.25% Series ($ 5.25 per share) 1,050,003 6.10% Series ($ 6.10 per share) 1,525,001 7.45% Series ($ 7.60 per share) 2,525,550 7.72% Series ($ 7.72 per share) 3,088,000 10.60% Series ($ 10.60 per share) 742,000 9.75% Series ($ 2.5876 per share)(First) 1,115,156 8.375% Series ($ 2.1340 per share) 1,517,969 8.75% Series ($ 2.1875 per share) 6,562,500 12-50% Series ($ 3.125 per share) 1,159,679 12-25% Series ($ 3.0625 per share) 1,258,061 8.70% Series ($ 12.175 per share) 2,175,000 7.85% Series ($ 1.9625 per share) 343,798 Adjustable Rate Series A 2,268,750 10.75% Series ($2.6875 per share) 430,000 Adjustable Rate Series B 4,906,250 Adjustable Rate Series C 4,793,750 ---------- Common Stock ($0.32 per share) $ 40,410,976 43,551,890 ---------- $ 83,962,866 ============ DIVIDENDS DECLARED AND PAID FROM JANUARY 1, 1992 TO DECEMBER 31, 1992: Preferred Stock: 3.40% Series ($ 3.40 per share) $ 680,000 3.60% Series ($ 3.60 per share) 1,260,000 3.90% Series ($ 3.90 per share) 936,005 4.10% Series ($ 4.10 per share) 861,001 4.85% Series ($ 4.85 per share) 1,212,503 5.25% Series ($ 5.25 per share) 1,050,002 6.10% Series ($ 6.10 per share) 1,525,001 7.45% Series ($ 7.45 per share) 2,391,450 7.72% Series ($ 7.72 per share) 3,088,000 10.60% Series ($10.60 per share) 159,000 9.75% Series ($ 2.4375 per share) 954,281 8.375% Series ($ 2.1340 per share) 1,308,594 7.85% Series ($ 1.9625 per share) 1,793,735 Adjustable Rate Series B 4,343,750 Adjustable Rate Series A 1,980,000 Adjustable Rate Series C 4,231,250 8.75% Series ($2.1875 per share) 6,562,500 8.70% Series.($2.175 per share) 2,175,000 --------- Common Stock ($.76 per share) $ 36,512,072 103,784,290 ----------- $140,296,362 ============ DIVIDENDS DECLARED AND PAID FROM JANUARY 1, 1993 TO DECEMBER 31, 1993: Preferred Stock: 3.40% Series ($3.40 per share) $ 680,000 3.60% Series ($3.60 per share) 1,260,000 3.90% Series ($3.90 per share) 936,005 4.10% Series ($4.10 per share) 861,000 4.85% Series ($4.85 per share) 1,212,503 5.25% Series ($5.25 per share) 1,050,002 6.10% Series ($6.10 per share) 1,525,001 7.45% Series ($7.45 per share) 2,257,350 7.72% Series ($7.72 per share) 3,088,000 9.75% Series ($9.75 per share) 793,406 8.375% Series ($8.375 per share) 1,099,219 7.85% Series ($7.85 per share) 1,793,735 Adjustable Rate Series B 3,898,438 Adjustable Rate Series A 1,950,001 Adjustable Rate Series C 3,775,000 8.75% Series 3,937,500 8.70% Series 7,740,000 --------- Common Stock ($.95 per share) $ 31,857,160 133,908,204 ----------- $165,765,364 ============ Exhibit A Sheet 14 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) DIVIDENDS DECLARED AND PAID FROM JANUARY 1, 1994 TO DECEMBER 31, 1994: Preferred Stock: 3.40% Series ($ 3.40 per share) $680,000 3.60% Series ($ 3.60 per share) 1,260,000 3.90% Series ($ 3.90 per share) 936,005 4.10% Series ($ 4.10 per share) 861,000 4.85% Series ($ 4.85 per share) 1,212,503 5.25% Series ($ 5.25 per share) 1,050,002 6.10% Series ($ 6.10 per share) 1,525,001 7.45% Series ($ 7.60 per share) 2,123,250 7.72% Series ($7.72 per share) 3,088,000 7.85% Series ($7.85 per share) 1,793,735 8.375% Series ($8.375 per share)(First) 889,844 8.70% Series 870,000 8.75% Series 1,312,500 9.50% Series 5,700,000 9.75% Series ($9.75 per share) 632,531 Adjustable Rate Series A 1,950,001 Adjustable Rate Series B 3,900,469 Adjustable Rate Series C 3,887,500 --------- Common Stock ($1.09 per share) $ 33,672,341 156,060,222 ----------- $189,732,563 ============ DIVIDENDS DECLARED AND PAID FROM JANUARY 1, 1995 TO DECEMBER 31, 1995: Preferred Stock: 3.40% Series ($ 3.40 per share) $ 680,000 3.60% Series ($ 3.60 per share) 1,260,000 3.90% Series ($ 3.90 per share) 936,004 4.10% Series ($ 4.10 per share) 861,001 4.85% Series ($ 4.85 per share) 1,212,502 5.25% Series ($ 5.25 per share) 1,050,002 6.10% Series ($ 6.10 per share) 1,525,001 7.45% Series ($ 7.45 per share) 1,989,150 7.72% Series ($ 7.72 per share) 3,088,000 7.85% Series ($ 7.85 per share) 1,793,735 8.375% Series ($ 8.375 per share) 680,469 8.70% Series 217,500 9.50% Series 14,250,010 9.75% Series ($ 9.75 per share) 471,656 Adjustable Rate Series A 1,957,501 Adjustable Rate Series B 3,723,125 Adjustable Rate Series C 3,900,000 --------- Common Stock ($ 1.12 per share) $ 39,595,656 161,650,599 ----------- $201,246,255 ============ DIVIDENDS DECLARED AND PAID FROM JANUARY 1, 1996 TO DECEMBER 31, 1996: Preferred Stock: 3.40% Series ($3.40 per share) $ 680,000 3.60% Series ($3.60 per share) 1,260,000 3.90% Series ($3.90 per share) 936,004 4.10% Series ($4.10 per share) 861,001 4.85% Series ($4.85 per share) 1,212,502 5.25% Series ($5.25 per share) 1,050,002 6.10% Series ($6.10 per share) 1,525,001 7.45% Series ($7.45 per share) 1,855,050 7.72% Series ($7.72 per share) 3,088,000 7.85% Series ($7.85 per share) 1,793,735 8.375% Series ($8.375 per share) 471,094 9.50% Series 14,250,010 9.75% Series ($9.75 per share) 263,250 Adjustable Rate Series A 1,950,001 Adjustable Rate Series B 3,410,156 Adjustable Rate Series C 3,675,000 --------- $ 38,280,806 -- Common Stock (no dividend declared) $ 38,280,806 ============ Exhibit A Sheet 15 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) 13. CONTINGENT ASSETS AND CONTINGENT LIABILITIES AND UNPAID CUMULATIVE DIVIDENDS ACCRUED (a) Statement of Contingent Assets and Contingent Liabilities. LONG-TERM CONTRACTS FOR THE PURCHASE OF ELECTRIC POWER: At January 1, 1997, the Company had long-term contracts to purchase electric power from the following generating facilities owned by New York Power Authority (NYPA):
- --------------------------------------------------------------------------------------------------------------------------------- Expiration date Purchased capacity Estimated annual Facility of contract in Kw. capacity cost - --------------------------------------------------------------------------------------------------------------------------------- Niagara - hydroelectric project........................... 2007 936,000 $26,176,000 St. Lawrence - hydroelectric project...................... 2007 104,000 1,300,000 Blenheim-Gilboa - pumped storage generating station....... 2002 270,000 7,500,000 Fitzpatrick - nuclear plant............................... 2014 110,000(1) 4,785,000 - --------------------------------------------------------------------------------------------------------------------------------- 1,420,000 $39,761,000 ========================================================== ================== ====================== ==========================
(a) 110,000 Kw through May 1997; 26,000 Kw thereafter The purchase capacities shown above are based on the contracts currently in effect. The estimated annual capacity costs are subject to price escalation and are exclusive of applicable energy charges. The total cost of purchases under these contracts was approximately, in millions, $93.3, $92.5 and $85.1 for the years 1996, 1995 and 1994, respectively. Under the requirements of the Federal Public Utility Regulatory Policies Act of 1978, the Company is required to purchase power generated by Independent Power Producers (IPPs), as defined therein. The Company has 157 IPP contracts, of which 148 are on line, amounting to approximately 2,710 MW of capacity at December 31, 1996. Of this amount 2,406 MW is considered firm. The following table shows the payments for fixed and other capacity costs, and energy and related taxes the Company estimates it will be obligated to make under these contracts without giving effect to the IPP agreement-in-principle. The payments are subject to the tested capacity and availability of the facilities, scheduling and price escalation.
- ------------------------------------------------------------------------------- (In thousands of dollars) Schedulable Fixed Costs ----------------------- Year Capacity Other Energy and Taxes Total - ------------------------------------------------------------------------------- 1997 $223,880 $ 40,510 $ 873,030 $1,137,420 1998 247,740 41,420 906,590 1,195,750 1999 252,130 42,450 943,720 1,238,300 2000 242,030 44,080 974,080 1,260,190 2001 244,620 45,650 1,042-380 1,332,650 - -------------------------------------------------------------------------------
The capacity and other fixed costs relate to contracts with 11 facilities where the Company is required to make capacity and other fixed payments, including payments when a facility is not operating but available for service. These 11 facilities account for approximately 774 MW of capacity, with contract lengths ranging from 20 to 35 years. The terms of these existing contracts allow the Company to schedule energy deliveries from the facilities and then pay for the energy delivered. The Company estimates the fixed payments under these contracts will aggregate to approximately $8 Exhibit A Sheet 16 of 23 billion dollars over their terms, using escalated contract rates. Contracts relating to the remaining facilities in service at December 31, 1996, require the Company to pay only when energy is delivered, except when the Company decides that it would be better to pay a particular project a reduced energy payment to have the project reduce its high priced energy deliveries as described below. The Company currently recovers schedulable capacity through base rates and energy payments, taxes and other schedulable fixed costs through the fuel adjustment clause (FAC). The Company paid approximately $1,088 million, $980 million and $960 million in 1996, 1995 and 1994 for 13,800,000 MWh, 14,000,000 MWh and 14,800,000 MWh, respectively, of electric power under all IPP contracts. On March 10, 1997, the Company and 19 developers of IPP projects jointly announced an agreement-in-principle to terminate or restructure 44 power purchase contracts. These contracts represent more than 90% of the Company's above-market power costs under all existing IPP contracts. The agreement contemplates that the Company would terminate or restructure the 44 power contracts in exchange for approximately $3.6 billion in cash and/or marketable debt securities, and 46 million shares of the Company's common stock, representing approximately 25% of the anticipated fully diluted outstanding common shares. The new debt will be subordinate to existing first mortgage bonds. The value of the common equity will vary depending on the market value of the shares at closing. In addition, the Company and several IPPs would enter into new agreements that would further compensate the IPPs and hedge prices for specific amounts of power. As noted in the Company's 1996 Form 10-K filed with the Securities and Exchange Commission. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Announced Agreement-in-Principle to Terminate or Restructure 44 IPP Contracts," implementation of these arrangements are subject to a number of contingencies. Separate from the agreement-in-principle, the Company has negotiated three long term and sixteen limited term contract amendments whereby the Company can reduce the energy deliveries from the facilities. These reduced energy agreements resulted in a reduction of IPP deliveries of approximately 984,000 Mwh during 1996. The Company expects to continue efforts of these types into the future, to control its power supply and related costs, but at this time cannot predict the outcome of such efforts. SALE OF CUSTOMER RECEIVABLES: The parent Company has established a single-purpose, wholly-owned financing subsidiary, NM Receivables Corp., whose business consists of the purchase and resale of an undivided interest in a designated pool of customer receivables, including accrued unbilled revenues. For receivables sold, the Company has retained collection and administrative responsibilities as agent for the purchaser. As collections reduce previously sold undivided interests, new receivables are customarily sold. NM Receivables Corp. has its own separate creditors which, upon liquidation of NM Receivables Corp., will be entitled to be satisfied out of its assets prior to any value becoming available to its equity holders. The sale of receivables are in fee simple for a reasonably equivalent value and are not secured loans. Some receivables have been contributed in the form of a capital contribution to NM Receivables Corp. in fee simple for reasonably equivalent value, and all receivables transferred to NM Receivables Corp. are assets owned by NM Receivables Corp. in fee simple and are not available to pay the parent Company's creditors. At June 30, 1997 and December 31, 1996, $250 million of receivables had been sold by NM Receivables, Corp. to a third party. The undivided interest in the designated pool of receivables was sold with limited recourse. The agreement provides for a formula based loss reserve pursuant to which additional customer receivables are assigned to the purchaser to protect against bad debts. At December 31, 1996, the amount of additional receivables assigned to the purchaser, as a loss reserve, was approximately $85.8 million. Although this represents the formula-based amount of credit exposure at December 31, 1996 under the agreement, historical losses have been Exhibit A Sheet 17 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) substantially less. To the extent actual loss experience of the pool receivables exceeds the loss reserve, the purchaser absorbs the excess. Concentrations of credit risk to the purchaser with respect to accounts receivable are limited due to the Company's large, diverse customer base within its service territory. The Company generally does not require collateral, i.e., customer deposits. TAX ASSESSMENTS: The Internal Revenue Service (IRS) has conducted an examination of the Company's federal income tax returns for the years 1989 and 1990 and issued a Revenue Agents' Report. The IRS has raised an issue concerning the deductibility of payments made to IPPs 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 IPPs 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. To the extent that contracts involving tracking accounts are terminated or restated or amended under the MRA with IPPs as described in the Company's June 30, 1997 Form 10-Q filed with the Securities and Exchange Commission, then it is possible that the effects of any proposed disallowance would be mitigated. 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: 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 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 power purchase agreement (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. The Company is unable to predict the ultimate disposition of this lawsuit. However, the Company believes it has meritorious defenses and intends to defend this lawsuit 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 this lawsuit has been made in the Company's financial statements. 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 Exhibit A Sheet 18 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) 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 89 sites with which it has been or may be associated, including 45 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 potentially responsible party (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 June 30, 1997 and December 31, 1996. This liability 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 $850 million, including approximately $340 million in the unlikely event the Company is required to assume 100% responsibility at non-owned sites. in addition, 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 final ratemaking disposition will be. Exhibit A Sheet 19 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) 14. ANALYSIS OF MISCELLANEOUS PAID-IN CAPITAL CREDITS
Contribution by Niagara Hudson Power Corporation on January 5, 1950 of: Capital stocks of certain subsidiaries at aggregate stated values $7,356,600 Other investments 52,277 $7,408,877 ---------- Amount of cash received upon liquidation of Niagara Hudson Power Corporation in excess of the estimated liabilities 500,000 Contributions in aid of construction acquired upon merger of Old Forge Electric Corporation credited to unearned surplus pursuant to the commission's order dated March 18, 1952 - Case 13343 28,773 Unearned surplus of the Oswego Canal Company acquired upon merger as of March 31, 1952, less write-down of its utility plant by $67,212.60 209,084 Transfer of the excess amounts reflected in the depreciation reserve balances at December 31, 1951 pursuant to the Commission's order dated July 8, 1953 in Case 14808 18,258,503 Excess of book value over purchase price of Capital stock of the Woodville Electric Light and Power Company - Case 17894 5,164 Refund of deposits for script certificates of Niagara Hudson Power Corporation which expired January 5, 1958 124,121 Proceeds per Court Order dated January 23, 1961 covering sale of unexchanged shares of Niagara Mohawk Power Corporation common stock (5,173 shares) 204,267 Excess at January 17, 1966 of the book value of Paul Smith's Electric Light and Power and Railroad Company ($1,848,871) over 41,750 shares of the Company's common stock at market of $26 per share ($1,085,500) given therefore - Case 23754 by order dated October 15, 1965 763,371 To record subsidiaries on the "Equity" basis: Excess book value over the cost of investments at the date of acquisition of Canadian Niagara Power Co., Ltd. ($3,547,284) and St. Lawrence Power Co. ($903,145) as previously recorded on Company's books. Ownership of these companies was transferred to Opinac Energy Corporation (formerly Opinac Investments, Limited) during 1982. 4,360,429 Excess of book value over the cost of investment carried on the Company's books at date of acquisition of Moreau Manufacturing Corporation 477,984 ----------- Total Credits $32,340,573
Exhibit A Sheet 20 of 23 FINANCIAL CONDITION OF NIAGARA MOHAWK POWER CORPORATION JUNE 30, 1997 (CONT'D) 14. ANALYSIS OF MISCELLANEOUS PAID-IN CAPITAL DEBITS: Transfer to Common Capital Stock as authorized by the Commission in Case 16389 by order dated August 18, 1953 $18,258,503 Excess of carrying value of lands, etc. relating to the St. Lawrence Project over the consideration received pursuant to the Commission's ordeproject over January 26, 1959 - Case 15212 5,271,767 Transferred to Accumulated Provision for Depreciation of Electric Plant in Service an amount previously credited to Miscellaneous Paid-in Capital, representing the excess of the book value of Paul Smith's Electric Light and Power and Railroad Company, $1,848,872 over 41,750 shares of $8 per common stock of Company, $1,085,500 as authorized by PSC - Case 23754 763,371 Excess of the cost of investment carried on the Company's books over the book value at date of acquisition of Beebee Island Corporation to record subsidiary on the "Equity" basis. 62,872 ------------ Total Debits 24,356,513 ------------ Balance June 30, 1997 $ 7,984,060 ===========
15. AMORTIZATION OF DEFERRED DEBITS AND DEFERRED CREDITS OR OTHER BALANCE SHEET ACCOUNTS: Capital Stock Expense: Miscellaneous Amortization: Capital stock expense is being amortized by debiting account 425 - Miscellaneous Amortization as any series of stock is and retired in accordance with sinking fund provisions. Amortization of Debt Discount and Expense: Original amounts of debt discount and expense applicable to bonds outstanding are being amortized in equal annual installments over the lives of the issues, by debiting account 428 - Amortization of Debt Discount and Expense. Also included in the debt expense being amortized are refunding premiums, commission and expenses relating to long-term debt reacquired prior to maturity. Amortization of Premium on Debt: Original amounts of premium applicable to bonds outstanding are being amortized in equal annual installments over the lives of the issues, by crediting account 429 - Amortization of Premium on Debt - Credit. 16. INCOME STATEMENTS AND BALANCE SHEETS: Detailed income statement for the 6 and 12 months ending June 30, 1997 and balance sheet at June 30, 1997 are attached. Exhibit A Sheet 21 of 23 NIAGARA MOHAWK POWER CORPORATION STATEMENT OF INCOME
SIX MONTHS TWELVE MONTHS ENDED ENDED Utility Operating Income: JUNE 30, 1997 JUNE 30, 1997 - ------------------------ ------------------------ ----------------- 400 Operating Revenues................................................ $2,109,951,296 $3,970,529,486 ------------------------ ----------------- 401 Operating Expenses................................................ 1,242,291,501 2,449,116,397 402 Maintenance Expenses.............................................. 100,974,015 196,429,971 403 Depreciation Expense.............................................. 167,872,325 331,724,346 404 Amortization of Limited-Term Electric Plant....................... 165,236 370,784 405 Amortization of Other Utility Plant............................... 384,817 682,541 406 Amortization of Utility Plant Acquisition Adjustments............. 17,098 32,933 407 Amortization of Property Losses................................... 581,201 1,402,241 408.1 Taxes Other Than Income........................................... 241,018,385 468,478,892 409.1 Federal Income Taxes.............................................. 56,910,000 93,736,768 410.1 Provision for Deferred Income Taxes............................... 104,027,000 152,701,000 411.1 Provision for Deferred Income Taxes - Credit...................... (61,587,000) (117,578,000) 411.4 Investment Tax Credit Adjustment.................................. -- (7,806,000) ------------------------ ----------------- Total Operating Expenses.......................................... 1,852,654,578 3,569,291,873 ------------------------ ----------------- Net Operating Revenues............................................ 257,297,718 401,237,613 ------------------------ ----------------- 412 Revenues from Utility Plant Leased to Others...................... 861,900 1,830,282 413 Expenses of Utility Plant Leased to Others........................ 8,205 16,410 ------------------------ ----------------- Total Utility Operating Income.................................... 258,151,413 403,051,485 ------------------------ -----------------
Other Income: - ------------ 418 Non-Opearting Rental Income....................................... (118,839) (264,035) 418.1 Equity in Earnings of Subsidiary Companies........................ 1,664,788 11,584,697 419 Interest and Dividend Income...................................... 11,382,711 20,105,845 419.1 Allowance for Funds Used During Construction...................... 4,818,389 9,316,589 421 Miscellaneous Non-Operating Income................................ 4,083,398 8,556,862 421.l Gain on Disposition of Property................................... (188,231) (110,819) ------------------------ ----------------- Total Other Income................................................ 21,642,216 49,189,139 ------------------------ -----------------
Other Income Deductions: - ----------------------- 421.2 Loss on Disposition of Property................................... 818,027 1,055,491 425 Miscellaneous Amortization........................................ 237,912 544,820 426 Miscellaneous Income Deductions................................... 1,848,148 1,184,237 ------------------------ ---------------- Total Other Income Deductions..................................... 2,904,087 2,784,548 ------------------------ ----------------
Taxes - Other Income and Deductions: - ----------------------------------- 408.2 Taxes Other Than Income Taxes.................................. 247,834 491,957 409.2 Miscellaneous Income Tax Adjustments........................... 4,805,000 13,001,000 410.2 Provisions for Deferred Income Taxes........................... -- 2,038,000 411.2 Provisions for Deferred Income Taxes - Credit.................. (4,686,000) (12,173,000) 420 Investment Tax Credit.......................................... (6,350,000) (8,210,000) ------------------------ ---------------- Total Taxes - Other Income and Deductions...................... (5,983,166) (4,852,043) ------------------------ ---------------- Net Other Income and Deductions................................ 24,721,295 51,256,634 ------------------------ ----------------
Interest Charges: - ----------------- 427 Interest on Long-Term Debt..................................... 126,811,525 254,172,492 428 Amortization of Debt Discount and Expense...................... 10,222,522 18,935,761 429 Amortization of Premium on Debt - Credit....................... (105,273) (223,047) 431 Other Interest Expense......................................... 2,172,731 9,012,462 ------------------------ ---------------- Total Interest Charges......................................... 139,101,505 281,897,668 ------------------------ ----------------
Extraordinary Items: - ------------------- 435 Extraordinary Deductions....................................... -- 103,637,399 409.3 Income Taxes, Extraordinary Items.............................. -- (36,273,000) ------------------------ ---------------- Total Extraordinary Items................................. -- (67,364,399) ------------------------ ---------------- Net Income................................................ $143,771,203 $105,046,052 ======================== ================
Exhibit A Sheet 22 of 23 NIAGARA MOHAWK POWER CORPORATION BALANCE SHEET
Assets and Other Debits June 30, 1997 - ----------------------- ---------------------- 101 Electric Plant in Service................................................................... $8,584,124,635 101 Gas Plant in Service........................................................................ 1,069,735,282 104 Electric Plant Leased to Others............................................................. 3,829,650 105 Electric Plant Held for Future Use.......................................................... 15,291,221 106 Completed Construction Not Classified - Electric............................................ 117,193,015 106 Completed Construction Not Classified - Gas................................................. 27,510,315 107 Construction Work in Progress............................................................... 259,280,151 108 Accumulated Provision for Depreciation of Electric Plant in Service......................... (3,186,307,168) 108 Accumulated Provision for Depreciation of Gas Plant in Service.............................. (310,396,220) 109 Accumulated Provision for Depreciation of Electric Plant Leased to Others................... (975,537) 111 Accumulated Provision for Amortization and Depletion Electric Plant in Service.............. (14,377,625) 112 Accumulated Provision for Amortization of Electric Plant Leased to Others................... (102,260) 118.1 Common Utility Plant........................................................................ 312,558,332 119.1 Accumulated Provision for Depreciation and Amortization of Common Utility Plant............. (50,297,270) 120 Nuclear Fuel Assemblies..................................................................... 575,750,535 120.5 Accumulated Provision for Amortization of Nuclear Fuel Assemblies........................... (493,805,133) ---------------------- Net Utility Plant........................................................................... 6,889,011,923 ---------------------- 121 Non-Utility Property (net of reserve)....................................................... 515,272 122 Accumulated Provision for Depreciation and Amortization of Non-Utility Property............. (578,973) 123.1 Investment in Companies..................................................................... 473,679,233 124 Other Investments........................................................................... 123,143 128 Other Special Funds......................................................................... 213,729,224 ---------------------- Total Other Property and Investments........................................................ 687,467,899 ---------------------- 131 Cash........................................................................................ 11,775,978 133 Dividend Special Deposits................................................................... 100 134 Other Special Deposits...................................................................... 7,228,298 135 Working Funds............................................................................... 2,392,808 136 Temporary Cash Investments.................................................................. 462,360,191 141 Notes Receivable............................................................................ 158,162 142 Customer Accounts Receivable................................................................ 4,393,120 143 Other Accounts Receivable................................................................... 15,491,464 146 Accounts Receivable from Associated Companies............................................... (1,822,799) 150 Materials and Supplies...................................................................... 138,895,135 164.1 Gas Stored Underground...................................................................... 23,686,881 165 Prepayments................................................................................. 62,093,819 171 Interest and Dividends Receivable........................................................... 3,826,368 172 Rents Receivable............................................................................ 3,308,692 174 Miscellaneous Current and Accrued Assets.................................................... 6,238,432 ---------------------- Total Current and Accrued Assets............................................................ 740,026,649 ---------------------- 181 Unamortized Debt Expense.................................................................... 115,319,899 182 Extraordinary Property Losses............................................................... 14,191,613 183 Preliminary Survey and Investigation Charges................................................ 2,188,354 184 Clearing Accounts........................................................................... (981,973) 185 Temporary Facilities........................................................................ (60,734) 186 Miscellaneous Deferred Debits............................................................... 1,237,411,743 188 Investment in Research and Development...................................................... (2,383,567) 190 Accumulated Deferred Income Taxes........................................................... 444,321,503 ---------------------- Total Deferred Debits....................................................................... 1,810,006,838 ---------------------- Total Assets and Other Debits............................................................... $10,126,513,309 ======================
Exhibit A Page 23 of 23 NIAGARA MOHAWK POWER CORPORATION BALANCE SHEET
Liabilities and Other Credits June 30, 1997 - ----------------------------- ---------------------- 201 Common Stock Issued...................................................................... $144,390,619 204 Preferred Stock Issued................................................................... 532,550,125 207 Premium on Capital Stock................................................................. 1,485,117,797 209 Reduction in Par or Stated Value of Capital Stock........................................ 325,858,036 210 Gain on Resale or Cancellation of Reacquired Stock....................................... 652,172 211 Miscellaneous Paid-In Capital............................................................ 7,984,060 214 Capital Stock Expense.................................................................... (21,011,205) 215 Appropriated Retained Earnings........................................................... 1,461,630 216 Unappropriated Retained Earnings......................................................... 639,291,237 216.1 Unappropriated Undistributed Subsidiary Earnings......................................... 142,251,130 217 Reacquired Capital Stock................................................................. (1,250,000) ---------------------- Total Proprietary Capital................................................................ 3,257,295,601 ---------------------- 221 Bonds.................................................................................... 2,841,305,000 224 Other Long-Term Debt..................................................................... 689,749,636 225 Unamortized Premium on Long-Term Debt.................................................... 800,750 226 Unamortized Discount on Long-Term Debt - Debit........................................... (11,099,421) ---------------------- 3,520,755,965 ---------------------- 232 Accounts Payable......................................................................... 194,215,807 234 Accounts................................................................................. (137,210) 235 Customer Deposits........................................................................ 16,414,690 236 Taxes Accrued............................................................................ 93,297,343 237 Interest Accrued......................................................................... 63,325,455 239 Matured Long-Term Debt................................................................... 22,291 241 Tax Collections Payable.................................................................. 218,153 242 Miscellaneous Current and Accrued Liabilities............................................ 331,875,073 ---------------------- Total Current and Accrued Liabilities.................................................... 699,231,602 ---------------------- 253 Other Deferred Credits................................................................... 828,195,129 255 Accumulated Deferred Investment Tax Credits.............................................. 174,131,418 282 Accumulated Deferred Income Taxes - Liberalized Depreciation............................. 1,443,497,594 283 Accumulated Deferred Income Taxes - Other................................................ 203,406,000 ---------------------- Total Deferred Credits................................................................... 2,649,230,141 ---------------------- Total Liabilities and Other Credits...................................................... $10,126,513,309 ======================
Exhibit B Sheet 1 of 9 NIAGARA MOHAWK POWER CORPORATION BALANCE SHEET
Assets and Other Debits June 30, 1997 December 31, 1996 ---------------------- --------------------- 101 Electric Plant in Service.............................................. $ 8,564,124,635 $ 8,547,804,076 10l Gas Plant in Service................................................... 1,069,735,282 1,066,823,007 104 Electric Plant Leased to Others........................................ 3,829,650 3,890,971 105 Electric Plant Held for Future Use..................................... 15,291,221 15,291,221 106 Completed Construction Not Classified - Electric....................... 117,193,015 44,433,213 106 Completed Construction Not Classified - Gas............................ 27,510,315 814,501 107 Construction Work in Progress.......................................... 259,280,151 279,991,646 108 Accumulated Provision for Depreciation of Electric Plant in Service.... (3,186,307,168) (3,044,310,628) 108 Accumulated Provision for Depreciation of Gas Plant in Service......... (310,396,220) (296,152,223) 109 Accumulated Provision for Depreciation of Electric Plant Leased to Others........................................................... (975,537) (969,065) 111 Accumulated Provision for Amortization and Depletion Electric Plant in Service.................................................... (14,377,625) (13,992,808) 112 Accumulated Provision for Amortization of Electric Plant Leased to Others............................................................. (102,260) (100,527) 118.1 Common Utility Plant................................................... 312,558,332 292,591,189 119.1 Accumulated Provision for Depreciation and Amortization of Common Utility Plant....................................................... (50,297,270) (43,177,042) 120 Nuclear Fuel Assemblies................................................ 575,750,535 573,041,073 120.5 Accumulated Provision for Amortization of Nuclear Fuel Assemblies...... (493,805,133) (480,861,596) ----------------- ----------------- NET UTILITY PLANT...................................................... 6,889,011,923 6,945,117,008 ----------------- ----------------- 121 Non-Utility Property (net of reserve).................................. 515,272 872,398 122 Accumulated Provision for Depreciation and Amortization of Non-Utility Property................................................ (578,973) (573,351) 123.1 Investment in Companies................................................ 473,679,233 401,220,514 124 Other Investments...................................................... 123,143 123,143 128 Other Special Funds................................................... 213,729,224 198,023,653 ----------------- ----------------- TOTAL OTHER PROPERTY AND INVESTMENTS................................... 687,467,899 599,666,357 ----------------- ----------------- 131 Cash................................................................... 11,775,978 29,050,447 133 Dividend Special Deposits.............................................. 100 100 134 Other Special Deposits................................................. 7,228,298 6,977,512 135 Working Funds.......................................................... 2,392,808 3,113,875 136 Temporary Cash Investments............................................. 462,360,191 176,039,453 141 Notes Receivable....................................................... 158,162 159,645 142 Customer Accounts Receivable........................................... 4,393,120 15,561,912 143 Other Accounts Receivable.............................................. 15,491,464 45,096,369 145 Notes Receivable from Associated Companies............................. -- 6,096,000 146 Accounts Receivable from Associated Companies.......................... (1,822,799) 111,011,606 150 Materials and Supplies................................................. 138,895,135 141,699,402 164.1 Gas Stored Underground................................................. 23,686,881 43,430,750 165 Prepayments............................................................ 62,093,819 18,241,655 171 Interest and Dividends Receivable...................................... 3,826,368 1,190,805 172 Rents Receivable....................................................... 3,308,692 6,441,683 174 Miscellaneous Current and Accrued Assets............................... 6,238,432 5,988,192 ----------------- ----------------- TOTAL CURRENT AND ACCRUED ASSETS....................................... 740,026,649 610,099,406 ----------------- ----------------- l81 Unamortized Debt Expense............................................... 115,319,899 125,027,930 182 Extraordinary Property Losses.......................................... 14,191,613 14,675,298 183 Preliminary Survey and Investigation Charges........................... 2,188,354 1,733,401 184 Clearing Accounts...................................................... (981,973) 2,880 185 Temporary Facilities................................................... (60,734) (29,651) 186 Miscellaneous Deferred Debits.......................................... 1,237,411,743 1,240,842,959 188 Investment in Research and Development................................. (2,383,567) (2,894,332) 190 Accumulated Deferred Income Taxes...................................... 444,321,503 473,177,000 ----------------- ----------------- TOTAL DEFERRED DEBITS.................................................. 1,810,006,838 1,852,535,485 ----------------- ----------------- TOTAL ASSETS AND OTHER DEBITS.......................................... $10,126,513,309 $10,007,418,256 ================= =================
Exhibit B Sheet 2 of 9 NIAGARA MOHAWK POWER CORPORATION BALANCE SHEET
Liabilities and Other Credits June 30, 1997 December 31, 1996 ---------------------- --------------------- 201 Common Stock Issued.................................................... $ 144,390,619 $ 144,365,214 204 Preferred Stock Issued................................................. 532,550,125 536,850,125 207 Premium on Capital Stock............................................... 1,485,117,797 1,484,903,283 209 Reduction in Par or Stated Value of Capital Stock...................... 325,858,036 325,858,036 210 Gain on Resale or Cancellation of Reacquired Stock..................... 652,172 652,172 211 Miscellaneous Paid-In Capital.......................................... 7,984,060 7,984,060 214 Capital Stock Expense.................................................. (21,011,205) (21,033,822) 215 Appropriated Retained Earnings......................................... 1,461,630 1,291,758 216 Unappropriated Retained Earnings....................................... 639,291,237 515,993,277 216.1 Unappropriated Undistributed Subsidiary Earnings....................... 142,251,130 140,586,342 217 Reacquired Capital Stock............................................... (1,250,000) (1,250,000) ----------------- ----------------- TOTAL PROPRIETARY CAPITAL.............................................. 3,257,295,601 3,136,200,445 ----------------- ----------------- 221 Bonds.................................................................. 2,841,305,000 2,841,305,000 224 Other Long-Term Debt................................................... 689,749,636 691,882,346 225 Unamortized Premium on Long-Term Debt.................................. 800,750 906,023 226 Unamortized Discount on Long-Term Debt - Debit......................... (11,099,421) (11,613,912) ----------------- ----------------- 3,520,755,965 3,522,479,457 ----------------- ----------------- 232 Accounts Payable....................................................... 194,215,807 297,950,000 234 Accounts Payable to Associated Companies............................... (137,210) 1,043,232 235 Customer Deposits...................................................... 16,414,690 15,505,536 236 Taxes Accrued.......................................................... 93,297,343 7,011,360 237 Interest Accrued....................................................... 63,325,455 63,014,529 239 Matured Long-Term Debt................................................. 22,291 22,291 241 Tax Collections Payable................................................ 218,153 2,136,246 242 Miscellaneous Current and Accrued Liabilities.......................... 331,875,073 328,371,435 ----------------- ----------------- TOTAL CURRENT AND ACCRUED LIABILITIES.................................. 699,231,602 715,054,629 ----------------- ----------------- 253 Other Deferred Credits................................................. 828,195,129 817,695,725 255 Accumulated Deferred Investment Tax Credits............................ 174,131,418 180,325,000 282 Accumulated Deferred Income Taxes - Liberalized Depreciation........... 1,443,497,594 1,421,550,000 283 Accumulated Deferred Income Taxes - Other.............................. 203,406,000 214,113,000 ----------------- ----------------- TOTAL DEFERRED CREDITS................................................. 2,649,230,141 2,633,683,725 ----------------- ----------------- TOTAL LIABILITIES AND OTHER CREDITS.................................... $10,126,513,309 $10,007,418,256 ================= =================
Exhibit B Sheet 3 of 9
NIAGARA MOHAWK POWER CORPORATION EXPLANATION OF CHANGES IN THE FOLLOWING ACCOUNTS AT DECEMBER 31, 1996 IN COMPARISON WITH JUNE 30, 1997 Investment in Companies Balance on December 31, 1996....................................................................... $401,220,514 Balance on June 30, 1997........................................................................... 473,679,233 -------------- $72,458,719 ============== Additional Equity Contribution in NM Receivables Corporation................................... $76,000,000 Increase Earnings for NM Receivables Corporation............................................... 2,453,923 Increase in NM Uranium, Inc.................................................................... 1,758,526 Increase Earnings for NM Holdings, Inc......................................................... 146,036 Increase in Land Transfers to NM Holdings, Inc................................................. 84,629 Increase Earnings for Moreau Manufacturing Corporation......................................... 5,854 Decrease in NM Suburban Gas, Inc. (due to consolidation with NMPC)............................. (6,317,393) Lower Earnings for Opinac Energy Corporation................................................... (920,052) Transfer Sheridan Land Loss Reserve to NM Holdings, Inc........................................ (731,830) Lower Earnings for Beebee Island Corporation................................................... (20,974) -------------- $72,458,719 ============== Other Special Funds Balance on December 31, 1996....................................................................... $198,023,653 Balance on June 30, 1997........................................................................... 213,729,224 -------------- $15,705,571 ============== Increase in Nuclear Decommissioning Trust...................................................... $15,376,845 Increase in NYSERDA Interest Collateral on Deposit with Citibank (Senior Credit Facility)...... 150,586 Increase in SERP Trust Fund.................................................................... 133,098 Increase in Executive Deferred Compensation.................................................... 68,220 Decrease in Special Severance & Retirement Allowance Plan Trust................................ (23,178) -------------- $15,705,571 ============== Temporary Cash Investments Balance on December 31, 1996....................................................................... $176,039,453 Balance on June 30, 1997........................................................................... 462,360,191 -------------- 286,320,738 ============== Increase in Miscellaneous Temporary Investments................................................ $286,331,315 Decrease Investment in Roseton................................................................. (10,577) -------------- $286,320,738 ============== Customer Accounts Receivable Balance on December 31, 1996....................................................................... $15,561,912 Balance on June 30, 1997........................................................................... 4,393,120 -------------- ($11,168,792) ============== Decrease in Customers' Other Sales............................................................. ($7,129,067) Decrease in Customers' NERAM Surcharge......................................................... (4,158,228) Decrease in Customers' Cash Over & (Short)..................................................... (56,959) Increase in Gas Revenue Sharing Surcharge...................................................... 175,462 -------------- ($11,168,792) ==============
Exhibit B Sheet 4 of 9
NIAGARA MOHAWK POWER CORPORATION EXPLANATION OF CHANGES IN THE FOLLOWING ACCOUNTS AT DECEMBER 31, 1996 IN COMPARISON WITH JUNE 30, 1997 Other Accounts Receivable Balance on December 31, 1996....................................................................... $45,096,369 Balance on June 30, 1997........................................................................... 15,491,464 -------------- ($29,604,905) ============== Lower Miscellaneous Accounts Receivable........................................................ ($26,731,228) Lower Other Work In Progress - Jobbing......................................................... (2,330,916) Lower Anticipated Nuclear Inventory Proceeds................................................... (771,250) Decrease in NYS Relocation Projects............................................................ (60,941) Decrease in Receivable from DRIP/ESFP.......................................................... (56,968) Lower Property Damage Claims................................................................... (32,695) Decrease in Freight Discount................................................................... (500) Increase in Transportation Equipment Auction................................................... 292,580 Decrease in Receivable from Officers & Employees............................................... 54,800 Higher Personal Expense Advances............................................................... 18,105 Increase in Receivable for Oswego #6........................................................... 12,598 Higher Net Miscellaneous Receivables........................................................... 1,510 -------------- ($29,604,905) ============== Notes Receivable from Associated Companies Balance on December 31, 1996....................................................................... $6,096,000 Balance on June 30, 1 997.......................................................................... 0 -------------- Decrease in Notes Rec. from NM Suburban Gas, Inc. (due to consolidation with NMPC)............. ($6,096,000) ============== Accounts Receivable from Associated Companies Balance on December 31, 1996....................................................................... $111,011,606 Balance on June 30, 1997........................................................................... (1,822,799) -------------- ($112,834,405) ============== Decrease in Accounts Receivable from NM Receivables Corporation................................ ($112,039,329) Decrease in Accounts Receivable from Plum Street Enterprises, Inc.............................. (674,513) Decrease in Accounts Receivable from NM Suburban Gas, Inc...................................... (288,119) Decrease in Accounts Receivable from Beebee Island Corporation................................. (34,306) Decrease in Accounts Receivable from Opinac Energy Corporation................................. (413) Increase in Accounts Receivable from Canadian Niagara Power Corporation, Limited............... 107,951 Increase in Accounts Receivable from Moreau Manufacturing Company.............................. 74,423 Increase in Accounts Receivable from NM Holdings, Inc.......................................... 19,901 -------------- ($112,834,405) ============== Materials and Supplies Balance on December 31, 1996....................................................................... $141,699,402 Balance on June 30, 1997........................................................................... 138,895,135 -------------- ($2,804,267) ============== Lower Nine Mile Point Material and Supplies.................................................... ($6,388,522) Lower Steam Plant Fuel......................................................................... (1,871,842) Lower Obsolete Material Inventory Reserve - Energy Distribution................................ (220,282) Lower Stores Expense Unallocated............................................................... (13,688) Higher Material and Supplies - General......................................................... 4,039,653 Higher Computer Hardware Costs................................................................. 915,116 Lower Obsolete Material Inventory Reserve - Generation......................................... 460,068 Increase in Nine Mile Point Inventory Reserve.................................................. 220,809 Higher MIMS transfer to Nine Mile Point........................................................ 52,235 Higher Undistributed Fuel Stock Expense........................................................ 2,186 -------------- ($2,804,267) ==============
Exhibit B Sheet 5 of 9
NIAGARA MOHAWK POWER CORPORATION EXPLANATION OF CHANGES IN THE FOLLOWING ACCOUNTS AT DECEMBER 31, 1996 IN COMPARISON WITH JUNE 30, 1997 Gas Stored Underground Balance on December 31, 1996....................................................................... $ 43,430,750 Balance on June 30, 1997........................................................................... 23,686,881 -------------- Lower Inventory Withdrawals Compared to Injections............................................. ($19,743,869) ============== Prepayments Balance on December 31, 1996....................................................................... $ 18,241,655 Balance on June 30, 1997........................................................................... 62,093,819 -------------- $ 43,852,164 ============== Higher Prepaid Taxes (principally real estate taxes)........................................... $ 45,627,107 Lower Prepaid Insurance........................................................................ (994,061) Decrease in Advances for Operation and Maintenance of Sacandaga and Stillwater Reservoir and Roseton Generating Station......................................... (780,882) -------------- $43,852,164 ============== Interest and Dividends Receivable Balance on December 31, 1996....................................................................... $ 1,190,805 Balance on June 30, 1997........................................................................... 3,826,368 -------------- $2,635,563 ============== Higher Interest on Commercial Paper, CD's, and Other Short Term Investments.................... $ 2,678,767 Higher Interest on Temporary Cash Investments - IPP............................................ 3,260 Decrease in Miscellaneous Interest and Dividends Receivable.................................... (46,464) -------------- $2,635,563 ============== Rents Receivable Balance on December 31, 1996....................................................................... $ 6,441,683 Balance on June 30, 1997........................................................................... 3,308,692 -------------- Decrease in Miscellaneous Rents Receivable..................................................... ($3,132,991) ============== Unamortized Debt Expense Balance on December 31, 1996....................................................................... $ 125,027,930 Balance on June 30, 1997........................................................................... 115,319,899 -------------- ($9,708,031) ============== Amortization of First Mortgage Bonds........................................................... ($ 6,290,771) Amortization of Senior Credit Facility......................................................... (2,923,984) Amortization of LILCO G&R Bonds................................................................ (260,074) Amortization of NYSERDA Notes.................................................................. (226,690) Amortization of Medium Term Notes.............................................................. (6,449) Amortization of Revolving Credit Agreement..................................................... (63) -------------- ($9,708,031) ==============
Exhibit B Sheet 6 of 9
NIAGARA MOHAWK POWER CORPORATION EXPLANATION OF CHANGES IN THE FOLLOWING ACCOUNTS AT DECEMBER 31, 1996 IN COMPARISON WITH JUNE 30,1997 Miscellaneous Deferred Debits Balance on December 31, 1996....................................................................... $1,240,842,959 Balance on June 30, 1997........................................................................... 1,237,411,743 -------------- ($3,431,216) ============== Lower Deferred GAC Surcharge/Refund Adjustment................................................. ($31,454,249) Lower Deferred Fuel Costs...................................................................... (3,858,343) SFAS 109 (Regulatory Tax Asset) Adjustment..................................................... (3,703,000) Lower Unrecovered FERC 191 Gas Costs........................................................... (2,400,004) Amortization of Other Postretirement Benefits.................................................. (2,137,214) Amortization of Bank Facility Agreement Line of Credit Fees.................................... (1,968,598) Amortization of Deferred Nine Mile 2 Outage Costs.............................................. (1,950,837) Amortization of Other Postemployment Benefits.................................................. (1,896,885) Amortization of Deferred VERP Costs............................................................ (1,148,000) Amortization of Nuclear Outages Deferred Replacement Power Costs............................... (427,500) Lower LNG Amortization Surcharge............................................................... (242,041) Amortization of Capital Stock Expense.......................................................... (215,298) Amortization of Deferred Nine Mile 2 Costs and Carrying Charges................................ (72,673) Lower Deferred Rate Implementation Revenues.................................................... (38,300) Lower Roseton Station Operation Costs.......................................................... (18,292) Amortization of Excess AFUDC - Electric Plant in Service....................................... (17,098) Lower Accrued Interest on Supplier Refunds..................................................... (8,616) Lower CTI Freight Bill Payments................................................................ (6,186) Lower Excess NMU Deferred Costs................................................................ (5,472) Amortization of Deferred Week 53 Payroll....................................................... (4,556) Amortization of Unamortized Loss on Reaquired Debt............................................. (3,616) Higher Other Work in Progress - Other.......................................................... 21,808,800 Higher Deferred Nine Mile 1 Outage Costs....................................................... 13,172,400 Increase in IPP Action Plan Implementation Costs............................................... 5,196,630 Increase in Uncollectible Accounts Receivable Recoverable in Rates............................. 3,100,000 Higher Gas Supply Realignment Costs............................................................ 2,309,555 Higher IPP Buyout Initiative Costs............................................................. 1,447,894 Increase in Deferred Take-or-Pay Direct Billed Charges......................................... 629,028 Higher Nine Mile 1 Prepaid Low-Level Waste Costs............................................... 275,750 Higher Nine Mile 2 Prepaid Low-Level Waste Costs............................................... 194,404 Higher Dunkirk Deferred Property Taxes......................................................... 5,461 Higher Office Supplies Contract Payments....................................................... 3,100 Higher Other Work in Progress - Retirement of OPP.............................................. 2,540 -------------- $3,431,216 ============== Accumulated Deferred Income Taxes Balance on December 31, 1996....................................................................... $473,177,000 Balance on June 30, 1997........................................................................... 444,321,503 -------------- Decrease in Statutory Rate Deferred Taxes...................................................... ($28,855,497) ============== Preferred Stock Issued Balance on December 31, 1996................................................................... $536,850,125 Balance on June 30, 1997....................................................................... 532,550,125 -------------- Sinking Fund Payments.......................................................................... ($4,300,000) ============== Unappropriated Retained Earnings Balance on December 31, 1996....................................................................... $515,993,277 Balance on June 30, 1997........................................................................... 639,291,237 -------------- $123,297,960 ============== Increase in Net Income (excluding Subsidiary Earnings)......................................... $142,106,416 Preferred Dividends............................................................................ (18,808,456) -------------- $123,297,960 ==============
Exhibit B Sheet 7 of 9
NIAGARA MOHAWK POWER CORPORATION EXPLANATION OF CHANGES IN THE FOLLOWING ACCOUNTS AT DECEMBER 31, 1996 IN COMPARISON WITH JUNE 30,1997 Other Long-Term Debt Balance on December 31, 1996....................................................................... $691,882,346 Balance on June 30, 1997........................................................................... 689,749,636 -------------- ($2,132,710) ============== Increase in Revolving Credit Agreement......................................................... Interest on Nuclear Fuel Disposal Costs........................................................ $2,879,428 Decrease in IPP Contract Termination (settlement agreement payment)............................ (3,300,000) Decrease in Non-Current Obligations Under Capital Leases....................................... 1,712,138) -------------- ($2,132,710) ============== Accounts Payable Balance on December 31, 1996....................................................................... $297,950,000 Balance on June 30, 1997........................................................................... 194,215,807 -------------- ($103,734,193) ============== Decrease in Accounts Payable Vouchers.......................................................... ($217,634,078) Decrease in Accounts Payable Outstanding Checks................................................ (10,918,366) Decrease in Accounts Payable Nuclear Invoice Accrual........................................... (7,975,081) Decrease in Accounts Payable Contractor Retention.............................................. (769,667) Increase in Purchase Power/Gas Invoice Accrual................................................. 124,249,767 Increase in Accounts Payable Payroll........................................................... 6,365,870 Increase in Accounts Payable Roseton Liability................................................. 1,468,795 Increase in Procurement Card Purchases......................................................... 555,739 Increase in Other Accounts Payable............................................................. 498,140 Increase in Employee Expense Accounts.......................................................... 144,214 Increase in Office Supplies Contract Costs..................................................... 86,528 Increase in Meal Allowance..................................................................... 74,665 Increase in Miscellaneous Catalog Items........................................................ 51,605 Increase in LOOP Regulated Energy.............................................................. 43,730 Increase in Fastener Contract Costs............................................................ 18,595 Increase in Limited Value Order Check Charges.................................................. 5,351 -------------- ($103,734,193) ============== Taxes Accrued Balance on December 31, 1996....................................................................... $7,011,360 Balance on June 30, 1997........................................................................... 93,297,343 -------------- $86,285,983 ============== Increase in Accrued Real Estate Taxes.......................................................... $66,336,036 Increase in Accrued Federal Income Tax......................................................... 17,025,691 Increase in Accrued State Gross Income Tax..................................................... 4,144,814 Increase in Accrued Gross Earnings Tax......................................................... 1,147,330 Increase in Sales and Use Tax.................................................................. (1,515,646) Decrease in Accrued Federal Old Age Benefits Tax............................................... (495,089) Decrease in State Unemployment Tax............................................................. (284,841) Decrease in Federal Unemployment Tax........................................................... (54,694) Decrease in Municipal Gross Income Tax......................................................... (17,618) -------------- $86,285,983 ==============
Exhibit B Sheet 8 of 9
NIAGARA MOHAWK POWER CORPORATION EXPLANATION OF CHANGES IN THE FOLLOWING ACCOUNTS AT DECEMBER 31, 1996 IN COMPARISON WITH JUNE 30,1997 Miscellaneous Current and Accrued Liabilities Balance on December 31, 1996.. .................................................................... $328,371,435 Balance on June 30, 1997... ....................................................................... 331,875,073 -------------- $3,503,638 ============== Increase in Liability for Co-tenant Avances to Nine Mile 2..................................... $7,531,121 Increase in Accrued Pensions - Funding......................................................... 6,608,863 Increase Liability for RG&E Advance to Oswego 6................................................ 1,606,684 Increase in OPEB Internal Reserve.............................................................. 773,000 Higher Workers' Compensation Insurance Claims.................................................. 254,765 Higher Other Postemployment Benefit Liability.................................................. 186,700 Higher Department of Energy Citronelle Refund.................................................. 153,069 Increase in Liability for Roseton Generating Station........................................... 128,872 Increase in Week 53 Payroll Liability Accrual.................................................. 88,500 Increase in Executive Deferred Compensation Liability.......................................... 68,220 Higher Accrued Vacation Pay at End of Year..................................................... 47,844 Increase in Liability for Salina Meadows Lease................................................. 37,073 Increase in Accued Expenses - HYDRA-CO. Enterprises, Inc. Sale................................. 26,431 Increase in NYSDEC Salmon River Fund........................................................... 11,966 Increase in Liability and Property Damage Insurance on Relocation Projects..................... 11,570 Increase in Net Miscellaneous.................................................................. 358 Decrease in GAC - Tariff Customer Refund....................................................... (8,039,974) Decrease in Other Current and Accrued Liabilities - Other...................................... (3,233,808) Decrease in NYPA - Fitzpatrick Contract Liability.............................................. (828,422) Decrease in Natural Gas Refund................................................................. (819,878) Decrease in Other Payroll Deductions........................................................... (613,177) Decrease in Supplemental Executive Retirement Plan Liability................................... (126,409) Lower Outstanding Dividend Checks.............................................................. (119,165) Decrease in Unclaimed Accounts Payable Checks.................................................. (57,907) Decrease in Liability for Separation Allowance Costs........................................... (55,981) Decrease in Optional Cash Dividend Reivestment Plan............................................ (51,026) Decrease in Human Resource Non-Qualified Pension Enhancement Plan.............................. (30,462) Decrease in Obligations Under Capital Leases - Current......................................... (29,575) Decrease in Unclaimed Dividends Payments....................................................... (25,614) -------------- $3,503,638 ============== Other Deferred Credits Balance on December 31, 1996....................................................................... $817,695,725 Balance on June 30, 1997........................................................................... 828,195,129 -------------- $10,499,404 ============== Increase in Environmental Insurance Recoveries (net)........................................... $31,275,951 Increase in Gas Contigency Reserve............................................................. 15,537,075 Increase in Other Postretirement Benefit....................................................... 1,694,163 Increase in Nine Mile 2 Refueling Outage Cost Revenue Deferred................................. 1,203,438 Increase in Low-Level Radwaste Disposal Liability.............................................. 725,608 Increase in IPP Capital Reimbursement.......................................................... 275,303 Increase in Proceeds from Sale of Allowances................................................... 191,370 Increase in Other Deferred Credits - Miscellaneous............................................. 124,061 Increase in Net Miscellaneous.................................................................. 1,321 Decrease in Accrued Unbilled Revenues Deferred................................................. (29,900,000) Decrease in Deferred Pension Settlement Gain................................................... (3,415,500) Decrease in Liability for IPP Overgeneration Adjustments....................................... (2,139,580) Decrease in MERIT Overcollection............................................................... (1,552,170) Decrease in Deferred DIRAM Revenue............................................................. (1,401,758) Decrease in Gas Non-Core Revenue Sharing....................................................... (620,996) Decrease in Deferred Pension Expense........................................................... (599,315) Decrease in Gas Customer Service Penalty....................................................... (576,000) Decrease in IPP Operation & Maintenance Reimbursement.......................................... (129,087) Decrease on Gain on Sale of Volney-Marcy Transmission Line..................................... (92,772) Decrease in Gain on Redemption of Bonds........................................................ (43,121) Decrease in Purchase of Emission Reduction Credits............................................. (31,500) Decrease in Net Gain on Sale of Utility Property............................................... (27,087) -------------- 10,499,404 ==============
Exhibit B Sheet 9 of 9
NIAGARA MOHAWK POWER CORPORATION EXPLANATION OF CHANGES IN THE FOLLOWING ACCOUNTS AT DECEMBER 31, 1996 IN COMPARISON WITH JUNE 30, 1997 Accumulated Deferred Investment Tax Credits Balance on December 31, 1996....................................................................... $180,325,000 Balance on June 30, 1997........................................................................... 174,131,418 -------------- Decrease in Accumulated Deferred Investment Tax Credits........................................ $6,193,582 ============== Accumulated Deferred Income Taxes - Liberalized Depreciation Balance on December 31, 1996....................................................................... $1,421,550,000 Balance on June 30, 1997........................................................................... 1,443,497,594 -------------- Increase in Statutory Rate..................................................................... $21,947,594 ============== Accumulated Deferred Income Taxes - Other Balance on December 31, 1996....................................................................... $214,113,000 Balance on June 30, 1997........................................................................... 203,406,000 -------------- ($10,707,000) ============== Increase in Statutory Rate..................................................................... ($10,930,000) Increase in Previously Flowed Through.......................................................... 223,000 -------------- ($10,707,000) ==============
EXHIBIT C NIAGARA MOHAWK POWER CORPORATION SUMMARY OF CHANGES IN UTILITY PLANT AND DEPRECIATION RESERVE ACCOUNTS FOR THE PERIOD DECEMBER 31, 1996 THROUGH JUNE 30, 1997
Utility Plant ------------- Balance Balance December 31, 1996 Debits Credits June 30, 1997 ----------------- ------ ------- ------------- Utility Plant (Beginning Balance)...... $10,824,680,897 Plant in Service: Additions........................ $153,834,026 Retirements...................... $13,472,185 Adjustments...................... 1,767,570 Construction Work in Progress: Net Change.......................... 20,711,495 Nuclear Fuel Assemblies: Net Change.......................... 2,709,462 Utility Plant (Ending Balance)......... $10,945,273,135 --------------- ------------ ----------- --------------- TOTAL............................ $10,824,680,897 $156,543,488 $35,951,250 $10,945,273,135 =============== ============ =========== ===============
Depreciation Reserve -------------------- Balance Balance December 31, 1998 Debits Credits June 30, 1997 ----------------- ------ ------- ------------- Depreciation Reserve (Beginning Balance) $3,879,563,888 Plant in Service: Accruals.......................... $171,205,407 Gross Salvage..................... 1,509,845 Retirements...................... $14,445,611 Cost of Removal.................. 4,767,941 Adjustments...................... 10,190,724 Nuclear Fuel Assemblies: Amortization........................ 12,943,537 Retirement Work in Progress: Net Change - Retirement of Property........... 1,167,677 Removal Costs.................... 2,268,987 Gross Salvage.................... 1,162,673 Depreciation Reserve (Ending Balance).. $4,056,261,212 -------------- ------------ ----------- -------------- TOTAL............................ $3,879,563,888 $198,179,863 $21,482,539 $4,056,261,212 ============== ============ =========== ==============
EXHIBIT D NIAGARA MOHAWK POWER CORPORATION ANALYSIS OF ADJUSTMENTS TO UTILITY PLANT FOR THE PERIOD DECEMBER 31, 1996 THROUGH JUNE 30, 1997
Contra Accounts --------------------------------------------- Number Title Reason for Adjustments Amount - ------ -------------------------------- --------------------------------------------- ----------------- 102 Electric Plant Purchased To transfer balances between Electric Plant ($277) Purchased and Electric Plant in Service. 121 Other Physical Property To transfer property between OPP - (29,928) Pledged and Electric Plant in Service. 123.1 Investment in Subsidiary Companies To transfer property between NM Holdings 4,348 and Electric Plant in Service. 243 Obligations Under Capital Leases - Adjustment for amortization of capital (29,575) Current leases. 227 Obligations Under Capital Leases - Adjustment for amortization of capital (1,712,138) Non Current leases. ----------- TOTAL............................................................................ ($1,767,570) ===========
EXHIBIT E NIAGARA MOHAWK POWER CORPORATION ANALYSIS OF ADJUSTMENTS TO DEPRECIATION RESERVE FOR THE PERIOD DECEMBER 31, 1996 THROUGH JUNE 30, 1997
Contra Accounts --------------------------------------------- Number Title Reason for Adjustments Amount - ------ -------------------------------- --------------------------------------------- ---------------- 108E Accumulated Depreciation - Electric To transfer balances between Accumulated $625 Plant in Service Depreciation - Electric Plant in Service to Accumulated Depreciation - Electric Plant Leased from Others and Accumulated Depreciation - Common Plant in Service. 108E Accumulated Depreciation - Electric To transfer balances between Accumulated 2,178 Plant Leased from Depreciation - Electric Plant Leased from Others to Accumulated Depreciation - Electric Plant in Service and Accumulated Depreciation - Common Plant in Service. 108G Accumulated Depreciation - Gas Plant To transfer balances between Accumulated (5,058) in Service Depreciation - Gas Plant in Service and Accumulated Depreciation - Common Plant in Service. 119.1 Accumulated Depreciation - Common To transfer balances between Accumulated (82,955) Plant in Service Depreciation - Common Plant in Service to Accumulated Depreciation - Electric Plant in Service, Accumulated Depreciation - Electric Plant Leased from Others, Accumulated Depreciation - Gas Plant in Service, and Accumulated Depreciation - Common Plant in Service. 119.1 Accumulated Depreciation - Common To transfer balances between Accumulated 85,210 Plant Leased from Others Depreciation - Common Plant Leased from Others to Accumulated Depreciation - Common Plant in Service. 123.1 Investment in Subsidiary Companies To transfer NM Suburban Gas depreciation 2,146,413 - NM Suburban Gas reserve to Niagara Mohawk Power Corp. 128 Other Special Funds To record 1997 earnings on Nine Mile Point nuclear decommissioning external trust 8,044,311 --------- TOTAL............................................................................ $10,190,724 ===========
EXHIBIT F NIAGARA MOHAWK POWER CORPORATION EXPLANATION OF CHANGES IN NON-UTILITY PROPERTY FOR THE PERIOD DECEMBER 31, 1996 THROUGH JUNE 30, 1997
Non-Utility Plant (net of reserve) - ---------------------------------- Gross Balance December 31, 1996.................................. $5,097,398 Less: Reserve Balance December 31, 1996...................... 4,225,000 $872,398 ---------- Balance June 30, 1997............................................ 4,740,272 Less: Reserve Balance June 30, 1997.......................... 4,225,000 515,272 ---------- --------- NET CHANGE....................................................... ($357,126) ========= Transfer of Other Physical Property - Unpledged - ----------------------------------------------- Oswego Steam RR Fuel Oil Delivery Facility (C)................... $1,133 Hindsdale Station (C) ........................................ 61 Long Branch Station (C).......................................... 44,481 Tully Station (C)................................................ 2,860 Evans Mills (C).................................................. 1,936 Franklin Street Station (C)...................................... 4,907 Schoharie Development (E)........................................ 416 Schuylerville Lighting Arrester House (E)........................ 100 Fort Plain - Marshville 3 (E).................................... 1,379 ---------- TOTAL TRANSFER OF OTHER PHYSICAL PROPERTY - UNPLEDGED................ $57,273 New Purchases of Other Physical Property - Unpledged Transferred Employees' Properties................................ (357,259) Sale of Other Physical Property - Pledged Station 1 Buffalo (W)............................................ 7,356 Land Sale Correction (W)......................................... 137 Portville Station (W)............................................ (283) (Nl) Fredonia Station (W)............................................. 4,488 Langsford Station (W)............................................ 703 Perrysburg Station (W)........................................... 132 Pavillion Station (W)............................................ 500 Station 5 Buffalo (W)............................................ 4,295 East Olean Station (W)........................................... 643 Shawnee Road Station (W)......................................... 1,073 Oswego RR Fuel Oil Facility (C).................................. (1,133) Hinsdale Station (C)............................................. (61) Long Branch Station (C).......................................... (44,481) Tully Station (C)................................................ (2,860) Evans Mills Station (C).......................................... (1,936) Franklin Street Station (C)...................................... (4,907) Delta Lake Station (C)........................................... 2,381 Schoharie Development Land (E)................................... (416) Schuylerville - Lightning Arrester House (E)..................... (100) Unused Land - New Scotland Transmission (E)...................... (24,292)(Nl) Fort Plain - Marshville Transmission (E)......................... (1,379) Spier - Rotterdam Lines (E)...................................... (5,250)(Nl) December 1996 Error Corrected (E)................................ (836) Hadley Station (E)............................................... 106 Watervliet Station (E)........................................... 8,980 ------- TOTAL SALES OF OTHER PHYSICAL PROPERTY - PLEDGED............. (57,140) --------- NET CHANGE....................................................... ($357,126) ========= (N1) Transferred to NM Holdings
EXHIBIT G NIAGARA MOHAWK POWER CORPORATION REIMBURSEMENT MARGIN FOR THE PERIOD DECEMBER 31, 1996 THROUGH JUNE 30, 1997
(SFAS 71 AMOUNTS EXCLUDED) Balance Balance December 31, 1996 Net Activity June 30, 1997 ----------------- ------------ ------------- Deferrals: Add: Deferred Debits: Unamortized Debt Expense...................................... $138,002,451 ($12,260,963) $125,741,488 Extraordinary Property Losses................................. 20,598,618 (875,085) 19,723,533 Preliminary Survey and Investigation Charges.................. 1,949,301 662,492 2,611,793 Clearing Accounts............................................. 2,880 (216,248) (213,368) Temporary Facilities.......................................... (29,651) (18,553) (48,204) Miscellaneous Deferred Debits................................. 1,369,981,181 (32,124,604) 1,337,856,577 Investment in Research and Development........................ (2,894,332) 595,892 (2,298,440) Accumulated Deferred Income Taxes............................. 473,408,000 (22,329,420) 451,078,580 ------------- ------------- ------------- Net Deferred Debits........................................... 2,001,018,448 (66,566,489) 1,934,451,959 Less: Deferred Credits: Other Deferred Credits........................................ 848,797,611 12,270,176 861,067,787 Accumulated Deferred Investment Tax Credits 180,325,000 (6,354,582) 173,970,418 Accumulated Def. Income Taxes - Accelerated Amortization...... - - - Accumulated Def. Income Taxes - Liberalized Depreciation...... 1,483,398,000 (6,946,406) 1,476,451,594 Accumulated Def. Income Taxes - Other......................... 202,515,000 14,092,000 216,607,000 Liability for Environmental Restoration Costs................. 225,000,000 - 225,000,000 ------------- ------------- ------------- Net Deferred Credits.......................................... 2,940,035,611 13,061,188 2,953,096,799 ------------- ------------- ------------- NET DEFERRAL................................................................. (939,017,163) (79,627,677) (1,018,644,840) Working Capital Allowance (Forecasted - Actual Not Available)................ 380,000,000 (22,309,000) 357,691,000 Net Utility Plant............................................................ 6,945,117,009 (56,105,086) 6,889,011,923 ------------- ------------- ------------- REIMBURSABLE PLANT AND WORKING CAPITAL....................................... 6,386,099,846 (158,041,763) 6,228,058,083 Long-Term Securities Issued to Date: Long-Term Debt: Bonds......................................................... 2,841,305,000 - 2,841,305,000 Other Long-Term Debt (less RCA)............................... 691,882,346 (2,944,229) 688,938,117 Unamortized Premium on Long-Term Debt......................... 906,023 (122,819) 783,204 Unamortized Discount on Long-Term Debt........................ (11,844,234) 619,803 (11,224,431) Less: Long-Term Debt Due Within One Year...................... 44,600,000 - 44,600,000 ------------- ------------ ------------- Net Long-Term Debt............................................ 3,477,649,135 (2,447,245) 3,475,201,890 Preferred Stock: Preferred Stock Issued........................................ 536,850,125 (4,300,000) 532,550,125 Less: Sinking Fund Requirement............................... 8,870,000 - 8,870,000 ------------- ------------ ------------- Net Preferred Stock........................................... 527,980,125 (4,300,000) 523,680,125 Common Stock: Common Stock Issued........................................... 144,365,214 54,137 144,419,351 Premium on Capital Stock...................................... 1,484,903,283 425,694 1,485,328,977 Reduction in Par or Stated Value of Capital Stock............. 325,858,036 - 325,858,036 Gain on Resale or Cancellation of Reacquired Stock............ 652,171 - 652,171 Miscellaneous Paid-In Capital................................. 7,984,060 - 7,994,060 Capital Stock Expense......................................... (21,033,822) 22,617 (21,011,205) ------------- ------------ ------------- Net Common Stock.............................................. 1,942,728,942 502,448 1,943,231,390 ------------- ------------ ------------- TOTAL LONG-TERM SECURITIES................................................... 5,948,358,202 (6,244,797) 5,942,113,405 ------------- ------------ ------------- TOTAL REIMBURSEMENT MARGIN................................................... 437,741,644 (151,796,966) 285,944,678 Investments in Subsidiaries*................................................. 176,342,601 (5,887,248) 170,455,353 ------------- ------------- ------------- *Excludes $224,877,913 for NMR in 12/96 and $303,223,880 in 6/97. (NMR was created in 9/97 and is used as a financing vehicle by the Company.) REIMBURSEMENT MARGIN BEFORE NEW ENCUMBRANCES................................. 261,399,043 (145,909,718) 115,489,325 Encumbrances: Case 93-M-0981 Preferred Stock, First Mortgage Bonds, or Common Stock.... 355,000,000 - 355,000,000 Case 95-M-1141 Revolving Credit Agreement................................ 125,000,000 - 125,000,000 Case 95-M-1141 Term Loan Agreement....................................... 150,000,000 - 150,000,000 ------------- ------------ ------------- Total Encumbrances....................................................... 630,000,000 - 630,000,000 ------------- ------------ ------------- Reimbursement Margin (Encumbered Reserve).................................... ($368,600,957) ($145,909,718) ($514,510,675) ============= ============ =============
EXHIBIT H NIAGARA MOHAWK POWER CORPORATION CAPITAL BUDGET SUMMARY ($000) 1997-2001
1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- Generation Business Group: Nine Mile Point No. 1......................... $8,645 $9,086 $9,416 $9,407 $9,401 Nine Mile Point No. 2 (NMPC Share)............ 3,557 7,250 3,813 3,811 3,807 Nine Mile Point Common (NMPC Share)........... 2,144 1,359 871 882 892 -------- -------- -------- -------- -------- SUBTOTAL NUCLEAR GENERATION............... 14,346 17,695 14,100 14,100 14,100 Albany Steam Station.......................... 600 600 600 600 600 Dunkirk Steam Station......................... 4,252 4,786 2,794 5,770 3,750 Huntley Steam Station......................... 2,100 8,357 5,745 1,475 1,300 Hydro Generation.............................. 12,200 12,977 13,050 12,976 13,085 Oswego Steam Station.......................... 500 500 500 500 500 Roseton Steam Station......................... 600 600 750 750 750 Other Fossil/Hydro Generation Projects........ 3,600 2,095 1,095 1,095 1,095 -------- -------- -------- -------- -------- SUBTOTAL FOSSIL & HYDRO GENERATION........ 23,852 29,915 24,534 23,166 21,080 -------- -------- -------- -------- -------- TOTAL GENERATION BUSINESS GROUP........ 38,198 47,610 38,634 37,266 35,180 -------- -------- -------- -------- -------- Energy Distribution Business Group: Customer Service.............................. 300 323 335 347 358 Electric Marketing............................ 120 129 134 139 143 Engineering and Support Services.............. 38,112 46,025 43,513 36,445 37,447 Finance/Operations Support.................... 5,100 328 1,132 2,116 2,119 Quality & Systems Improvement................. 1,300 3,200 3,300 3,300 3,100 Re-Engineering Project........................ 1,000 - - - - Special Projects.............................. 15,824 15,894 16,450 16,695 17,654 NM Gas........................................ 51,747 51,830 51,480 51,450 51,350 Regional Control.............................. 2,321 2,344 2,367 2,391 2,414 Capital Region - Distribution................. 12,918 14,001 14,139 14,278 14,416 Capital Region - Transmission................. 7,909 8,582 8,975 9,270 9,571 Central Region - Distribution................. 12,271 12,310 12,432 12,554 12,676 Central Region - Transmission................. 2,285 3,424 2,183 2,202 2,220 Frontier Region - Transmission................ 4,424 5,262 4,689 4,118 4,200 Genesee Region - Transmission................. 1,140 1,220 1,169 1,587 1,618 Mohawk Valley Region - Distribution........... 6,366 6,207 6,269 6,330 6,392 Mohawk Valley Region - Transmission........... 2,518 1,138 1,122 1,130 1,138 Northeast Region - Distribution............... 9,067 8,947 9,035 9,124 9,212 Northeast Region - Transmission............... 2,642 3,197 3,191 3,284 3,366 Northern Region - Distribution................ 7,941 7,864 7,942 8,020 8,097 Northern Region - Transmission................ 1,831 1,960 1,870 1,780 1,842 Southwest Region - Transmission............... 1,422 1,942 1,637 2,143 2,195 Western Regions - Distribution................ 17,913 16,948 17,116 17,283 17,451 Other Transmission Projects & Equipment....... 7,679 7,690 8,060 8,130 8,200 -------- -------- -------- -------- -------- SUBTOTAL ELECTRIC DELIVERY................ 100,647 103,036 102,196 103,624 105,008 -------- -------- -------- -------- -------- TOTAL ENERGY DISTRIBUTION BUSINESS GROUP....................... 214,150 220,765 218,540 214,116 217,179 -------- -------- -------- -------- -------- Finance: Controller.................................... 4,333 4,200 4,301 4,400 4,500 Treasurer..................................... 271 598 253 266 261 -------- -------- -------- -------- -------- TOTAL FINANCE............................. 4,604 4,798 4,554 4,666 4,761 -------- -------- -------- -------- -------- Human Resources: Human Resources Equipment..................... 605 232 207 513 268 Other Post Employment Benefits (OPEB's)....... 3,009 3,203 2,987 3,077 3,170 -------- -------- -------- -------- -------- TOTAL HUMAN RESOURCES..................... 3,614 3,435 3,194 3,590 3,438 -------- -------- -------- -------- -------- Information Technology: Customer Service System....................... 17,225 16,368 - - - Other I/T Projects............................ 14,947 4,912 4,179 3,650 3,759 -------- -------- -------- -------- -------- TOTAL INFORMATION TECHNOLOGY.............. 32,172 21,280 4,179 3,650 3,759 -------- -------- -------- -------- -------- EXECUTIVE/AUDITS.................................. 10 40 75 20 35 LEGAL & CORPORATE RELATIONS....................... 300 300 300 300 300 -------- -------- -------- -------- -------- TOTAL NIAGARA MOHAWK POWER CORP............... $293,048 $298,228 $269,476 $263,608 $264,652 ======== ======== ======== ======== ========
STATE OF NEW YORK PUBLIC SERVICE COMMISSION - -------------------------------------------------- In the Matter of the Application of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation for Authority Under Sections 70, 107, Case 98- 108 and 110 of the Public Service Law to Form a Holding Company Structure to Engage in Certain Related Transactions. - -------------------------------------------------- PETITION OF NIAGARA MOHAWK HOLDINGS, INC. and NIAGARA MOHAWK POWER CORPORATION FOR AUTHORITY TO FORM A HOLDING COMPANY STRUCTURE TO ENGAGE IN CERTAIN RELATED TRANSACTIONS EXHIBIT D AGREEMENT AND PLAN OF EXCHANGE This AGREEMENT AND PLAN OF EXCHANGE (the "Agreement"), dated as of May 14,1998, is between Niagara Mohawk Power Corporation, a New York corporation and the corporation whose shares of Common Stock, par value $1.00 per share, will be acquired pursuant to the "Exchange" provided for in this Agreement (the "Subject Corporation"), and Niagara Mohawk Holdings, Inc., a New York corporation and the corporation which will acquire the foregoing shares of Common Stock of the Subject Corporation (the "Acquiring Corporation"). The Subject Corporation and the Acquiring Corporation are hereinafter referred to, collectively, as the "Corporations". WITNESSETH: WHEREAS, the authorized capital of the Subject Corporation is $1,215,000,000, consisting of (a) 185,000,000 shares of Common Stock, par value $1.00 per share ("Subject Corporation Common Stock"), of which 144,419,351 shares are issued and outstanding (which number of issued and outstanding shares is subject to change prior to the Effective Time (as hereinafter defined) of the Exchange pursuant to the Dividend Reinvestment and Common Stock Purchase Plan ("DRIP") and the Employee Savings Fund Plans for Represented and Non-Represented Employees (each an "Employee Plan" and collectively the "Employee Plans") of the Subject Corporation and the issuance of Subject Corporation Common Stock pursuant to the Master Restructuring Agreement of the Subject Corporation, dated as of July 9, 1997, as amended, (b) 3,400,000 shares of Cumulative Preferred Stock, par value $100 per share ("Subject Corporation $100 Preferred Stock"), of which 2,322,000 shares are issued and outstanding, (c) 19,600,000 shares of Cumulative Preferred Stock, par value $25 per share ("Subject Corporation $25 Preferred Stock"), of which 11,681,204 shares are issued and outstanding and (d) 8,000,000 shares of Preference Stock, par value $25 per share ("Preference Stock"), no shares of which are outstanding. WHEREAS, the Acquiring Corporation is a wholly-owned subsidiary of the Subject Corporation with authorized capital stock consisting of 300,000,000 shares of Common Stock, par value $0.01 per share ("Acquiring Corporation Common Stock"), of which 100 shares are issued and outstanding and owned by the Subject Corporation and 50,000,000 shares of Preferred Stock, par value $0.01 per share, no shares of which are outstanding. WHEREAS, the Boards of Directors of the Corporations deem it desirable and in the best interests of the Corporations and the shareholders of the Subject Corporation that, at the Effective Time, (a) the Acquiring Corporation acquire and become the owner and holder of each share of Subject Corporation Common Stock issued and outstanding at the Effective Time, (b) each share of Subject Corporation Common Stock issued and outstanding immediately prior to the Effective Time be automatically exchanged for one share of Acquiring Corporation Common Stock, and (c) each holder of shares of Subject Corporation Common Stock issued and outstanding immediately prior to the Effective Time becomes the holder of a like number of shares of Acquiring Corporation Common Stock, and on the terms and conditions hereinafter set forth; and WHEREAS, the Boards of Directors of the Corporations have each approved and adopted this Agreement, and the Board of Directors of the Subject Corporation has recommended that the shareholders of the Subject Corporation approve and adopt the Exchange and this Agreement pursuant to Section 913 of the New York Business Corporation Law (the "BCL"). NOW, THEREFORE, the Corporations hereby agree as follows: A-1 ARTICLE I The Exchange and this Agreement shall be submitted to the holders of Subject Corporation Common Stock for approval and adoption as provided by Section 913 of the BCL. The affirmative vote of the holders of at least two-thirds of the issued and outstanding Subject Corporation Common Stock shall be necessary to approve and adopt the Exchange and this Agreement. ARTICLE II Subject to the terms and conditions of this Agreement, the Exchange shall become effective immediately following the close of business on the date of filing with the New York Department of State (the "Department of State") of a certificate of exchange pursuant to Section 913(d) of the BCL ("Certificate"), or at such later time and date as may be stated in the Certificate (the time and date at and on which the Exchange becomes effective being referred to herein as the "Effective Time"). ARTICLE III A. At the Effective Time: (1) each share of Subject Corporation Common Stock issued and outstanding immediately prior to the Effective Time shall be automatically exchanged for one share of Acquiring Corporation Common Stock, which shares shall be fully paid and nonassessable by the Acquiring Corporation; (2) the Acquiring Corporation shall acquire and become the owner and holder of each issued and outstanding share of Subject Corporation Common Stock so exchanged; (3) each share of Acquiring Corporation Common Stock issued and outstanding immediately prior to the Effective Time shall be cancelled and shall thereupon constitute an authorized and unissued share of Acquiring Corporation Common Stock; (4) each share of Subject Corporation Common Stock held under the DRIP or an Employee Plan (including fractional and uncertificated shares) immediately prior to the Effective Time shall be automatically exchanged for a like number of shares (including fractional and uncertificated shares) of Acquiring Corporation Common Stock, which shares shall be held under and pursuant to the DRIP or be issued under such Employee Plan, as the case may be, as hereinafter provided; (5) each unexpired and unexercised option to purchase Subject Corporation Common Stock ("Subject Corporation Stock Option") under the 1992 Stock Option Plan (the "Option Plan"), whether vested or unvested, will be automatically converted into an option (a "Substitute Option") to purchase a number of shares of Acquiring Corporation Common Stock equal to the number of shares of Subject Corporation Common Stock that could have been purchased immediately prior to the Effective Time (assuming full vesting) under such Subject Corporation Stock Option, at a price per share of Acquiring Corporation Common Stock equal to the per share option exercise price specified in such Subject Corporation Stock Option. In accordance with Section 424(a) of the Internal Revenue Code of 1986, as amended, each Substitute Option shall provide the option holder with rights and benefits that are no less and no more favorable to him than were provided under the Subject Corporation Stock Option; and (6) the former holders of Subject Corporation Common Stock shall be entitled only to receive shares of Acquiring Corporation Common Stock in exchange therefor as provided in this Agreement. B. Shares of Subject Corporation $100 Preferred Stock, Subject Corporation $25 Preferred Stock and Subject Corporation Preference Stock shall not be exchanged or otherwise affected by or in connection with the Exchange. Each share of Subject Corporation $100 Preferred Stock issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding following the Exchange and shall continue to be one share of Subject Corporation $100 Preferred Stock of the A-2 applicable series designation. Each share of Subject Corporation $25 Preferred Stock issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding following the Exchange and shall continue to be one share of Subject Corporation $25 Preferred Stock of the applicable series designation. C. As of the Effective Time, the Acquiring Corporation shall succeed to the DRIP as in effect immediately prior to the Effective Time, and the DRIP shall be appropriately modified to provide for the issuance or delivery of Acquiring Corporation Common Stock on and after the Effective Time pursuant thereto. D. As of the Effective Time, (1) the Employee Plans shall be appropriately amended to provide for the issuance or delivery of Acquiring Corporation Common Stock, and the Acquiring Corporation shall agree to issue or deliver Acquiring Corporation Common Stock, and (2) the Option Plan shall also be appropriately amended to provide for the issuance of options by the Acquiring Corporation to purchase Acquiring Corporation Common Stock, in each case on and after the Effective Time pursuant thereto. ARTICLE IV A. The filing of the Certificate with the Department of State and the consummation of the Exchange shall be subject to satisfaction of the following conditions at or prior to the Effective Time: (1) the affirmative vote of the holders of Subject Corporation Common Stock provided for in Article I of this Agreement shall have been received; (2) such orders, authorizations, approvals or waivers from the New York Public Service Commission and all other jurisdictive regulatory bodies, boards or agencies required to consummate the Exchange and related transactions shall have been received, shall remain in full force and effect, and shall not include, in the sole judgment of the Board of Directors of the Subject Corporation, unacceptable conditions; and (3) the Acquiring Corporation Common Stock to be issued in connection with the Exchange shall have been listed, subject to official notice of issuance, by the New York Stock Exchange. ARTICLE V Following the Effective Time, each holder of an outstanding certificate or certificates theretofore representing shares of Subject Corporation Common Stock may, but shall not be required to, surrender the same to the Acquiring Corporation's Transfer Agent for cancellation and reissuance of a new certificate or certificates in such holder's name or for cancellation and transfer, and each such holder or transferee shall be entitled to receive a certificate or certificates representing the same number of shares of Acquiring Corporation Common Stock as the shares of Subject Corporation Common Stock previously represented by the certificate or certificates surrendered. Until so surrendered or presented for exchange or transfer, each outstanding certificate which, immediately prior to the Effective Time, represents Subject Corporation Common Stock shall be deemed and shall be treated for all purposes to represent the ownership of the same number of shares of Acquiring Corporation Common Stock as though such surrender or exchange or transfer had taken place. The holders of Subject Corporation Common Stock at the Effective Time shall have no right at and after the Effective Time to have their shares of Subject Corporation Common Stock transferred on the stock transfer books of the Subject Corporation (such stock transfer books being deemed closed for this purpose at the Effective Time), and at and after the Effective Time such stock transfer books may be deemed to be the stock transfer books of the Acquiring Corporation. A-3 ARTICLE VI A. This Agreement may be amended, modified or supplemented, or compliance with any provision hereof may be waived, at any time prior to the Effective Time (including, without limitation, after receipt of the affirmative vote of holders of Subject Corporation Common Stock as provided in Article IV(1) hereof), by the mutual consent of the Boards of Directors of the Subject Corporation and the Acquiring Corporation at any time prior to the Effective Time; provided, however, that no such amendment, modification, supplement or waiver shall be made or effected if such amendment, modification, supplement or waiver would, in the sole judgment of the Board of Directors of the Subject Corporation, materially and adversely affect the shareholders of the Subject Corporation. B. This Agreement may be terminated and the Exchange and related transactions abandoned, at any time prior to the Effective Time (including, without limitation, after receipt of the affirmative vote of holders of Subject Corporation Common Stock as provided in Article IV(1) hereof), if the Board of Directors of the Subject Corporation determines, in its sole judgment, that consummation of the Exchange would for any reason be inadvisable or not in the best interests of the Subject Corporation or its shareholders. IN WITNESS WHEREOF, each of the Corporations, pursuant to authorization and approval given by its Board of Directors, has caused this Agreement to be executed as of the date first above written. Niagara Mohawk Power Corporation By: William E. Davis ----------------------------------- William E. Davis Chairman of the Board and Chief Financial Officer Niagara Mohawk Holdings, Inc. By: William F. Edwards ----------------------------------- William F. Edwards Chief Financial Officer A-4 STATE OF NEW YORK PUBLIC SERVICE COMMISSION - -------------------------------------------------- In the Matter of the Application of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation for Authority Under Sections 70, 107, Case 98- 108 and 110 of the Public Service Law to Form a Holding Company Structure to Engage in Certain Related Transactions. - -------------------------------------------------- PETITION OF NIAGARA MOHAWK HOLDINGS, INC. and NIAGARA MOHAWK POWER CORPORATION FOR AUTHORITY TO FORM A HOLDING COMPANY STRUCTURE TO ENGAGE IN CERTAIN RELATED TRANSACTIONS EXHIBIT E
PRESENT STRUCTURE ----------- | NIAGARA | | MOHAWK | ----------- | | -------------------------------------------------------------------------------------------------- | | | | | | | | | | | | - --------------- --------------- ------------------ ------------- ---------------- ---------- | NM Holdings | | NM Uranimum | | NM Receivables | | Opinac NA | | Beebee Island | | Moreau | - --------------- --------------- ------------------ ------------- ---------------- ---------- | | --------------- ----------------- | Plum Street | | Opinac Energy | | Enterprises | | | --------------- ----------------- | | 50% | ----------------- | CNP | -----------------
PROPOSED STRUCTURE -------------------------------- | Niagara Mohawk Holdings, Inc.| -------------------------------- | | --------------------------------------------------------------------- | | | | ------------- ----------- | Opinac NA | | Niagara | | | | Mohawk | ------------ ----------- | | | | ----------------- ----------------------------------------------------------------------- | | | | | | | | | | | | | | - --------------- ---------- ------------------ --------------- ------------- ---------- ---------- | Plum Street | | Opinac | | NM Receivables | | NM Holdings | | NM Uranium | | Beebee | | Moreau | | Enterprises | | Energy | | | | | | | | Island | | | - --------------- ---------- ------------------ --------------- -------------- ---------- ---------- | | 50% | ---------- | CNP | ----------
EX-99.7 9 FERC APPLICATION UNDER SECTION 203 FPA Exhibit 20 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No. ________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING I. INTRODUCTION Niagara Mohawk Power Corporation ("NMPC" or the "Applicant") requests that the Commission authorize implementation of a corporate restructuring plan that will create a holding company structure. Because the corporate restructuring would be deemed to result in a "disposition of jurisdictional facilities," see Central Hudson Gas & Electric Corp., 84 FERC Sec. 62,010 (1998); Central Vermont Public Service Corp., 39 F.E.R.C. Para. 61,295 (1987), NMPC seeks this authorization under Section 203 of the Federal Power Act (the "FPA"), 16 U.S.C. Sec. 824b, and applicable Commission regulations, 18 C.F.R. Part 33. The corporate restructuring will create a holding company that will hold directly the common stock of NMPC. The corporate restructuring will have no effect on the jurisdictional facilities, rates, or services of NMPC and will be consistent with the public interest. NMPC respectfully requests that the Commission approve this application by September 15, 1998. This is approximately the same time frame in which NMPC anticipates receiving its other -1- regulatory approvals, and will permit it to proceed as expeditiously as possible with the corporate restructuring. II. DESCRIPTION OF THE NEW HOLDING COMPANY STRUCTURE Under the proposed holding company structure, NMPC will become a wholly-owned subsidiary of a new holding company, Niagara Mohawk Holdings, Inc. ("Holdings"),1/ a New York corporation. The present equity owners of NMPC will become the equity owners of Holdings. The corporate restructuring will result in a change in the identity of the direct holder of NMPC's equity, but no change in the beneficial owners of that equity, who will merely exchange their NMPC shares for shares in Holdings. The corporate restructuring is more fully described in the Agreement and Plan of Exchange ("Exchange Agreement"), which provides for the exchange of the outstanding shares of NMPC common stock on a share-for-share basis for shares of Holdings common stock, and an excerpt from the Form S-4 Registration Statement for Holdings, dated May 29, 1998, attached hereto as Exhibit H. III. BACKGROUND NMPC is an investor-owned public utility organized in 1937 under the laws of New York state. NMPC is engaged principally in the generation, purchase, transmission, distribution, and sale - ------------------ 1/ The name Niagara Mohawk Holdings, Inc. may be changed prior to the effective time of the share exchange (as hereinafter defined) at the discretion of the Board of Directors of Holdings. -2- of electricity and the purchase, distribution, sale, and transportation of gas. NMPC supplies electricity at both retail and wholesale. As of January 1, 1998, NMPC's electric transmission and distribution systems were composed of 952 substations with a rated transformer capacity of approximately 28,500,000 kilovolt amperes, approximately 8,000 circuit miles of overhead transmission lines, 1,100 cable miles of underground transmission lines, 113,100 miles of overhead distribution lines, and 5,800 cable miles of underground distribution cables. NMPC's generating facilities consist of four fossil fuel steam plants (as well as a 25% interest in the Roseton steam plant), two nuclear fuel steam plants, various diesel generating units, and 72 hydroelectric plants.2/ NMPC is a "public utility" as defined in Section 201(e) of the Federal Power Act, 16 U.S.C. Sec. 824(e). NMPC sells electric energy at wholesale to, and transmits electric energy in interstate commerce for, other electric utilities under rate schedules and tariffs approved by the Commission. NMPC's utility operations are also subject to regulation by the New York Public Service Commission (the "NYPSC") pursuant to New York's Public Service Law (the "PSL"). The - ---------------- 2/ Pursuant to orders of the New York Public Service Commission described infra, NMPC has committed to separate, to the fullest degree practical, its competitive generation business from the monopoly wires business. That commitment included implementation of NMPC's Non-Nuclear Generation Asset Divestiture Plan, which was approved in PSC Cases 94-E-0098 and 94-E-0099, ORDER AUTHORIZING PROCESS FOR THE AUCTION OF GENERATING FACILITIES (May 6, 1998). All of the non-nuclear generating facilities described herein are subject to that auction. 1998). All of the non-nuclear generating facilities described herein are subject to that auction. -3- NYPSC's jurisdiction includes supervision over NMPC's retail rates and issuances for bonds, capital stock and certain other securities, and investments by NMPC in other entities, including certain subsidiaries. NMPC is an "exempt" holding company under the Public Utility Holding Company Act of 1935 ("1935 Act"). It must obtain approval of the corporate restructuring from the Securities and Exchange Commission (the "SEC") under Section 9(a)(2) of the 1935 Act. Holdings will file with the SEC a claim of exemption under Section 3(a)(1) of the 1935 Act from the obligation to register as a holding company. In addition to its utility operations, NMPC owns an unregulated subsidiary, Opinac North America, Inc., which, in turn, owns Opinac Energy Corporation3/ and Plum Street Enterprises, Inc. and Plum Street Energy Marketing, Inc. (subsidiary of Plum Street Enterprises, Inc.) (collectively, the "non-utility subsidiaries"), which participate principally in energy-related services. Canadian Niagara Power Company, Limited ("CNP") is owned 50% by Opinac Energy Corporation. CNP owns a 99.99% interest in Canadian Niagara Wind Power Company, Inc. and Cowley Ridge Partnership, respectively, which together operate a wind power joint venture in the Province of - -------------------- 3/ Opinac Energy Corporation is an exempt holding company under Section 3(a)(5) of the Public Utility Holding Company Act of 1935. OPINAC ENERGY CORPORATION, 52 S.E.C. Docket 1475 (1992). -4- Alberta, Canada. NMPC also has several other subsidiaries including NM Uranium Inc., NM Holdings, Inc., Moreau Manufacturing Corp., Beebee Island Corp., and NM Receivables Corp. Subject to the approval of various applications and requests filed with the SEC, the NYPSC, the Nuclear Regulatory Commission (the "NRC"), and this Commission, NMPC proposes to form the holding company structure discussed above, whereby NMPC will become a subsidiary of Holdings. The NMPC shareholders have already approved the formation of the holding company at its Annual Meeting held on June 29, 1998. As part of the proposal, NMPC's non-regulated subsidiaries will be transferred to Holdings. The resulting corporate structure will more clearly separate NMPC's regulated and non-regulated businesses. This separation is consistent with federal and state initiatives for the restructuring of the electric utility industry.4/ The corporate restructuring is also consistent with a Settlement Agreement (the "Settlement"), dated October 10, 1997, among the Staff of the NYPSC , NMPC, and other parties which provides for fundamental changes to the structure of NMPC's business. The Settlement was approved by the NYPSC on March 20, 1998.5/ Among other things, the Settlement calls for NMPC - ----------------- 4/ E.g., Order No. 888: Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services By Public Utilities, 75 F.E.R.C. Para. 61,080 (1996), reaff'd and clarified, Order No. 888-A, 78 F.E.R.C. Para. 61,220 (1997); NYPSC Opinion 96-12, Cases 94-E-0952, et. al., Opinion and Order Regarding Competitive Opportunities for Electric Service. (1996). 5/ Niagara Mohawk Power Corp., Cases 94-E-0098 and 94-E-0099, et al., Opinion and Order Adopting Terms of Settlement Agreement Subject to Modification and Conditions (March 20, 1998) (the "Settlement Order"). -5- to divest all its hydro and fossil generation assets. NMPC's nuclear assets will remain part of its regulated business. NMPC will continue to distribute electricity through its transmission and distribution systems, but, by the end of 1999, all of NMPC's customers will be able to choose their electricity supplier in a competitive market. Electric rates will be unbundled into separate charges for transmission, distribution, customer service, electric supply, and a non-bypassable competitive transition charge (the "CTC"). Finally, the Settlement allows NMPC to form, at its election, the holding company structure discussed herein. Under the Settlement, NMPC may form a holding company within one year of that approval. The Settlement is more fully described in the Settlement Order, a copy of which is attached hereto as Exhibit J. IV. PUBLIC INTEREST STANDARDS The Commission has held that the transfer of a public utility's common stock from its existing shareholders to a holding company constitutes a transfer of the ownership and control of the utility's jurisdictional facilities and is thus "a disposition of facilities" subject to Commission review and approval under Section 203 of the FPA. See, e.g., Central Hudson Gas & Electric Corp., 84 FERC Sec.62,010 (1998); Illinois Power Co., 67 F.E.R.C. Para. 61,136 (1994); Central Vermont Public Service Corp., 39 F.E.R.C. Para. 61,295 (1987). Because NMPC's proposed restructuring would entail the transfer of the ownership of its common stock from existing shareholders to Holdings, NMPC is seeking approval under Section 203 and the Commission's regulations thereunder. -6- The proposed holding company structure is intended to provide NMPC with the financial and regulatory flexibility to compete more effectively in an increasingly competitive energy industry by providing a structure that can more easily accommodate both regulated and unregulated lines of business. NMPC currently operates under the regulatory constraints of the NYPSC that were generally designed to discourage electric utilities from participating in unregulated businesses and that limit (i) the total amount of incremental investment in unregulated operations, (ii) the amount that can be invested annually, (iii) the cumulative amount that can be invested in any single line of business, and (iv) the debt-equity ratios of its subsidiaries. Under current regulations, any time NMPC wishes to allocate funds to new unregulated ventures, it must seek NYPSC approval. The approval process itself leads to long delays, forces the Company to reveal its plans to competitors, and gives competitors the opportunity to intervene in the regulatory approval process and attempt to gain competitive advantage by seeking restrictions that would handicap NMPC. The holding company structure proposed herein would largely eliminate many of these regulatory constraints that would otherwise severely limit or handicap NMPC's ability to participate in unregulated business opportunities as the industry evolves. The holding company structure is a well-established form of organization for those companies conducting multiple lines of business. It is a common form of organization for unregulated companies and for those regulated companies, such as telephone utilities and water utilities, which are not subject to the 1935 Act. In addition, the holding company structure is utilized by many electric utilities which are involved in unregulated activities. -7- More generally, the holding company structure will enable Holdings to engage in unregulated businesses without obtaining the prior approval of the NYPSC, thereby enabling Holdings to pursue unregulated business opportunities in a timely manner. Under the new corporate structure, financing of unregulated activities of Holdings and its non-utility subsidiaries will not require NYPSC approval. In addition, the capital structure of each non-utility subsidiary may be appropriately tailored to suit its individual business. Also, under the holding company structure, Holdings will not need NYPSC approval to issue debt or equity securities to finance the acquisition of the stock or assets of other companies. The ability to raise capital for acquisitions without prior NYPSC approval should allow competition on a level basis with other potential acquirers, some of which are already holding companies. Under the holding company structure, the issuance of debt or equity securities by Holdings to finance the acquisition of stock or assets of another company should not adversely affect NMPC's capital devoted to and available for regulated utility operations. The holding company structure separates the operations of unregulated and regulated businesses. As a result, it provides a better structure for regulators to assure that there is no cross-subsidization of costs or transfer of business risk from unregulated to regulated lines of business. A holding company structure also makes it easier for investors to analyze and value individual lines of business. Moreover, the use of a holding company structure provides legal protection against the imposition of liability on regulated utilities for the results of unregulated business activities. In -8- short, the holding company structure is a highly desirable form of conducting regulated and unregulated businesses within the same corporate group. The Commission is obligated to approve a proposed disposition of facilities under FPA Section 203 if it is "consistent with the public interest." The applicant need not show a positive public benefit, Entergy Services, Inc., 65 FERC Para. 61,332 (1993); Central Vermont Public Service Corp., 39 F.E.R.C. at 61,190, n. 14. Rather, [o]nly an absence of negative detriment [to the public interest] is required." Id. See also Pacific Power and Light Co. v. F.P.C., 11 F.2d 1014, 1016 (9th Cir. 1962). The Commission routinely has found that the disposition of facilities in connection with the creation of holding companies is consistent with the public interest. New York State Electric and Gas Corp., 81 FERC Para. 62,201 (1997); Boston Edison Co. and BEC Energy, 80 FERC Para. 61,274 (1997). The disposition of facilities in the present situation is very similar to the disposition of facilities in the New York State Electric and Gas case. 81 FERC Para. 62,201 (1997). In both instances, an electric and gas company filed to transfer ownership and control of jurisdictional facilities, through a transfer of common stock from existing shareholders to a newly formed holding company. The proposed corporate restructuring is in the public interest as evaluated against the three factors set forth in the Commission's recently issued Merger Policy Statement: (1) effect on rates, -9- (2) effect on competition, and (3) effect on regulation.6/ A. THE PROPOSED RESTRUCTURING WILL NOT AFFECT OPERATING COSTS OR RATE LEVELS. The proposed corporate restructuring will have no affect on either NMPC's operating costs or its rate levels. The transaction costs of the restructuring will not affect NMPC's retail or wholesale rates because these costs will not be included in rates. Any future changes in NMPC's wholesale power or transmission rates will continue to be subject to Commission review and acceptance under the FPA. B. THE PROPOSED RESTRUCTURING WILL NOT HAVE AN ADVERSE EFFECT ON COMPETITION. Market power in wholesale electric markets results from the ownership or control of generation assets, transmission assets, or other inputs that could be used as barriers to entry. See, e.g., Kansas City Power and Light Co., 67 F.E.R.C. Para. 61,183, at 61,556-558 (1994). NMPC's proposed corporate restructuring will have no effect on the ownership or control of such assets and inputs and thus will not adversely affect competition. - --------------------- 6/ Order No. 592, Inquiry concerning the Commission's Merger Policy Under the Federal Power Act; Policy Statement, Docket No. RM96-6-000. 61 Fed. Reg. 68,595, 68,605 (issued December 18, 1996) ("Merger Policy Statement"). The Merger Policy Statement addresses public utility mergers subject to the Commission's jurisdiction under Section 203(a) of the FPA. While the instant Application does not involve a "merger" between electric public utilities, but rather the corporate restructuring of an electric public utility, NMPC has addressed each of the criteria set forth in the Merger Policy Statement to demonstrate that the Corporate restructuting is in the public interest. -10- Further, the Settlement, of which the concept of the corporate restructuring is a part, is being effected substantially as a response to the NYPSC's policy of increasing competitive choices for New York ratepayers. In approving the Settlement, the NYPSC stated: "The terms of the Settlement ... will offer a generally sound regulatory framework for Niagara Mohawk, its competitors, and its customers in the transition to fully competitive generation and energy services markets." Settlement Order at 74. Moreover, the auction of NMPC's non-nuclear generating facilities, described supra, also will facilitate development of the competitive market. Thus, the effect of the restructuring on competition in the electric power industry either will be neutral or will offer positive benefits by enhancing competition. C. THE PROPOSED RESTRUCTURING WILL NOT IMPAIR THE EFFECTIVENESS OF STATE OR FEDERAL REGULATION. The proposed corporate restructuring will not impair effective regulation of NMPC's utility operations by either state or federal agencies. NMPC's utility services rates and facilities will continue to be regulated by the NYPSC and the Commission. Indeed, because of the increase in the existing operational delineation between NMPC and its unregulated subsidiaries which will result, the corporate restructuring will enhance the auditing of utility costs and revenues. * * * -11- For the foregoing reasons, NMPC's proposed corporate restructuring is compatible with the public interest and should be authorized by the Commission. V. SUPPORTING INFORMATION In support of this Application, and pursuant to 18 C.F.R. Sec. 33.2, NMPC states the following: a. The exact name and the address of the Applicant's principal business office and each company whose activities are involved: Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, New York 13202 Niagara Mohawk Holdings, Inc. 300 Erie Boulevard West Syracuse, New York 13202 b. Names and addresses of persons authorized to receive notices and communications concerning this Application: Paul J. Kaleta, Esq. Vice President--Law and General Counsel M. Margaret Fabic, Esq. Chief Counsel--Energy Delivery Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, New York 13202 (315) 428-6593 Steven J. Agresta, Esq. J. Phillip Jordan, Esq. Swidler & Berlin 3000 K Street NW Suite 300 Washington, DC 20007 (202) 424-7757 -12- c. Designation of the territories served, by counties and States: NMPC is engaged principally in the business of generating, purchasing, transmitting and distributing electricity and purchasing, transporting and distributing natural gas. NMPC's service territory is located entirely within New York State. NMPC's service territory has an area of approximately 24,000 square miles and a population of 3.5 million. The largest cities in which NMPC serves either or both electricity and natural gas are Buffalo, Syracuse, Albany, Utica, Schenectady, Niagara Falls, Watertown and Troy. The following counties in New York are all of the counties in which NMPC provides retail electric services: Onondaga, Cayuga, Chenango, Cortland, Franklin, Hamilton, Herkimer, Jefferson, Lewis, Madison, Oneida, Oswego, St. Lawrence, Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Livingston, Monroe, Niagara, Ontario, Orleans, Seneca, Wayne, Wyoming, Albany, Clinton, Columbia, Dutchess, Essex, Fulton, Greene, Montgomery, Orange, Otsego, Rensselaer, Saratoga, Schenectady, Schoharie, Warren, and Washington. d. General statement briefly describing the facilities owned or operated for transmission of electric energy in interstate commerce or for the sale of electric energy at wholesale in interstate commerce: As of January 1, 1998, NMPC's electric transmission and distribution systems were composed of 952 substations with a rated transformer capacity of approximately 28,500,000 kilovolt -13- amperes, approximately 8,000 circuit miles of overhead transmission lines, 1,100 cable miles of underground transmission lines, 113,100 miles of overhead distribution lines, and 5,800 cable miles of underground distribution cables. All of NMPC's electric transmission facilities are located in the State of New York. NMPC's generating facilities currently consist of four fossil fuel steam plants (as well as a 25% interest in the Roseton steam plant), two nuclear fuel steam plants, various diesel generating units, and 72 hydroelectric plants, and has a majority interest in Beebee Island and Feeder Dam hydro plants and their output. NMPC also purchases substantially all the output of 93 other hydroelectric facilities. e. Whether the application is for disposition of facilities by sale, lease, or otherwise, and a description of the consideration, if any, and the method of arriving at the amount thereof. The "disposition of facilities" deemed to occur solely from the creation of a holding company over NMPC does not involve any consideration or sales price. f. Statement of the facilities to be disposed of, giving a description of their present use and proposed use after disposition. State whether the proposed disposition includes all the operating facilities of the parties to the transactions: -14- The creation of a holding company over NMPC is deemed to be a "disposition" for purposes of the FPA of all of NMPC's facilities, including all operating facilities. However, after the holding company structure is implemented, title, possession and use of all utility property, subject to the terms of the Settlement, will still be held by NMPC, which will be a wholly owned subsidiary of Holdings. g. Statement (in the form prescribed by the Commission's Uniform System of Accounts for Public Utilities as Licensees) of the cost of the facilities involved in the disposition: After the proposed corporate restructuring, all of the physical facilities currently owned by NMPC will, subject to the terms of the Settlement, continue to be owned by NMPC, and NMPC will be a wholly owned subsidiary of Holdings. Therefore, NMPC incorporates herein by reference the statements contained in its FERC Form No. 1 for the year ended December 31, 1997, relating to the cost of NMPC's net utility plant. h. Statement as to the effect of the proposed transaction upon any contract for the purchase, sale, or interchange of electric energy: The proposed corporate restructuring will have no effect on any of NMPC's contracts for the purchase, sale, or interchange of electric energy. The Master Restructuring Agreement ("MRA") -15- between NMPC and 14 independent power producers, consummated on June 30, 1998, terminates, restates, or amends 27 power purchase agreements, representing nearly 1700 MW of capacity. i. Statement as to whether any application with respect to the transaction or any part thereof is required to be filed with any other federal or state regulatory body: The proposed corporate restructuring requires the approval of the NYPSC, the SEC pursuant to the 1935 Act, and the NRC. The Settlement, which includes a description of the corporate restructuring, has been approved by the NYPSC in the Settlement Order. Concurrent with the filing of this Application, NMPC is filing applications with the NRC, and the SEC for approval to effect the proposed corporate restructuring. Additionally, a compliance filing with the NYPSC will be required consistent with the Settlement and the Settlement Order. No similar application is required to be filed with any other State or federal regulatory body. The SEC, NRC and NYPSC filings are attached hereto as Exhibit G. j. The facts relied upon to show that the proposed disposition will be consistent with the public interest: Reference is hereby made to the prior discussion in Section IV of this Application. k. Brief statement of franchises held, showing date of expiration, if not perpetual: -16- A listing of the franchises held by NMPC and their dates of expiration is attached hereto as Exhibit K. The proposed corporate restructuring does not involve a transfer of any franchises and there will be no change in franchised territories as a result of the proposed corporate restructuring. l. Form of notice suitable for publication in the Federal Register, briefly summarizing the application in such a way as to acquaint the public with its scope and purpose: A form of Notice suitable for publication in the Federal Register, pursuant to 18 C.F.R. Sec. 35.8, is attached hereto as Exhibit L. In addition, enclosed with Exhibit L is a 3 1/2" diskette containing the notice of filing in WordPerfect 5.1 for DOS. VI. REQUIRED EXHIBITS The following exhibits required by Section 33.3 of the Commission's regulations are filed herewith, except as noted below. All exhibits are relevant only to, and therefore address only, NMPC. Exhibit A -- Resolutions of the Board of Directors dated May 14, 1998 authorizing the proposed corporate restructuring. Exhibit B -- A statement of the measure of control or ownership exercised by or over NMPC and the nature and extent of any intercorporate relationships. -17- Exhibit C -- Balance sheets and supporting plant schedules for the 12-month period ended December 31, 1997 on an actual basis in the form prescribed for Statements A and B of the FERC Annual Report Form No. 1. and pro forma balance sheets. Exhibit D -- A statement of all known contingent liabilities excepting minor items. Exhibit E -- Income statements for the 12-month period ended December 31, 1997 on an actual basis in the form prescribed for Statement C of the FERC Annual Report Form No. 1 and pro forma income statements. Exhibit F -- An analysis of retained earnings for the period covered by the income statements referred to in Exhibit E and pro forma retained earnings statements. Exhibit G -- Copies of applications or requests filed with the NYPSC, the NRC, and the SEC. Copies of agency orders will be filed with the Commission after they have been issued. Exhibit H -- Copies of the Agreement and Plan of Exchange between NMPC and Holdings. Exhibit I -- A map showing NMPC's properties and interconnections and the principal cities of the area served. In addition, NMPC has attached the following exhibits: -18- Exhibit J Niagara Mohawk Power Corp., Cases 94-E-0098 and 94-E-0099, et al., Opinion and Order Adopting Terms of Settlement Agreement Subject to Modifications and Conditions (Mar. 20, 1998) (Settlement Order) Exhibit K List of Franchises Exhibit L Form of Notice suitable for publication in the Federal Register (hard copy and 3 1/2" diskette in Word Perfect 5.1 for DOS) WHEREFORE, Niagara Mohawk Power Corporation respectfully requests that the Commission approve this Application and authorize the proposed corporate restructuring under the terms and conditions set forth herein. Respectfully submitted, NIAGARA MOHAWK POWER CORPORATION By: /s/ Paul J. Kaleta ------------------------------- Name: Paul J. Kaleta Title: Vice President -- Law and General Counsel Paul J. Kaleta, Esq. Steven J. Agresta Vice President -- Law and General Counsel J. Phillip Jordan M. Margaret Fabic, Esq. Swidler & Berlin, Chtd. Chief Counsel -- Energy Delivery 3000 K Street, N.W., Suite 300 Niagara Mohawk Power Corporation Washington, D.C. 20007-5116 300 Erie Boulevard West Voice (202) 424-7501 Syracuse, New York 13202 Fax (202) 424-7692 Voice (315) 428-6593 Fax (315) 428-6407 Dated: July 22, 1998 -19- UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No. ________________ STATE OF NEW YORK ) COUNTY OF ONONDAGA ) s: AFFIDAVIT OF WILLIAM F. EDWARDS William F. Edwards, being duly sworn, states that he is the Senior Vice President and Chief Financial Officer of Niagara Mohawk Power Corporation ("NMPC"); that he is authorized on the part of NMPC to sign and file with the Federal Energy Regulatory Commission the foregoing Application; and that said request is true and correct to the best of his knowledge, information and belief. ---------------------------------- William F. Edwards SUBSCRIBED and SWORN to before me, a Notary Public, this ____ day of _________, 1998. - ---------------------------------- Notary Public -20- NIAGARA MOHAWK POWER CORPORATION I, STEVEN W. TASKER, Vice President and Controller of Niagara Mohawk Power Corporation, a corporation organized and existing under the laws of the State of New York, HEREBY CERTIFY that I have reviewed Exhibits C, D, E and F annexed hereto and they are true and correct to the best of my knowledge. IN WITNESS WHEREOF, I have hereunto subscribed my name this 20th day of July, 1998. ----------------------------- Steven W. Tasker Vice President and Controller NIAGARA MOHAWK POWER CORPORATION I, M MARGARET FABIC, Chief Counsel-- Energy Delivery of Niagara Mohawk Power Corporation, a corporation organized and existing under the laws of State of New York, HEREBY CERTIFY that I have reviewed Exhibits B, G and I annexed hereto and they are true and correct to the best of my knowledge. IN WITNESS WHEREOF, I have hereunto subscribed my name this 20th day of July, 1998. ----------------------------- M. Margaret Fabic Chief Counsel-Energy Delivery UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No. __________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT A NIAGARA MOHAWK POWER CORPORATION I, KAPUA A. RICE, Secretary of Niagara Mohawk Power Corporation, a corporation organized and existing under the laws of the State of New York, HEREBY CERTIFY: 1. That a meeting of the Board of Directors of Niagara Mohawk Power Corporation was duly called and held on May 14, 1998, pursuant to law and the By-Laws of said Corporation; 2. That a quorum of the Board of Directors was present at said meeting and acted throughout; 3. That at said meeting resolutions, a true and correct copy of which is annexed hereto, were duly adopted by the Board of Directors; 4. That said resolutions have not been in any respect amended, rescinded or annulled, but remain in full force and effect; 5. That the Secretary or any Assistant Secretary of said Corporation is authorized by provision of the By-Laws of said Corporation to certify as to the acts of the Board of Directors. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the corporate seal of Niagara Mohawk Power Corporation this 23rd day of June, 1998. /s/ Kapua A. Rice ---------------------------- Kapua A. Rice Secretary APPROVAL OF BINDING SHARE EXCHANGE AGREEMENT FOR HOLDING COMPANY: After discussion, on motion duly made, seconded and carried by the affirmative vote of all directors present, the following resolutions were adopted: RESOLVED, That the Agreement and Plan of Exchange (the "Exchange Agreement") with Niagara Mohawk Holdings, Inc. ("Holdings") attached as Exhibit A to the draft prospectus/proxy statement circulated to the Board is hereby adopted and approved and the Chairman and Chief Executive Officer or the President of Niagara Mohawk Power Corporation (the "Corporation") is hereby authorized, empowered and directed to execute and deliver the Exchange Agreement in substantially such form, with such changes theretin, if any, as he may approve, whether upon suggestion of counsel or otherwise; and be it further RESOLVED, That any of the officers of the Corporation are, and each of them is, authorized and empowered to file or cause to be filed a Certificate of Exchange with the Department of State of the State of New York, in the event that the Exchange Agreement is adopted and approved by holders of shares of Common Stock of Niagara Mohawk Power Corporation; and be it further RESOLVED, That, if and when the share exchange becomes effective, the Corporation's Dividend Reinvestment and Common Stock Purchase Plan as in effect immediately prior to the effective time be appropriately amended, so that shares of Common Stock of Holdings will be issued under such Plan on and after the effective time; and be it further RESOLVED, That, if and when the share exchange becomes effective, the Employee Savings Fund Plans for Represented and Non-Represented Employees and the 1992 Stock Option Plan (together the "Stock Plans"), as in effect immediately prior to the effective time be appropriately amended, so that shares of Common Stock of the Holdings will be issued under such Plans on and after the effective time, and all stock options previously the obligations of the Corporation shall be assumed by Holdings. RESOLVED, that the appropriate officers of the Corporation be, and each of them are, hereby authorized and empowered to take or cause to be taken such other and -2- further action as they in their discretion may deem necessary or desirable to carry out the intent and purposes of the foregoing resolutions and any such action heretofore taken by such officers is hereby approved, ratified and confirmed. 5/14/98 APPROVED BY THE BOARD OF DIRECTORS May 14 1998 KAPUA A. RICE SECRETARY UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No. __________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT B UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULAOTRY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No. ________________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING EXHIBIT B Upon implementation of the proposed corporate restructuring described in this Application, Niagara Mohawk Holdings, Inc. (Holdings) will own or control, directly or indirectly, 100% of all the common stock of Niagara Mohawk Power Corporation (Niagara Mohawk) and all of the subsidiaries of both companies, with the following exceptions. Holdings will own 50% of the common stock of Canadian Niagara Power, 67% of the common stock of Moreau Manufacturing Corp. and 86% of Beebee Island Corp., each of which is a public utility. However, Niagara Mohawk expects to sell or liquidate its majority interests in two of its generation subsidiaries, Beebee Island and Moreau, before or shortly after the share exchange, Holdings will retain an indirect 50% interest in CNP. Holdings will exercise no measure of control or ownership over any other public utility, bank, trust company, banking association, firm that is authorized by law to underwrite or participate in the marketing of securities of a public utility, or company that supplies electric equipment. 1 The officers of Holdings will be as follows: Chairman of the Board and William E. Davis Chief Executive Officer President Albert J. Budney, Jr. Chief Financial Officer William F. Edwards Chief Legal Officer Gary J. Lavine, Esq. Chief Accounting Officer Steven W. Tasker Secretary Kapua A. Rice The directors of Holdings will be: Salvatore H. Alfiero William F. Allyn Albert J. Budney, Jr. Lawrence Burkhardt, III Douglas M. Costle William E. Davis William J. Donlon Anthony H. Gioia Bonnie Guiton Hill Clark A. Johnson Henry A. Panasci, Jr. Patti McGill Peterson Donald B. Riefler Stephen B. Schwartz By application pursuant to Federal Power Act Section 305(b) dated June 29, 1998, Mr. Alfiero has requested authority to hold the following interlocking positions: Position Corporation Classification - -------- ----------- -------------- Director Niagara Mohawk Power Corporation Public Utility (Niagara Mohawk) Director Phoenix Home Mutual Insurance Co. Firm authorized by law to (Phoenix) underwrite or market utility securities Director Marine Midland Bank (Marine) Bank authorized by law to underwrite or market utility securities Director Southwire Company (Southwire) Electrical equipment manufacturer Phoenix, which is engaged in the insurance annuity business, is not authorized by law to underwrite or market utility securities. However, Phoenix also is the ultimate corporate parent of Phoenix Equity Planning Corporation (PEPCO) and W.S. Griffith & Co., Inc., (Griffith) which are authorized to market utility securities. For purposes of Section 305(b), the activities of PEPCO and Griffith may be imputed by FERC to Phoenix for 2 purposes of determining whether an interlocking directorate exists between a public utility and a bank, trust company, banking association, or firm that is authorized by law to underwrite or participate in the marketing of utility securities. The same imputation rule applies to Marine, a commercial bank whose ultimate corporate parent, HSBC Holdings plc, also is the ultimate corporate parent of HSBC Securities, Inc., which is authorized by law to participate in the marketing of utility securities. Mr. Alfiero serves as an outside director of Phoenix, Marine, and Southwire, and will serve as an outside director of Niagara Mohawk. Mr. Alfiero does not expect to be intimately involved in the day-to-day affairs of such companies or their subsidiaries or affiliates. In addition, Messrs. Allyn, Budney, Costle, Davis and Ms. McGill Peterson hold interlocking positions between public utilities and certain other entities, as previously reported on FERC 561:Annual Report of Interlocking Positions. The officers of Niagara Mohawk are as follows: Chairman of the Board and William E. Davis Chief Executive Officer President and Chief Albert J. Budney, Jr. Operating Officer Chief Financial Officer William F. Edwards Senior Vice President and John H. Mueller Chief Nuclear Officer Senior Vice Presidents David J. Arrington Darlene D. Kerr Gary J. Lavine 3 Vice Presidents Richard B. Abbott Joseph T. Ash Nicholas J. Ashooh Thomas H. Baron John T. Conway Kim A. Dahlberg Edward J. Dienst Theresa A. Flaim Paul J. Kaleta, Esq. Michael J. Kelleher Samuel F. Manno Douglas R. McCuen Clement E. Nadeau Arthur W. Roos Richard H. Ryzcek William J. Synwoldt Steven W. Tasker Carl D. Terry Stanley W. Wilczek Secretary Kapua A. Rice The Directors of Niagara Mohawk will be: William E. Davis Darlene D. Kerr John Mueller 4 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No. __________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT C FERC EXHIBIT C BALANCE SHEET AND SUPPORTING PLANT SCHEDULES Niagara Mohawk Power Corporation's balance sheet and supporting plant schedules are set forth in its FERC Form No. 1 for the year ended Decembert 31, 1997 (Resubmission No. 1, June 1998) (at pages 110-113 and 200-203), which is incorporated herein by reference. The pro forma balance sheet for the year ended December 31, 1997 reflecting the proposed transaction follows. Pro forma supporting plant schedules are not presented since they are unaffected by the proposed transaction.
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 (IN THOUSANDS OF DOLLARS) EXHIBIT C PRO FORMA FINANCIAL STATEMENTS PRO FORMA CONSOLIDATED ADJUSTMENTS NIAGARA NIAGARA NIAGARA MOHAWK MOHAWK MOHAWK POWER ASSETS HOLDINGS, INC. HOLDINGS, INC. CORPORATION ------ -------------- -------------- ----------- UTILITY PLANT: Electric plant $8,752,865 Nuclear fuel 577,409 Gas plant 1,131,541 Common plant 319,409 Construction work in progress 294,650 ----------- ----------- ----------- TOTAL UTILITY PLANT 11,075,874 Less: Accumulated depreciation and amortization 4,207,830 ----------- ----------- ----------- NET UTILITY PLANT 6,868,044 ----------- ----------- ----------- OTHER PROPERTY AND INVESTMENTS: Investment in subsidiary companies - consolidated 2,727,527 Investment 266,861 ----------- ----------- ----------- 2,727,527 266,861 ----------- ----------- ----------- CURRENT ASSETS: Cash, including temporary cash investments of $315,708 355,569 Accounts receivable 531,922 Less-Allowance for doubtful accounts (62,500) Materials and supplies, at average cost: Coal and oil for production of electricity 27,642 Gas storage 38,502 Other 118,308 Prepaid taxes 15,518 Other 19,390 ----------- ----------- ----------- 1,044,351 ----------- ----------- ----------- REGULATORY ASSETS: Regulatory tax asset 399,119 Deferred finance charges 239,880 Deferred environmental restoration costs 220,000 Unamortized debt expense 57,312 Postretirement benefits other than pensions 56,464 Other 204,049 ----------- ----------- ----------- 1,176,824 ----------- ----------- ----------- 75,864 ----------- ----------- ----------- OTHER ASSETS $ 2,727,527 $9,431,944 =========== =========== ===========
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 (IN THOUSANDS OF DOLLARS) (continued . . .) EXHIBIT C PRO FORMA FINANCIAL STATEMENTS CONSOLIDATED CONSOLIDATED INTER- NIAGARA OPINAC NORTH COMPANY MOHAWK ASSETS AMERICA, INC. ELIMINATIONS HOLDINGS, INC. ------ ------------- ------------- -------------- UTILITY PLANT: Electric plant $ $8,752,865 Nuclear fuel 577,409 Gas plant 1,131,541 Common plant 319,409 Construction work in progress 294,650 ----------- ----------- ----------- TOTAL UTILITY PLANT 11,075,874 Less: Accumulated depreciation and amortization 4,207,830 ----------- ----------- ----------- NET UTILITY PLANT 6,868,044 ----------- ----------- ----------- OTHER PROPERTY AND INVESTMENTS: Investment in subsidiary companies - consolidated (2,727,527) Investment 104,848 371,709 ----------- ----------- ----------- 104,848 (2,727,527) 371,709 ----------- ----------- ----------- CURRENT ASSETS: Cash, including temporary cash investments of $315,708 22,663 378,232 Accounts receivable 23,002 (180) 554,744 Less-Allowance for doubtful accounts (62,500) Materials and supplies, at average cost: Coal and oil for production of electricity 27,642 Gas storage 945 39,447 Other 118,308 Prepaid taxes 15,518 Other 919 20,309 ----------- ----------- ----------- 47,529 (180) 1,091,700 ----------- ----------- ----------- REGULATORY ASSETS: Regulatory tax asset 399,199 Deferred finance charges 239,880 Deferred environmental restoration costs 220,000 Unamortized debt expense 57,312 Postretirement benefits other than pensions 56,464 Other 204,049 ----------- ----------- ----------- 1,176,824 ----------- ----------- ----------- 75,864 ----------- ----------- ----------- OTHER ASSETS $152,377 ($2,727,707) $9,584,141 =========== =========== ===========
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 (IN THOUSANDS OF DOLLARS) EXHIBIT C PRO FORMA FINANCIAL STATEMENTS PRO FORMA CONSOLIDATED ADJUSTMENTS NIAGARA NIAGARA NIAGARA MOHAWK MOHAWK MOHAWK POWER HOLDINGS, INC. HOLDINGS, INC. CORPORATION -------------- -------------- ----------- CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholders' equity: Common stock-$.01 par value; authorized 300,000,000 shares: issued 144,419,351 shares 1,444 144,419 Capital stock premium and expense 1,922,663 1,779,688 Retained earnings 803,420 671,852 ----------- ----------- ----------- 2,727,527 2,595,959 ----------- ----------- ----------- Cumulative preferred stock - $100 par value; authorized 3,400,000 shares; issued 2,322,000 shares: Optionally redeemable 210,000 Mandatorily redeemable 20,400 Cumulative preferred stock - $25 par value; authorized 19,600,000 shares; issued 11,781,204 shares: Optionally redeemable 230,000 Mandatorily redeemable 56,210 Cumulative preference stock - $25 par value; authorized 8,000,000 shares; issued none Long-term debt 3,417,381 ----------- ----------- ----------- TOTAL CAPITALIZATION 2,727,527 6,529,950 ----------- ----------- ----------- CURRENT LIABILITIES: Long-term debt due within one year 67,095 Sinking fund requirements on redeemable preferred stock 10,120 Accounts payable 243,082 Payable on outstanding bank checks 23,720 Customers' deposits 18,372 Accrued taxes 9,005 Accrued interest 62,643 Accrued vacation pay 36,532 Other 63,767 ----------- ----------- ----------- 534,336 ----------- ----------- ----------- REGULATORY LIABILITIES: Deferred finance charges 239,880 ----------- ----------- ----------- OTHER LIABILITIES: Accumulated deferred income taxes 1,387,659 Employee pension and other benefits 240,211 Deferred pension settlement gain 12,438 Unbilled revenues 43,281 Other 24,189 ----------- ----------- ----------- 1,907,778 ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES: Liability for environmental restoration 220,000 ----------- ----------- ----------- $ 2,727,527 $9,431,944 =========== =========== ===========
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 (IN THOUSANDS OF DOLLARS) (continued . . .) EXHIBIT C PRO FORMA FINANCIAL STATEMENTS CONSOLIDATED CONSOLIDATED INTER- NIAGARA OPINAC NORTH COMPANY MOHAWK AMERICA, INC. ELIMINATIONS HOLDINGS, INC. ------------- ------------- -------------- CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholders' equity: Common stock-$.01 par value; authorized 300,000,000 shares: issued 144,419,351 shares 1 (144,420) 1,444 Capital stock premium and expense 133,568 (1,913,256) 1,922,663 Retained earnings (2,001) (669,851) 803,420 ----------- ----------- ----------- 131,568 (2,727,527) 2,727,527 ----------- ----------- ----------- Cumulative preferred stock - $100 par value; authorized 3,400,000 shares; issued 2,322,000 shares: Optionally redeemable 210,000 Mandatorily redeemable 20,400 Cumulative preferred stock - $25 par value; authorized 19,600,000 shares; issued 11,781,204 shares: Optionally redeemable 230,000 Mandatorily redeemable 56,210 Cumulative preference stock - $25 par value; authorized 8,000,000 shares; issued none Long-term debt 3,417,381 ----------- ----------- ----------- TOTAL CAPITALIZATION 131,568 (2,727,527) 6,661,518 ----------- ----------- ----------- CURRENT LIABILITIES: Long-term debt due within one year 67,095 Sinking fund requirements on redeemable preferred stock 10,120 Accounts payable 20,193 (180) 263,095 Payable on outstanding bank checks 23,720 Customers' deposits 18,372 Accrued taxes 9,005 Accrued interest 62,643 Accrued vacation pay 36,532 Other 989 64,756 ----------- ----------- ----------- 21,182 (180) 555,338 ----------- ----------- ----------- REGULATORY LIABILITIES: Deferred finance charges 239,880 ----------- ----------- ----------- OTHER LIABILITIES: Accumulated deferred income taxes (627) 1,387,032 Employee pension and other benefits 240,211 Deferred pension settlement gain 12,438 Unbilled revenues 43,281 Other 254 224,443 ----------- ----------- ----------- (373) 1,907,405 ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES: Liability for environmental restoration 220,000 ----------- ----------- ----------- $152,377 ($2,727,707) $9,584,141 =========== =========== ===========
NIAGARA MOHAWK HOLDINGS, INC. ACCOUNTING ENTRY TO RECORD THE REORGANIZATION BALANCE SHEET AT DECEMBER 31, 1997 (IN THOUSANDS OF DOLLARS) EXHIBIT C
SUBSIDIARY LINE DESCRIPTION DEBIT CREDIT Niagara Mohawk Holdings, Inc. Investment in subsidiary companies - consolidated 2,727,527 Niagara Mohawk Holdings, Inc. Common stock 144,420 Niagara Mohawk Holdings, Inc. Capital stock premium and expense 1,913,256 Niagara Mohawk Holdings, Inc. Retained Earnings 669,851
To record Niagara Mohawk Holdings, Inc's investment in subsidiaries. Remaining entry represents normal consolidating eliminating entries. UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No.__________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT D FERC EXHIBIT D --------- STATEMENT OF ALL KNOWN CONTINGENT LIABILITIES As of the date of this application, the material contingent liabilities of Niagara Mohawk Power Corporation, not including minor items such as damage claims and similar items involving relatively small amounts, are set forth in Niagara Mohawk Power Corporation's (NMPC) Annual Report on Form 10-K/A for the year ended December 31, 1997, and NMPC's Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1998, appropriate excerpts of which are attached hereto. NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Excerpt from Niagara Mohawk Power Corporation Form 10 K/A for the Year ended December 31, 1997. NOTE 2. RATE AND REGULATORY ISSUES AND CONTINGENCIES The Company's financial statements conform to GAAP, including the accounting principles for rate-regulated entities with respect to its regulated operations. Substantively, these principles permit a public utility, regulated on a cost-of-service basis, to defer certain costs which would otherwise be charged to expense, when authorized to do so by the regulator. These deferred costs are known as regulatory assets, which in the case of the Company are approximately $937 million, net of approximately $240 million of regulatory liabilities at December 31, 1997. These regulatory assets are probable of recovery. The portion of the $937 million which has been allocated to the nuclear generation and electric transmission and distribution business is approximately $810 million, which is net of approximately $240 million of regulatory liabilities. Regulatory assets allocated to the rate-regulated gas distribution business are $127 million. Generally, regulatory assets and liabilities were 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. The Company concluded as of December 31, 1996 that the termination, restatement or amendment of IPP contracts and implementation of PowerChoice was the probable outcome of negotiations that had taken place since the PowerChoice announcement. Under PowerChoice, the separated non-nuclear generation business would no longer be rate-regulated on a cost-of-service basis and, accordingly, regulatory assets related to the non-nuclear power generation business, amounting to approximately $103.6 million ($67.4 million after tax or 47 cents per share) was charged against 1996 income as an extraordinary non-cash charge. The PSC in its written order issued March 20, 1998 approving PowerChoice, determined to limit the estimated value of the MRA regulatory asset that can be recovered from customers to approximately $4,000 million. The ultimate amount of the regulatory asset to be established may vary based on certain events related to the closing of the MRA. The estimated value of the MRA regulatory asset includes the issuance of 42.9 million shares of common stock, which the PSC in determining the recoverable amount of such asset, valued at $8 per share. Because the value of the consideration to be paid to the IPP Parties can only be determined at the MRA closing, the value of the limitation on the recoverability of the MRA regulatory asset is expected to be recorded as a charge to expense in the second quarter of 1998 upon the closing of the MRA. The charge to expense will be determined as the difference between $8 per share and the Company's closing common stock price on the date the MRA closes, multiplied by 42.9 million shares. Using the Company's common stock price on March 26, 1998 of $12 7/16 per share, the charge to expense would be approximately $190 million (85 cents per share). Under PowerChoice, the Company's remaining electric business (nuclear generation and electric transmission and distribution business) will continue to be rate-regulated on a cost-of-service basis and, accordingly, the Company continues to apply SFAS No. 71 to these businesses. Also, the Company's IPP contracts, including those restructured under the MRA and those not so restructured will continue to be the obligations of the regulated business. The EITF of the FASB reached a consensus on Issue No. 97-4 "Deregulation of the Pricing of Electricity - Issues Related to the Application of SFAS No. 71 and SFAS No. 101" in July 1997. As discussed previously, the Company discontinued the application of SFAS No. 71 and applied SFAS No. 101 with respect to the fossil and hydro generation business at December 31, 1996, in a manner consistent with the EITF consensus. In addition, EITF 97-4 does not require the Company to earn a return on regulatory assets that arise from a deregulating transition plan in assessing the applicability of SFAS No. 71. In the event the MRA and PowerChoice are implemented, the Company believes that the regulated cash flows to be derived from prices it will charge for electric service over 10 years, including the CTC, assuming no unforeseen reduction in demand or bypass of the CTC or exit fees, will be sufficient to recover the MRA regulatory asset and to provide recovery of and a return on the remainder of its assets, as appropriate. In the event the Company could no longer apply SFAS No. 71 in the future, it would be required to record an after-tax non-cash charge against income for any remaining unamortized regulatory assets and liabilities. Depending on when SFAS No. 71 was required to be discontinued, such charge would likely be material to the Company's reported financial condition and results of operations and the Company's ability to pay dividends. The PowerChoice agreement, while having the effect of substantially depressing earnings during its five-year term, will substantially improve operating cash flows. With the implementation of PowerChoice, specifically the separation of non-nuclear generation as an entity that would no longer be cost-of-service regulated, the Company is required to assess the carrying amounts of its long-lived assets in accordance with SFAS No. 121. SFAS No. 121 requires long-lived assets and certain identifiable intangibles held and used by an entity to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or when assets are to be disposed of. 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/or its disposition. The Company has determined that there is no impairment of its fossil and hydro generating assets. To the extent the proceeds resulting from the sale of the fossil and hydro assets are not sufficient to avoid a loss, the Company would be able to recover such loss through the CTC. The PowerChoice agreement provides for deferral and future recovery of losses, if any, resulting from the sale of the non-nuclear generating assets. The Company believes that it will be permitted to record a regulatory asset for any such loss in accordance with EITF 97-4. The Company's fossil and hydro generation plant assets had a net book value of approximately $1.1 billion at December 31, 1997. As described in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Master Restructuring Agreement and the PowerChoice Agreement," the conclusion of the termination, restatement or amendment of IPP contracts, and closing of the financing necessary to implement such termination, restatement or amendment, as well as implementation of PowerChoice, is subject to a number of contingencies. In the event the Company is unable to successfully bring these events to conclusion, it is likely that application of SFAS No. 71 would be discontinued. The resulting non-cash after-tax charges against income, based on regulatory assets and liabilities associated with the nuclear generation and electric transmission and distribution businesses as of December 31, 1997, would be approximately $526.5 million or $3.65 per share. 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 and preferred dividends and certain types of transfers of assets could be adversely impacted by any such write-downs, The Company has recorded the following regulatory assets on its Consolidated Balance Sheets reflecting the rate actions of its regulators: REGULATORY TAX ASSET represents the expected future recovery from ratepayers of the tax consequences of temporary differences between the recorded book bases and the tax bases of assets and liabilities. This amount is primarily timing differences related to depreciation. These amounts are amortized and recovered as the related temporary differences reverse. In January 1993, the PSC issued a Statement of Interim Policy on Accounting and Ratemaking Procedures that required adoption of SFAS No. 109 on a revenue-neutral basis. DEFERRED FINANCE CHARGES represent the deferral of the discontinued portion of AFC related to CWIP at Unit 2 which was included in rate base. In 1985, pursuant to PSC authorization, the Company discontinued accruing AFC on CWIP for which a cash return was being allowed. This amount, which was accumulated in deferred debit and credit accounts up to the commercial operation date of Unit 2, awaits future disposition by the PSC. A portion of the deferred credit could be utilized to reduce future revenue requirements over a period shorter than the life of Unit 2, with a like amount of deferred debit amortized and recovered in rates over the remaining life of Unit 2. PowerChoice provides for netting, and thereby elimination of the debit and credit balances of deferred finance charges. DEFERRED ENVIRONMENTAL RESTORATION COSTS represent the Company's share of the estimated costs to investigate and perform certain remediation activities at both Company owned sites and non-owned sites with which it may be associated. The Company has recorded a regulatory asset representing the remediation obligations to be recovered from ratepayers. PowerChoice and the Company's gas settlement provide for the recovery of these costs over the settlement periods. The Company believes future costs, beyond the settlement periods, will continue to be recovered in rates. See Note 9 - "Environmental Contingencies." UNAMORTIZED DEBT EXPENSE represents the costs to issue and redeem certain long-term debt securities which were retired prior to maturity. These amounts are amortized as interest expense ratably over the lives of the related issues in accordance with PSC directives. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS represent the excess of such costs recognized in accordance with SFAS No. 106 over the amount received in rates. In accordance with the PSC policy statement, postretirement benefit costs other than pensions are being phased-in to rates over a five-year period and amounts deferred will be amortized and recovered over a period not to exceed 20 years. Substantially all of the Company's regulatory assets described above are being amortized to expense and recovered in rates over periods approved in the Company's electric and gas rate cases, respectively. NOTE 9. COMMITMENTS AND CONTINGENCIES See Note 2. LONG-TERM CONTRACTS FOR THE PURCHASE OF ELECTRIC POWER: At January 1, 1998, the Company had long-term contracts to purchase electric power from the following generating facilities owned by NYPA:
Expiration date Purchased Estimated annual Facility of Contract capacity in MW capacity cost - --------------------------------- ---------------- --------------- ----------------- Niagara - hydroelectric project 2007 951 $27,369,000 St. Lawrence - Hydroelectric 2007 104 1,300,000 project Blenheim-Gilboa - pumped 2002 270 7,500,000 storage generating station - --------------------------------- ---------------- --------------- ---------------- 1,325 $36,169,000 ================================= ================ =============== =================
The purchase capacities shown above are based on the contracts currently in effect. The estimated annual capacity costs are subject to price escalation and are exclusive of applicable energy charges. The total cost of purchases under these contracts and the recently cancelled contract with Fitzpatrick nuclear plant was approximately, in millions, $91.0, $93.3 and $92.5 for the years 1997, 1996 and 1995, respectively. In May 1997, the Company cancelled its commitment to purchase 110 MW of capacity from the Fitzpatrick facility. The Company continues to have a contract with Fitzpatrick to purchase for resale up to 46 MW of power for NYPA's economic development customers. Under the requirements of PURPA, the Company is required to purchase power generated by IPPs, as defined therein. The Company has 141 PPAs with 148 facilities, of which 143 are on line, amounting to approximately 2,695 MW of capacity at December 31, 1997. Of this amount 2,382 MW is considered firm. The following table shows the payments for fixed and other capacity costs, and energy and related taxes the Company estimates it will be obligated to make under these contracts without giving effect to the MRA. The payments are subject to the tested capacity and availability of the facilities, scheduling and price escalation. - ------------------------------------------------------------------- (In thousands of dollars) SCHEDULABLE FIXED COSTS VARIABLE COSTS ------------------------- ------------------------------ ENERGY AND YEAR CAPACITY OTHER TAXES TOTAL - ------ ----------- ----------- -------------- ------------- 1998 $247,740 $41,420 $ 906,590 $1,195,750 1999 252,130 42,450 943,720 1,238,300 2000 242,030 44,080 974,080 1,260,190 2001 244,620 45,650 1,042,380 1,332,650 2002 248,940 47,330 1,063,830 1,360,100 ====== =========== =========== ============= ============= The capacity and other fixed costs relate to contracts with 11 facilities, where the Company is required to make capacity and other fixed payments, including payments when a facility is not operating but available for service. These 11 facilities account for approximately 774 MW of capacity, with contract lengths ranging from 20 to 35 years. The terms of these existing contracts allow the Company to schedule energy deliveries from the facilities and then pay for the energy delivered. The Company estimates the fixed payments under these contracts will aggregate to approximately $8 billion over their terms, using escalated contract rates. Contracts relating to the remaining facilities in service at December 31, 1997, require the Company to pay only when energy is delivered, except when the Company decides that it would be better to pay a particular project a reduced energy payment to have the project reduce its high priced energy deliveries as described below. The Company currently recovers schedulable capacity through base rates and energy payments, taxes and other schedulable fixed costs through the FAC. The Company paid approximately $1,106 million, $1,088 million and $980 million in 1997, 1996 and 1995 for 13,500,000 MWh, 13,800,000 MWh and 14,000,000 MWh, respectively, of electric power under all IPP contracts. On July 9, 1997, the Company announced the MRA to terminate, restate or amend certain IPP power purchase contracts. As a result of negotiations, the MRA currently provides for the termination, restatement or amendment of 28 PPAs with 15 IPPs, in exchange for an aggregate of approximately $3,616 million in cash and 42.9 million shares of the Company's common stock and certain fixed price swap contracts. Under the terms of the MRA, the Company would terminate PPAs representing approximately 1,180 MW of capacity and restate contracts representing 583 MW of capacity. The restated contracts are structured to be in the form of financial swaps with fixed prices for the first two years changing to an indexed pricing formula thereafter. The contract quantities are fixed for the full ten year term of the contracts. The MRA also requires the Company to provide the IPP Parties with a number of fixed price swap contracts with a term of seven years beginning in 2003. The terms of the MRA have been and continue to be modified. Since 1996, the Company has negotiated 2 long term and several limited term contract amendments whereby the Company can reduce the energy deliveries from the facilities. These reduced energy agreements resulted in a reduction of IPP deliveries of approximately 1,010,000 MWh and 984,000 MWh during 1997 and 1996, respectively. SALE OF CUSTOMER RECEIVABLES: The Company has established a single-purpose, wholly-owned financing subsidiary, NM Receivables Corp., whose business consists of the purchase and resale of an undivided interest in a designated pool of customer receivables, including accrued unbilled revenues. For receivables sold, the Company has retained collection and administrative responsibilities as agent for the purchaser. As collections reduce previously sold undivided interests, new receivables are customarily sold. NM Receivables Corp. has its own separate creditors which, upon liquidation of NM Receivables Corp., will be entitled to be satisfied out of its assets prior to any value becoming available to the Company. The sale of receivables are in fee simple for a reasonably equivalent value and are not secured loans. Some receivables have been contributed in the form of a capital contribution to NM Receivables Corp. in fee simple for reasonably equivalent value, and all receivables transferred to NM Receivables Corp. are assets owned by NM Receivables Corp. in fee simple and are not available to pay the parent Company's creditors. At December 31, 1997 and 1996, $144.1 and $250 million, respectively, of receivables had been sold by NM Receivables, Corp. to a third party. The undivided interest in the designated pool of receivables was sold with limited recourse. The agreement provides for a formula based loss reserve pursuant to which additional customer receivables are assigned to the purchaser to protect against bad debts. At December 31, 1997, the amount of additional receivables assigned to the purchaser, as a loss reserve, was approximately $64.4 million. Although this represents the formula-based amount of credit exposure at December 31, 1997 under the agreement, historical losses have been substantially less. To the extent actual loss experience of the pool receivables exceeds the loss reserve, the purchaser absorbs the excess. Concentrations of credit risk to the purchaser with respect to accounts receivable are limited due to the Company's large, diverse customer base within its service territory. The Company generally does not require collateral, i.e., customer deposits. TAX ASSESSMENTS: The Internal Revenue Service ("IRS") has conducted an examination of the Company's federal income tax returns for the years 1989 and 1990 and issued a Revenue Agents' Report. The IRS has raised an issue concerning the deductibility of payments made to IPPs 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 IPPs 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. To the extent that contracts involving tracking accounts are terminated or restated or amended under the MRA with IPP Parties as described in Note 2, the effects of any proposed disallowance would be mitigated with respect to the IPP Parties covered under the MRA. The Company is vigorously defending its position on this issue. The IRS is currently conducting its examination of the Company's federal income tax returns for the years 1991 through 1993. ENVIRONMENTAL CONTINGENCIES: The public utility industry typically utilizes and/or generates in its operations a broad range of hazardous and potentially hazardous wastes and by-products. 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 aid in 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 124 sites with which it has been or may be associated, including 76 which are Company-owned. The number of owned sites increased as the Company has established a program to identify and actively manage potential areas of concern at its electric substations. This effort resulted in identifying an additional 32 sites. With respect to non-owned sites, the Company may be required to contribute some proportionate share of remedial costs. Although one party can, as a matter of law, be held liable for all of the remedial costs at a site, regardless of fault, in practice costs are usually allocated among PRPs. 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 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 investigations are ongoing for most sites, the estimated cost of remedial action is subject to change. Estimates of the cost of remediation and post-remedial monitoring are based upon a variety of factors, including identified or potential contaminants; location, size and use of the site; proximity to sensitive resources; status of regulatory investigation and knowledge of activities and costs at similarly situated sites. Additionally, the Company's estimating process includes an initiative where these factors are developed and reviewed using direct input and support obtained from the DEC. 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 at certain of these PRP sites and is contesting liability accordingly. As a consequence of site characterizations and assessments completed to date and negotiations with PRPs, the Company has accrued a liability in the amount of $220 million, which is reflected in the Company's Consolidated Balance Sheets at December 31, 1997. The potential high end of the range is presently estimated at approximately $650 million, including approximately $285 million in the unlikely event the Company is required to assume 100% responsibility at non-owned sites. The amount accrued at December 31, 1997, incorporates the additional electric substations, previously mentioned, and a change in the method used to estimate the liability for 27 of the Company's largest sites to rely upon a decision analysis approach. This method includes developing several remediation approaches for each of the 27 sites, using the factors previously described, and then assigning a probability to each approach. The probability represents the Company's best estimate of the likelihood of the approach occurring using input received directly from the DEC. The probable costs for each approach are then calculated to arrive at an expected value. While this approach calculates a range of outcomes for each site, the Company has accrued the sum of the expected values for these sites. The amount accrued for the Company's remaining sites is determined through feasibility studies or engineering estimates, the Company's estimated share of a PRP allocation or where no better estimate is available, the low end of a range of possible outcomes. In addition, the Company has recorded a regulatory asset representing the remediation obligations to be recovered from ratepayers. PowerChoice provides for the continued application of deferral accounting for cost differences resulting from this effort. In October 1997, the Company submitted a draft feasibility study to the DEC, which included the Company's Harbor Point site and five surrounding non-owned sites. The study indicates a range of viable remedial approaches, however, a final determination has not been made concerning the remedial approach to be taken. This range consists of a low end of $22 million and a high end of $230 million, with an expected value calculation of $51 million, which is included in the amounts accrued at December 31, 1997. The range represents the total costs to remediate the properties and does not consider contributions from other PRPs. The Company anticipates receiving comments from the DEC on the draft feasibility study by the spring of 1999. At this time, the Company cannot definitively predict the nature of the DEC proposed remedial action plan or the range of remediation costs it will require. While the Company does not expect to be responsible for the entire cost to remediate these properties, it is not possible at this time to determine its share of the cost of remediation. In May 1995, the Company filed a complaint pursuant to applicable Federal and New York State law, in the U.S. District Court for the Northern District of New York against several defendants seeking recovery of past and future costs associated with the investigation and remediation of the Harbor Point and surrounding sites. In a motion currently pending before the court, the New York State Attorney General has moved to dismiss the Company's claims against the State of New York, the New York State Department of Transportation, the Thruway Authority and Canal Corporation. The Company has opposed this motion. The case management order presently calls for the close of discovery on December 31, 1998. As a result, the Company cannot predict the outcome of the pending litigation against other PRPs or the allocation of the Company's share of the costs to remediate the Harbor Point and surrounding sites. 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. To date, the Company has reached settlements with a number of insurance carriers, resulting in payments to the Company of approximately $36 million, net of costs incurred in pursuing recoveries. Under PowerChoice the electric portion or approximately $32 million will be amortized over 10 years. The remaining portion relates to the gas business and is being amortized over the three year settlement period. CONSTRUCTION PROGRAM: The Company is committed to an ongoing construction program to assure delivery of its electric and gas services. The Company presently estimates that the construction program for the years 1998 through 2002 will require approximately $1.4 billion, excluding AFC and nuclear fuel. For the years 1998 through 2002, the estimates, in millions, are $328, $269, $264, $275 and $300, respectively, which includes $26, $25, $22, $20 and $38, respectively, related to non-nuclear generation. The impact of the ice storm (see Note 13) on the construction program will not be known until restoration efforts have been completed. These amounts are reviewed by management as circumstances dictate. Under PowerChoice, the Company will separate, through sale or spin-off, the Company's non-nuclear power generation business from the remainder of the business. GAS SUPPLY, STORAGE AND PIPELINE COMMITMENTS: In connection with its gas business, the Company has long-term commitments with a variety of suppliers and pipelines to purchase gas commodity, provide gas storage capability and transport gas commodity on interstate gas pipelines. The table below sets forth the Company's estimated commitments at December 31, 1997, for the next five years, and thereafter. (In thousands of dollars) Year Gas Supply Gas Storage/Pipeline ---- ---------- -------------------- 1998 $103,990 $95,720 1999 78,380 99,490 2000 56,110 81,550 2001 53,140 60,170 2002 39,860 26,610 Thereafter 155,560 71,130 With respect to firm gas supply commitments, the amounts are based upon volumes specified in the contracts giving consideration for the minimum take provisions. Commodity prices are based on New York Mercantile Exchange quotes and reservation charges, when applicable. For storage and pipeline capacity commitments, amounts are based upon volumes specified in the contracts, and represent demand charges priced at current filed tariffs. At December 31, 1997, the Company's firm gas supply commitments extend through October 2006, while the gas storage and transportation commitments extend through October 2012. Beginning in May 1996, as a result of a generic rate proceeding, the Company was required to implement service unbundling, where customers could choose to buy natural gas from sources other than the Company. To date the migration has not resulted in any stranded costs since the PSC has allowed utilities to assign the pipeline capacity to the customers choosing another supplier. This assignment is allowed during a three-year period ending March 1999, at which time the PSC will decide on methods for dealing with the remaining unassigned or excess capacity. In September 1997, the PSC indicated that it is unlikely utilities will be allowed to continue to assign pipeline capacity to departing customers after March 1999. The Company is unable to predict how the PSC will resolve these issues. NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Excerpt from Niagara Mohawk Power Corporation Form 10Q/A for the quarterly period ended March 31, 1998. NOTE 2. CONTINGENCIES ENVIRONMENTAL ISSUES: The public utility industry typically utilizes and/or generates in its operations a broad range of hazardous and potentially hazardous wastes and by-products. 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 aid in 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 126 sites with which it has been or may be associated, including 78 which are Company-owned. The number of owned sites increased as the Company has established a program to identify and actively manage potential areas of concern at its electric substations. This effort resulted in identifying an additional 32 sites. With respect to non-owned sites, the Company may be required to contribute some proportionate share of remedial costs. Although one party can, as a matter of law, be held liable for all of the remedial costs at a site, regardless of fault, in practice costs are usually allocated among PRPs. 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 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 investigations are ongoing for most sites, the estimated cost of remedial action is subject to change. Estimates of the cost of remediation and post-remedial monitoring are based upon a variety of factors, including identified or potential contaminants; location, size and use of the site; proximity to sensitive resources; status of regulatory investigation and knowledge of activities at similarly situated sites. Additionally, the Company's estimating process includes an initiative where these factors are developed and reviewed using direct input and support obtained from the New York State Department of Environmental Conservation ("DEC"). Actual 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 denied any responsibility at certain of these PRP sites and is contesting liability accordingly. As a consequence of site characterizations and assessments completed to date and negotiations with PRPs, the Company has accrued a liability in the amount of $220 million, which is reflected in the Company's Consolidated Balance Sheets at March 31, 1998 and December 31, 1997. The potential high end of the range is presently estimated at approximately $650 million, including approximately $285 million in the unlikely event the Company is required to assume 100% responsibility at non-owned sites. The amount accrued at March 31, 1998 and December 31, 1997 incorporates the additional electric substations, previously mentioned, and a change in the method used to estimate the liability for 27 of the Company's largest sites to rely upon a decision analysis approach. This method includes developing several remediation approaches for each of the 27 sites, using the factors previously described, and then assigning a probability to each approach. The probability represents the Company's best estimate of the likelihood of the approach occurring using input received directly from the DEC. The probable costs for each approach are then calculated to arrive at an expected value. While this approach calculates a range of outcomes for each site, the Company has accrued the sum of the expected values for these sites. The amount accrued for the Company's remaining sites is determined through feasibility studies or engineering estimates, the Company's estimated share of a PRP allocation or where no better estimate is available, the low end of a range of possible outcomes. In addition, the Company has recorded a regulatory asset representing the remediation obligations to be recovered from ratepayers. PowerChoice provides for the continued application of deferral accounting for cost differences resulting from this effort. In October 1997, the Company submitted a draft feasibility study to the DEC, which included the Company's Harbor Point site and five surrounding non-owned sites. The study indicates a range of viable remedial approaches, however, a final determination has not been made concerning the remedial approach to be taken. This range consists of a low end of $22 million and a high end of $230 million, with an expected value calculation of $51 million, which is included in the amounts accrued at March 31, 1998 and December 31, 1997. The range represents the total costs to remediate the properties and does not consider contributions from other PRPs. The Company anticipates receiving comments from the DEC on the draft feasibility study by the summer of 1999. At this time, the Company cannot definitively predict the nature of the DEC proposed remedial action plan or the range of remediation costs it will require. While the Company does not expect to be responsible for the entire cost to remediate these properties, it is not possible at this time to determine its share of the cost of remediation. In May 1995, the Company filed a complaint, pursuant to applicable Federal and New York State law, in the U.S. District Court for the Northern District of New York against several defendants seeking recovery of past and future costs associated with the investigation and remediation of the Harbor Point and surrounding sites. The New York State Attorney General moved to dismiss the Company's claims against the State of New York, the New York State Department of Transportation and the Thruway Authority and Canal Corporation under the Comprehensive Environmental Response, Compensation and Liability Act. The Company opposed this motion. On April 3, 1998, the Court denied the New York State Attorney General's motion as it pertains to the Thruway Authority and Canal Corporation, and granted the motion relative to the State of New York and the Department of Transportation. The case management order presently calls for the close of discovery on December 31, 1998. As a result, the Company cannot predict the outcome of the pending litigation against other PRPs or the allocation of the Company's share of the costs to remediate the Harbor Point and surrounding sites. 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. To date, the Company has reached settlements with a number of insurance carriers, resulting in payments to the Company of approximately $36 million, net of costs incurred in pursuing recoveries. Under PowerChoice the electric portion or approximately $32 million will be amortized over 10 years. The remaining portion relates to the gas business and is being amortized over the three year settlement period. TAX ASSESSMENTS: The Internal Revenue Service ("IRS") has conducted an examination of the Company's federal income tax returns for the years 1989 and 1990 and issued a Revenue Agents' Report. The IRS has raised an issue concerning the deductibility of payments made to IPPs 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 IPPs 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. To the extent that contracts involving tracking accounts are terminated or restated or amended under the MRA with IPP Parties as described in Note 3, the effects of any proposed disallowance would be mitigated with respect to the IPP Parties covered under the MRA. The Company is vigorously defending its position on this issue. The IRS is currently conducting its examination of the Company's federal income tax returns for the years 1991 through 1993. NOTE 3. RATE AND REGULATORY ISSUES AND CONTINGENCIES The Company's financial statements conform to GAAP, including the accounting principles for rate-regulated entities with respect to its regulated operations. As discussed below, the Company discontinued application of regulatory accounting principles to the Company's fossil and hydro generation business. Substantively, SFAS No. 71 permits a public utility, regulated on a cost-of-service basis, to defer certain costs which would otherwise be charged to expense, when authorized to do so by the regulator. These deferred costs are known as regulatory assets, which in the case of the Company are approximately $935 million, net of approximately $240 million of regulatory liabilities at March 31, 1998. These regulatory assets are probable of recovery. The portion of the $935 million which has been allocated to the nuclear generation and electric transmission and distribution business is approximately $811 million, which is net of approximately $240 million of regulatory liabilities. Regulatory assets allocated to the rate-regulated gas distribution business are $124 million. Generally, regulatory assets and liabilities were 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. The Company concluded as of December 31, 1996, that the termination, restatement or amendment of IPP contracts and implementation of PowerChoice was the probable outcome of negotiations that had taken place since the PowerChoice announcement. Under PowerChoice, the separated non-nuclear generation business would no longer be rate-regulated on a cost-of-service basis and, accordingly, regulatory assets related to the non-nuclear power generation business, amounting to approximately $103.6 million ($67.4 million after tax or 47 cents per share) were charged against 1996 income as an extraordinary non-cash charge. The PSC, in its written order issued March 20, 1998 approving PowerChoice, determined to limit the estimated value of the MRA Regulatory Asset that can be recovered from customers to approximately $4 billion. The ultimate amount of the MRA Regulatory Asset to be established may vary based on certain events related to the closing of the MRA. The estimated value of the MRA Regulatory Asset includes the issuance of 42.9 million shares of common stock, which the PSC, in determining the recoverable amount of such asset, valued at $8 per share. Because the value of the consideration to be paid to the IPP Parties can only be determined at the MRA closing, the value of the limitation on the recoverability of the MRA Regulatory Asset is expected to be recorded as a charge to expense in the second quarter of 1998 with the closing of the MRA. The charge to expense will be detemiined by the difference between $8 per share and the Company's closing common stock price on the date the MRA closes, multiplied by 42.9 million shares. Using the Company's common stock price on March 26, 1998 of $12 7/16 per share, the charge to expense would be approximately $190 million (85 cents per share). As a result of amendments to the MRA dated April 22 and May 7, 1998, the amount of cash compensation to be paid to the IPP Parties was increased a net amount of approximately $15 million to $3.631 billion. The net increase in cash compensation was partly in exchange for net reductions in future payment obligations. The Company proposes, subject to PSC approval, to adjust the MRA Regulatory Asset as a consequence of the amendments. The amortization periods related to components of changes to the cash compensation will generally correspond to the changes in cash flow resulting from the amendments. The Company expects that the net amount of annual MRA Regulatory Asset amortization to be slightly higher in the period beyond PowerChoice. Under PowerChoice, the Company's remaining electric business (nuclear generation and electric transmission and distribution business) will continue to be rate-regulated on a cost-of-service basis and, accordingly, the Company continues to apply SFAS No. 71 to these businesses. Also, the Company's IPP contracts, including those restructured under the MRA, will continue to be the obligations of the regulated business. The EITF of the FASB reached a consensus on Issue No. 97-4 "Deregulation of the Pricing of Electricity - Issues Related to the Application of SFAS No. 71 and SFAS No. 101" in July 1997. As discussed previously, the Company discontinued the application of SFAS No. 71 and applied SFAS No. 101 with respect to the fossil and hydro generation business at December 31, 1996, in a manner consistent with EITF 97-4. EITF 97-4 does not require the Company to earn a return on regulatory assets that arise from a deregulating transition plan in assessing the applicability of SFAS No. 71. The Company believes that the regulated cash flows to be derived from prices it will charge for electric service over the next 10 years, including the Competitive Transition Charge ("CTC") assuming no unforeseen reduction in demand or bypass of the CTC or exit fees, will be sufficient to recover the MRA Regulatory Asset and to provide recovery of and a return on the remainder of its assets, as appropriate. In the event the Company could no longer apply SFAS No. 71 in the future, it would be required to record an after-tax non-cash charge against income for any remaining unamortized regulatory assets and liabilities. Depending on when SFAS No. 71 was required to be discontinued, such charge would likely be material to the Company's reported financial condition and results of operations and adversely affect the Company's ability to pay dividends. It is expected that the PowerChoice agreement, while having the effect of substantially depressing earnings during its five-year term, will substantially improve operating cash flows. With the implementation of PowerChoice, specifically the separation of non-nuclear generation as an entity that would no longer be cost-of-service regulated, the Company is required to assess the carrying amounts of its long-lived assets in accordance with SFAS No. 121. SFAS No. 121 requires long-lived assets and certain identifiable intangibles held and used by an entity to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or when assets are to be disposed of. 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/or its disposition. The Company has determined that there is no impairment of its fossil and hydro generating assets. To the extent the proceeds resulting from the sale of the fossil and hydro assets are not sufficient to avoid a loss, the Company would be able to recover such loss through the CTC. The PowerChoice agreement provides for deferral and future recovery of losses, if any, resulting from the sale of the non-nuclear generating assets. The Company believes that it will be permitted to record a regulatory asset for any such loss in accordance with EITF 97-4. The Company's fossil and hydro generation plant assets had a net book value of approximately $1.1 billion at March 31, 1998. As described in Form 10-K/A for fiscal year ended December 31, 1997, Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Master Restructuring Agreement and the PowerChoice Agreement," the conclusion of the termination, restatement or amendment of IPP contracts, and closing of the financing necessary to implement such termination, restatement or amendment, as well as implementation of PowerChoice, is subject to a number of contingencies. In the event the Company is unable to successfully bring these events to conclusion, it is likely that application of SFAS No. 71 would be discontinued. The resulting non-cash after-tax charges against income, based on regulatory assets and liabilities associated with the nuclear generation and electric transmission and distribution businesses as of March 31, 1998, would be approximately $527 million or $3.65 per share. 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 and preferred dividends and certain types of transfers of assets could be adversely impacted by any such write-downs. UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No.__________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT E FERC EXHIBIT E --------- ACTUAL AND PRO FORMA INCOME STATEMENTS Niagara Mohawk Power Corporation's income statement is set forth in its FERC Form No. 1 for the year ended December 31, 1997 (Resubmission No. 1, June 1998) (at pages 114-117), which is incorporated herein by reference. The pro forma income statement for the year ended December 31, 1997 reflecting the proposed transaction follows.
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 (IN THOUSANDS OF DOLLARS) EXHIBIT E PRO FORMA FINANCIAL STATEMENTS PRO FORMA CONSOLIDATED ADJUSTMENTS NIAGARA NIAGARA NIAGARA MOHAWK MOHAWK MOHAWK POWER HOLDINGS, INC. HOLDINGS, INC. CORPORATION -------------- -------------- ----------- OPERATING REVENUES: Electric 3,309,441 Gas 656,963 ----------- ----------- ----------- 3,966,404 ----------- ----------- ----------- OPERATING EXPENSES: Fuel for electric generation 179,455 Electricity purchased 1,236,108 Gas purchased 345,610 Other operation and maintenance 837,606 Depreciation and amortization 339,641 Other taxes 471,469 ----------- ----------- ----------- 3,409,889 ----------- ----------- ----------- OPERATING INCOME 556,515 OTHER INCOME 27,321 ----------- ----------- ----------- INCOME BEFORE INTEREST CHARGES 583,836 INTEREST CHARGES 273,906 EQUITY IN EARNINGS OF SUBSIDIARY 183,335 PREFERRED DIVIDEND REQUIREMENT OF SUBSIDIARY (37,397) ----------- ----------- ----------- INCOME BEFORE FEDERAL AND FOREIGN INCOME TAXES 145,938 309,930 FEDERAL AND FOREIGN INCOME TAXES 126,595 ----------- ----------- ----------- NET INCOME (LOSS) 145,938 183,335 DIVIDENDS ON PREFERRED STOCK 37,397 ----------- ----------- ----------- BALANCE AVAILABLE FOR COMMON STOCK 145,938 145,938 RETAINED EARNINGS, JANUARY 1, 1997 657,482 CORPORATE RESTRUCTURING (131,568) ----------- ----------- ----------- RETAINED EARNINGS, DECEMBER 31, 1997 $145,938 $671,852 =========== =========== =========== AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (IN THOUSANDS) BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK
NIAGARA MOHAWK HOLDINGS, INC. UNAUDITED CONSOLIDATED OF STATEMENT INCOME AND RETAINED EARNINGS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 (IN THOUSANDS OF DOLLARS) (continued . . . ) EXHIBIT E PRO FORMA FINANCIAL STATEMENTS CONSOLIDATED CONSOLIDATED INTER- NIAGARA OPINAC NORTH COMPANY MOHAWK AMERICA, INC. ELIMINATIONS HOLDINGS, INC. ------------- ------------- -------------- OPERATING REVENUES: Electric 3,309,441 Gas 656,963 ----------- ----------- ----------- 3,966,404 ----------- ----------- ----------- OPERATING EXPENSES: Fuel for electric generation 179,455 Electricity purchased 1,236,108 Gas purchased 345,610 Other operation and maintenance (2,234) 835,282 Depreciation and amortization 339,641 Other taxes 471,469 ----------- ----------- ----------- (2,234) 3,407,565 ----------- ----------- ----------- OPERATING INCOME 2,324 558,839 OTHER INCOME (2,324) 24,997 ----------- ----------- ----------- INCOME BEFORE INTEREST CHARGES 583,836 INTEREST CHARGES 273,906 EQUITY IN EARNINGS OF SUBSIDIARY (183,335) PREFERRED DIVIDEND REQUIREMENT OF SUBSIDIARY 37,397 ----------- ----------- ----------- INCOME BEFORE FEDERAL AND FOREIGN INCOME TAXES (145,938) 309,930 FEDERAL AND FOREIGN INCOME TAXES 126,595 ----------- ----------- ----------- NET INCOME (LOSS) (145,938) 183,335 DIVIDENDS ON PREFERRED STOCK 37,397 ----------- ----------- ----------- BALANCE AVAILABLE FOR COMMON STOCK (145,938) 145,938 RETAINED EARNINGS, JANUARY 1, 1997 657,482 CORPORATE RESTRUCTURING (2,001) 133,569 ----------- ----------- ----------- RETAINED EARNINGS, DECEMBER 31, 1997 ($2,001) ($12,369) 803,420 =========== =========== =========== AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (IN THOUSANDS) 144,404 BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK $1.01
UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No.__________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT F FERC EXHIBIT F --------- STATEMENT OF RETAINED EARNINGS A statement of retained earnings for the period covered by the income statement referred to in Exhibit E is set forth in Niagara Mohawk Power Corporation's Form No. 1 for the year ended December 31, 1997 (Resubmission No. 1, June 1998) (at pages 118-119), which is incorporated herein by reference. A pro forma statement of retained earnings is not presented since it unaffected by the proposed transaction, as indicated in Exhibit E. UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No.__________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT G UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No. _________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT H NIAGARA MOHAWK POWER CORPORATION I, KAPUA A. RICE, Secretary of Niagara Mohawk Power Corporation, HEREBY CERTIFY that the attached is a true and complete copy of the Agreement and Plan of Exchange, dated as of May 14, 1998, between Niagara Mohawk Power Corporation and Niagara Mohawk Holdings, Inc. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of the Niagara Mohawk Power Corporation this 16th day of July, 1998. /s/ Kapua A. Rice ------------------------ Kapua A. Rice Secretary AS FILED WITH SECURITIES AND EXCHANGE COMMISSION ON MAY 29,1998 REGISTRATION NO. 333-49769 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ AMENDMENT NO 2 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ NIAGARA MOHAWK HOLDINGS, INC. (Exact name of registrant as specified in charter)
NEW YORK 4931 16-1549726 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation) Classification Code Number) Identification No.) WILLIAM F. EDWARDS CHIEF FINANCIAL OFFICER NIAGARA MOHAWK HOLDINGS, INC. 300 ERIE BOULEVARD WEST 300 ERIE BOULEVARD WEST SYRACUSE, NEW YORK 13202 SYRACUSE, NEW YORK 13202 (315) 474-1511 (315) 474-1511 - ------------------------------------------ --------------------------------------- (Address, including zip code, and (Name, address, including zip code, and telephone number, including area code, of telephone number, including area registrant's principal executive offices) code, of agent for service) - ------------------------------------------- -----------------------------------------
COPIES TO: Janet T. Geldzahler, Esq. Sullivan & Cromwell 125 Broad Street New York, New York 10004 (212) 558-4000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement has become effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. |_| THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. THE BOARD OF DIRECTORS RECOMMENDS THAT THE HOLDERS OF COMMON STOCK VOTE IN FAVOR OF APPROVAL OF PROPOSAL NO. 3. - -------------------------------------------------------------------------------- PROPOSAL 4: HOLDING COMPANY AND ADOPTION OF THE EXCHANGE AGREEMENT - -------------------------------------------------------------------------------- The Board of Directors of Niagara Mohawk unanimously believes that it is in the best interests of Niagara Mohawk and its shareholders to restructure Niagara Mohawk so that it will become a separate subsidiary of a new parent holding company, with the present holders of Common Stock becoming the holders of the common stock of the new parent. To carry out such restructuring, Niagara Mohawk has caused to be incorporated a New York corporation, Holdings, which now has a nominal amount of stock outstanding and no present business or properties of its own. All of the currently outstanding shares of Holdings common stock are owned by Niagara Mohawk. The Board of Directors of each of Niagara Mohawk and Holdings has adopted the Exchange Agreement under which, subject to adoption by Niagara Mohawk's shareholders and the satisfaction of other conditions, Niagara Mohawk will become a subsidiary of Holdings through the exchange of the outstanding shares of Niagara Mohawk Common Stock on a share-for-share basis for shares of Holdings common stock (referred to in this Prospectus/Proxy Statement as the "share exchange" or the "exchange"). Following the share exchange, certain of Niagara Mohawk's existing subsidiaries involved in non-utility operations will be transferred to Holdings and become subsidiaries of Holdings. See "--The Share Exchange--Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings". The Exchange Agreement is attached to this Prospectus/Proxy Statement as Exhibit A and is incorporated herein by reference. Niagara Mohawk is subject to regulation by the PSC under the New York Public Service Law (the "Public Service Law"). The PowerChoice Agreement approved the holding company restructuring and the terms with which Niagara Mohawk and Holdings have agreed to comply in their on-going relationships and activities. REASONS FOR THE HOLDING COMPANY STRUCTURE AND SHARE EXCHANGE General The proposed holding company structure is intended to provide Niagara Mohawk and its subsidiaries with the financial and regulatory flexibility to compete more effectively in an increasingly competitive energy industry by providing a structure that can accommodate both regulated and unregulated lines of business. Niagara Mohawk currently operates under the regulatory constraints of the PSC that were generally designed to discourage electric utilities from participating in unregulated businesses and that limit (i) the total amount of the incremental investment in its unregulated operations, (ii) the amount that can be invested annually, (iii) the cumulative amount that can be invested in any single line of business and (iv) the debt-equity ratios of its subsidiaries. Under current regulations, any time Niagara Mohawk wishes to allocate funds to new unregulated ventures, it must seek PSC approval. The approval process itself leads to long delays, forces the Company to reveal its plans to competitors, and gives competitors the opportunity to intervene in the regulatory approval process and attempt to gain competitive advantage by seeking restrictions that would handicap Niagara Mohawk. The holding company structure proposed here largely would eliminate many of these regulatory constraints that would otherwise severely limit or handicap Niagara Mohawk's ability to participate in unregulated business opportunities as the industry evolves. In approving PowerChoice, the PSC has given the Company 12 months in which to form a holding company. The holding company structure is a well-established form of organization for companies conducting multiple lines of business. It is a common form of organization for unregulated companies and for those regulated companies, such as telephone utilities and water utilities, which are not subject to the Holding 59 Company Act. In addition, it is utilized by many electric companies which are involved in unregulated activities. Niagara Mohawk wishes to take advantage of this opportunity, and desires to do so by utilizing the most efficient and effective corporate structure. More generally, the holding company structure will enable Holdings to engage in unregulated businesses without obtaining the prior approval of the PSC, thereby enabling Holdings to pursue unregulated business opportunities in a timely manner. Under the new corporate structure financing of unregulated activities of Holdings and its non-utility subsidiaries will not require PSC approval. In addition, the capital structure of each non-utility subsidiary may be appropriately tailored to suit its individual business. Also, under the holding company structure, Holdings would not need PSC approval to issue debt or equity securities to finance the acquisition of the stock or assets of other companies. The ability to raise capital for acquisitions without prior PSC approval should allow competition on a level basis with other potential acquirors, some of which are already holding companies. Under a holding company structure, the issuance of debt or equity securities by Holdings to finance the acquisition of the stock or assets of another company should not adversely affect Niagara Mohawk's capital devoted to and available for regulated utility operations. The holding company structure separates the operations of regulated and unregulated businesses. As a result, it provides a better structure for regulators to assure that there is no cross-subsidization of costs or transfer of business risk from unregulated to regulated lines of business. A holding company structure also is preferred by the investment community because it makes it easier to analyze and value individual lines of business. Moreover, the use of a holding company structure provides legal protection against the imposition of liability on regulated utilities for the results of unregulated business activities. In short, the holding company structure is a highly desirable form of conducting regulated and unregulated businesses within the same corporate group. As discussed below under "-The Share Exchange-Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings," as part of the holding company restructuring, certain of the current non-utility subsidiaries of Niagara Mohawk will be transferred to and become, or become owned through, separate subsidiaries of Holdings following the share exchange. Niagara Mohawk needs the financial and regulatory flexibility provided by this holding company structure to operate in a changing environment and successfully address the new levels of competition. Opportunities in the new competitive environment could take many forms, including joint ventures and strategic alliances in addition to direct investments in new businesses. All of these opportunities will be easier to pursue under a holding company structure than they would be under the current structure. Strategic alliances with unregulated third party participants and/or diversification into unrelated fields may also help protect against the market and financial risks to which Niagara Mohawk is now, and increasingly will be, exposed. Thus, Holdings may wish to increase its investment in unregulated energy-related businesses, whether through additional "ground floor" investment, the acquisition of existing energy and energy services providers, or the formation of strategic alliances with industry partners. reena Holdings will continue to seek to invest in the current lines of business and, through its subsidiaries, will engage in energy marketing and other energy-related activities. Although Holdings has not identified other specific business opportunities, it believes that such activities would likely include areas with which Niagara Mohawk is already familiar, such as information systems, environmental services, engineering services, financial services, meter reading, and billing and collection services. Under a holding company structure, Holdings should be able to take advantage of opportunities in a timely fashion and compete more effectively against other energy companies. Except for the restrictions set forth in the PowerChoice Agreement and discussed in "--The Share Exchange--The PowerChoice Agreement", Holdings believes it should not otherwise be required to obtain PSC approval for investments in non-utility businesses, would not be subject to the limitations imposed under certain provisions of New York law applicable to Niagara 60 Mohawk, and thus should be able to compete more effectively against other entities not subject to similar constraints. Given its financial condition and contractual restrictions, the Company does not foresee Holdings making substantial investments in unregulated businesses in the near future. However, under the terms of the PowerChoice Agreement, Niagara Mohawk has a one-year window in which it can adopt the holding company structure. CERTAIN CONSIDERATIONS Future Performance of Holdings Common Stock Cannot Be Assured. The purpose of the share exchange is to establish a holding company structure that will enhance the ability to take advantage of business opportunities outside of Niagara Mohawk's present markets. The Board of Directors believes the share exchange and holding company structure to be in the best interests of Niagara Mohawk and its shareholders. Nevertheless, the success of Holdings in realizing its goals and the future performance of Holdings common stock cannot be assured. Dividends on Holdings Common Stock Will Initially Depend on Common Stock Dividends Paid by Niagara Mohawk. Holdings does not now, nor will it immediately after the share exchange, conduct directly any business operations from which it will derive any revenues. Holdings plans to obtain funds for its own operations from dividends paid to Holdings by its subsidiaries, and from sales of securities or debt incurred by Holdings. Dividends on Holdings common stock will initially depend upon the earnings, financial condition and capital requirements of Niagara Mohawk, and the dividends that Niagara Mohawk pays to Holdings. Niagara Mohawk suspended the common stock dividend in 1996 to help stabilize its financial condition. In making future dividend decisions with respect to Niagara Mohawk or Holdings, the applicable board would evaluate, along with standard business considerations, the entity's financial condition, contractual and regulatory restrictions, competitive pressure on prices, available cash flow and retained earnings and other strategic considerations. In the future, dividends from Holdings' subsidiaries other than Niagara Mohawk may also be a source of funds for dividend payments by Holdings. Payment of Niagara Mohawk dividends to Holdings will be subject to the prior rights of holders of Niagara Mohawk preferred stock, First Mortgage Bonds and other long-term debt. In addition, although it has no present intention to do so, Niagara Mohawk may issue additional preferred stock in the future to meet its capital requirements. Such additional preferred stock will also have preferential dividend rights. The PowerChoice Agreement also imposes the following limitations on the dividends that Niagara Mohawk may pay to Holdings after the share exchange: net income available for common dividends plus in each of the following years: 1998: $50 million, 1999: $75 million, 2000, 2001 and 2002: $100 million, 2003: $80 million, 2004: $60 million, 2005: $40 million, 2006: $20 million, thereafter: $0. If the Company files a rate case for any year from 2003 to 2007, this dividend limitation will be reassessed in the rate filing. The Indenture to be entered into with respect to the Senior Notes will also contain limitations on the amount of dividends payable with respect to the Common Stock. Non-Utility Businesses Will Not Be Available as Sources for Dividends on Niagara Mohawk Preferred Stock. Following consummation of the share exchange, certain of Niagara Mohawk's non-utility subsidiaries will be transferred to Holdings, and will not be available to the holders of Niagara Mohawk preferred stock as a source of cash for the payment of dividends or other amounts. Non-Utility Businesses. Niagara Mohawk's principal non-utility subsidiaries that will be transferred to Holdings participate in energy marketing and brokering, energy services and Canadian electricity generation and distribution. It is the current intention of Holdings for these non-utility subsidiaries to engage primarily in energy-related businesses which will not be regulated by state or federal agencies which regulate public utilities. Such businesses may encounter competitive and other factors not previously experienced by Niagara 61 Mohawk, and may have different, and perhaps greater, investment risks than those involved in the regulated utility business of Niagara Mohawk. There can be no assurance that such businesses will be successful or, if unsuccessful, that they will not have a direct or indirect adverse effect on Holdings. As is the case now, any losses incurred by such businesses will not be recoverable in utility rates of Niagara Mohawk. As Holdings engages in more such business activities, the market price of Holdings' stock will be affected to a lesser extent by the performance of Niagara Mohawk. Comparable earnings from Niagara Mohawk's unregulated businesses were $(4.7) million, or (3.3) cents per share in 1997, $23.2 million, or 16.1 cents per share in 1996, and $10.3 million, or 7.1 cents per share in 1995. Niagara Mohawk's total investment in these businesses, computed in accordance with PSC specifications as a percentage of consolidated capitalization, was 2.5%, 2.6% and 2.1% as of December 31, 1997, 1996 and 1995, respectively. Holdings will obtain funds to invest in non-utility subsidiaries and other businesses from dividends it receives from Niagara Mohawk, borrowings and other financings, and dividends Holdings may in the future receive from any non-utility subsidiaries. There can be no assurance that non-utility subsidiaries will have earnings or pay any dividends to Holdings in the foreseeable future. Implementation of the Rate Plan. The new rate plan contained in the PowerChoice Agreement will take effect upon the closing of the MRA and will continue to govern utility rates and charges of Niagara Mohawk even if common shareholders of Niagara Mohawk do not approve the holding company proposal and adopt the Exchange Agreement. In that event, Niagara Mohawk will not be able to realize the benefits it expects from a holding company structure, which Niagara Mohawk believes is important in the future deregulated competitive environment of the energy industry. See also "-The Share Exchange-The PowerChoice Agreement" below. Certain Restrictions in the PSC Order. As summarized above, the PowerChoice Agreement imposes certain limitations on the dividends that Niagara Mohawk may pay to Holdings after the share exchange. See also "-The Share Exchange-Dividend Policy". The PowerChoice Agreement also contains restrictions on transactions between Niagara Mohawk and Holdings or any other subsidiary of Holdings, loans, guarantees or pledges by Niagara Mohawk for the benefit of Holdings or any other subsidiary of Holdings, and Board and managerial interlocks between Niagara Mohawk and Holdings or any other subsidiary of Holdings. See "--The Share Exchange-Regulatory Approvals" and "--Management--Restriction on Board and Management Interlocks between Holdings and Niagara Mohawk". There can be no assurance as to the effect, if any, that such restrictions will have on the business or operations of Holdings, Niagara Mohawk or the non-utility subsidiaries. 62 A. THE SHARE EXCHANGE EXCHANGE AGREEMENT The Exchange Agreement has been unanimously adopted by the Boards of Directors of Niagara Mohawk and Holdings and is subject to adoption by the holders of at least two-thirds of the outstanding shares of Niagara Mohawk Common Stock. See "--Vote Required" below. In the share exchange: (1) each share of Niagara Mohawk Common Stock outstanding immediately prior to the effective time of the share exchange will be exchanged for one new share of Holdings common stock; (2) Holdings will become the owner of all outstanding Niagara Mohawk Common Stock; and (3) the shares of Holdings common stock held by Niagara Mohawk immediately prior to the share exchange will be canceled. As a result, upon completion of the share exchange, Holdings will become a holding company, Niagara Mohawk will become a subsidiary of Holdings, and all of Holdings common stock outstanding immediately after the share exchange will be owned by the former holders of Niagara Mohawk Common Stock outstanding immediately prior to the share exchange. Following the share exchange, certain of Niagara Mohawk's existing non-utility subsidiaries will be transferred to Holdings and become subsidiaries of Holdings. See "--Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings". The Exchange Agreement is attached to this Prospectus/Proxy Statement as Exhibit A and is incorporated herein by reference. Niagara Mohawk's outstanding preferred stock will not be exchanged in the share exchange but will continue as shares of Niagara Mohawk preferred stock. The share exchange will not change the rights of the holders of such shares as currently provided in Niagara Mohawk's Amended Certificate of Incorporation. Debt of Niagara Mohawk will remain unchanged and will continue as outstanding obligations of Niagara Mohawk after the share exchange. REGULATORY APPROVALS FEDERAL POWER ACT The FERC has held that the transfer of common stock of a public utility company, such as the Company, from its existing stockholders to a holding company in a transaction such as the share exchange constitutes a transfer of the "ownership and control" of the facilities of such utility, and is thus a "disposition of facilities" subject to FERC review and approval under Section 203 of the Federal Power Act. The Company will apply for such approval and for approval of the transfer of certain power sales contracts and a tariff associated with certain of its generation assets. ATOMIC ENERGY ACT A provision in the Atomic Energy Act requires Nuclear Regulatory Commission ("NRC") consent for the transfer of control of NRC licenses. The NRC Staff has in the past asserted that this provision applies to the creation of a holding company over an NRC-licensed utility company in a transaction such as the share exchange. The Company will apply for NRC approval under the Atomic Energy Act for the transfer of control resulting from the Share Exchange of its two licenses, for Nine Mile Point 1 and Nine Mile Point 2, respectively. PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 The Company is currently exempt from the Public Utility Holding Company Act of 1935 under Section 3(a)(2) thereof. Holdings will own 100% of the common stock of the Company, majority interests in Beebee Island Corporation and Moreau Manufacturing Corporation and 50% of CNP, all of which are public utility companies for purposes of the Holding Company Act. Section 9(a)(2) of the Act requires the 63 prior approval of the SEC under Section 10 of the Holding Company Act for any person to become an affiliate of more than one public utility company. Holdings will apply for such approval. Holdings will also apply to the Commission for an order exempting Holdings from all provisions of the Holding Company Act, except Section 9(a)(2) thereof, pursuant to the exemption provided by Section 3(a)(1) thereof. The basis for such exemption is that the holding company, and every subsidiary company thereof which is a public-utility company from which the holding company derives any material part of its income, are predominantly intrastate in character and are organized in the same state. PUBLIC SERVICE LAW The New York Public Service Law ("NYPSL") requires approval from the PSC in order to undertake the reorganization represented by the formation of the holding company structure. The NYPSL also requires PSC approval for a holding company to acquire the stock of a utility pursuant to a share exchange. The Company has obtained PSC approval of the holding company concept and will make appropriate additional filings with respect to the formation of a holding company. CONDITIONS TO EFFECTIVENESS OF THE SHARE EXCHANGE The share exchange is subject to the satisfaction of the following conditions (in addition to adoption of the Exchange Agreement by the holders of Niagara Mohawk Common Stock): (i) all necessary orders, authorizations, approvals or waivers from the PSC and all other jurisdictive regulatory bodies, boards or agencies have been received, remain in full force and effect, and do not include, in the sole judgment of the Board of Directors of Niagara Mohawk, unacceptable conditions; and (ii) shares of Holdings common stock to be issued in connection with the exchange have been listed, subject to official notice of issuance, by the New York Stock Exchange. Following satisfaction of these conditions, the share exchange will become effective immediately following the close of business on the date of filing with the New York Department of State of a certificate of exchange pursuant to Section 913(d) of the New York Business Corporation Law. Niagara Mohawk cannot predict when all conditions will be satisfied, but expects that the share exchange will become effective in the first quarter of calendar 1999. EXCHANGE OF STOCK CERTIFICATES If the share exchange is effected, it will not be necessary for holders of Niagara Mohawk Common Stock to physically exchange their existing stock certificates for certificates of Holdings common stock. The certificates which represent shares of Niagara Mohawk Common Stock outstanding immediately prior to the effective time of the share exchange will automatically represent an equal number of shares of Holdings common stock immediately after the effective time and will no longer represent Niagara Mohawk Common Stock. New certificates bearing the name of Holdings will be issued after the share exchange, if and as certificates representing shares of Niagara Mohawk Common Stock outstanding immediately prior to the share exchange are presented for exchange or transfer. Niagara Mohawk preferred stock will not be exchanged but will continue as shares of Niagara Mohawk preferred stock. The share exchange will not change the rights of the holders of such shares as provided in Niagara Mohawk's Amended Certificate of Incorporation. Debt of Niagara Mohawk will remain unchanged and will continue as outstanding obligations of Niagara Mohawk after the share exchange. TRANSFER OF NIAGARA MOHAWK'S NON-UTILITY SUBSIDIARIES TO HOLDINGS Other than for the transfer of the subsidiaries described under "Certain Considerations-Non-Utility Businesses" and other de minimis non-utility investments, and except for dividends or other distributions with respect to Niagara Mohawk Common Stock held by Holdings, it is expected that Niagara Mohawk will 64 not transfer at less than a fair consideration any of its other assets to Holdings or any Holdings subsidiaries. Niagara Mohawk will develop accounting and other procedures to the extent determined to be necessary or appropriate to insure separation of utility and non-utility businesses. See "--The PowerChoice Agreement" below. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Shares of Niagara Mohawk Common Stock held in its Dividend Reinvestment and Common Stock Purchase Plan (including uncertificated whole and fractional shares) will automatically become a like number of shares of Holdings common stock at the effective time of the share exchange. At the effective time, Holdings will succeed to the Plan as in effect immediately prior to the effective time, and shares of Holdings common stock will be issued under the Plan on and after the effective time. Holdings will file a post-effective amendment to Niagara Mohawk's registration statement on Form S-3 for the Plan shortly after the effective time of the exchange. AMENDMENT OR TERMINATION OF THE EXCHANGE AGREEMENT The Boards of Directors of Niagara Mohawk and Holdings may amend any of the terms of the Exchange Agreement at any time before or after its adoption by the holders of Niagara Mohawk Common Stock and prior to the effective time, but no such amendment may, in the sole judgment of the Board of Directors of Niagara Mohawk, materially and adversely affect the rights of Niagara Mohawk's shareholders. The Exchange Agreement may be terminated and the share exchange abandoned at any time before or after the shareholders of Niagara Mohawk adopt the Exchange Agreement, and prior to the effective time, if the Board of Directors of Niagara Mohawk determines, in its sole judgment, that consummation of the exchange would, for any reason, be inadvisable or not be in the best interests of Niagara Mohawk or its shareholders. LISTING OF HOLDINGS COMMON STOCK Holdings is applying to have its common stock listed on the New York Stock Exchange. It is expected that such listing will become effective at the effective time of the share exchange. The stock exchange ticker symbol of Holdings common stock will be "NMK", and quotations will be carried in newspapers as they have been for Niagara Mohawk Common Stock. Following the share exchange, Niagara Mohawk Common Stock will no longer trade and will be delisted and no longer registered pursuant to Section 12 of the Securities Exchange Act of 1934. NIAGARA MOHAWK COMMON STOCK MARKET PRICES AND DIVIDENDS Niagara Mohawk Common Stock is listed and principally traded on the New York Stock Exchange. The table below sets forth the high and low sales prices of Niagara Mohawk Common Stock for the fiscal 65 periods indicated as reported in The Wall Street Journal as New York Stock Exchange Composite Transactions. No dividends were paid on the Common Stock during such period. PRICE RANGE -------------------- HIGH LOW ---- ---- ($) ($) Calendar 1996 First Quarter........................... 10 1/8 6 1/2 Second Quarter.......................... 8 5/8 6 1/2 Third Quarter........................... 8 7/8 6 3/4 Fourth Quarter.......................... 10 7 5/8 Calendar 1997 First Quarter........................... 11 1/8 8 1/8 Second Quarter.......................... 9 7 7/8 Third Quarter........................... 10 1/16 8 1/4 Fourth Quarter.......................... 10 9/16 9 1/16 Calendar 1998 First Quarter........................... 13 9/16 10 1/8 Second Quarter (through May 28, 1998)... 13 11 The closing price of Niagara Mohawk Common Stock on May 28, 1998 was reported to have been $12 3/16. DIVIDEND POLICY Holdings does not now, nor will it immediately after the share exchange, conduct directly any business operations from which it will derive any revenues. Holdings plans to obtain funds for its own operations from dividends paid to Holdings on the stock of its subsidiaries, and from sales of securities or debt incurred by Holdings. Dividends on Holdings common stock will initially depend upon the earnings, financial condition and capital requirements of Niagara Mohawk, and the dividends paid by Niagara Mohawk to Holdings. In the future, dividends from Holdings' subsidiaries other than Niagara Mohawk may also be a source of funds for dividend payments by Holdings. Payment of dividends on Niagara Mohawk Common Stock will continue to be subject to the prior rights of holders of Niagara Mohawk preferred stock. Niagara Mohawk suspended the common stock dividend in 1996 to help stabilize its financial condition. In making future dividend decisions with respect to Niagara Mohawk or Holdings, the applicable board would evaluate, along with standard business considerations, the entity's financial condition, contractual restrictions and regulatory restrictions, competitive pressure on prices, available cash flow and retained earnings and other strategic considerations. In addition, as set forth above under "Certain Considerations", the PowerChoice Agreement contains restrictions on the dividends Niagara Mohawk can pay Holdings. See "Certain Considerations--Dividends on Holdings Common Stock Will Initially Depend on Common Stock Dividends Paid by Niagara Mohawk". CERTAIN FEDERAL INCOME TAX CONSEQUENCES Niagara Mohawk and Holdings have received advice from Bryan Cave LLP, their special tax counsel, that the principal federal income tax consequences of the share exchange are as summarized below. Tax Implications to Niagara Mohawk Shareholders. Under section 351 of the Code, no gain or loss will be recognized by a holder of Niagara Mohawk Common Stock as a result of the exchange of such holder's Niagara Mohawk Common Stock solely for Holdings common stock. The tax basis of the Holdings common stock received in the share exchange will be the same as the exchanging shareholder's basis in the 66 Niagara Mohawk Common Stock surrendered. The holding period of the Holdings common stock received by each exchanging shareholder will include the holding period during which such shareholder held the Niagara Mohawk Common Stock surrendered, provided that such stock was held as a capital asset on the date of the share exchange. No federal income tax consequences will result from the share exchange to holders of Niagara Mohawk preferred stock in respect of such stock. Tax Implications to Niagara Mohawk and Holdings. No gain or loss will be recognized by Niagara Mohawk or Holdings as a result of the share exchange. The basis of the Niagara Mohawk Common Stock received by Holdings will be the same as the aggregate tax basis that the holders of Niagara Mohawk Common Stock had in such stock immediately prior to the share exchange. Holdings' holding period in the Niagara Mohawk Common Stock received in the share exchange will include the period during which such stock was held by the holders of Niagara Mohawk Common Stock. Continuation of Affiliated Group. Consummation of the share exchange will not result in a termination of the existence of the affiliated group of corporations of which Niagara Mohawk has been the common parent. Niagara Mohawk will be included in such affiliated group of corporations of which Holdings will become the new common parent. Reporting Requirements. Pursuant to applicable Treasury regulations, shareholders of Niagara Mohawk Common Stock will be required to attach to their federal income tax returns a complete statement of all facts pertinent to the share exchange, including the shareholder's basis in the shares of Niagara Mohawk Common Stock transferred to Holdings and the type, number and value of shares of Holdings common Stock received in the share exchange. In addition, such shareholders will be required to keep permanent records of any information relating to the share exchange that is required to be filed with their income tax returns. The Bryan Cave opinion is based on certain factual representations received from Niagara Mohawk and Holdings, and upon the firm's review and analysis of relevant and currently applicable Code provisions, Treasury regulations, other administrative pronouncements and judicial decisions. Such opinion is not binding upon either the Internal Revenue Service or the courts. Authorities relied upon in the Bryan Cave opinion could be repealed, revoked or modified, possibly with retroactive effect, so as to result in federal income tax consequences different from those indicated. THE FOREGOING FEDERAL INCOME TAX DISCUSSION IS INTENDED TO PROVIDE ONLY A GENERAL SUMMARY. IT DOES NOT PURPORT TO ADDRESS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO THE SHARE EXCHANGE, INCLUDING TAX CONSEQUENCES WHICH MAY VARY DEPENDENT ON THE PARTICULAR CIRCUMSTANCES OR SPECIAL TAX STATUS OF CERTAIN NIAGARA MOHAWK SHAREHOLDERS. NOR DOES IT, OR THE BRYAN CAVE OPINION, ADDRESS THE CONSEQUENCES OR EFFECT OF ANY APPLICABLE STATE, LOCAL OR FOREIGN TAX LAWS, OR ANY ESTATE, INHERITANCE OR GIFT TAX LAWS. EACH HOLDER OF NIAGARA MOHAWK COMMON STOCK IS STRONGLY URGED TO CONSULT WITH SUCH HOLDER'S OWN TAX ADVISOR REGARDING FEDERAL OR OTHER POSSIBLE TAX CONSEQUENCES ARISING OUT OF THAT HOLDER'S PARTICIPATION IN THE SHARE EXCHANGE. NIAGARA MOHAWK EMPLOYEE PLANS The Exchange Agreement provides that Niagara Mohawk's Employee Savings Fund Plans for Represented and Non-Represented Employees, Dividend Reinvestment and Common Stock Purchase Plan and 1992 Stock 0ption Plan (together, the "Niagara Mohawk Stock Plans"), along with other employee benefit plans maintained by Niagara Mohawk (collectively with the Niagara Mohawk Stock Plans, the "Niagara Mohawk Employee Plans"), such as the pension plans, health plans and disability plans, will be amended to provide for Holdings taking over responsibility for such Plans upon consummation of the share exchange. The Niagara Mohawk 1992 Stock Option Plan (the "Option Plan") was previously approved by Niagara Mohawk shareholders. 67 Stock Based Plans If the share exchange is consummated, shares of Niagara Mohawk Common Stock then held under the Niagara Mohawk Stock Plans will automatically become a like number of shares of Holdings common stock. Upon consummation of the share exchange, all outstanding stock options under Niagara Mohawk's Option Plan will be converted into options to acquire, on the same terms and conditions as were applicable under such stock options immediately prior to the share exchange, such number of shares of Holdings common stock as the holders of such options would have been entitled to receive pursuant to the share exchange had such holders exercised such stock options in full immediately prior to the share exchange, at a price per share of Holdings common stock equal to the per share option price of Niagara Mohawk Common Stock. Also, a vote in favor of the share exchange will also constitute approval, under the Option Plan, as then amended, for shares of Holdings common stock, instead of Niagara Mohawk Common Stock, to be issued and delivered in the future under such Plan. Holdings may issue future options on its common stock under such Plan. In addition, performance shares granted and to be granted under such Plan will be treated in a comparable manner. Holdings will file post-effective amendments to Niagara Mohawk's registration statements on Form S-8 for the amended Niagara Mohawk Stock Plans shortly after the effective time of the share exchange. Non-Stock Based Plans Upon consummation of the share exchange, Holdings will take over responsibility for all of Niagara Mohawk's retirement and other employee benefit plans, such as the pension plans, health plans and disability plans. Benefits provided for in these non-stock based plans will not be changed as a result of the holding company restructuring and share exchange. TREATMENT OF NIAGARA MOHAWK PREFERRED STOCK Shares of Niagara Mohawk preferred stock will not be exchanged in the share exchange but will continue as shares of preferred stock of Niagara Mohawk. Therefore, holders of Niagara Mohawk preferred stock will not become holders of Holdings preferred or common stock as a result of the share exchange. Except as discussed under this caption, the share exchange and the holding company structure will not change the rights of holders of the outstanding shares of Niagara Mohawk preferred stock. Niagara Mohawk preferred stock will continue to rank senior to Niagara Mohawk Common Stock as to dividends and as to the distribution of Niagara Mohawk's assets upon any liquidation. The restructuring is not expected to affect adversely the holders of Niagara Mohawk preferred stock. Dividends on Niagara Mohawk preferred stock will continue to be paid as before, depending upon the earnings, financial condition and other relevant factors affecting Niagara Mohawk. However, the assets or earnings of Holdings' subsidiaries other than Niagara Mohawk will not be available to pay dividends on Niagara Mohawk preferred stock or to make distributions with respect to such preferred stock in the event of a liquidation if the share exchange is consummated. See "--Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings" above. Appraisal rights under the New York Business Corporation Law are not available to holders of Niagara Mohawk preferred stock inasmuch as that preferred stock is not being exchanged for Holdings stock and will continue as Niagara Mohawk preferred stock after the holding company restructuring. After the share exchange, Niagara Mohawk will continue to be subject to the periodic reporting requirements of the Securities Exchange Act of 1934. The Board of Directors considered the effects on the holders of the Niagara Mohawk Common Stock and the holders of Niagara Mohawk preferred stock in determining that the share exchange should only involve the Niagara Mohawk Common Stock. The Board's decision to exchange Niagara Mohawk 68 Common Stock for Holdings common stock was primarily based on the Board's desire to confer the expected benefits of the share exchange on those investors who are best placed to enjoy such benefits, namely the holders of Niagara Mohawk Common Stock. Even if the Niagara Mohawk preferred stock were to be exchanged for preferred stock of Holdings, investors in such preferred stock would continue to receive fixed dividend payments in respect of their investment. The expected benefits of the share exchange include those discussed above, such as increased flexibility in operating Holdings' unregulated businesses and enhanced ability to take advantage of the new business opportunities in a timely manner. The Board's decision not to exchange Niagara Mohawk preferred stock in the share exchange was primarily based on the Board's desire not to alter, or potentially alter, the nature of the investment decision represented by the Niagara Mohawk preferred stock (namely, a direct investment in a regulated utility) and the priority position of the holders of Niagara Mohawk preferred stock with respect to dividends and assets on liquidation. As to holders of Niagara Mohawk preferred stock, the benefits of continuing as investors in Niagara Mohawk's regulated utility business outweigh any loss of access to the return on future investments made by the unregulated businesses of Holdings. In that regard, investors in priority position securities, such as the holders of Niagara Mohawk preferred stock, benefit to the extent that such securities have been issued by the corporate entity that holds directly and/or has unrestricted access to the principal assets of the enterprise. As discussed above under the caption "Certain Considerations", the funds required to pay dividends on Holdings common stock for a period of time following the share exchange are expected to be derived predominately from dividends paid by Niagara Mohawk. If the Niagara Mohawk preferred stock also were to be exchanged pursuant to the share exchange and become preferred stock of Holdings, the funds required to pay dividends on that preferred stock would also be derived predominately from dividends paid by Niagara Mohawk. Although it has no present intention to do so, it is expected that Niagara Mohawk may need to issue preferred stock in the future to meet its capital requirements. The preferred stock that would be issued by Niagara Mohawk would have preference over the Common Stock as to the payment of dividends and, therefore, would reduce the amount of funds available to Niagara Mohawk for the payment of dividends to Holdings. As a result, the conversion of the Niagara Mohawk preferred stock to Holdings preferred stock would result in the dividend payments and distributions upon liquidation with respect to those shares being subordinated to the dividend and distribution rights of any newly created preferred stock of Niagara Mohawk. TREATMENT OF NIAGARA MOHAWK DEBT, ASSETS AND LIABILITIES, AND BUSINESS The current indebtedness of Niagara Mohawk will continue to be obligations of Niagara Mohawk and will be neither assumed nor guaranteed by Holdings in connection with the share exchange. Niagara Mohawk's first mortgage bonds will continue to be secured by first mortgage liens on all of the properties of Niagara Mohawk that are currently subject to such liens. Such indebtedness will be neither assumed nor guaranteed by Holdings in connection with the share exchange. The decision to have the indebtedness of Niagara Mohawk continue as obligations of Niagara Mohawk is based upon a desire not to alter, or potentially alter, the nature of the investment represented by such fixed income obligations, namely a direct investment in a regulated utility. The consolidated assets and liabilities of Niagara Mohawk and its subsidiaries immediately before the Effective Time will be the same as the consolidated assets and liabilities of Holdings and its subsidiaries immediately after the Effective Time. All the business and operations conducted immediately before the Effective Time by Niagara Mohawk and its subsidiaries will continue to be conducted immediately after the Effective Time by Niagara Mohawk and such subsidiaries as subsidiaries of Holdings. HOLDINGS CAPITAL STOCK Holdings' certificate of incorporation and by-laws will govern certain rights of Holdings' shareholders after the share exchange as discussed under this caption and under "--Comparative Shareholders' Rights" below. 69 The following statements with respect to Holdings common stock are based on certain provisions of Holdings' certificate of incorporation and by-laws and on New York law. Holdings' certificate of incorporation is attached as Exhibit B hereto and is incorporated herein by reference and Holdings' by-laws are attached as Exhibit C hereto and are incorporated herein by reference. Holdings is authorized to issue 300,000,000 shares of common stock and 50,000,000 shares of preferred stock. Holdings preferred stock may be issued from time to time in series as Holdings' Board of Directors may determine, and the respective dividend rates, redemption terms (if any), amounts payable on liquidation, voting rights (if any), number of votes per share, conversion rights (if any), and other terms will be fixed by Holdings' Board of Directors with respect to any such series prior to issuance. When issued in the share exchange, shares of Holdings common stock will be fully paid and nonassessable. Holders of Holdings common stock and preferred stock are not entitled to preemptive rights. Dividends Subject to prior rights of Holdings preferred stock (if any should become outstanding), Holdings common stock is entitled to such dividends as may be declared by Holdings' Board of Directors, and Holdings may purchase or otherwise acquire outstanding shares of common stock, out of funds legally available therefor. As noted above, the PowerChoice Agreement and the terms of Niagara Mohawk's debt imposes certain limitations on the dividends that Niagara Mohawk may pay to Holdings after the share exchange. At least initially after the exchange, dividends on Holdings common stock will depend on dividends paid by Niagara Mohawk on its Common Stock owned by Holdings. Liquidation Rights Upon liquidation of Holdings, any net assets remaining after payment to the holders (if any) of Holdings preferred stock of the full amounts to which they are entitled to receive are distributable pro rata to the holders of Holdings common stock. Voting Rights Holders of Holdings common stock are entitled to one vote per share. There are no cumulative voting rights. Holdings' Board of Directors is divided into three classes, with directors elected generally to serve for terms of three years. Transfer Agent and Registrar The transfer agent and registrar for Holdings common stock will be The Bank of New York of New York, NY. Indemnification and Limitation of Liability As do the Niagara Mohawk By-Laws, the Holdings by-laws will provide that Holdings shall indemnify to the full extent permitted by law any person made, or threatened to be made, a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person or such person's testator or intestate is or was a director, officer or employee of Holdings, or serves or served at the request of Holdings with any other enterprise as a director, officer or employee; expenses incurred by any such person in defending any such action, suit or proceeding will be paid or reimbursed by Holdings promptly upon receipt by it of an undertaking of such person to repay such expenses if it shall ultimately be determined that such person is not entitled to be indemnified by Holdings. No amendment of 70 this by-law provision will impair the rights of any person arising at any time with respect to events occurring prior to such amendment. As does Niagara Mohawk's Certificate of Incorporation, Holdings' certificate of incorporation provides that a director shall not be personally liable to Holdings or its shareholders for damages for any breach of duty in such capacity, except to the extent that such exemption is not permitted under the BCL (presently, such exemption is not permitted for acts or omissions in bad faith or involving intentional misconduct or a knowing violation of law, or if the director personally gained in fact a financial profit or other advantage to which the director was not legally entitled or if such act violated Section 719 of the BCL). Any amendment, modification or repeal of such liability limitation provision may not apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment, modification or repeal. Possible Effect of Certain Holdings Provisions and the BCL It is not the intention of the Board of Directors to discourage legitimate offers to enhance shareholder value. However, certain provisions of Holdings' certificate of incorporation and by-laws may have the effect of discouraging unilateral tender offers or other attempts to take over and acquire the business of Holdings. These provisions, all of which are already contained in Niagara Mohawk's Certificate of Incorporation or By-Laws or otherwise apply to Niagara Mohawk, might discourage a potentially interested purchaser from attempting a unilateral takeover bid for Holdings on terms which some shareholders might favor. If they discourage potential takeover bids, these provisions might limit the opportunity for Holdings' shareholders to sell their shares at a premium over then prevailing market prices. Non-Cumulative Voting. Neither Niagara Mohawk nor Holdings provides for cumulative voting in the election of directors. The procedure known as cumulative voting permits shareholders to multiply the number of votes to which they may be entitled by the total number of directors to be elected in the same election by the holders of the class or classes of shares of which their shares are a part and to cast their whole number of votes for one candidate or to distribute them among any two or more candidates. Under cumulative voting, it is possible for representation on the Board of Directors to be obtained by an individual or group of individuals who own less than a majority of the voting stock. Such a shareholder or group may have interests and goals which are not consistent with, and indeed might be in conflict with, those of a majority of the shareholders. The Board of Directors believes that each director should represent all shareholders, rather than the interests of any special constituency, and that the presence on Holdings' Board of one or more directors representing such a constituency could disrupt and impair the efficient management of Holdings. The lack of cumulative voting could discourage the accumulation of blocks of Holdings common stock and therefore could tend to make temporary increases in the market price of Holdings common stock, which could result therefrom, less likely to occur. Therefore, in these limited instances, shareholders may not be able to sell their shares of Holdings common stock at a market price temporarily influenced by this type of activity. Advance Notice of Business to be Brought Before Shareholder Meetings. As under Niagara Mohawk's By-Laws, under Holdings' by-laws shareholders must provide Holdings prior written notice of any business to be brought before an annual or special meeting (including the nomination of directors) in order for it to be considered. With respect to any annual meeting, such by-laws require the written notice to be received by the Secretary of Holdings no earlier than 90 days nor later than 60 days prior to the date of the annual meeting, except that if the date of the annual meeting is first publicly announced less than 70 days prior to the date of the meeting, such by-laws require the written notice to be received by the Secretary of Holdings not more than 10 days after such public announcement. These by-law provisions provide a more orderly procedure for conducting shareholder meetings and provide the Board of Directors with a meaningful opportunity prior to shareholder meetings to inform shareholders, to the extent deemed necessary or desirable by the Board of Directors, of any business proposed to be conducted at such meetings, together 71 with any recommendation of the Board of Directors. Also, by requiring advance notice of nominations by shareholders, these by-law provisions afford the Board of Directors a meaningful opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Board of Directors, to inform shareholders about such qualifications. On the other hand, these by-law provisions may provide sufficient time for Holdings to institute litigation or take other steps to respond to such business, or to prevent such business from being acted upon, if such response or prevention is thought to be necessary or desirable. With respect to the election of directors, these by-law provisions may tend to inhibit shareholders who do not have any intention of controlling Holdings or its Board of Directors from participating in the nomination process; such provisions may also provide sufficient time for Holdings to institute litigation or take other steps to prevent the nominee from being elected or serving if such prevention is thought to be necessary or desirable. "Blank-Check" Preferred Stock. Holdings' certificate of incorporation will authorize the issuance of 50,000,000 shares of Holdings preferred stock. In addition, after giving effect to the share exchange, approximately 113 million shares of Holdings common stock will be authorized but unissued and not reserved for issuance. An effect of the existence of unissued Holdings common stock and preferred stock may be to enable the Holdings Board of Directors to render more difficult or discourage a transaction to obtain control of Holdings. Such shares might be issued by the Board of Directors without shareholder approval in transactions that might prevent or render more difficult or costly the completion of a takeover transaction, as by diluting voting or other rights of the proposed acquiror. In this regard, Holdings' certificate of incorporation (as does Niagara Mohawk's) will grant the Board of Directors broad power to establish the rights and preferences of the authorized and unissued preferred stock, one or more classes or series of which could be issued entitling holders to vote separately as a class on any proposed merger or consolidation, to convert such stock into shares of Holdings common stock or possibly other securities, to demand redemption at a specified price under prescribed circumstances related to a change of control, or to exercise other rights designed to impede a takeover. Section 912 of the New York Business Corporation Law. Section 912 of the BCL would prohibit a "business combination" (as defined in Section 912, generally including mergers, sales and leases of assets, issuances of securities and similar transactions) by Holdings or a subsidiary with an "interested shareholder" (as defined in Section 912, generally the beneficial owner of 20 percent or more of Holdings' voting stock) within five years after the person or entity becomes an interested shareholder, unless (i) prior to the person or entity becoming an interested shareholder, the business combination or the transaction pursuant to which such person or entity became an interested shareholder shall have been approved by Holdings' Board of Directors, or (ii) the business combination is approved by the holders of a majority of the outstanding voting stock of Holdings, excluding shares held by the interested shareholder, at a meeting called for such purpose not earlier than five years after such interested shareholder's stock acquisition date, or pursuant to a stringent "fair price" formula. Section 70 of the New York Public Service Law. Under Section 70 of the Public Service Law, unless authorized by the PSC, no gas corporation or electric corporation may directly or indirectly acquire the stock or bonds of any other corporation incorporated for, or engaged in, the same or a similar business, or proposing to operate or operating under a franchise from New York State or any other state or any other municipality. In general, no stock corporation other than a gas corporation or electric corporation or street railroad corporation may purchase or acquire, take or hold, more than ten percent (10%) of the voting capital stock of any gas corporation or electric corporation organized or existing under or by virtue of the laws of New York unless with the consent of, and subject to the terms and conditions set by, the PSC. No consent may be given by the PSC to any such acquisition unless it has been shown that such acquisition is in the public interest. Any contract, assignment, transfer or agreement for transfer of any stock in violation of Section 70 will be void and of no effect, and no such transfer or assignment may be made upon the books of any such gas corporation or electric corporation, or will be recognized as effective for any purpose. An 72 "electric corporation" is defined to generally include any corporation, company, partnership and person owning, operating or managing any electric plant for use by others than itself and its tenants, or except where electricity is generated solely from co-generation, small buyers or alternative energy production facilities or distributed from such facilities to users located near such a facility. Other Provisions. Some other provisions of Holdings' certificate of incorporation and by-laws may also tend to discourage potential offers to take over and acquire the business of Holdings. Holdings' Board of Directors will be divided into three classes, with directors in each class generally being elected to serve a three-year term. Also, special shareholder meetings may be called only by the Chairman of the Board of Directors or by the Board pursuant to a resolution adopted by a majority of the entire Board. Holdings' certificate of incorporation also provides that directors may not be removed without cause by the shareholders, except in the case of a director elected by the holders of any class or series of stock (other than Holdings common stock), voting as a class or series, when so entitled by the applicable provisions of Holdings' certificate of incorporation. Finally, certain provisions (relating to, for example, limitation on director liabilities, the ability to call special meetings of shareholders, presiding at meetings of shareholders, classified Board of Directors, election and removal of directors, advance notice requirements for shareholder proposals and nomination of directors at shareholder meetings, and indemnification) may only be amended by the affirmative vote of not less than two-thirds of the shares entitled to vote at a shareholder meeting or, with respect to By-Law amendments affecting such provisions, two-thirds of the entire Board. Niagara Mohawk's Certificate of Incorporation and By-Laws presently contain a number of these provisions. COMPARATIVE SHAREHOLDERS' RIGHTS Niagara Mohawk and Holdings are both New York corporations. When the share exchange becomes effective, holders of Niagara Mohawk Common Stock will become holders of Holdings common stock, and their rights will be governed by Holdings' certificate of incorporation and by-laws instead of those of Niagara Mohawk. Certain differences between the rights of holders of Holdings common stock and those of holders of Niagara Mohawk Common Stock are summarized below. Such summary is qualified in its entirety by reference to the information included in the exhibits hereto, in exhibits to the Registration Statement of which this Prospectus/Proxy Statement is a part, and in materials incorporated herein by reference. Voting Requirements for Significant Transactions. As a result of a recent change in the BCL, the necessary vote for significant transactions involving Holdings, such as mergers, consolidations, share exchanges and dissolution, will be a majority vote, rather than the two-thirds vote applicable to Niagara Mohawk. The Board of Directors believes this lower vote requirement will facilitate any transactions deemed to be in the best interests of Holdings and its shareholders. Purpose Clause. The corporate purposes for which Niagara Mohawk may engage in business are generally those related to rendering electric or gas service and related activities. Holdings is authorized to engage in any and all lawful acts and activities. Authorized Shares. Authorized Holdings and Niagara Mohawk common stock is 300,000,000 and 185,000,000, subject to increase to 250,000,000 shares if Proposal 3 is adopted, shares, respectively. As of the record date for the Annual Meeting, there were 144,419,351 shares of Niagara Mohawk Common Stock issued and outstanding. Up to approximately 187 million shares of Holdings common stock may be issued in the share exchange. The additional authorized but unissued shares of Holdings common stock will be available for issuance under the Dividend Reinvestment and Stock Purchase Plan and the Option Plan, as well as possibly for stock splits, stock dividends, equity financings, and for other general corporate purposes (including, possibly, acquisitions) (none of which is under current consideration). In addition, as of the record date, there were 3,400,000 shares of Cumulative Preferred Stock, par value $100 per share, of which 2,322,000 shares were issued and outstanding, and 19,600,000 shares of 73 Cumulative Preferred Stock, par value $25 per share, of which 11,681,204 shares were issued and outstanding. There will be 50,000,000 authorized shares of Holdings preferred stock, all of which are unissued. Preferred Stock. The respective Boards of Directors of Holdings and Niagara Mohawk are authorized to issue preferred stock in series. The voting rights and certain preferences of the Niagara Mohawk preferred stock are determined in Niagara Mohawk's certificate of incorporation. Niagara Mohawk preferred stock is generally not entitled to vote but only has limited voting rights as required by law and as set out in the Niagara Mohawk's certificate of incorporation, which rights generally arise only in the event of certain arrearages in payment of dividends and certain corporate transactions affecting Niagara Mohawk preferred stock. Niagara Mohawk preferred stock is subject to redemption and sinking fund provisions. After the share exchange, outstanding Niagara Mohawk preferred stock will continue as equity securities of Niagara Mohawk with the same preferences, designations, relative rights, privileges and powers, and subject to the same restrictions, limitations and qualifications, as were applicable to outstanding Niagara Mohawk preferred stock prior to the share exchange. Holdings' certificate of incorporation will not establish voting rights, preferences or other rights with respect to Holdings preferred stock. Holdings' Board of Directors is given full authority to establish and designate each particular series of preferred stock and to fix the rights, preferences and limitations of each particular series, and the relative rights, preferences and limitations between series, as follows: (i) the serial designation; (ii) the number of shares in such series; (iii) the dividend rate or rates and the date or dates upon which such dividends shall be payable; (iv) whether dividends on such series will be cumulative, and, if so, from which date or dates; (v) liquidation preferences; (vi) redemption terms, if any; (vii) provisions relating to sinking or other similar funds; (viii) provisions relating to the conversion or exchange of shares of such series into shares of any class of stock (except that conversion or exchange may not be made into shares having superior dividend or liquidation preferences); (ix) the voting rights, if any, in addition to those required by law and the number of votes per share; and (x) any other relative rights, preferences or limitations of such series not inconsistent with the Holdings' certificate of incorporation or with applicable law. Management believes that the ability to issue Holdings preferred stock will provide important flexibility to Holdings. Par Value. The par value of Holdings preferred stock differs from those of Niagara Mohawk preferred stocks. A designated par value is not required under the BCL and in modern corporate practice par value does not serve any useful purpose. It is anticipated that the difference in par values will not affect the market value of Holdings preferred stock. The par value per share of Holdings common stock, $0.01, was reduced from the $1.00 par value per share of Niagara Mohawk Common Stock to save on filing fees in New York. Classified Board. As is the case with Niagara Mohawk Holdings' certificate of incorporation and by-laws will provide (i) for the Board to determine the number of directors; and (ii) for the division of the Board into three classes with directors in each class generally being elected for a three-year term. See "--Management" below. Other Provisions. Holdings' certificate of incorporation will provide that directors may not be removed without cause by the shareholders, except in the case of a director elected by the holders of any class or series of stock (other than Holdings common stock), voting as a class or series, when so entitled by the applicable provisions of Holdings' restated certificate of incorporation. Also, certain provisions (relating to, for example, preferred stock, limitation on director liabilities, the ability to call special meetings of shareholders, classified Board of Directors, election and removal of directors, advance notice requirements for shareholder proposals and nomination of directors at shareholder meetings) may only be amended by the affirmative vote of not less than two-thirds of the shares then entitled to vote at 74 shareholder meetings. Other provisions of Holdings' certificate of incorporation or by-laws may be amended, repealed or adopted by a vote of the shareholders of Holdings at the time entitled to vote at any shareholder meeting or, in the case of the Holdings by-laws, by the Board of Directors of Holdings. See also "--Holdings Capital Stock". BUSINESS Niagara Mohawk is engaged in the generation, purchase, transmission, distribution and sale of electricity and the purchase, distribution, sale and transportation of natural gas in New York State. Niagara Mohawk provides electric service to its customers in areas of central, northern and western New York having a total population of approximately 3.5 million, including the cities of Buffalo, Syracuse, Albany, Utica, Schenectady, Niagara Falls, Watertown and Troy. Niagara Mohawk sells, distributes and transports natural gas in areas of central, northern and eastern New York contained within its electric service territory having a total population of approximable 1.7 million. Niagara Mohawk owns or has a significant ownership interest in seven principal fossil and nuclear electric generating facilities providing it with a total capacity of approximately 5,299 megawatts of electricity. Niagara Mohawk's principal non-utility subsidiaries participate in real estate development of property formerly owned by Niagara Mohawk and energy-related services. In addition, Niagara Mohawk holds a single-purpose subsidiary established to facilitate the sale of an undivided interest in a designated pool of customer receivables. Certain of these subsidiaries will be transferred to and therefor become separate subsidiaries of Holdings after the share exchange. After the share exchange occurs, Holdings will have no material assets other than its ownership of stock of its subsidiaries, which initially will consist of all of Niagara Mohawk's outstanding common stock and thereafter the common stock of certain Niagara Mohawk's existing non-utility subsidiaries. See "--Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings". It is expected that, in the future, Holdings will expand into some other businesses and ventures. REGULATION OF HOLDINGS AND NIAGARA MOHAWK Regulation of Holdings. Holdings must comply with the PowerChoice Agreement. As discussed and referred to above under "--The PowerChoice Agreement", there are restrictions on transactions between Niagara Mohawk and Holdings and other Holdings subsidiaries, restrictions on loans, guarantees or pledges for the benefit of Holdings and other Holdings subsidiaries, and restrictions on Board and managerial interlocks between Niagara Mohawk and Holdings and other Holdings subsidiaries. As a result of the share exchange, Holdings will become a "public utility holding company" under the Holding Company Act. Though Niagara Mohawk expects to sell or liquidate its majority interests in two of its generation subsidiaries, Beebee Island Corporation and Moreau Manufacturing Corporation, Holdings will retain an indirect 50% interest in CNP which does not contribute a material part of its income. In 1994 the SEC issued a release soliciting the views of interested parties on a study being conducted by its staff to develop recommendations regarding certain Congressional concerns and the needs of those affected by regulation under the Holding Company Act. In June 1995 the staff completed its study and issued a report which concluded that significant changes were needed in the current regulatory scheme. The SEC staff report viewed the Holding Company Act as unnecessarily restrictive in many regards which could prevent companies from responding effectively to changes now occurring in the utility industry. Among the staff report's recommendations were three legislative options for the SEC to offer to Congress-repeal of the Holding Company Act with legislation to continue federal protection of consumers, unconditional repeal of the Holding Company Act, or a broadening of the SEC's authority to exempt holding companies where state regulation was adequate. Pending legislative action, the staff report recommended that the SEC act administratively to modernize and simplify holding company regulation, reduce delays in current administration, and minimize regulatory overlap, including rulemaking proposals 75 and significant changes in the SEC's past interpretations under the Act. One of these proposals was a rule to exempt most energy-related diversification within investment limitations. Niagara Mohawk cannot predict whether Congress will take any action to significantly modify or repeal the Holding Company Act, or whether the SEC will take action to revise or modify significantly its Holding Company Act rules, decisions and interpretations. Regulation of Niagara Mohawk. Niagara Mohawk will continue to be subject to regulation by the PSC after the share exchange. Niagara Mohawk's utility retail sales, which include sales of gas, transportation and balancing services, will continue to be made primarily under rate schedules and tariffs filed with and subject to the jurisdiction of the PSC. See "--The PowerChoice Agreement" below. In addition, Niagara Mohawk will continue to be subject to regulation by the PSC, as it has been in the past, regarding issuances of securities, capital ratio maintenance, and the maintenance of its books and records. Niagara Mohawk also will continue to be subject to regulation by the FERC and the NRC. FERC will continue to regulate the terms and conditions of Niagara Mohawk's transmission of electricity, along with transmission interconnections and ancillary services, as well as the terms and conditions of its sales of electric energy for resale. FERC will also continue to regulate Niagara Mohawk's disposition of any capacity on interstate gas pipelines to which it has rights under firm contracts. The NRC will continue to review and regulate Niagara Mohawk's operation of the two Nine Mile Point nuclear units. THE POWERCHOICE AGREEMENT Prohibitions of Affiliate Loans, Guarantees and Pledges. Under the PowerChoice Agreement, Niagara Mohawk is prohibited from making loans to, or providing guarantees or other credit support for the obligations of, Holdings or any other subsidiary of Holdings. Likewise, Niagara Mohawk may not pledge its assets for the obligations of any other entity, including Holdings or any other subsidiary of Holdings. Prohibitions of Affiliate Transactions and Other Restrictions. The PowerChoice Agreement generally prohibit any transaction between Niagara Mohawk and Holdings or any other subsidiary of Holdings, except for the provision of certain corporate administrative services, certain "grandfathered" transactions as listed therein, transactions permitted as a matter of generic policy by the PSC, and tariffed transactions. In addition, Holdings and its subsidiaries are required by the PowerChoice Agreement to operate as separate entities, and the PowerChoice Agreement prescribes capital ratio maintenance requirements for Niagara Mohawk. Finally, the PowerChoice Agreement sets out guidelines for the allocation of costs among Holdings, Niagara Mohawk and the other subsidiaries of Holdings. Restrictions on Board and Management Interlocks. In order to address concerns regarding the possible diversion of the attention of Niagara Mohawk's management away from the utility business, as well as to avoid potential conflicts of interest with the management of Holdings, the PowerChoice Agreement contains restrictions regarding the composition of the Boards and managements of Niagara Mohawk and Holdings and other subsidiaries of Holdings. See "--Management--Restrictions on Board and Management Interlocks between Holdings and Niagara Mohawk". The PowerChoice Agreement will continue to govern Niagara Mohawk's utility rates and charges even if common shareholders do not approve the holding company proposal and adopt the Exchange Agreement at Niagara Mohawk's Annual Meeting. In that event, Niagara M hawk will not be able to realize the benefits it expects from a holding company structure, which it believes is necessary in the future deregulated competitive environment of the energy industry. STATUTORY APPRAISAL RIGHTS Holders of shares of Niagara Mohawk Common Stock are not entitled to appraisal rights under the BCL as a result of the exchange. 76 B. MANAGEMENT DIRECTORS AND OFFICERS OF HOLDINGS Holdings' certificate of incorporation and by-laws divides Holdings' Board of Directors into three classes, which will become effective prior to the share exchange, with directors in each class generally being elected for a three-year term. Holdings' by-laws will permit the Board of Directors to fix from time to time the number of directors, and the Board has fixed its initial size at 3, to be increased to 14, effective as of the effective time of the share exchange. A vote in favor of the share exchange will also constitute ratification of the make-up of Holdings' Board of Directors. Presently William E. Davis, Albert J. Budney, Jr. and William F. Edwards are the directors of Holdings. Immediately prior to the effective time of the share exchange, Mr. Edwards will resign and Niagara Mohawk, as such sole shareholder, will elect all of the then current Niagara Mohawk directors to the Board of Holdings in the same classes as they presently serve. As of the effective time of the share exchange, Mr. Budney will resign from the Board of Niagara Mohawk, Mr. Davis will serve on the Boards of Directors of both Holdings and Niagara Mohawk and the remaining Niagara Mohawk directors will be Darlene D. Kerr and John H. Mueller. After completion of the share exchange, Holdings' Board vacancies may be filled by action of Holdings' Board of Directors. Holdings also contemplates amending the certificate of incorporation and by-laws of Niagara Mohawk following the share exchange to reflect more appropriate provisions for a subsidiary. The following individuals are officers of Holdings: William E. Davis Chairman and Chief Executive Officer Albert J. Budney, Jr. President William F. Edwards Chief Financial Officer Kapua A. Rice Secretary In addition, prior to the share exchange, Gary J. Lavine will become Chief Legal Officer and Steven W. Tasker will become Chief Accounting Officer. For further information concerning persons to become directors or officers of Holdings, see "Proposal 1: Nomination and Election of Directors-Nominees for Class I Directors", "--Continuing Class II Directors", "Continuing Class III Directors" and "--Security Ownership of Directors and Executive Officers". RESTRICTIONS ON BOARD AND MANAGEMENT INTERLOCKS BETWEEN HOLDINGS AND NIAGARA MOHAWK In order to address concerns regarding the possible diversion of the attention of Niagara Mohawk's management away from the utility business, as well as to avoid potential conflicts of interest with the Board and management of Holdings, the PowerChoice Agreement sets forth the following restrictions regarding the composition of the managements of Niagara Mohawk and Holdings. Composition of the Boards of Directors. Niagara Mohawk's Board of Directors must include at least a majority of outside directors (i.e., not an officer of either Holdings or any of its unregulated affiliates). Separation of Employees and Officers. Niagara Mohawk and the unregulated subsidiaries of Holdings will have separate operating employees and operating officers. Officers of Holdings may be officers of either Niagara Mohawk or an unregulated affiliate. 77 C. OTHER INFORMATION VALIDITY OF HOLDINGS COMMON STOCK The validity of the shares of Holdings common stock to be issued in the share exchange will be passed upon by Sullivan & Cromwell, general counsel to Niagara Mohawk and Holdings, 125 Broad Street, New York, New York 10004. EXPERTS The consolidated financial statements incorporated by reference herein have been audited by Price Waterhouse LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. COSTS The Board of Directors considered the financial cost to Niagara Mohawk of implementing the share exchange, including the expenses associated with obtaining required approvals, the costs of this proxy solicitation and the other expenses incurred in connection with registering the Holdings common stock with the Commission. In the Board's view, these expenses, although in some cases significant, are acceptable in light of the benefits to Niagara Mohawk of the share exchange. AGREEMENT AND PLAN OF EXCHANGE This AGREEMENT AND PLAN OF EXCHANGE (the "Agreement"), dated as of May 14 1998, is between Niagara Mohawk Power Corporation, a New York corporation and the corporation whose shares of Common Stock, par value $1.00 per share, will be acquired pursuant to the "Exchange" provided for in this Agreement (the "Subject Corporation"), and Niagara Mohawk Holdings, Inc., a New York corporation and the corporation which will acquire the foregoing shares of Common Stock of the Subject Corporation (the "Acquiring Corporation"). The Subject Corporation and the Acquiring Corporation are hereinafter referred to, collectively, as the "Corporations". WITNESSETH: WHEREAS, the authorized capital of the Subject Corporation is $1,215,000,000, consisting of (a) 185,000,000 shares of Common Stock, par value $1.00 per share ("Subject Corporation Common Stock"), of which 144,419,351 shares are issued and outstanding (which number of issued and outstanding shares is subject to chance prior to the Effective Time (as hereinafter defined) of the Exchange pursuant to the Dividend Reinvestment and Common Stock Purchase Plan ("DRIP") and the Employee Savings Fund Plans for Represented and Non-Represented Employees (each an "Employee Plan" and collectively the "Employee Plans") of the Subject Corporation and the issuance of Subject Corporation Common Stock pursuant to the Master Restructuring Agreement of the Subject Corporation, dated as of July 9, 1997, as amended, (b) 3,400,000 shares of Cumulative Preferred Stock, par value $100 per share ("Subject Corporation $100 Preferred Stock"), of which 2,322,000 shares are issued and outstanding, (c) 19,600,000 shares of Cumulative Preferred Stock, par value $25 per share ("Subject Corporation $25 Preferred Stock"), of which 11,681,204 shares are issued and outstanding and (d) 8,000,000 shares of Preference Stock, par value $25 per share ("Preference Stock"), no shares of which are outstanding. WHEREAS, the Acquiring Corporation is a wholly-owned subsidiary of the Subject Corporation with authorized capital stock consisting of 300,000,000 shares of Common Stock, par value $0.01 per share ("Acquiring Corporation Common Stock"), of which 100 shares are issued and outstanding and owned by the Subject Corporation and 50,000,000 shares of Preferred Stock, par value $0.01 per share, no shares of which are outstanding. WHEREAS, the Boards of Directors of the Corporations deem it desirable and in the best interests of the Corporations and the shareholders of the Subject Corporation that, at the Effective Time, (a) the Acquiring Corporation acquire and become the owner and holder of each share of Subject Corporation Common Stock issued and outstanding at the Effective Time, (b) each share of Subject Corporation Common Stock issued and outstanding immediately prior to the Effective Time be automatically exchanged for one share of Acquiring Corporation Common Stock, and (c) each holder of shares of Subject Corporation Common Stock issued and outstanding immediately prior to the Effective Time becomes the holder of a like number of shares of Acquiring Corporation Common Stock, all on the terms and conditions hereinafter set forth; and WHEREAS, the Boards of Directors of the Corporations have each approved and adopted this Agreement, and the Board of Directors of the Subject Corporation has recommended that the shareholders of the Subject Corporation approve and adopt the Exchange and this Agreement pursuant to Section 913 of the New York Business Corporation Law (the "BCL"). NOW, THEREFORE, the Corporations hereby agree as follows: A-1 ARTICLE I The Exchange and this Agreement shall be submitted to the holders of Subject Corporation Common Stock for approval and adoption as provided by Section 913 of the BCL. The affirmative vote of the holders of at least two-thirds of the issued and outstanding Subject Corporation Common Stock shall be necessary to approve and adopt the Exchange and this Agreement. ARTICLE II Subject to the terms and conditions of this Agreement, the Exchange shall become effective immediately following the close of business on the date of filing with the New York Department of State (the "Department of State") of a certificate of exchange pursuant to Section 913(d) of the BCL ("Certificate"), or at such later time and date as may be stated in the Certificate (the time and date at and on which the Exchange becomes effective being referred to herein as the "Effective Time"). ARTICLE III A. At the Effective Time: (1) each share of Subject Corporation Common Stock issued and outstanding immediately prior to the Effective Time shall be automatically exchanged for one share of Acquiring Corporation Common Stock, which shares shall be fully paid and nonassessable by the Acquiring Corporation; (2) the Acquiring Corporation shall acquire and become the owner and holder of each issued and outstanding share of Subject Corporation Common Stock so exchanged; (3) each share of Acquiring Corporation Common Stock issued and outstanding immediately prior to the Effective Time shall be cancelled and shall thereupon constitute an authorized and unissued share of Acquiring Corporation Common Stock; (4) each share of Subject Corporation Common Stock held under the DRIP or an Employee Plan (including fractional and uncertificated shares) immediately prior to the Effective Time shall be automatically exchanged for a like number of shares (including fractional and uncertificated shares) of Acquiring Corporation Common Stock, which shares shall be held under and pursuant to the DRIP or be issued under such Employee Plan, as the case may be, as hereinafter provided; (5) each unexpired and unexercised option to purchase Subject Corporation Common Stock ("Subject Corporation Stock Option") under the 1992 Stock Option Plan (the "Option Plan"), whether vested or unvested, will be automatically converted into an option (a "Substitute Option") to purchase a number of shares of Acquiring Corporation Common Stock equal to the number of shares of Subject Corporation Common Stock that could have been purchased immediately prior to the Effective Time (assuming full vesting) under such Subject Corporation Stock Option, at a price per share of Acquiring Corporation Common Stock equal to the per share option exercise price specified in such Subject Corporation Stock Option. In accordance with Section 424(a) of the Internal Revenue Code of 1986, as amended, each Substitute Option shall provide the option holder with rights and benefits that are no less and no more favorable to him than were provided under the Subject Corporation Stock Option; and (6) the former holders of Subject Corporation Common Stock shall be entitled only to receive shares of Acquiring Corporation Common Stock in exchange therefor as provided in this Agreement. B. Shares of Subject Corporation $100 Preferred Stock, Subject Corporation $25 Preferred Stock and Subject Corporation Preference Stock shall not be exchanged or otherwise affected by or in connection with the Exchange. Each share of Subject Corporation $100 Preferred Stock issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding following the Exchange and shall continue to be one share of Subject Corporation $100 Preferred Stock of the A-2 applicable series designation. Each share of Subject Corporation $25 Preferred Stock issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding following the Exchange and shall continue to be one share of Subject Corporation $25 Preferred Stock of the applicable series designation. C. As of the Effective Time, the Acquiring Corporation shall succeed to the DRIP as in effect immediately prior to the Effective Time, and the DRIP shall be appropriately modified to provide for the issuance or delivery of Acquiring Corporation Common Stock on and after the Effective Time pursuant thereto. D. As of the Effective Time, (1) the Employee Plans shall be appropriately amended to provide for the issuance or delivery of Acquiring Corporation Common Stock, and the Acquiring Corporation shall agree to issue or deliver Acquiring Corporation Common Stock, and (2) the Option Plan shall also be appropriately amended to provide for the issuance of options by the Acquiring Corporation to purchase Acquiring Corporation Common Stock, in each case on and after the Effective Time pursuant thereto. ARTICLE IV A. The filing of the Certificate with the Department of State and the consummation of the Exchange shall be subject to satisfaction of the following conditions at or prior to the Effective Time: (1) the affirmative vote of the holders of Subject Corporation Common Stock provided for in Article I of this Agreement shall have been received; (2) such orders, authorizations, approvals or waivers from the New York Public Service Commission and all other jurisdictive regulatory bodies, boards or agencies required to consummate the Exchange and related transactions shall have been received, shall remain in full force and effect, and shall not include, in the sole judgment of the Board of Directors of the Subject Corporation, unacceptable conditions; and (3) the Acquiring Corporation Common Stock to be issued in connection with the Exchange shall have been listed, subject to official notice of issuance, by the New York Stock Exchange. ARTICLE V Following the Effective Time, each holder of an outstanding certificate or certificates theretofore representing shares of Subject Corporation Common Stock may, but shall not be required to, surrender the same to the Acquiring Corporation's Transfer Agent for cancellation and reissuance of a new certificate or certificates in such holder's name or for cancellation and transfer, and each such holder or transferee shall be entitled to receive a certificate or certificates representing the same number of shares of Acquiring Corporation Common Stock previously represented by the certificate or certificates surrendered. Until so surrendered or presented for exchange or transfer, each outstanding certificate which, immediately prior to the Effective Time, represents Subject Corporation Common Stock shall be deemed and shall be treated for all purposes to represent the ownership of the same number of shares of Acquiring Corporation Common Stock as though such surrender or exchange or transfer had taken place. The holders of Subject Corporation Common Stock at the Effective Time shall have no right at and after the Effective Time to have their shares of Subject Corporation Common Stock transferred on the stock transfer books of the Subject Corporation (such stock transfer books being deemed closed for this purpose at the Effective Time), and at and after the Effective Time such stock transfer books may be deemed to be the stock transfer books of the Acquiring Corporation. A-3 ARTICLE VI A. This Agreement may be amended, modified or supplemented, or compliance with any provision hereof may be waived, at any time prior to the Effective Time (including, without limitation, after receipt of the affirmative vote of holders of Subject Corporation Common Stock as provided in Article IV(1) hereof), by the mutual consent of the Boards of Directors of the Subject Corporation and the Acquiring Corporation at any time prior to the Effective Time; provided, however, that no such amendment, modification, supplement or waiver shall be made or effected if such amendment, modification, supplement or waiver would, in the sole judgment of the Board of Directors of the Subject Corporation, materially and adversely affect the shareholders of the Subject Corporation. B. This Agreement may be terminated and the Exchange and related transactions abandoned, at any time prior to the Effective Time (including, without limitation, after receipt of the affirmative vote of holders of Subject Corporation Common Stock as provided in Article IV(1) hereof), if the Board of Directors of the Subject Corporation determines, in its sole judgment, that consummation of the Exchange would for any reason be inadvisable or not in the best interests of the Subject Corporation or its shareholders. IN WITNESS WHEREOF, each of the Corporations, pursuant to authorization and approval given by its Board of Directors, has caused this Agreement to be executed as of the date first above written. Niagara Mohawk Power Corporation By: William E. Davis -------------------------------------- William E. Davis Chairman of the Board and Chief Financial Officer Niagara Mohawk Holdings, Inc. By: William F. Edwards -------------------------------------- William F. Edwards Chief Financial Officer A-4 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No.__________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT I NIAGARA MOHAWK [MAP] UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No.__________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT J STATE OF NEW YORK PUBLIC SERVICE COMMISSION OPINION NO. 98-8 CASE 94-E-0098 - Proceeding on Motion of the Commission as to the Rates, Charges, Rules and Regulations of Niagara Mohawk Power Corporation for the Electric Service. CASE 94-E-0099 - Proceeding on Motion of the Commission as to the Rates, Charges, Rules and Regulations of Niagara Mohawk Power Corporation for Electric Street Lighting Service. OPINION AND ORDER ADOPTING TERMS OF SETTLEMENT AGREEMENT SUBJECT TO MODIFICATIONS AND CONDITIONS Issued and Effective: March 20, 1998 CASES 94-E-0098 and 94-E-0099 TABLE OF CONTENTS ----------------- Page ---- INTRODUCTION 1 General Background 2 Procedural History 3 SUMMARY OF THE MRA AND THE SETTLEMENT 7 EXCEPTIONS 10 Master Restructuring Agreement 10 1. Prudence 11 2. Escrow Account 13 3. Steam Host and Power Producer Dealings 16 4. Third-Party Releases and Ratemaking Presumptions 17 5. Discussion and Conclusion 18 PowerChoice Settlement Provisions 22 1. The General Public Interest Standard 22 2. The Settlement's Revenue Decreases 26 a. Exceptions 26 b. Replies 27 c. Discussion 29 3. The Settlement's Duration 30 4. Customer Charges 33 5. Stranded Cost Recovery 36 a. Exceptions 36 b. Replies 38 c. Discussion 40 -i- CASES 94-E-0098 and 94-E-0099 TABLE OF CONTENTS ----------------- Page ---- 6. Enron/Wepco Rate Proposals 42 a. Energy Backout Rate 42 b. Niagara Mohawk Energy Sales to ESCOs 44 c. Alternative Residential Rate Design 45 7. Generation Auction Incentives 46 8. Nuclear Generation Facilities 49 9. Niagara Mohawk's Identity and Royalty Payments 51 a. Use of the Corporate Name 51 b. Royalty Payments 52 10. Generic and Case-Specific Determinations 54 11. State Environmental Quality Review Act Findings 56 12. Other Matters 58 a. Cost Allocation Manual Review Procedures 58 b. Disclosure of Social Security Numbers 59 c. Future Tax Refunds 60 d. Residential Hydroelectric Allotments 61 e. PULP's Legal Arguments 62 f. Standard Performance Contracts 65 g. Local Taxes and the CTC 66 h. Additional Public Comments 67 i. Recently Settled and Corrected Matters 67 j. Finch's Exceptions 69 -ii- CASES 94-E-0098 and 94-E-0099 TABLE OF CONTENTS ----------------- Page ---- k. Recovery of Costs Associated With Termination of Gas Transportation and Peak Shaving Agreements 73 l. Service Quality Incentive 73 CONCLUSION 74 ORDER 75 APPENDICES -iii- STATE OF NEW YORK PUBLIC SERVICE COMMISSION COMMISSIONERS: John F. O'Mara, Chairman Maureen O. Helmer Thomas J. Dunleavy CASE 94-E-0098 - Proceeding on Motion of the Commission as to the Rates, Charges, Rules and Regulations of Niagara Mohawk Power Corporation for Electric Service. CASE 94-E-0099 - Proceeding on Motion of the Commission as to the Rates, Charges, Rules and Regulations of Niagara Mohawk Power Corporation for Electric Street Lighting Service. OPINION NO. 98-8 OPINION AND ORDER ADOPTING TERMS OF SETTLEMENT AGREEMENT SUBJECT TO MODIFICATIONS AND CONDITIONS (Issued and Effective March 20, 1998) BY THE COMMISSION: INTRODUCTION ------------ On October 10, 1997, Niagara Mohawk Power Corporation (Niagara Mohawk or the company) filed a Settlement Agreement (Settlement) addressing electric rate, corporate structure, and competitive market matters. In addition to the company, the Settlement was executed by Department of Public Service Staff (Staff); the Settling Independent Power Producers (SIPPs); the Independent Power Producers of New York, Inc. (IPPNY); Sithe/Independence Power Partners, L.P.; Multiple Intervenors (MI); the Steam Host Action Group (SHAG); Pace Energy Project; Natural Resources Defense Council; Adirondack Council; Association for Energy Affordability; New York Rivers United; New York State Community Action Association; Joint Supporters by The E Cubed Company; National Association of Energy Services Companies; IBEW Local 97; State Department of Economic Development, Empire State Development Corporation, and the Job -1- CASES 94-E-0098 and 94-E-0099 Development Authority (jointly DED); and, the New York Power Authority (NYPA). The Settlement includes the Master Restructuring Agreement (MRA) that Niagara Mohawk entered into with 16 independent power producers to ameliorate the above-market prices the company pays for electricity. Both the Settlement and the MRA are considered in this opinion and order. General Background - ------------------ In 1990, Niagara Mohawk charged among the lowest electricity prices of the investor-owned utilities operating in New York, even taking into account its costs for two nuclear generation plants. However, between 1990 and 1995, the company's average retail prices rose by 25% and some customers experienced 35% increases in their total bills. Several factors contributed to this dramatic change. For one thing, the company's external costs grew rapidly during the early 1990's. By 1995, they had become nearly half of Niagara Mohawk's total costs. In addition, gross receipts and real property taxes increased the company's costs. By far, the single largest factor contributing to the company's higher electric prices was increased payments to independent power producers (IPPs) pursuant to power purchase agreements (PPAs) containing prices exceeding the market value of electricity. In 1995, for example, Niagara Mohawk's total payments to IPPs exceeded $1 billion. These payments were expected to increase over the next 20 years at a rate faster than the forecast rate of inflation. Niagara Mohawk's financial difficulties have been compounded by economic recession in its service territory. From 1990 to 1995, electric sales did not grow appreciably. Even today, growth lags in comparison with the downstate region. While economic growth, and other factors, have helped to moderate electricity prices elsewhere, Niagara Mohawk's electric rates remain relatively high. -2- CASES 94-E-0098 and 94-E-0099 In 1993, the company began to reduce its internal costs by implementing a substantial work force reduction. Over five years, it managed to decrease its departmental expenses by almost ten percent and capital spending by a third. With respect to external costs, Niagara Mohawk sought to monitor the IPPs' qualifying facility status, to curtail purchases from IPPs, and it requested assurances from the IPPs that ratepayers will ultimately receive the anticipated benefits of front-loaded contracts that were supported in rates. It also sought to limit the amount paid for IPP generation in excess of contract quantities and to eliminate statutory requirements mandating IPP purchases. The company also challenged various property tax assessments and lobbied for legislative tax reforms. While some of its efforts were successful, Niagara Mohawk did not manage to reduce its external costs appreciably. Finally, during the 1990's, Niagara Mohawk was under constant pressure to reduce electric prices from customers with access to competitive alternatives. It was also strongly encouraged to stop increasing electric rates. Procedural History - ------------------ These cases began in February 1994 when Niagara Mohawk filed a proposal for a traditionally-derived electric rate increase for 1995 and proposed electric price caps for the succeeding four years. The company's 1995 rate proposal was fully litigated; Staff and other parties responded to the company's multi-year rate proposal with alternatives of their own. Following the first round of hearings, new rates were set for 1995 and these proceedings were bifurcated.1 We directed Niagara Mohawk to continue to devise an acceptable multi-year plan addressing its rate levels, the company's financial - -------- 1 Cases 94-E-0098 et al., Order Setting Electric, Electric Street Lighting, and Gas Rates (issued April 21, 1995); Opinion No. 95-21 (issued December 21, 1995). -3- CASES 94-E-0098 and 94-E-0099 security, customer service quality, and certain regulatory changes needed to stimulate competition in the marketplace. During the summer of 1995, the parties met regularly to address these matters. Administrative Law Judge Jeffrey E. Stockholm served as a Settlement Judge and he aided the parties in their efforts to achieve a negotiated resolution of the issues.1 Initially, the company provided the parties pertinent information about its financial condition and stated its position on electric restructuring issues. In October 1995, Niagara Mohawk submitted, only for settlement discussion purposes, a comprehensive, multi-year rate and restructuring proposal commonly referred to as "PowerChoice".2 For the next nine months, the parties continued negotiations and we developed our approach to restructuring New York's electric utilities. In May 1996, the electric service competitive opportunities decision was issued.3 Niagara Mohawk was explicitly excepted from the filing requirements of that decision as it had already submitted its PowerChoice proposal.4 In June 1996, progress in the PowerChoice settlement discussions stalled while Niagara Mohawk focused its efforts on separate negotiations with the IPPs. Completion of these efforts was necessary for Niagara Mohawk to be able to draft a revised PowerChoice proposal for the parties to consider. On July 9, 1997, the company executed the MRA with 16 SIPPs whose 29 PPAs represent more than 80% of Niagara Mohawk's above-market costs. - -------- 1 Later on, Administrative Law Judges Jaclyn A. Brilling and Judith A. Lee also provided the parties assistance in their settlement efforts. 2 Niagara Mohawk decided to make the PowerChoice proposal public to promote a better understanding of the changes under consideration. 3 Cases 94-E-0952 et al., Competitive Opportunities Proceeding, Opinion No. 96-12 (issued May 20, 1996). 4 Ibid., pp. 74-75. -4- CASES 94-E-0098 and 94-E-0099 Thereafter, on July 23, 1997, the PowerChoice settlement discussions resumed and the company presented a new settlement offer taking into account the MRA. Negotiations facilitated by the Settlement Judge culminated on October 10, 1997 when the Settlement was filed. In accordance with the October 17, 1997 ruling that set the schedule for these proceedings, the parties prefiled testimony supporting and opposing the Settlement.1 Evidentiary hearings began on November 18, 1997 and ran for three days. Between November 25 and December 4, 1997 public statement hearings were held at ten locations throughout the company's service territory. Oral statements and written comments were received from residential, commercial, and industrial customers and their representatives. Statements and comments were also received from local government officials and participants in the emerging competitive electric market. On December 29, 1997, Administrative Law Judge William Bouteiller's recommended decision was issued. The Judge recommended that the MRA be accepted and the financing needed to implement it be approved. He also recommended that the Settlement be adopted subject to three modifications that would shorten it from five to three years, eliminate those customer charge increases that would increase customers' bills, and permit some customers to use on-site generation and to form municipal systems without having to pay some or all of their share of the company's stranded costs.2 Briefs on exceptions to the recommended decision were filed on January 9, 1998 by Niagara Mohawk; Staff; the State Consumer Protection Board (CPB); the State Department of Law (DOL); the SIPPs; the National Power Lenders Forum (NPLF); MI; SHAG; Norcen Energy Resources Limited (Norcen); DED; IPPNY; the - -------- 1 Cases 94-E-0098 and 94-E-0099, Ruling Setting Case Schedule, (issued October 17, 1997). 2 The Judge presented various other recommendations that are discussed below in the context of the parties' exceptions. -5- CASES 94-E-0098 and 94-E-0099 Federal Executive Agencies and the Department of Defense (USEA);1 Retail Council of New York and the Buffalo Commercial Building Association (Retail Council); the City of Oswego;2 Public Utility Law Project of New York, Inc. (PULP); Enron Capital & Trade Resources Corp. and Wheeled Electric Power Company (Enron/Wepco); Finch, Pruyn & Company, Inc. (Finch); New York State Electric Gas Corporation (NYSEG); Novus Engineering, P.C.; The Wing Group for the Retail Service Communities; and, the City of Buffalo.3 Briefs opposing exceptions were filed on January 16, 1997 by all but nine of the parties filing exceptions4 and by Central Hudson Gas & Electric Corporation, Long Island Lighting Company, and Rochester Gas and Electric Corporation (jointly Central Hudson/LILCO/RG&E); New York Coalition for On-Site Power Generation (Coalition); ENtrust, LLC; and, ANR Pipeline and Empire State Pipeline.5 - -------- 1 USEA generally supports the recommended decision and takes no specific exceptions to it. 2 The Cities of Fulton and Cohoes, the New York State Conference of Mayors, and the New York State Assessors' Association join in the brief filed by the City of Oswego. 3 The City of Buffalo's brief was filed by Council Member Alfred T. Coppola. 4 DOL, NPLF, IPPNY, USEA, Retail Council, NYSEG, PULP, The Wing Group, and the City of Buffalo did not file briefs opposing exceptions. 5 Written comments continued to be submitted after the recommended decision was issued, including those from the Niagara Chapter of the Sierra Club, State Senator James W. Wright, the New York State Wide Senior Action Council, Inc., and the Genesee Memorial Hospital. -6- CASES 94-E-0098 and 94-E-0099 SUMMARY OF THE MRA AND THE SETTLEMENT1 -------------------------------------- The MRA will terminate, restate, or amend 29 PPAs and provide the SIPPs about $3.6 billion in cash,2 46 million shares of Niagara Mohawk common stock, and a portfolio of financial and physical delivery contracts. Currently, the 29 PPAs affect 1800 MW of capacity and, on average, 11,500 gWh of energy per year for the next five years. They require Niagara Mohawk to pay substantially more than it would cost the company either to generate the same amount of electricity or to purchase it from others. Initially, the MRA reduces by about 5,000 gWh Niagara Mohawk's annual purchases from the SIPPs and makes this electricity available for purchase in the competitive energy market. Most of the electricity remaining under contract to Niagara Mohawk will be subject to financial instruments that allow generators to participate fully in the competitive market. New contracts for 5,000-8,000 gWh annually will be executed and indexed to the cost of competitive natural gas supplies. Various conditions and requirements must be satisfied before Niagara Mohawk and the SIPPs will close the MRA, including the negotiation of restated and amended contracts and their obtaining third-party consents to terminate the existing PPAs and other agreements. The SIPPs expect to enter into new arrangements to restructure their projects economically. Niagara Mohawk must complete its financing arrangements. Both sides must obtain approvals from their boards of directors, shareholders, and partners. While one or more of the SIPPs may, under certain circumstances, drop out of the MRA, Niagara Mohawk remains obliged to close it as long as the company's benefits are not adversely affected by the loss of a particular SIPP. - -------- 1 This section summarizing the MRA and the Settlement is provided for the convenience of the reader. It does not take precedence over the MRA's or the Settlement's terms. 2 $50 million of this amount may either be paid in short-term notes or cash at the company's option. -7- CASES 94-E-0098 and 94-E-0099 The Settlement itself runs for five years. It would reduce average residential and commercial prices by 3.2% during its first three years relative to 1995 levels, including anticipated reductions in the New York State gross receipts tax. Tariff rates for the industrial class would be reduced to below 6(cent)/kWh which is a reduction of 25% by 2000. Because some industrial customers are already receiving discounts, not all customers will experience the 25% reduction. During the settlement term, Niagara Mohawk could defer certain unanticipated costs (above the forecasted amounts) for environmental remediation, nuclear decommissioning, and changes in governmental requirements. But it would eliminate the existing fuel adjustment clause (FAC) and various other bill surcharge mechanisms. In the fourth and fifth years of the settlement period, Niagara Mohawk could file for rate increases, but they would be capped at one percent annually for increases in transmission, distribution, nuclear, customer service costs, and changes in the competitive transition charge (CTC). Beyond this amount, the company's recovery of deferred costs, certain surcharges, and any auction incentive it earns is limited by the rate of inflation. The Settlement allows Niagara Mohawk to recover its MRA-related costs. A MRA-related regulatory asset would be established and this liability would be paid off over the next ten years, if not sooner. The Settlement also provides the company a reasonable opportunity to recover its strandable costs; however, Niagara Mohawk has agreed to forgo most of the earnings it would otherwise receive, and the proposed rate plan is premised on the limited recovery of the company's carrying charges for the MRA-related regulatory asset. Thus, the company would absorb over the next five years approximately $2 billion of its stranded costs due to electric industry restructuring by accepting a very low equity return during the Settlement's term. Otherwise, stranded costs are recoverable from all customers through the CTC, other fees, and access charges. -9- CASES 94-E-0098 and 94-E-0099 The Settlement provides for the divestiture of Niagara Mohawk's fossil and hydro generation assets either at auction or by being spun off to a separate entity. If the auction produces viable results, winning bids would be selected within eleven months of Commission approval of an auction plan. The Settlement allows the company to retain for shareholders a percentage of the auction sale proceeds as an incentive to obtain the maximum amount. Niagara Mohawk may keep its generation assets that receive no positive bids at auction. The Settlement allows Niagara Mohawk's nuclear facilities to remain with the regulated business while the Commission and the company explore statewide resolutions to nuclear power issues. If this matter is not resolved this way, the company would have to file, no later than 24 months, a plan that analyzes all available solutions for the nuclear facilities, including the feasibility of an auction, transfer, or divestiture. Niagara Mohawk would be allowed to pass through to customers its replacement power costs if a nuclear plant is prudently retired. This year, large industrial and commercial customers would have full retail access and, by the end of 1999, all customers would be able to choose their own electricity suppliers. Niagara Mohawk would continue to deliver electricity over its transmission and distribution facilities, and it would continue to be the provider of last resort for customers who do not choose another supplier. The Settlement proposes to decrease electric energy charges and to increase the customer charges that residential and small commercial customers pay. While the classes would, on the whole, experience an overall 3.2% revenue decrease, about 44% of residential and 55% of small commercial customers' bills would increase slightly if this Settlement provision were approved. Under the Settlement, electric rates would be unbundled into separate charges for transmission, distribution, customer service, electric commodities, and the CTC. Customers will have bundled and unbundled service options, and the ability to choose -9- CASES 94-E-0098 and 94-E-0099 a fixed or floating CTC. Niagara Mohawk would charge its customers the actual market price for the electricity it provides. Customers who purchase electricity from a competing supplier would see Niagara Mohawk's energy charge "backed out" of their utility bills. Certain customer service costs would also be backed out of customers' bills. To ensure that customers obtain quality service from Niagara Mohawk, the Settlement includes an incentive mechanism that exposes the company to up to a $6.6 million loss annually if its performance does not measure up to specified standards. To assist low-income customers, the Settlement requires Niagara Mohawk to expand its Low Income Customer Assistance Program (LICAP) and make it available to all qualified customers. The Settlement provides for a third-party administrator for the system benefits charge and $15 million during each of its first three years for demand-side management, research and development, and low-income energy efficiency programs. The Settlement also contains a number of other environmental and public policy provisions, including those concerning the development of an environmental disclosure mechanism, wind and photovoltaic generation, the donation and sale of land holdings of significance to the environment, and the retirement of sulfur dioxide allowances. It also allows the company to operate as a holding company and contains rules for affiliate transactions and standards for competitive conduct. No additional royalty payments for affiliated companies would be required other than those subsumed by the proposed rate plan. The Settlement also addresses tax refunds Niagara Mohawk may receive, and the disposal of certain real estate interests the company no longer needs pursuant to an Occupancy Cost Reduction Initiative. EXCEPTIONS ---------- Master Restructuring Agreement - ------------------------------ Two parties, PULP and the City of Oswego, except to the Judge's recommendation to accept the MRA and approve the financing needed to execute it. Five other parties--the SIPPs, -10- CASES 94-E-0098 and 94-E-0099 NPLF, Niagara Mohawk, SHAG, and DED--except to the recommendations about the need for an escrow account to control the payment of the MRA proceeds, and whether we should oversee negotiations between the steam hosts and power producers. Finally, Norcen seeks certain ratemaking presumptions for any costs Niagara Mohawk incurs to obtain third-party releases from the existing PPAS. The parties' arguments are summarized first, followed by a discussion and our conclusions on these matters. 1. Prudence -------- PULP claims the Settlement's proponents did not demonstrate that the MRA is prudent and that ratepayers should bear its costs. PULP says they failed to meet their burden of proof and that the Judge skirted the issue by limiting his finding. It insists that the MRA's prudence must be addressed directly but, it says, the record is deficient and precludes an affirmative finding. PULP believes the proponents should have compared the MRA to other alternatives, including a continuation of the status quo. Because Niagara Mohawk did not provide a quantitative, present value analysis of competing alternatives, PULP claims there is no way of knowing whether it is prudent for the company to incur debt to finance the MRA. PULP also objects to the SIPPs acquiring almost 25% of Niagara Mohawk's common stock. It claims such an ownership interest guarantees the SIPPs two seats on the company's board of directors that they could use to influence company decisions.1 Rather than support corporate policies that benefit ratepayers, shareholders, and competition, PULP says these directors would favor the SIPPs' interests. Instead of obtaining cash and common stock, PULP considers it preferable that the SIPPs receive utility debt, such - -------- 1 The SIPPs deny that the MRA provides them any seats on the board of directors. They say it only requires Niagara Mohawk to select two directors from a list of ten candidates who are not affiliated with the SIPPs but who are acceptable to them. -11- CASES 94-E-0098 and 94-E-0099 as notes and bonds. Alternatively, it contends Niagara Mohawk should have followed through with its plan to acquire the SIPPs' facilities through eminent domain proceedings. PULP fears that the SIPPs will use their MRA proceeds to purchase Niagara Mohawk generating plants at auction and thereby control the price of electricity in the upstate region. If this were to occur, PULP says, it would defeat our efforts to establish a competitive electricity market. Finally, PULP challenges any suggestion that Niagara Mohawk must take steps to avoid bankruptcy now. It insists that the company has cash resources to sustain it to the year 2000 and there is ample time for Niagara Mohawk to strike a better deal than the one presented here. If need be, PULP says, the company could obtain temporary rate relief were a true emergency to arise. Thus, PULP urges that other alternatives be explored, including a merger and consolidation of Niagara Mohawk with another electric distribution company, before the MRA is accepted. The City of Oswego also criticizes the MRA, saying it is neither the only alternative nor the best one available. Rather than worry about bankruptcy, the City says an approach should be established to provide sufficient rate reductions for residential customers, to avoid adverse consequences for local municipalities, and to better serve the public interest. In response to PULP and Oswego, Niagara Mohawk insists the MRA is prudent, that bankruptcy is the likely alternative, and that corporate insolvency would not serve the public interest.1 As to PULP's call for a net present value analysis, the company says the MRA payments are less than those required by the existing contracts and it denies that the MRA's benefits can be determined by this measure alone. In addition to providing - -------- 1 As to when the company would become bankrupt, Niagara Mohawk concedes that its insolvency is not imminent; however, it says, steps must be taken to arrest its financial demise. Since it sees no better approach emerging in the future, the company urges that the MRA be approved. -12- CASES 94-E-0098 and 94-E-0099 financial savings, Niagara Mohawk points out that the MRA permits it to restructure long-term IPP payments and its debt obligations. It also notes that the MRA provides a basis for rate reductions and a quick transition to competition in the generation market. Also, by forgoing a return on the MRA-related regulatory asset, the company says, it will bear a large portion of the costs of the financing without obtaining recovery from ratepayers. Niagara Mohawk urges us to reject PULP's alternatives, noting that the MRA was produced through years of litigation and arms length bargaining. The company denies that the SIPPs could gain corporate control with their equity interest since they cannot act in concert in a competitive market, and because any SIPP with more than a two percent equity interest must execute a written agreement to remain independent of the other power producers. The SIPPs add that they have neither the intent nor the ability to control Niagara Mohawk's transmission and distribution system, nor can they influence unduly its board of directors. They point to the large number of producers, their diverse ownership and geographical locations, and to the competition among them. Rather than keep their Niagara Mohawk common stock, the SIPPs say it is more likely they will use it to settle creditors' claims. 2. Escrow Account -------------- The SIPPs, NPLF, and PULP except to the Judge's recommendation that the SIPPs provide steam hosts, and others, reasonable assurances of their ability to pay claims and judgments with the MRA-related proceeds and other assets. Absent such assurances, the Judge recommended that we carefully consider the need for an escrow account to serve this purpose. The SIPPs agree with the Judge's recommendations concerning other SHAG proposals; however, with respect to the need for any "reasonable assurances," they insist that nothing in -13- CASES 94-E-0098 and 94-E-0099 the record suggests that they would breach contracts, deplete assets, or attempt to avoid their responsibilities. The SIPPs note that detailed contracts control their relationships with the steam hosts and that the contracts were executed by knowledgeable executives. The SIPPs also claim there are ample assets available to meet their obligations,1 and that they are required by state and federal law to deal fairly with suppliers, contractors, and creditors.2 Given the prevailing contracts and applicable law, the SIPPs insist that no further assurances are needed. They urge us not to provide the steam hosts any new or better rights than those bargained for in the respective contracts. NPLF also considers it unwise to require the SIPPs to provide any assurances to steam hosts beyond those in their contracts. It objects to the use of regulatory authority either to obtain additional assurances or to review the adequacy of any assurances due the steam hosts. NPLF says it is better to refrain from overseeing power producer/steam host transactions. According to NPLF, an escrow mechanism, or any similar process, could adversely affect the SIPPs' secured creditors and prevent the MRA's consummation.3 As to any potential Niagara Mohawk liability to the SIPPs' contractors and suppliers related to the PPAS, the SIPPs say that the MRA provides the company adequate protection because - -------- 1 In addition to MRA-related proceeds, the SIPPs claim they have physical assets and contractual rights with substantial value. 2 The SIPPs observe that the New York Debtor and Creditor Law and the Federal Bankruptcy Code protect creditors against fraudulent conveyances and the improper depletion of assets. They also note that the Delaware, New York, and Illinois Revised Uniform Limited Partnership Acts protect creditors by prohibiting limited partnerships from making distributions that result in liabilities exceeding assets. 3 PULP and the Retail Council are also opposed to the establishment of an escrow account to benefit the steam hosts. They believe the steam hosts' contracts should determine their rights. -14- CASES 94-E-0098 and 94-E-0099 it can insist on adequate releases (or indemnification) or Niagara Mohawk can refuse to close the deal. Niagara Mohawk insists that it is not a party to the SIPPs' dealings with the steam hosts and it has no liability to them. It prefers to remain out of these matters. In response to the parties who oppose an escrow account, SHAG insists one is needed to address concerns about the power producers' contract performances, and to protect thousands of jobs in the upstate region it asserts are otherwise at risk. SHAG fears the power producers will pursue a strategy of protracted litigation and force them to incur significant costs that they may not be able to recover without an escrow account. In SHAG's opinion, the assurances the SIPPs have provided to date are inadequate. SHAG adds that the applicable state and federal statutes do not preclude limited partnerships from making wrongful distributions--they merely provide an injured party a cause of action against a partner who receives a fraudulent conveyance. SHAG insists that an escrow account is needed to preserve the MRA proceeds before they can be conveyed to others. As to the possibility of protracted litigation between IPPs and steam hosts, SHAG says its members cannot afford to incur the operational problems and service interruptions that lawsuits may engender. It also suggests Niagara Mohawk may have to be involved if the disputes go to court. If litigation ensues, SHAG also says there could be job losses and damage to the upstate economy. Given that the MRA is, in part, attributable to governmental urgings that the SIPPs modify the existing PPAS, SHAG considers it proper for us to require an escrow account for the benefit of contractors, suppliers, and creditors which would serve the public interest by forestalling economic harm to them. SHAG also doubts that the MRA would unravel if an escrow account were established. It insists that the steam hosts are not seeking to improve their positions or take unfair advantage of the power producers. SHAG concludes, saying the steam hosts have -15- CASES 94-E-0098 and 94-E-0099 provided reasonable estimates of their costs and damages if the SIPPs cease to perform their contractual duties. 3. Steam Host and Power Producer Dealings -------------------------------------- Contrary to the Judge's recommendation, SHAG urges us to oversee the negotiations between SIPPs and steam hosts. It claims only we are in a position to assist the parties and address their concerns. According to SHAG, performance delays, interruptions, and uncertain thermal supplies would adversely affect the steam hosts' competitive positions and their capital investments. It asks us to promote good faith negotiations and determine when SIPPs may terminate service to steam hosts. It also proposes that we address regulatory issues that may arise between the parties and ameliorate the steam hosts' economic losses by exempting them from the CTC, other fees, and access charges, when necessary. DED agrees with SHAG that steam hosts should be relieved of the CTC and other charges and fees. It urges that such relief not be limited to SHAG members but also be made available to other similarly situated firms. DED believes Niagara Mohawk should be kept whole by ratepayers for any revenues it loses. DED also argues that steam host relief is important to the State's economy. The SIPPs respond that there is little need for us to oversee negotiations with steam hosts. They say there is no strategy to protract negotiations or to assume a litigation stance. The SIPPs point to instances where steam hosts and power producers have reached agreements, and cases where power producers have offered to continue to provide thermal energy under existing contracts. Thus, the SIPPs surmise that only a few steam hosts are threatening the MRA by seeking our involvement in their negotiations. In its reply, Niagara Mohawk opposes SHAG's and DED's request that steam hosts be relieved of the CTC and other transition charges. The company highlights its poor financial -17- CASES 94-E-0098 and 94-E-0099 condition, emphasizes its substantial contribution to the Settlement, and complains that relieving steam hosts of the CTC would unfairly burden the company further. In response to DED's proposal that lost revenues be collected from other customers, Niagara Mohawk points out that residential, commercial, and other industrial customers' rates are already too high and should not be increased further to pick up stranded costs that should properly be allocated to the steam hosts. 4. Third-Party Releases and Ratemaking Presumptions ------------------------------------------------ Norcen, a natural gas supplier to three SIPPs which has "backstop agreements" with Niagara Mohawk,1 considers the MRA imprudent to the extent it does not avoid potential negative effects on third parties such as it. To mitigate the MRA's adverse consequences, Norcen proposed that any costs Niagara Mohawk incurs to obtain third-party consents and releases be presumed to be recoverable in rates. It also proposed that any costs the company incurs to unsuccessfully block third-party rights be presumed to be unrecoverable. The Judge recommended against these presumptions, and Norcen excepts. Norcen says its approach does not require any final determinations now and it only provides the company the benefit of rebuttable presumptions. It claims such presumptions are the regulatory norm for circumstances like these and they should be made explicit. Next, Norcen says Niagara Mohawk can afford to make payments to third parties even taking its MRA financing costs into account. It suggests that any additional costs be recovered from ratepayers through the CTC. Finally, Norcen criticizes the Judge for observing that third parties should look primarily to the SIPPs, and not Niagara Mohawk, for their compensation. In response, it points to the - -------- 1 According to Norcen, these agreements are separate contracts in which Niagara Mohawk has undertaken independent obligations otherwise undertaken by the IPPs. -17- CASES 94-E-0098 and 94-E-0099 backstop agreements Niagara Mohawk executed and says the company has a direct contractual relationship with Norcen for which it is responsible. If the SIPPs do not cover the full enterprise value created by the PPAs, then Norcen believes Niagara Mohawk should remain liable to third parties that have valid claims against it.1 In response, Niagara Mohawk urges us not to establish any ratemaking presumptions at this time. The company says they are unnecessary and premature until a court determines that Niagara Mohawk is liable to Norcen. The SIPPs also ask us not to prejudge Norcen's claims against the company. They say the way the MRA works, ratepayers do not have any financial risks or liabilities running to Norcen. Finally, ANR Pipeline and Empire State Pipeline urge that no third-party entities affected by the MRA or the Settlement be given preferential treatment. It says none of the third-party interests should receive any precedence over the others. 5. Discussion and Conclusion ------------------------- Several parties correctly suggest that the MRA's prudence is the first matter that must be decided in these proceedings because much depends upon this determination. To the MRA's credit, few parties have challenged it even though all recognize this issue as one of the most important in these cases. Only PULP and Oswego present alternatives to the MRA and urge us either to postpone a decision or to explore a different avenue. The other parties who raise issues about the MRA do not challenge it; rather, they either assume it will be implemented and seek to assure that their own interests are protected, or they simply seek our assistance to avoid commercial disputes. Beginning with the procedural issues, we find that the record in these cases is sufficiently developed to evaluate the - -------- 1 In its reply brief, Norcen addresses the reasonable assurances the SIPPs provided in response to the Judge's request and says they are inadequate. Like the steam hosts, Norcen urges that an escrow account be established to protect its interests. -18- CASES 94-E-0098 and 94-E-0099 MRA's prudence. The Settlement's proponents executed their responsibilities and fulfilled their burden of going forward by providing direct testimony supporting the reasonableness of the MRA and the Settlement. Such testimony was provided by the Settlement's primary sponsors, including the company, the SIPPs, Staff, and DED.1 We also find that the Settlement's opponents were afforded ample opportunity to challenge the MRA's merits and to provide us all the information they consider relevant to the MRA's prudence, including alternatives. Turning to the substantive issues, we find that the MRA is a reasonable method to restructure the company's finances and provide Niagara Mohawk the means to provide safe and adequate service, at just and reasonable rates, in New York's emerging competitive electric market. Among other things, the MRA is projected to result in new contracts with IPPs that will afford Niagara Mohawk greater operating flexibility, allowing it to make fewer purchases on a "must take" basis. The new contracts will also give Niagara Mohawk greater flexibility to make purchases from IPPs when needed, at lower per kWh rates. The anticipated cumulative effect of these changes is that Niagara Mohawk, and ultimately ratepayers, will avoid future rate increases previously forecast to total 20% or more over the next few years.2 Indeed, our analysis suggests these new arrangements will yield ratepayer benefits on a net present value basis of approximately $0.5 billion if the future payment streams are discounted at 10%, and more if a lower discount rate were assumed.3 Additionally, the MRA permanently resolves many of the - -------- 1 See, for example, Tr. 12,565-12,568; 12,779-12,795; 13,039-13,042; 13,066-13,073; 13,288-13,292. 2 See Tr. 13,040. 3 The analysis values the transfer of Niagara Mohawk's stock to the SIPPs based on the company's valuation of the regulatory asset as presented in Appendix C to the Settlement. Our prudence determination is premised on that value. -19- CASES 94-E-0098 and 94-E-0099 most difficult issues recently faced by Niagara Mohawk, short of a utility bankruptcy, which no party advocates. Nor are we troubled by Niagara Mohawk using a portion of its common stock to pay the SIPPs. The proponents have convincingly demonstrated that the SIPPs cannot use their combined interests in the company to improperly influence its operations. Were they to attempt to do so, we would investigate any such circumstances and take proper steps to preclude improper manipulations of the competitive market. The opponents of the MRA have also failed to establish that there is any serious alternative that would produce the same or greater benefits than the MRA. PULP, for example, suggests a continuation of the status quo, including the prospects for rate increases, is preferable to the MRA because the company might be able to avoid making payments to the SIPPs by moving closer towards bankruptcy. However, we consider PULP's proposal inferior because of its greater risk of rate increases and for courting the uncertain and adverse effects of a Niagara Mohawk bankruptcy on the rates and service of this and other New York utilities. If efforts were made to put off the restructuring of the company's finances, such action would create pressure for higher rates as more uneconomic purchase power obligations came due. It would also leave the steam hosts and other third parties far more vulnerable than they are under the MRA. In any event, we would continue to face the same issues that are before us now as they would not disappear. We could not put off these matters for long and there is no reason to believe any better solution than the MRA would be presented. PULP suggests that the SIPPs would accept lower payments if the company were closer to insolvency. However, there is no evidence that the proximity of bankruptcy proceedings would lead to the results PULP envisions. The reorganization of the company in a bankruptcy proceeding would entail great uncertainty, and we are not convinced that the public interest is best served by pursuing any such course. -20- CASES 94-E-0098 and 94-E-0099 However, we are concerned about the effect of the MRA on steam hosts. We agree that it is an important public interest consideration bearing on whether we should approve and find prudent the MRA, because the potential effects on steam hosts could have a substantial impact on the economy in Niagara Mohawk's service territory. If satisfactory arrangements between the SIPPs and steam hosts had not been reached, the public interest would not have been served. Consequently, to the extent such arrangements had not been reached we would not have approved the MRA. When we first considered these proceedings in early February 1998, we expressed a strong interest in obtaining prompt resolutions of the issues remaining between the SIPPs and the SHAG members in order to serve the public interest, protect the State's economy, and minimize the risk that the MRA might not close. Such results benefit ratepayers by making clear and certain the company's obligations during the rate plan. Consequently, our Staff assisted these parties and they managed to resolve their private disputes in all cases except one pertaining to Encogen Four Partners, Ltd. (Encogen) and Outokumpu American Brass, Inc. (American Brass). Thus, we are satisfied that acceptable steam host/SIPP arrangements have been reached in all cases except one. We hereby find the MRA to be in the public interest and Niagara Mohawk's conduct to be prudent to the extent that satisfactory SIPP/steam host arrangements are reached. Consequently, if the one outstanding dispute cannot be resolved to the mutual satisfaction of the parties or the Commission, Niagara Mohawk should not proceed to consummate the MRA as concerns Encogen.1 With respect to the parties' exceptions urging us to place the MRA-related proceeds in an escrow account to ensure - -------- 1 As Niagara Mohawk has agreed in the Settlement Agreement, this finding of prudence carries with it no entitlement to recovery by Niagara Mohawk of any return on the regulatory asset associated with the MRA, either during the term of the Settlement or thereafter. -21- CASES 94-E-0098 and 94-E-0099 their availability for steam hosts, the treatment described above adequately addresses these interests. And as to third-party claims, we are satisfied that no liabilities will flow to Niagara Mohawk from the SIPPs' dealings. Finally, there is no need for us to adopt any of the ratemaking presumptions that Norcen proposes. We accept Niagara Mohawk's and the SIPP's representations that their resolution of the matters pertaining to Norcen are not expected to result in any additional costs for ratepayers.1 PowerChoice Settlement Provisions - --------------------------------- 1. The General Public Interest Standard ------------------------------------ Our Settlement Guidelines establish the following standards for assessing a proposed settlement and determining whether it should be approved: A desirable settlement should strive for a balance among (1) protection of the ratepayers, (2) fairness to investors, and (3) the long term viability of the utility; should be consistent with sound environmental, social, and economic policies of the Agency and the State; and should produce results that were within the range of reasonable results that would likely have arisen from a Commission decision in a litigated proceeding. In judging a settlement, the Commission shall give weight to the fact that a settlement reflects the agreement by normally adversarial parties.2 The PowerChoice Settlement proponents maintain, and the Judge generally found, that these criteria are satisfied. However, the opponents, principally PULP and the City of Oswego, - -------- 1 The parties' exceptions concerning the CTC are discussed elsewhere in this opinion and order. 2 Cases 90-M-0225 et al., Settlement Procedures, Opinion No. 92-2 (issued March 24, 1992) Appendix B, p.8. -22- CASES 94-E-0098 and 94-E-0099 claim that the Settlement is generally not in the public interest. PULP argues that the changes to the rate plan recommended by the Judge demonstrate that the Settlement is not in the public interest. Moreover, PULP contends the Settlement is contrary to law and inconsistent with desirable public policy objectives even if all of the Judge's recommended changes were adopted. Only to the extent PULP's position is accepted in its entirety would this party conclude that the Settlement is in the public interest. In general, PULP prefers that restructuring of the electric industry proceed pursuant to legislation. Also, rather than rely on the company's historical operating data and information provided in other proceedings, PULP would prefer that Niagara Mohawk provide more recent financial data and forecasts to set electric rates for 1998 and subsequent years. The City of Oswego meanwhile contends a better analysis of the Settlement's impacts on local municipal units is needed before its reasonableness can be determined. Until the Settlement's effects on local business, employment, and municipal revenues are fully known and detailed, the City maintains, the requirements of the State Environmental Quality Review Act (SEQRA) cannot be completed and action on the Settlement should wait. Niagara Mohawk responds to PULP's general arguments.1 Comparing the Settlement with the vision and goals provided by our Competitive Opportunities decision,2 the company observes that the Settlement reduces electric prices, aids the State's economy, creates a competitive market, and provides customers retail access. It also points out that the Settlement was negotiated in full compliance with our rules and guidelines and - -------- 1 The company, Staff, and MI also respond to the specific points supporting PULP's and Oswego's general opposition to the Settlement. Such points are addressed below. 2 Cases 94-E-0952 et al., supra, Opinion No. 96-12. -23- CASES 94-E-0098 and 94-E-0099 describes it as properly balanced, protecting ratepayers and investors and helping ensure the company's long-term viability. All of this is demonstrated, according to the company, in the Settlement's specific provisions. And, as a wide range of interests--20 parties in all--have endorsed the Settlement, Niagara Mohawk says, this is strong proof that the public interest and the State's environmental, social, and economic policies are well served by the Settlement. Niagara Mohawk also points to the Settlement's specific benefits to refute PULP. The company points, for example, to the rate reductions for all customer classes, lower energy charges approaching marginal costs, and cost-based customer charges. It highlights as well the Settlement's few cost deferrals and surcharges, and the elimination of the fuel adjustment clause. Niagara Mohawk also contends the Settlement will achieve electric generation competition because the divestiture of its non-nuclear facilities will end its vertical integration and control over the generation market. In the next two years, the company goes on, energy suppliers will move into the industrial, commercial, and residential sectors and, by the end of 1999, all customers will be able to choose their own unbundled energy services. Niagara Mohawk contends, as well, that the public interest is served by its corporate and financial structure changes ending the current arrangements with the SIPPs, allowing competitive markets to form, and segregating monopoly services from competitive ventures. The company says it expects to halt its financial deterioration, avoid bankruptcy, and recover uneconomic stranded costs without disturbing the operation of the competitive marketplace. And it will abide by the rules governing affiliate relationships and protecting competitive conduct. In sum, according to the company, no other alternative provides as much benefit and serves the public interest as well as the Settlement. No other party, it says, has laid out an alternative approach that accomplishes as much as the Settlement. -24- CASES 94-E-0098 and 94-E-0099 Any continuation of the status quo, the company warns, will require rate increases to cover its rising costs. Finally, Niagara Mohawk points to the low earnings it will experience for the next three to five years as convincing proof that it is making every effort to serve the public interest through this Settlement. Responding to the City of Oswego, Niagara Mohawk contends its electric rates in a competitive market should not be made to cover the cost of government services for localities that may lose tax revenues due to electric industry restructuring. The company also maintains that, on the whole, the Settlement will provide substantial economic and social benefits for the entire service territory by creating new business opportunities, generating jobs, and promoting economic development. In this context, Niagara Mohawk believes the local impacts of concern to Oswego do not provide good reason to forgo the sale of the company's generation facilities, which is essential to electric generation competition. Many of PULP's and Oswego's public interest criticisms and concerns are discussed below in the context of our issue-specific findings and in the overall discussion and conclusion at the end of this opinion and order. These include, for example, those about the Settlement's proposed rate design, the adequacy and fairness of the proposed rate reductions, and compliance with SEQRA. At this point, however, we observe that legislative action, while possible, is not necessary for us to evaluate the Settlement's reasonableness or to implement its terms. Furthermore, legislation proposed to date does not provide the level of benefits created by the Settlement. Also, it is not necessary for us to have more recent financial results and forecasts in order to evaluate the Settlement's reasonableness. Staff conducted an examination of the company's financial condition over the Settlement term which provides us an ample basis for evaluating the Settlement's rate plan. In sum, we conclude that the Settlement, as modified and conditioned by this opinion and order, is in the public interest. -25- CASES 94-E-0098 and 94-E-0099 2. The Settlement's Revenue Decreases ---------------------------------- a. Exceptions ---------- CPB, PULP and Retail Council consider the 3.2% revenue decreases proposed for the residential and small commercial customer classes to be too small and urge that the classes receive greater decreases. CPB excepts to the Judge's recommendation against the ratemaking adjustments it proposed. At a minimum, CPB believes a 5.2% revenue decrease should apply to these classes and it can be achieved by reducing the company's bad debt expense, increasing the forecast of electric sales, and increasing the amortization period for the MRA-related regulatory asset. Several other parties also propose changes in the amortization of the MRA-related regulatory asset or in the term of the MRA debt financing.1 CPB says residential and commercial customers expect to see lower rates from the changes in the electric industry. CPB notes that these customers experienced substantial rate increases in recent years and it remains unpersuaded that a valid cost basis exists to raise customer charges now.2 Lower prices for residential and small commercial customers, CPB says, would help to improve the economic condition of the service territory. It also believes that Niagara Mohawk's long-term financial viability would improve were lower electric prices implemented for all customers. Retail Council and PULP complain about the disparity in the revenue decreases the Settlement would provide to large industrial and commercial customers, on the one hand, and to small commercial and residential customers, on the other. PULP believes there are sufficient programs currently available to - -------- 1 CPB specifically proposes that the amortization period for the MRA-related asset be extended by a year. Enron/Wepco consider a one to three year extension of the MRA debt financing proper while PULP does not quantify the extension it recommends. 2 Customer charges are addressed below. -26- CASES 94-E-0098 and 94-E-0099 provide electric rate relief to large industrial customers and the Settlement's provisions are not needed. Retail Council argues that the Settlement's industrial rate provisions are flawed and the record does not support disparate rate reductions for the various classes. According to it, economic development and business growth are more apt to come from the commercial and service sectors than from industry. Assuming there are insufficient funds to provide large decreases for the commercial and service sectors, Retail Council contends that all classes should receive comparable revenue reductions. If any customers are to receive disparate rate reductions, PULP urges that low-income customers' rates be reduced by 25%. It says these customers are the neediest and least able to afford even modest bill increases. b. Replies ------- In response to CPB's proposal for larger revenue decreases, Staff and the company say there are no funds available to finance such reductions. They also say any extension of the payment period for the MRA-related debt or the amortization period of the regulatory asset is undesirable. According to Staff, an extension would only shift these costs to future ratepayers and increase the total amount (and the interest payments) ratepayers would have to pay. Staff urges that the company's cash flow not be adversely affected, and the company agrees that its cash flow is needed to sustain its operations. Niagara Mohawk says an extension of the MRA financing is contrary to strandable cost minimization and would unnecessarily extend the transition to competition. The company also contends an extension of the financing period would be unfair to it to the extent it agreed to give up some earnings for the next few years on the condition it can repay the MRA-related debt promptly and thus improve its financial condition. The company concludes by saying an extension of the MRA financing could endanger its ability to obtain this financing and thereby upset the Settlement. -27- CASES 94-E-0098 and 94-E-0099 Niagara Mohawk and Staff fail to see any merit in CPB's proposed adjustments to bad debt expense and electric sales. They are unaware of any support for CPB's position on bad debt, and they are concerned about increasing the company's financial risk exposure. As to the projected sales, Staff observes that CPB did not provide its own sales forecast but compared the company's projections with actual sales. Niagara Mohawk also challenges CPB's policy arguments for an additional two percent rate decrease for residential customers. It insists that the proposed industrial rate reductions are needed to produce competitive, electric rates, particularly if NYPA sales are ignored. The company also disputes the extent to which small businesses can reasonably be expected to drive the upstate economy and provide economic growth. Given that the upstate area remains vulnerable to loss of load and usage reductions from industrial and large commercial accounts, the company insists that the Settlement's industrial rate reductions are of paramount importance. MI also disputes CPB's claim about the economic advantages of expanding large industry versus smaller businesses. Like Niagara Mohawk, MI contends that existing industrial rates remain unattractive, even taking into account low-cost hydropower that is available in limited quantities to specified customers. MI insists that small businesses, by themselves, cannot rehabilitate the upstate region or provide sufficient amounts of sustained economic growth. It says industrial growth is needed to cure the lag in the State's economy dating back to 1989. Staff questions the wisdom of PULP's proposal to use the limited amount of rate reductions available to reduce only low-income customers' rates. Staff contends it would be better to use the amount available to improve the local economy and thereby provide assistance to more customers. Staff also notes that the Settlement's LICAP program, its provider of last resort provisions, the service quality standards, and the revenue reduction for the residential class, all enure to the benefit of low-income customers. -28- CASES 94-E-0098 and 94-E-0099 c. Discussion ---------- We agree that the largest possible rate decrease overall, and the decreases for the residential and commercial classes, are important objectives. In recent cases involving other electric companies, we did not approve the parties' proposed settlements until we were satisfied that all reasonable means for obtaining the greatest amount of rate decreases were exhausted. In this case, we are satisfied that a full examination of the company's ability to provide rate decreases was made and it suggests decreases larger than anticipated in the Settlement cannot reasonably be granted at this time. However, to implement the Settlement in a manner that ensures that S.C. 1 (residential) and S.C. 2 (commercial) customers experience the tariff rate reductions projected from the Settlement relative to current rate levels, we shall require the company to reduce its energy charges using as the base year the most current twelve-month period or the 1995 base year levels as set forth in the agreement, whichever base year results in the lowest first year rate level. With respect to CPB's proposals to further reduce the company's total revenue requirements based on a forecast of the company's bad debt expense and an increase in the company's projection of future electric sales, we find these projections are too speculative to support any further rate decreases at this time. As to various parties' proposals to adjust the term of the MRA financing or extend the amortization of the MRA-related asset on the company's books, we find the Settlement reasonable and adopt it without any change. In reaching this decision, we have balanced the need for reductions in Niagara Mohawk's bundled electric rates with the company's need to be able to finance the MRA and we conclude that the Settlement, as proposed, is fairly balanced. Concerning various parties' suggestions that more economic development can be obtained by shifting more of the overall revenue reduction from the industrial customers to the -29- CASES 94-E-0098 and 94-E-0099 commercial and residential customer classes, we are not persuaded that any such substantial changes should be made. To begin, industrial load is more contestable to the extent industrial customers have a greater ability to shift production. Lower industrial rates help maintain total load and ensure contribution to total costs, benefiting all ratepayers. While it may be true that some economic growth could be stimulated by reducing electric rates for commercial and retail customers more than the amount the Settlement provides, and by reducing the cost of electricity for residential customers, we are not willing to sacrifice the improvements that the Settlement provides in the electric rates for large industrial customers, which provide substantial net employment opportunities in the upstate region. Moreover, if the amount available to reduce rates were used to provide all classes of customers the same percentage reductions, residential and small commercial customers would only see slightly greater reductions--4.3% instead of the Settlement's 3.2% reductions.1 In sum, the larger reductions for the industrial class provide a significant opportunity for economic development as well as a contribution to total fixed costs to the benefit of all customers. Finally, as to PULP's proposal for a 25% rate decrease for low-income customers, the Settlement's LICAP provisions provide substantial benefits designed to assist needy customers. Before we would entertain a proposal like PULP's, the expanded LICAP program should be fully implemented and its results evaluated. Finally, we conclude implementation of PULP's proposal, with the limited resources available, would provide less benefit to the economy overall in comparison with the Settlement. 3. The Settlement's Duration ------------------------- Rather than commit to a five-year settlement term, the Judge recommended that we adopt the Settlement only for three - -------- 1 Tr. 13,048. -30- CASES 94-E-0098 and 94-E-0099 years. He expressed concern about the possibility of electric rate increases in 2001 and 2002, and recommended that the company file in the normal course for any rate increases in either of these years. Niagara Mohawk, Staff, NPLF, MI, and DED except. Niagara Mohawk says the period need not be shortened because the Settlement does not assure it any rate relief for 2001 and 2002. The company points out that the Settlement requires it to fully justify any request it makes for these years and it caps the request at one percent for each year. If this limit is not adopted, Niagara Mohawk says ratepayers may otherwise be exposed to greater rate increases. Niagara Mohawk also says it negotiated for a reasonably assured revenue stream in the Settlement's fourth and fifth years. Without an assurance of adequate revenues in these years, the company says it would be exposed to higher financial risks than it can stand. It also expresses concern that other important Settlement provisions, including the collection of any generation sale auction incentive and recovery of certain deferred and nuclear generation costs, would be undermined if the Settlement's term were shortened. NPLF is also concerned about Niagara Mohawk's financial risks absent the five-year Settlement. It says a shorter period would threaten the viability of the financing needed for the MRA. Staff explains that the Settlement does not provide the company automatic rate increases in 2001 or 2002, and it emphasizes the amount Niagara Mohawk may seek in these years is limited. Staff also contends it is desirable to preserve advantageous Settlement features that apply in the fourth and fifth years, including the service quality incentives, the LICAP enrollment targets, and the affiliate transaction rules and competitive conduct standards. MI points out that the Settlement places a "hard cap" on the amount by which rates can increase. While it would have preferred an absolute prohibition on rate increases, MI considers this aspect of the Settlement to be a reasonable compromise. MI also sees benefits in various Settlement provisions for 2001 and -31- CASES 94-E-0098 and 94-E-0099 2002, including those concerning optional five-year contracts for large industrial and commercial customers and those allowing certain customers to extend their current contracts for the full Settlement term.1 DED also supports a five-year Settlement for reasons similar to those already discussed. The provisions for 2001 and 2002 of primary interest to DED are those governing S.C. 11 contracts and the transition plan for the Economic Development Zone Rider. In response to these exceptions, various parties continue to state concerns about customers being exposed to higher rates in 2001 and 2002. CPB, Oswego, and PULP, for example, generally favor a three-year rate plan. CPB says that even if the rate increases for 2001 and 2002 are not automatic, they remain a real possibility due to the Settlement's provisions. Similarly, PULP says electricity prices for residential customers could escalate significantly under the Settlement due to market changes in energy rates, higher customer charges, company cost increases, deferrals, and surcharges. The parties' exceptions are granted and the Settlement will be approved for five years. As many proponents point out, the Settlement offers substantial benefits in the fourth and fifth years. While the Judge is properly concerned about rate stability in the fourth and fifth years, we are satisfied such stability will be afforded by the Settlement. This is because, as some parties point out, any rate increase requests in those years is not automatic and they will be subject to full review. The company's possible rate increases for non-commodity costs are capped at one percent and those increases, together with surcharges and deferral recoveries, are subject to an overall - -------- 1 While MI seeks to preserve a five-year rate option for industrial customers that would lock in their Niagara Mohawk electric commodity and CTC charges, Enron/Wepco is concerned that the company will use this option to provide large customers below market rates and preclude marketers from competing for their business. -32- CASES 94-E-0098 and 94-E-0099 inflation cap. Moreover, our current forecasts suggest the need for increases in these years will not be great and they can be ameliorated by anticipated savings related to recent interest rate reductions.1 Finally, we are concerned that shortening the Settlement's term to three years could adversely affect the terms and maturity of the MRA-related debt issues, if not their feasibility overall. In sum, the risks of significant rate increases are sufficiently minimized that the Settlement should be approved for its full term. 4. Customer Charges ---------------- The Settlement proposes to increase the customer charges for residential and small commercial customers over the next three years as energy rates decline. For low-use customers, the higher customer charges would increase their electric bills by modest dollar amounts. The Judge recommended against any customers experiencing bill increases due to the Settlement, seeing such results as contrary to the objective of decreasing customers' electricity costs. The company and Staff except, while CPB, DOL, PULP and Oswego oppose the Settlement's proposed customer charge increases and the exceptions. - -------- 1 The financial forecasts supporting the Settlement (Appendix C to the agreement) are premised in part on an assumed average interest rate of 8.5% for the senior subordinated notes needed to finance the MRA. Since the time those forecasts were made, interest rates have declined. While the actual interest rates on the senior subordinated notes will not be known until the company issues the notes in the near future, we are requiring the company to defer the interest rate savings between the forecasted 8.5% and the actual rate for each of the five years of the settlement period. To the extent the Commission reduces rates beyond the levels in PowerChoice or the company applies for a rate increase in the fourth or fifth year, as allowed by the Settlement's terms, the deferred interest rate savings may be used to fund such reductions or offset any such increase that may be authorized. To the extent a deferred interest rate savings balance remains at the end of the fifth year, we will decide at that time how best to use the deferred savings. -33- CASES 94-E-0098 and 94-E-0099 The excepting parties insist there are good reasons for the Settlement's rate design provisions. The company, for example, contends it is proper to align energy rates with marginal energy costs. Staff agrees, noting the benefits of economically efficient pricing that customers should see in a competitive energy market. The company and Staff point out the customer charge proposal also will help to eliminate the inherent unfairness of large-use customers paying for costs that small-use customers should bear. Niagara Mohawk also emphasizes that it prefers to recover its fixed costs through customer charges so any decline in sales will not affect the recovery of these costs. Given its generally poor financial condition, the resulting revenue stability will help minimize the company's risks. Anticipating arguments that customer charges should not be increased for low-income, low-use residential customers who may not be able to afford modestly higher bills, Niagara Mohawk and Staff say LICAP provides them sufficient assistance. Staff also notes that many low-income customers who use large amounts of electricity stand to benefit substantially from the proposed changes. Finally, highlighting the Settlement's substantial advantages for average and high-use residential customers, Staff points out that under the Settlement energy charges would decrease by about 17%. It notes that small commercial customers would also see significant energy rate savings. Staff believes that such reductions would improve economic development in the service territory, making it more attractive for small businesses to expand their operations.1 In response, CPB denies that low-use customer rates and costs are out of line. According to CPB, there is conflicting cost of service evidence on this point and, in a competitive - -------- 1 Staff observes that the Retail Council Supports the Settlement's rate design approach for small commercial customers. -34- CASES 94-E-0098 and 94-E-0099 environment, a new study may be needed to adequately address its differences with Staff. On the basis of the cost data CPB would credit, it says that non-heat (low-use) customers are not being subsidized by high-use, electric heating customers. CPB also believes that many low-income, low-use residential customers would experience unacceptable bill increases were the Settlement approved. And it remains concerned that higher minimum bills will lead to lower sales, greater uncollectibles, and customer disconnections. Retail Council characterizes the Judge's rate design recommendations as regressive and counterproductive. It urges that the electric bill components be realigned, as the Settlement provides, to more accurately reflect marginal customer and energy costs. In this regard, it says the Settlement's rate design provisions are better than the Judge's status quo recommendations. If we adopt any customer charge increases, PULP says we should also adopt its low-income rate proposal. DOL urges us not to allow any bill increases pursuant to the Settlement. Oswego responds to Staff by claiming that many residential customers may be worse off by the Settlement's effects on local employment, disposable income, and municipalities with utility generation facilities. The Settlement's proponents have offered valid reasons why it would be beneficial to increase the customer charges applicable to the residential and small commercial customer classes. In previous rate proceedings, we have permitted these charges to increase for many of the reasons that the proponents have advanced here. But this portion of the Settlement has generated substantial public reaction. At a time when we are fostering a transition to competition and economic development, the Settlement's proposed customer charges would have the undesirable effect of increasing the bills for many of the company's residential and small commercial customers. This holds the potential for customer confusion and skepticism about the benefits of competition. In these circumstances, we shall -35- CASES 94-E-0098 and 94-E-0099 exercise our discretion on this rate design matter and defer a final decision on this aspect of the Settlement until unbundled rates are filed for residential and small commercial customers. No changes from base period levels will be made in these charges for now. 5. Stranded Cost Recovery ---------------------- a. Exceptions ---------- The Judge generally recommends the use of a competitive transition charge (CTC) and a system of access charges and other fees to provide Niagara Mohawk the revenues it needs to pay the stranded costs associated with restructuring its above-market purchase power agreements and divestiture of its fossil generation facilities. However, he also recommends that some amount of stranded cost bypass be allowed for on-site generation and municipalities. Numerous exceptions to these recommendations have been filed by Niagara Mohawk, Staff, MI, PULP, CPB, Enron, Novus, and The Wing Group. Niagara Mohawk contends that stranded cost bypass for self-generators and municipalities would be unfair to the remaining ratepayers and would constitute poor public policy. It maintains as well that uneconomic on-site generation should be discouraged and that all customers should pay stranded costs, other than the $2 billion the company will absorb during the term of the Settlement. The company observes that the debt needed to finance the MRA can only be obtained if it has sufficient revenues. If any customers are allowed to bypass the CTC, access charges, and other fees, the company contends, the debt market may not be sufficiently assured of Niagara Mohawk's ability to repay the MRA-related debt. This could prevent the financing or result in higher debt costs. The company also doubts that any amount of stranded cost bypass can reasonably be controlled and limited. Staff agrees that stranded cost bypass must be prevented in order to finance the MRA. Given the company's already poor financial condition, Staff is concerned about any -36- CASES 94-E-0098 and 94-E-0099 loopholes for customers to bypass the CTC. Staff also supports access charges and other fees to recover embedded investments and discharge commitments before customers can be allowed to bypass the system. Staff distinguishes between economic and uneconomic on-site generation and notes that only uneconomic alternatives to the company's services are discouraged under the Settlement. While MI supports the Settlement, it also believes that customers who have determined that on-site generation is a viable alternative should be allowed to obtain backup service from Niagara Mohawk without paying a CTC, access charges, or other fees. If the Judge's recommendations on this matter were to be adopted, it proposes that the parties devise suitable criteria for an on-site generation program. PULP opposes stranded cost bypass by any customers other than perhaps large industrial and commercial customers who have competitive alternatives.1 CPB opposes the CTC mechanism altogether, claiming it is anti-competitive. According to CPB, Niagara Mohawk should simply reduce its rates, achieve greater efficiencies, and absorb any stranded costs it cannot recover within these constraints. It fears the company will use the CTC to engage in predatory pricing and thereby harm the competitive market. It is also concerned about the CTC being used to reverse the modest rate decreases that residential and small commercial customers obtain from the Settlement. Enron/Wepco oppose the CTC to the extent the level of this charge can vary over time, or "float" pursuant to the Settlement's terms. Like CPB, they say the charge is incompatible with the operation of a competitive market. They contend the floating CTC will be a significant barrier to entry - -------- 1 With respect to these customers, PULP believes we should reconsider whether they should be able to avoid making CTC payments. In general, PULP considers it inequitable for stranded cost recovery to shift from some customers to others. It suggests that the existing exemption for customers with flexible negotiated rates cease when their contracts end. Only in those cases where the CTC would force a customer off the system would PULP support a waiver. -37- CASES 94-E-0098 and 94-E-0099 by competitors, precluding them from offering consumers a fixed-price product in competition with Niagara Mohawk's. These parties urge that a fixed CTC be established from the start. They claim customers can be assured of rate decreases without Niagara Mohawk's floating CTC and they point to other settlements that contain fixed CTCs and provide specified rate decreases for bundled service. Novus, meanwhile, urges establishment of an on-site generation program that does not have the Settlement's "suppressing" effects. Specifically, it proposes that up to 8 MW of load currently served by Niagara Mohawk be allowed to convert to on-site generation without having to pay access charges. It says this amount of self-generation would have virtually no impact on the company but would allow some beneficial self-generation to develop in the service territory. Finally, The Wing Group, on behalf of various local communities interested in municipalization, points to substantial amounts of customer dissatisfaction with the rates Niagara Mohawk charges. It urges that all types of on-site generation be exempt from stranded cost recovery. b. Replies ------- Niagara Mohawk insists that no substantial amount of CTC bypass can be tolerated. Responding to MI, the company says it is inappropriate for this party, as a signatory to the agreement, to support any Settlement modifications, even those proposed by the Judge. In response to CPB, Niagara Mohawk reiterates that it will absorb $2 billion of stranded costs and that it should not be asked to absorb any more. Staff says CPB has misconceptions about the proposed CTC and explains that the CTC is included in the company's bundled rates, which will be unbundled and reduced during the Settlement term. According to Staff, the overall Settlement approach enhances competition and does not allow the company to use the CTC to abuse the marketplace. -38- CASES 94-E-0098 and 94-E-0099 The company opposes PULP's proposal for ratepayers and shareholders to share stranded costs as this too would increase the amount of stranded costs for it to absorb. Staff responds to PULP's criticism of the rates applicable to large industrial and commercial customers by stating that the CTC applies to these customers despite any energy discounts they may receive to remain on the electric system. Responding to Enron/Wepco, Niagara Mohawk and Staff say a floating CTC guarantees that customers experience fixed and stable prices, which are important to several parties who executed the Settlement and to ratepayers generally during the transition period. The company also says it cannot afford to undercollect stranded costs, and a fixed CTC applicable to all customers would expose it to this risk. Finally, Niagara Mohawk says Enron/Wepco can only speculate that a floating CTC will hinder competition since no one knows how retail marketers will offer their services and products. If it interferes with competition, the company says we can modify the transition process accordingly. Staff says that Enron/Wepco only present theoretical arguments against a floating CTC that do not pertain here. Staff insists it is not possible to implement a fixed CTC for all customers immediately without exposing the company to an unacceptable amount of financial risk. Further, Staff argues that Enron ignores the relationship between the wholesale market and retail rates. According to it, the mixture of fixed and floating CTCs provided in the Settlement carefully balances the hedged and unhedged power facing Niagara Mohawk in the wholesale market. Staff concludes that the Settlement's mix of fixed and floating CTC options represents the best retail package that could be fashioned given the existing and restructured IPP contracts. Responding to The Wing Group, Niagara Mohawk says this party cannot credibly oppose the company's recovery of stranded -39- CASES 94-E-0098 and 94-E-0099 costs given that it is affiliated to a firm that wants full recovery of its strandable costs.1 Various other parties oppose the company's and Staff's positions and urge that a limited amount of stranded cost bypass be allowed for on-site generation and municipal interests. These parties include Oswego, ENtrust, Coalition, Finch, and Novus. They doubt that a limited amount of CTC bypass for these interests would expose the company to any large risks, and they urge that competition from on-site generation not be precluded. They note that this alternative has been historically available to customers and they claim it should not be forestalled now. c. Discussion ---------- We previously determined that it is prudent for Niagara Mohawk to execute the MRA in order to reduce the financial burdens due to its uneconomic purchase power contracts with the IPPs. This significant transaction benefits all the company's customers by mitigating a long-standing problem and by making the transition to a competitive generation market possible. A non-avoidable CTC is both an important element to Niagara Mohawk's ability to issue over $3 billion of debt to fund the IPP buyout and a reasonable means to recover the costs of the MRA from all who benefit from it. Were any customers who currently use the company's generation resources able to bypass the CTC, aside from grandfathering self-generation investments already made, this would unfairly require the remaining customers on the system to pay costs which are fairly and properly attributable to departing or bypassing customers. To ensure that the CTC remains manageable, and does not become too large a burden for any group of customers, we will approve the Settlement's terms imposing certain fees in limited circumstances and structuring backup rates to recover stranded costs from on-site generators. We note that the Settlement states that the access fees related to on- - -------- 1 This point refers to The Wing Group's affiliation to Western Resources, Inc. -40- CASES 94-E-0098 and 94-E-0099 site generators taking back-up service are designed to discourage uneconomic bypass. Consistent with this goal, we will require that the company's implementing tariff be designed to avoid any harsh results for customers who can demonstrate that, as of October 10, 1997, they had made a decision to proceed with and had made a substantial investment in on-site generation, effectively grandfathering them from the effects of the new rates.1 Any municipality that forms its own electric system will be required to pay for the generation facility costs that are attributable to the customers who transfer to municipal service. Consequently, we are granting the Settlement proponents' exceptions concerning stranded cost recovery.2 With respect to CPB's and Enron/Wepco's concerns about the CTC being anti-competitive, their arguments are unpersuasive. The application of this charge to all customers helps to ensure that all generation will compete on an equal footing, thus furthering development of a competitive market. Through our continuing oversight of the company, and by enforcing applicable Settlement provisions, we shall ensure that Niagara Mohawk does not engage in predatory pricing, or any other anti-competitive behavior during the transition to a competitive market or after a fully competitive market is established. Also, the CTC cannot be rigidly fixed for all customers initially without sacrificing the rate decreases that customers are expecting to see in the company's bundled rates pursuant to the Settlement. - -------- 1 Such customers shall be considered the same as existing S.C. 7 customers under Settlement Sec.4.11.4.1. To implement this requirement, we are directing Niagara Mohawk to file a proposal within two weeks and interested parties will have ten days to comment on it. 2 MI proposed that the parties meet to consider ways to implement the Judge's recommendations but no such meetings are necessary. -41- CASES 94-E-0098 and 94-E-0099 6. Enron/Wepco Rate Proposals -------------------------- a. Energy Backout Rate ------------------- The Judge recommends that we reject Enron/Wepco's proposal to increase the amount to be backed out of Niagara Mohawk's bundled rates when customers obtain commodity services from other marketers. He considered the Settlement's provisions covering this matter adequate for the limited period before the independent system operator (ISO) begins to operate. He saw no need to expend any substantial resources to devise a better administrative method for setting this credit before a fully competitive market emerges. Enron/Wepco except. These parties say the Settlement's backout rate is too low and anti-competitive because it does not reflect all the costs that they claim an equally efficient rival would bear. At a minimum, Enron/Wepco urge that the backout rate be adjusted for property taxes, and that the New York Power Pool's (NYPP's) 18% reserve requirement be substituted for the 14% figure the company estimates assumed. They say there is no reason not to use the NYPP's reserve requirements for 1998. With respect to property taxes that were excluded from Niagara Mohawk's original estimates, Enron/Wepco attempt to demonstrate how this item could affect the calculation of generation costs. Enron/Wepco say that Niagara Mohawk forecasted $15/kW for capacity without accounting for property taxes. In 1997, the average real estate taxes the company paid on its steam stations was $22.50/kW. Thus, they maintain that an equally efficient competitor should receive a $37.50/kW capacity credit. In addition to this, Enron/Wepco point to other costs (administrative and general costs, depreciation, and allowances for funds used during construction) excluded from the Settlement's backout rate. In sum, they say the Settlement's backout rate provisions are so low as to preclude rivals from entering the market. Enron/Wepco insist that a properly designed backout rate should cover up to three to five years worth of generation costs. But, they say, the Settlement's provisions neither cover -42- CASES 94-E-0098 and 94-E-0099 the costs for this period nor do they otherwise reflect long-run incremental costs that are more properly used to set backout rates. Finally, as a check on Niagara Mohawk's backout rate, Enron/Wepco compared it to the then available backout rate proposal in the NYSEG case. They say that the Judge's recommendations here are inconsistent with those made by a different Judge in the NYSEG case, which they prefer. In response, Niagara Mohawk insists that the parties negotiated a proper backout rate, and the forecasts of market prices they relied upon are reliable. It says the long-run incremental cost (LRIC) method Enron/Wepco favor should not be used to administratively set the backout rate because past attempts to do this resulted in much too high prices for independent power production. According to Niagara Mohawk, competition currently exists in the generation market and it requires no stimulation before the ISO operates and the company divests its generation facilities. Niagara Mohawk admits that the Settlement's backout rate is low but says it is not because the rate omits costs. It insists that the low backout rate reflects low market prices and a surplus of electricity that is driving energy prices down. Addressing property taxes specifically, Niagara Mohawk says the Settlement's backout rate need not be adjusted for this cost because an equally efficient ESCO can purchase electric commodities in the open market and need not build or operate any generation facilities. Thus, an ESCO may never incur any property taxes and, the company says, it would be incorrect to adjust the backout rate for this. With respect to NYPP reserve requirements, Niagara Mohawk insists a 14% requirement is reasonable for 1998. It says the current 18% standard is not pertinent because the New York State Reliability Council is expected to only require a 14% reserve when the ISO begins to operate later this year. In any event, Niagara Mohawk says this item has only a small effect on the backout rate. -43- CASES 94-E-0098 and 94-E-0099 Finally, the company says whatever the settlement in the NYSEG case is, it is not good precedent here and its circumstances are distinguishable in any event due to different financial circumstances between the two utility companies. Staff criticizes Enron/Wepco's backout rate proposal for not reflecting the current market price of power and as posing a serious risk to the proper development of a competitive market. Like Niagara Mohawk, it observes that marketers purchase power in the open market from competing suppliers at market prices. Because rivals need only incur these market prices, Staff suggests no specific allowance is needed to cover Niagara Mohawk's property taxes or any of its other costs. Staff concludes that it is market prices, not Enron/Wepco's LRIC approach, that provide the proper backout rate. The company and Staff are correct that the backout rate proposed here requires no change and this Settlement provision is approved. As the company notes, competition has begun and market-based transactions are occurring. The backout rate is properly pegged to a market price and the forecast of such prices negotiated by the proponents is both reasonable and the only such forecast presented here. Finally, we concur that the financial risks faced by Niagara Mohawk and NYSEG are different--among them being Niagara Mohawk's agreement to accept poor earnings--and, in any event, the NYSEG settlement is not precedential. b. Niagara Mohawk Energy Sales to ESCOs ------------------------------------ Enron/Wepco proposed that Niagara Mohawk be required to sell energy to them and other marketers at the same price backed out of the company's bundled rates. The company responded, saying it would sell to them but only if it had hedged power left from meeting its retail customers' needs. The Judge accepted Niagara Mohawk's response; however, Enron/Wepco continue to urge that the company be unconditionally required to provide them energy at the Settlement back-out rate. They point to the Dairylea pilot program and other utility companies' retail access programs where this approach was used. They say a similar stop- -44- CASES 94-E-0098 and 94-E-0099 gap measure is needed here so competition can begin without ESCOs incurring losses. Niagara Mohawk responds that it may not have sufficient amounts of hedged power to provide electric commodities to ESCOs. And, it says, the company should not be required to bear the financial risk of providing unhedged commodities to marketers. Requiring Niagara Mohawk to sell at its backout rate is reasonable only to the extent the company has a sufficiently hedged wholesale supply. And the company is willing to sell to ESCOs up to that point. Beyond it, however, the effect of any such requirement would be to expose the company to an unknown, potentially significant risk, at a time when it is already in a weak position. For this reason, Enron/Wepco's approach is not reasonable here and its exception on this point is denied. c. Alternative Residential Rate Design ----------------------------------- The Judge found that the record did not demonstrate sufficiently the merits of Enron/Wepco's alternative rate design for the residential class. He recommended that the proposal be examined further and addressed when the company presents its unbundled tariffs for this class. This approach is similar to the one we adopted in the Orange & Rockland rate restructuring case. Enron/Wepco and Niagara Mohawk except. Enron/Wepco urge that their alternative rate design be adopted now since, they believe, they have shown its clear advantages, including additional revenues for Niagara Mohawk. They also say there would be no adverse customer impacts under their proposal as residential customers' total bills would remain the same as those produced by the current rate design. But, they say, customers would benefit from the new design's lower usage-sensitive energy prices. On the other hand, Niagara Mohawk excepts to further consideration for the Enron/Wepco proposal when it files unbundled rates. It says the proposal has never been tried or fully analyzed. It also contends that the proposal presents unacceptable financial risks and it fears that no additional -45- CASES 94-E-0098 and 94-E-0099 revenues would materialize. According to Niagara Mohawk, Enron/Wepco overestimate the price elasticity for the proposed price change. And, the company is not sure that customers would like the alternative design which it considers to be impractical and too costly to administer. Enron/Wepco respond by denying their proposal creates any financial risk for the company and they stand by their price elasticity estimates. According to them, there is no good reason to delay a move to lower energy rates, given that customer charges can be adjusted to maintain overall bill levels. They say that a similar approach has worked well in the telecommunications industry and suggest this could also work in the electric industry. Staff responds to Enron/Wepco, saying the Judge properly put off their alternative to when the unbundled tariffs are filed. It says this is the best way to deal with the controversy and uncertainty surrounding the proposal. We shall adopt the Judge's recommendation to handle this matter just as we did in the Orange & Rockland case.1 This rate design proposal is basically the same as the one we previously considered in the Orange and Rockland case, and it has not been adequately developed for us to consider adopting it. The proposal may therefore be raised again by Enron/Wepco and be explored further when unbundled rates for the residential and small commercial customers are filed. 7. Generation Auction Incentives ----------------------------- The Judge recommends we adopt CPB's proposal to limit the financial incentive payments to Niagara Mohawk when it divests its fossil and hydro-generation facilities to 10% of any gain. However, contrary to the CPB proposal that the ratepayer share of the sale proceeds be used to fund rate reductions, the - -------- 1 Case 96-E-0900, Orange and Rockland Utilities, Inc. - Electric Rates/Restructuring, Opinion No. 97-20 (issued December 31, 1997), mimeo pp. 16-18. -46- CASES 94-E-0098 and 94-E-0099 Judge recommends instead that it be used to pay off stranded costs. Niagara Mohawk, Staff, IPPNY, CPB, PULP, and Oswego except. The company and Staff support the Settlement's auction incentive provisions. Concerning the proposed incentive payments for any sales made below book cost, they insist that the plants' remaining original costs are irrelevant because the auction seeks bids based on future expectations of electric generation costs and revenues, not the plants' historic value. The company also contends that ratepayers are fully responsible for its stranded costs; therefore, they benefit from any proceeds obtained at auction even if the plants are sold at a loss. In further support of the Settlement's incentive provisions, the company and Staff claim they properly align ratepayer and shareholder interests and the graduated payment feature reflects the fact that higher bids and sales prices are harder to obtain. Nonetheless, if higher than expected prices are achieved, they say, the Settlement precludes the company from enjoying a windfall. These proponents claim the Judge's proposal lacks these attributes. Niagara Mohawk, Staff, and IPPNY also maintain that incentives greater than the Judge proposes are needed to maximize the sale price of the generation facilities. IPPNY notes that the Settlement's auction incentive provisions are designed to discourage the company from rejecting bids and to promote an auction over a spin-off of the generation facilities to another entity. These three parties assert that the auction incentive provisions are integral to the Settlement and shareholders expect higher equity earnings, if the auction proves to be successful, in exchange for otherwise accepting lower earnings. Niagara Mohawk also argues it is entitled to the full incentive contained in the Settlement, given its willingness to divest its non-nuclear generation facilities. Similarly, Staff points to the benefits of the company's withdrawal from the State's electric -47- CASES 94-E-0098 and 94-E-0099 generation market and argues such action warrants a strong incentive. CPB excepts to the recommendation that the auction proceeds be used to pay stranded costs. It urges that they be used instead to provide residential and small commercial customers greater rate decreases. Only after larger rate reductions are achieved for these customers would CPB use any auction proceeds to reduce stranded costs. CPB argues that public acceptance of the Settlement can only be gained with larger rate decreases and the auction proceeds provide a painless way to obtain them. It suggests that a similar issue in the Orange & Rockland rate restructuring case was resolved as it proposes. PULP is opposed to divestiture by Niagara Mohawk until comprehensive legislation is passed. Alternatively, it urges that additional hearings or proceedings be held concerning the company's generation divestiture plan filed on December 1, 1997. Oswego urges that comments on the company's December 1997 divestiture plan not be considered until after we act on the Settlement (a decision already made). However, until the economic and other effects of divestiture of generation facilities are fully evaluated and the impacts on local communities are known, Oswego says we should not find the Settlement to be in the public interest. According to Oswego, Niagara Mohawk has not provided sufficient concessions to warrant as large a financial incentive as the Settlement provides. In response to PULP and Oswego, Niagara Mohawk sees no need for further hearings or legislative action. The company also suggests we fully addressed the merits of utility generation divestiture in our Competitive Opportunities decision and argues our prior conclusions are not undermined by the record here. In response to Staff and the company, CPB insists that Niagara Mohawk should not receive an incentive for sales made below book value because ratepayers will have to pay for more stranded costs as a result. It argues the company should only be rewarded for obtaining a gain. As to the amount of an incentive -48- CASES 94-E-0098 and 94-E-0099 the company should be allowed to earn, CPB says a 10% incentive is ample and anything more, in its view, would be excessive. We find with respect to Niagara Mohawk's non-nuclear generation units, except for the Oswego facilities,1 15% of any gain the company achieves above net book value is a sufficient and proper incentive for it to obtain the best possible prices for these facilities at auction. As to Oswego's and PULP's procedural proposals, having decided to approve the Settlement with the modifications presented herein, we will next consider Niagara Mohawk's divestiture plan and the parties' comments concerning it. Given the ample record in these proceedings, there is no need for any additional hearings concerning the divestiture of the company's non-nuclear generation facilities. 8. Nuclear Generation Facilities ----------------------------- The Settlement provides that: [t]he nuclear assets held by Niagara Mohawk will remain part of [the transmission and distribution company] as a separate business unit until they are either transferred or divested. Niagara Mohawk will continue to pursue statewide solutions for its nuclear assets through discussions in formation of NYNOC and in any generic proceedings established by the Commission. Statewide solutions for nuclear plants will be explored before other potential solutions. . . . Absent a statewide solution, Niagara Mohawk commits to file a detailed plan, analyzing the proposed solutions for its nuclear assets, within 24 months of this Settlement Agreement. The plan will consider the feasibility of auction, transfer, and/or divestiture of Niagara Mohawk's nuclear assets. The detailed plan will undergo an - -------- 1 We are approving the Settlement's incentive provisions for the auction of the Oswego Steam Station. -49- CASES 94-E-0098 and 94-E-0099 appropriate level of Commission review and approval to be concluded on an expedited basis.1 The Judge recommends approval of this Settlement provision, and NYSEG excepts. Rather than pursue a statewide solution or consider a Niagara Mohawk plan thereafter, NYSEG urges that the company be required to auction its nuclear assets now to resolve this issue expeditiously. It considers the Settlement too open ended and insists that a continuation of the status quo is intolerable and contrary to our goal of obtaining complete divestiture of all utility generation facilities. NYSEG takes no solace in the fact that nuclear generation matters are currently being considered in Case 94-E-0952. Niagara Mohawk, Central Hudson/LILCO/RG&E, and Staff respond to NYSEG. The company says the Settlement approach is best because it neither delays the resolution of nuclear matters nor forestalls their proper consideration. It considers Case 94-E-0952 a better place to determine whether a nuclear auction should be pursued. The other utility companies agree with Niagara Mohawk on the latter point and dispute NYSEG's assertion that an auction would provide certainty. They say there are regulatory approval problems inherent with an auction that may not be easily resolved. Staff responds that the Settlement is neither adverse to nor inconsistent with NYSEG's preference for a nuclear auction because that result is not precluded. Staff insists that all worthy alternatives should be examined in Case 94-E-0952 before a decision is reached. It is clear that the disposition of Nine Mile 2 directly involves the other utilities and any resolution would affect each of them. Rather than seek to resolve such matters here, the Settlement properly acknowledges the currently ongoing - -------- 1 Settlement Sec.3.3.1. -50- CASES 94-E-0098 and 94-E-0099 statewide efforts and provides a reasonable period for Niagara Mohawk to submit its own proposal if the ongoing efforts fail. Moreover, we are considering divestiture of nuclear generation in Case 94-E-0952 and we have no plans to delay that proceeding. NYSEG's exception is therefore denied. 9. Niagara Mohawk's Identity and Royalty Payments ---------------------------------------------- a. Use of the Corporate Name ------------------------- Enron/Wepco proposed that Niagara Mohawk's affiliates be precluded from using the corporate name and logo in their marketing, particularly in the company's service territory. The Judge did not recommend their proposal and these parties except. Enron/Wepco say the Niagara Mohawk affiliates will obtain a competitive advantage from using the company name but it does not provide them with any greater efficiency, which should be the primary determinant of whether a competitor succeeds. In contrast, they say, new market entrants will have to expend substantial sums to establish their own brand names. Alternatively, if the affiliates are allowed to use the utility name, Enron/Wepco urge that a royalty be imposed to capture the name's value. These parties say one or the other approach is needed to ensure that affiliates do not dominate the energy services market simply by virtue of their association with the incumbent utility. Niagara Mohawk replies that its affiliates should be allowed to use its name. It says the name's value is uncertain but, in any event, its use should not be restricted nor should its affiliates be handicapped from the start. Other potential competitors, according to Niagara Mohawk, are large, well-funded, and fast becoming known to the consuming public. In this context, the company says there is no reason to place it at a competitive disadvantage. We are not persuaded that a utility must be denied the use of its name and identity in its own service territory for competitors to be able to enter the market and compete -51- CASES 94-E-0098 and 94-E-0099 successfully. Whether or not a utility affiliate is known to operate in the same market, competitors will, in any event, have to establish themselves and advertise. The exception is denied. b. Royalty Payments ---------------- The Settlement provides that the rate plan: . . .shall be in lieu of any and all "royalty" payments that could or might be asserted to be payable by any affiliate or imputed to [Niagara Mohawk] or credited to [Niagara Mohawk] customers at any time, including after the expiration of this Settlement.1 The Judge recommends that royalty payments not be required during the term of the Settlement because the company's low earnings during this period could reasonably be considered to subsume a royalty. However, he recommends that we not accept this provision to the extent it would exempt the company and its affiliates from making royalty payments indefinitely, even beyond the term of the agreement. The company, Staff, and PULP except. Niagara Mohawk says its low earnings under the Settlement and the $2 billion of stranded costs it is absorbing warrants permanent elimination of any royalty. As elsewhere, it insists that this provision is integral to the deal it struck. And it insists that the company's affiliates should not be hindered in their future competitive efforts by having to make any such payments. The company believes that changes in the electric industry since the Commission first adopted its royalty policy support the Settlement's approach. It also points to our approval of a recent settlement involving Consolidated Edison Company of New York, Inc. as precedent supporting approval of this Settlement provision. - ------- 1 Settlement Sec.9.3.1. -52- CASES 94-E-0098 and 94-E-0099 For its part, Staff points to the Settlement's affiliate transaction rules and its code of competitive conduct as reasons for eliminating royalty payments. It observes that, once the royalty requirement is dropped and affiliates begin to use the corporate name, it will become more difficult to apply the royalty concept fairly thereafter. Staff therefore argues against any reexamination of this matter at the Settlement's end. If Niagara Mohawk forms a holding company, PULP contends unregulated affiliates that use the corporate name and advertise their affiliation should be required to pay royalties to compensate the regulated utility company for the competitive value of this use. The company's current financial condition, according to PULP, is no excuse for not requiring a royalty, especially given that a royalty would be a beneficial source of new revenues. Further, PULP contends Niagara Mohawk should receive substantial royalty payments given that the Settlement allows the company to pay up to $625 million of dividends to a new parent company. In response to PULP, Niagara Mohawk argues that the Settlement's corporate structure and dividend payment provisions are reasonable and supported by the record. The company maintains that the rate plan subsumes an unquantified but certain sum to compensate for the use of the corporate name and argues that royalty requirements are fast becoming obsolete in any event. Staff replies that PULP is also incorrect to suggest there will be any additional money available to pay a royalty. For its part, CPB urges us not to rule out the possibility of an explicit royalty payment at a later date. It says it is best to reserve the right to examine this issue after the company's current circumstances are resolved and when it can be considered as a matter of long-term policy. It is permissible for the proponents of rate settlements to address the issue of royalty charges in any rate plan they submit, as the parties have done here. And, if a rate plan is otherwise acceptable, we would not necessarily reject it if it contained no explicit amount earmarked as such. Instead, -53- CASES 94-E-0098 and 94-E-0099 we examine a proposed settlement as a whole to determine whether it is reasonable. In this instance, we are satisfied with the rate plan being proposed for the next five years and we see no need to impute or ascribe any additional royalty amounts to the company, either as a matter of general policy or on the basis of arguments presented here. We therefore reject PULP's and Enron/Wepco's exceptions. As to whether the company should be subject to any royalty payments subsequent to the rate plan's five-year term, we are adopting the Settlement subject to the condition we will not preclude parties from raising and having the issue considered again, with any royalty to be effective, if ever, after this Settlement ends. 10. Generic and Case-Specific Determinations ---------------------------------------- The Judge accepted the Settlement's dividing line between those issues which would be fully resolved here on a company-specific basis and those which would be resolved in generic cases. Enron/Wepco except to this recommendation to the extent the Settlement's affiliate transaction rules and competitive code of conduct would remain in place for the Settlement's term even if intervening generic decisions are different. Similarly, they except to the extent the Settlement would establish specific creditworthiness requirements for ESCOs that operate in Niagara Mohawk's service territory. Enron/Wepco contend the negotiations that produced the Settlement should not dictate our policies to foster competition. They complain the Settlement's provisions restrict our flexibility to address competitive market developments, and claim the Settlement's rules are too inflexible, impairing competition and barring us from taking remedial action when necessary. These parties ask that we reserve the right to apply different rules and codes produced on a generic basis. As to the Settlement's creditworthiness requirements for ESCOs, Enron/Wepco again claim the provisions will impede -54- CASES 94-E-0098 and 94-E-0099 competition.1 They say the company does not require as much security as it seeks to obtain from ESCOs. Accordingly, they contend these requirements amount to an unfair barrier to entry that should be rejected. The details of implementing retail access, they say, should be the subject of further proceedings rather than be codified by the Settlement. Niagara Mohawk responds that the Settlement is intended to protect the company, during its term, from adverse financial impacts that could occur were changes made to our regulatory approach to affiliate relations. Staff observes that the Settlement's standards for competitive conduct do not provide the company any license to act improperly. Staff adds that the Settlement contains procedures for resolving competitor complaints and violations of its standards. Thus, Staff sees no reason why such matters should be referred to a generic proceeding. As to the Settlement's ESCO creditworthiness requirements, the company says they are needed to protect against the risk of an ESCO's default, in which case Niagara Mohawk would be obligated to pay for power needed to serve affected customers until they switch to another provider. Staff responds that the Settlement's creditworthiness requirement is commensurate with the company's financial exposure inasmuch as defaulting ESCOs may owe the company for three months or more of service. We find no need or reason to disturb the Judge's recommendations on these matters. We find that the Settlement's affiliate relationship rules and its code of competitive conduct are reasonable in the context of the overall agreement. Also, the Settlement's ESCO creditworthiness provisions are justified given the extent of the company's financial exposure. Accordingly, Enron/Wepco's exceptions are denied. - -------- 1 Enron/Wepco specifically object to the requirement that ESCOs provide security equal to their customers' two highest monthly usage levels multiplied by the company's highest monthly on-peak energy buyback rate. -55- CASES 94-E-0098 and 94-E-0099 As a final matter in this category, we note that the Settlement requires all customers in S.C. 3 and above to have an hourly interval meter whether or not they select an alternative energy supplier.1 Under the Settlement, such customers would bear the incremental cost of a new meter unless we decided otherwise as a matter of general policy. S.C. 3A and 4 customers already have such meters but S.C. 3 customers may have to obtain them by May 1999. We plan to consider, as a generic matter, whether customers should be required to bear the cost of new meters and we may adopt new metering standards for use in 1999. Therefore, Niagara Mohawk customers will not be required to purchase any replacement meters until the standards for 1999 are known. 11. State Environmental Quality Review Act Findings ----------------------------------------------- On May 3, 1996, in conformance with the State Environmental Quality Review Act (SEQRA), we issued a Final Generic Environmental Impact Statement (FGEIS) which evaluated the action adopted in Case 94-E-0952, the generic Competitive Opportunities Proceeding. The individual electric utility companies were subsequently required to provide individual environmental assessments of their restructuring proposals. Niagara Mohawk provided its Environmental Assessment Form (EAF) and SEQRA recommendation on August 26, 1997. The company supplemented its EAF on November 4, 1997 and addressed the environmental implications of Settlement provisions that differed from the company's original proposal. Parties to these proceedings were requested to provide their comments on the supplemented EAF either by December 3, 1997 or with their trial - -------- 1 Settlement Sec.8.3.2. -56- CASES 94-E-0098 and 94-E-0099 briefs. Comments on this matter were received from various parties, including SHAG, MI, and Oswego.1 The information provided by Niagara Mohawk in its EAF, the parties' comments and responses, and other information were evaluated in order to determine whether the potential impacts resulting from adopting the Settlement's terms would be within the bounds and thresholds of the FGEIS adopted in 1996. Arguably, all of the potential impacts need not be considered given that some result from Type II exempt rate actions. Nonetheless, the analysis examined all areas in which impacts would reasonably be expected. No impacts were found to be associated with the Settlement's treatment of the competitive transition charge (CTC). Localized community economic impacts may occur (e.g., due to reduced tax receipts or employment at existing generating stations), but these would be balanced by positive effects in other localities. Another potential concern is the possible increase in air pollution that could accompany increased demand for electric energy. It is possible that increases in energy demand will result from the Settlement's decrease in rates and in DSM expenditures: 0.50% average annual increased demand over the 1997-2012 period from the former and 0.13% increased demand from the latter. Each of these incremental growth rates is an upper bound. For example, it is not clear that all of the rate reductions from the Settlement should be attributed to restructuring; and the lower DSM expenditures do not consider ESCO DSM spending. Staff's view is that the actual growth rates - -------- 1 The final Environmental Assessment Form is Appendix C. The substantive comments received are considered here and in the EAF. As a procedural matter, Oswego excepts, contending we have failed to comply with the requirements of SEQRA to date. However, as detailed above, the process we have used complies fully with the applicable requirements. Moreover, the attached EAF addresses the substantive and environmental concerns that were raised by Oswego and other parties. -57- CASES 94-E-0098 and 94-E-0099 will be substantially less than the corresponding rates in the FGEIS (1% annual incremental growth from the "high sales" scenario, and 0.29% from the "no incremental utility DSM" scenario). Because of the inherent uncertainty in forecasting future impacts, as a matter of discretion, monitoring of the restructuring and environmental impacts is being implemented and a system benefits charge is being established. Based on these analyses, the potential environmental impacts of the Settlement are found to be within the range of thresholds and conditions set forth in the FGEIS. Therefore, no further SEQRA action is necessary. We note, however, that we will act in the future on the company's plan for auctioning its generation assets. Additional SEQRA analysis may be required at that time. 12. Other Matters ------------- a. Cost Allocation Manual Review Procedures ---------------------------------------- The Settlement requires Niagara Mohawk to file a cost allocation manual with the Director of the Office of Accounting and Finance that will become effective 30 days after it is submitted if the Director accepts the company's filing.1 The Judge recommended that the National Electrical Contractors Association (NECA) and other interested parties be allowed to examine the company's proposed manual and submit comments to the Director for his consideration. On exceptions, Niagara Mohawk says acceptance of the Judge's recommendation would change the Settlement which did not contemplate an opportunity for anyone to submit comments concerning the manual. The company also says it did not expect the Director to approve the manual but merely to accept it for filing purposes. While Niagara Mohawk does not object to NECA - -------- 1 Settlement Sec.9.2.1.3. -58- CASES 94-E-0098 and 94-E-0099 inspecting its proposed manual, it is opposed to NECA, or any other party, slowing the process the Settlement envisions. We adopt the Judge's recommendation allowing anyone interested in the company's cost allocation manual to submit timely comments to the Director of the Office of Accounting and Finance before he accepts the proposed manual. If need be, the Director can postpone the effective date of the manual, or any subsequently proposed amendments and supplements, beyond the 30-day period stated in the Settlement if additional time is required to consider any comments he receives. If the company submits a proposed manual which the Director considers to be unacceptable, our understanding of the Settlement is that he has the authority to refuse to accept the company's filing. In any event, by allowing parties to file comments we do not intend that there be any delay in this process. b. Disclosure of Social Security Numbers ------------------------------------- DOL proposed that Niagara Mohawk be required to inform customers in all instances that provision of social security numbers to an ESCO is not necessary to obtain electric service. The Judge recommended against the proposal. On exceptions, DOL urges that customers be notified of their right to decline to provide their social security information and that such action will not adversely affect service. DOL says customers should know that they can keep this information private to avoid its misuse. Niagara Mohawk responds that it complies with laws that apply to social security numbers and it knows of no customer who has been injured by having been asked to provide the company this form of identification. It urges us to refrain from imposing new disclosure requirements that neither Congress nor the Legislature has seen fit to impose. DOL also presented its concerns about the use of social security numbers in a recent rulemaking proceeding, Case 96-M-0706, in which we changed some of our consumer protection rules to streamline their operation, remove burdens on -59- CASES 94-E-0098 and 94-E-0099 utility companies, and maintain adequate customer protections. In that case, we said: In its comments on the Revised Rulemaking, [DOL] again argues for a prohibition on social security numbers, or that potential customers should at least be informed that disclosure is voluntary and no harmful consequences will come to those who refuse to supply it. [DOL] does not offer any new reasons why the use of social security numbers should be prohibited; we will not revise the proposal on this matter. However, we do agree that potential customers should not be coerced into revealing social security numbers or left with the impression that refusal to reveal a social security number will result in harmful consequences. If customers are asked for a social security number, they should also be made aware that they are not required to give it, and that other identification will be accepted.1 The rule we adopted applies to this situation and all ESCOs; this statement addresses adequately the concerns DOL raised in these cases. c. Future Tax Refunds ------------------ The Settlement seeks to streamline the handling of future tax refunds and deficiency assessments. The company would keep any refunds of up to $500,000 each and it would not be able to recover any liabilities up to this amount. Refunds and liabilities exceeding this amount would be deferred for disposition after the Settlement term.2 According to the Settlement, the company would not file a formal notice of the tax refunds it receives nor would additional hearings be convened.3 - -------- 1 Case 96-M-0706, Consumer Protection Rule Amendments, Memorandum and Resolution Adopting Amendments To 16 NYCRR Part 11 (issued February 17, 1998), p. 6. 2 Settlement Sec.11.1.2. 3 Id. -60- CASES 94-E-0098 and 94-E-0099 In response to DOL's objection to this proposed procedure, the Judge recommended that the company continue to provide formal notice of its refunds and that a decision on whether to hold a hearing be made after such notice is provided. The Judge supported the Settlement's substantive treatment of future refunds and recommended that the company have the benefit of a rebuttable presumption that the Settlement results should apply. On exceptions, Niagara Mohawk urges that the Settlement's approach to future refunds be adopted in its entirety. It insists that notice and hearings should not be needed for any refunds under $500,000. In response, CPB urges us to preserve the option to hold a hearing in any instance that may warrant one. It agrees with Niagara Mohawk that hearings are not needed for trivial matters but, it says, that should be decided after notice is provided. The notice requirements implementing PSL Sec.113(2), set forth at 16 NYCRR Sec.89.3, will be followed since they are not burdensome and we reserve the right to schedule a hearing upon the filing of such notice. However, we will establish a rebuttable presumption that all refunds received during the Settlement's term should be accounted for and applied as the Settlement provides. The Settlement provision is adopted subject to this change or condition. d. Residential Hydroelectric Allotments ------------------------------------ PULP objects to the Settlement's method for providing residential customers the benefit of certain low-cost hydroelectric power to which they are entitled. Rather than include this cost in the company's base rates, it would prefer to see hydropower separately stated on customers' bills without any markups. PULP says its approach is consistent with the move to unbundled charges, and it asserts its proposal should be adopted to ensure residential customers receive their full allocation of this low-cost electricity. Essentially, PULP is concerned -61- CASES 94-E-0098 and 94-E-0099 customers may end up paying more for NYPA hydropower based on its market value. The Judge recommended against this proposal because PULP did not show the Settlement would deprive residential customers of any of the benefits of their allocation of this power. PULP excepts, requesting that further proceedings be established at which Niagara Mohawk would prove the Settlement approach is the best means to provide hydropower benefits to residential customers. Niagara Mohawk responds, pointing to testimony and other information establishing that residential customers will continue to receive all their hydropower benefits of approximately $45 million per year. Similarly, Staff affirms that unbundling electricity charges will have no impact on the customers' hydropower benefits and they will receive them no matter who is their chosen supplier. Staff notes also that NYPA, the authority charged with the responsibility of administering this power, supports the Settlement, among other reasons, because it ensures residential customers will continue to receive their full hydropower benefits. Having considered PULP's points, we find that the Judge's recommendation properly resolves this matter. For the reasons offered by the Judge and the parties, PULP's exception is denied. e. PULP's Legal Arguments ---------------------- PULP excepts to the Settlement's approach for implementing competition in the electric industry and claims we lack authority to implement its provisions. First, it objects to an expansion of LICAP through 2002 because it generally does not include customers who receive public assistance. It claims that these customers should have the same opportunity to obtain favorable credit terms as non-recipients of public assistance and that LICAP violates the Equal Credit Opportunity Act (ECOA).1 - -------- 1 Specifically, 15 U.S.C. Sec.1691(a)(2). -62- CASES 94-E-0098 and 94-E-0099 PULP insists that LICAP coverage of public assistance customers in the Child Assistance Program and the company's willingness to test a pilot program for public assistance customers is not enough to satisfy the ECOA's requirements. Next, PULP claims the Settlement's utility generation divestiture provisions would adversely affect the company's ability to provide adequate service, as the company would no longer own and operate facilities needed to supply customers. At most, it believes that the Settlement's proponents should have developed a proposal for comprehensive restructuring legislation rather than pursue generation divestiture through the Settlement. Similarly, PULP objects to the Settlement provisions contemplating that ESCOs will sell electricity to the public. PULP insists that they cannot do so without satisfying statutory requirements applicable to electric utility companies. It says all market entrants should be required to provide the customer service and rate protections that public utilities are currently required to provide. PULP also says the Settlement's retail access plan is impermissible. Rather than allow the market to set electricity prices, PULP says administrative action must set just and reasonable prices for adequate service. PULP doubts that adequate competition will emerge to protect customers' interests and it would prefer to see legislation establish competition in the electric industry. At a minimum, PULP urges us to condition the Settlement's approval on the formation of an adequate competitive electric market in which no sellers can exercise market power. It objects to any relaxation of the service rules applicable to electric utilities for the benefit of the ESCOs. Finally, PULP claims that, before we can establish any competitive opportunities policies, legislation should address the impacts of such changes on municipalities. As tax bases and local employment may suffer, PULP urges legislation be passed to address these matters. In response, Niagara Mohawk and Staff insist that PULP is viewing the applicable legal requirements too restrictively -63- CASES 94-E-0098 and 94-E-0099 and it is ignoring recent case law that supports the approach being used here. Staff also says PULP's legal arguments have already been presented, considered, and rejected. With the exception of PULP's challenge to Niagara Mohawk's LICAP, this party has not presented any new legal arguments or theories that we have not already considered and rejected. They deserve no further consideration here and PULP's exceptions on them are denied for reasons explained elsewhere.1 As to LICAP, we are satisfied it does not violate the Equal Credit Opportunity Act. To begin, LICAP is not primarily intended to be a mechanism for providing credit to customers. Instead, it is a means for the company to control its uncollectibles and the amount of bad debt it incurs, benefiting all customers. Moreover, even if the ECOA applies, a creditor does not violate the law if a refusal to extend credit to a public assistance recipient is made pursuant to a program otherwise expressly authorized for a class of disadvantaged persons.2 The LICAP proposal targets such a group, while taking into account the limited resources available for such a program in the circumstances presented. Finally, to the company's credit, it has agreed to substantially enlarge the scope of this program and make it applicable to more public assistance recipients. The company has also not ruled out the possibility that a suitable program to decrease arrears and uncollectibles might be developed for other public assistance customers. For all of these reasons, PULP's exceptions to the LICAP recommendations are denied. - -------- 1 See, for example, Case 94-E-0952, Competitive Opportunities, Opinion and Order Deciding Petitions for Clarification and Rehearing, Opinion No. 97-17 (issued November 18, 1997), mimeo pp. 29-35. 2 15 U.S.C. Sec. 1691(c)(1). -64- CASES 94-E-0098 and 94-E-0099 f. Standard Performance Contracts ------------------------------ With respect to system benefits charges (SBC), the Settlement says: [n]othing in this agreement will prohibit the Statewide administrator from allocating a significant portion of the total SBC revenues derived from Niagara Mohawk's customers to be disbursed within Niagara Mohawk's service territory through competitive standard performance contracts which provide for stipulated pricing for energy efficiency, consistent with any generic guidelines for SBC expenditures separately developed from this proceeding by the PSC.1 In its initial trial brief in these cases, NAESCO supported the Settlement's SBC provisions. Pointing to this provision, NAESCO said it supported the competitive distribution of energy efficiency funds through a standard performance contract mechanism with stipulated pricing. The Judge recited NAESCO's position in the recommended decision and MI, another Settlement supporter, excepts. MI disputes NAESCO's characterization of the provision and says its clear language does not provide support for standard performance contracts. According to MI, this provision merely preserves the matter for a future generic proceeding and the Settlement would permit such contracts to be used in the Niagara Mohawk service territory if they are allowed as a matter of general policy. NAESCO does not respond to MI's description of this section. MI is correct that the Settlement only establishes that the use of standard performance contracts is not barred by the agreement. Whether such contracts should be employed remains open for further consideration. - -------- 1 Settlement Sec.7.1.2. -65- CASES 94-E-0098 and 94-E-0099 g. Local Taxes and the CTC ----------------------- The City of Oswego claimed that the Settlement would adversely affect its tax structure and eliminate a significant source of its tax revenues. It proposed that lost tax revenues, due to reductions in the value of utility generation assets, be included in the CTC as part of the transition to a competitive, electric generation market. The Judge recommended that this proposal be rejected and Oswego excepts. Oswego says the Commission has the authority, and the public interest would be well served, to require that local taxing jurisdictions recover lost tax revenue through the CTC. However, Niagara Mohawk urges that local municipalities not be allowed to recover the cost of governmental and local services in utility charges applicable to all customers. The company says it is unfair to burden customers elsewhere with the costs for local services, which do not benefit and cannot be controlled by them. Staff responds that Oswego's tax problems are not due to the Settlement. It observes that the Settlement neither changes the City's tax base nor alters Oswego's assessment of the company's property. If anything, Staff says, the Settlement serves Oswego's interests by providing for three-year energy purchase contracts for the generation units that are sold. The allowance made for such contracts presumes that property taxes will continue to apply. The City of Oswego's proposal to include "stranded taxes" in the CTC is denied. We agree with the company that there are inequities in including any such amounts in the CTC that applies to all customers. Staff is also correct that the Settlement provides the City, and other municipalities that host utility generation facilities, a transition period with the -66- CASES 94-E-0098 and 94-E-0099 energy purchase contracts Niagara Mohawk expects to execute with the firms that buy its plants.1 h. Additional Public Comments -------------------------- The recommended decision considered the comments made by customers and their representatives at the public statement hearings and in correspondence. Written comments from persons interested in the Settlement continued to be submitted after the recommended decision was issued. For example, substantial comments about numerous Settlement provisions have been received from The Wing Group, a City of Buffalo Council Member, and a Washington, D.C. public utility consultant. Comments have also been received from the Sierra Club in the Niagara region, and the Statewide Senior Action Council, which reinforce the statements made by their respective members at the public statement hearings. Various firms interested in self-generation and customers interested in municipal power have also continued to submit comments on the Settlement's provisions, all of which have been considered. i. Recently Settled and Corrected Matters -------------------------------------- By letter dated January 22, 1998, Niagara Mohawk notified us that, as contemplated by the Settlement, various parties had considered the details of an implementation mechanism for the expanded LICAP program and had reached an agreement. These parties arrived at a performance incentive mechanism that contains annual enrollment, service, and workshop goals for the company to meet. Niagara Mohawk's failure to achieve these goals would subject the company to financial penalties of up to - -------- 1 We are aware that Niagara Mohawk is participating in ongoing negotiations with the City of Oswego, County, and School District representatives on the future tax status of the company's facilities in Oswego. We consider such negotiations between municipalities and utility companies to be a beneficial means for resolving such issues, absent legislation. -67- CASES 94-E-0098 and 94-E-0099 $1.1 million per year. The company will also provide quarterly and annual reports concerning its progress and performance. By letter dated January 23, 1998, the company also notified us that various parties have agreed on provisions for the customer service backout credit, as provided by the Settlement. Niagara Mohawk's revenue exposure for these credits is limited to $30 million during the first three years covered by the Settlement. This amount is allocated among the company's service classes and, if the class allocations are reached, access to the credits will be restricted. Staff will review the company's subscription levels, historical data, and its calculations when the available amounts may be exhausted. ESCOs will also be informed of the amounts that remain available to them. While we received these agreements after briefs opposing exceptions were filed, the parties to these proceedings were on notice that these matters would be considered and that the details of the LICAP performance incentive mechanism and a customer service backout credit would be submitted to us for consideration with the Settlement. This approach drew no objections when it was presented nor has any party criticized the specific provisions that have been reached. Accordingly, we will adopt the agreed-upon terms for these two additional issues. Finally, by letter dated February 13, 1998, Niagara Mohawk notified us that a provision the parties had intended to include in the Settlement was inadvertently omitted. The Settlement eliminates Niagara Mohawk's fuel adjustment clause (FAC). However, when the FAC ends, the company will have either a positive or negative deferred fuel balance that must either be paid back to customers or collected from them. The settling parties intended to include in the Settlement a provision to flow through the deferred fuel balance to customers over two monthly billing cycles. To accomplish this, the company has provided a revision for Settlement Sec.4.3.1. We accept this revision to the Settlement to the extent it allocates to customers deferred costs or benefits properly allocable to them. -68- CASES 94-E-0098 and 94-E-0099 j. Finch's Exceptions ------------------ Finch urges us to adopt and apply four general principles to on-site generation: (1) Supplemental service rates for on-site generators should be the same as the rates that apply to full service customers in the same service category; (2) Backup and maintenance service rates for on-site generators should be set using the same cost method that is used to develop rates for similar full requirements customers; (3) On-site generators should be given the option to obtain firm service at the same rates that apply to similar customers without on-site generation; and, (4) Customers with existing on-site generation facilities should not be transferred to a new service class that would substantially increase the rates applicable to them. Finch complains that the Settlement proponents have not provided a proposed tariff for the on-site generation parties to examine and see how the Settlement would actually apply to them. It insists that only a smattering of general concepts has been offered for consideration. Finch is concerned about such things as the amount of the proposed access charges, the applicable energy rates, surcharges, and reconciliations. It also claims that the proponents do not share a common understanding of the Settlement's on-site generation rate, tariff, and stranded cost provisions. Given such uncertainties as these, Finch says, it is impossible for on-site generation customers to determine how the Settlement specifically affects them. It believes this portion of the Settlement should be rejected and Niagara Mohawk should be required to provide a specific proposal for consideration now. Also with respect to the Settlement's on-site generation provisions, Finch claims they are unduly discriminatory, unjust and unreasonable, and not in the public -69- CASES 94-E-0098 and 94-E-0099 interest. It says they are contrary to the Public Service Law, the Public Utility Regulatory Policies Act (PURPA), and the Federal Energy Regulatory Commission (FERC) regulations implementing PURPA. Further, it maintains they are anti-competitive and preclude on-site generators from using economically competitive alternatives. In response to Finch, the company points out that this party entered the proceedings after the close of the record, did not contribute to the record, and did not participate in the settlement process. Nonetheless, the company responds to Finch's policy and legal arguments. As to Finch's concerns about rate discrimination, Niagara Mohawk says the existing and proposed service classes for on-site generators are based on their common characteristics and cost of service. It points out that such customers require continuous connections to the company's system for backup power and, as a group, they have distinguishable load and cost characteristics. The company contends that the Settlement's provisions for these customers are designed to recover the fixed costs associated with each customer's historic level of usage and to recover a proper share of stranded costs. Thus, the company says Finch errs in claiming that the Settlement's S.C. 7 provisions are not cost based. With respect to whether the intended revisions for S.C. 7 should have been submitted with the Settlement, Niagara Mohawk says the Settlement contains the complete proposal for revising the service classification and nothing more is needed for it to be approved. Given the complexity of these proceedings and large amount of activity they require, the company claims it is reasonable for action on the S.C. 7 tariff revisions to follow the Settlement's approval. Concerning the claim that the on-site generation rate proposal violates state and federal statutes and regulations, Niagara Mohawk denies Finch's assertion. The company insists that the Settlement's provisions are consistent with PURPA and FERC regulations requiring that accurate data and consistent -70- CASES 94-E-0098 and 94-E-0099 systemwide costing principles be used to set all customers' rates. Finch objects to the rate reductions for customers other than on-site generators; but, the company says this aspect of the Settlement is not discriminatory. Niagara Mohawk points out that the parties vigorously negotiated allocation of the rate decreases and applying the rate decreases to full service customers is fully justified. Next, Niagara Mohawk says on-site generators must pay stranded costs because the company stands ready to serve their load requirements at any time. According to the company, the valid reasons for not treating on-site generators the same as full requirement customers include the need to discourage uneconomic bypass and to avoid shifting costs to other ratepayers. Finally, the company says the Settlement's on-site generation provisions are clear and it will not have any difficulties submitting a revised S.C. 7 that complies with the Settlement. To the extent any party's view of the Settlement's requirements differs from the company's, it says any such matters can be resolved when the revised tariffs are filed. MI says Finch's claims of disparate treatment should not be credited because the Settlement does not produce or require any such results. MI suggests that Finch wait and see the new, on-site generation tariffs the company proposes, and the results of Niagara Mohawk's generation auction, before it launches any such charges. MI is correct that Finch's concerns about the actual rates and charges Niagara Mohawk will file to implement, the Settlement's provisions applicable to on-site generation are premature and should await the company's tariff filing. When the tariff is submitted, Finch and other parties will have an opportunity to examine it and provide their comments. In any event, Finch's broad criticisms and legal challenge of the Settlement's on-site generation provisions are rejected. Like all other classes of Customers, the on-site generators that subscribe to Niagara Mohawk's backup and -71- CASES 94-E-0098 and 94-E-0099 supplemental services must bear a portion of the company's stranded costs in fairness to all other customers who must also pay these costs. Moreover, it is reasonable to revise the S.C. 7 tariff due to the company's restructuring and the transition being made to a competitive market. During the transition period, uneconomic alternatives should not be encouraged as the company must be assured of a reasonable opportunity to pay its MRA-related costs. We have examined Finch's claims of discrimination and anti-competitive rates and find that the Settlement's on-site generation provisions do not violate any state or federal requirements that preclude undue discrimination and anticompetitive behavior. The Settlement proponents have detailed and supported the Settlement's acceptable approach to this class of customers. Clear differences exist between these customers and the company's full requirements customers supporting the separate classifications and the differing treatment they receive under the Settlement. There is, therefore, no need to adopt Finch's four general principles for on-site generators. The principles we normally adhere to design rates and to allocate revenue requirements will continue to apply except to the extent the Settlement requires any departures for its proper implementation. Finally, as discussed above, in making the transition from the existing S.C. 7 tariff to the revised tariff required by the Settlement, we are concerned that there not be any harsh impact for customers who, as of October 10, 1997, decided to implement on-site generation and have made a substantial investment. Niagara Mohawk will be required to present a proposal addressing this concern, and the parties may comment on it, before we consider the company's revised tariffs for S.C. 7. To the extent any other matters require our attention, there will be ample opportunity for the parties to state specific concerns in their comments on the company's on-site generation tariff revisions. -72- CASES 94-E-0098 and 94-E-0099 k. Recovery of Costs Associated With Termination of Gas Transportation and Peak Shaving Agreements ---------------------------------- Appendix B of the Settlement provides that the company would continue to recover, solely from gas customers, lost revenues or additional costs incurred in connection with new peak shaving and gas transportation contracts, in effect extending the terms and duration of the Stipulation and Agreement among the parties in Cases 95-G-1095 and 95-G-0091. We approve the gas- customer-only recovery mechanism to the extent it is limited to lost revenues and replacement costs incurred between now and October 31, 1999, as provided in the Gas Stipulation and Agreement. However, without fuller explanation of the relative benefits of restructuring the peak shaving and transportation contracts, we are unwilling at this time to extend this gas-customers-only recovery mechanism beyond October 31, 1999. We shall review the appropriate allocation between the gas and electric departments at the time the company files its proposed recovery mechanism of such lost revenues and replacement costs beyond October 31, 1999. l. Service Quality Incentive ------------------------- Section 6 of the Settlement describes a service quality incentive whose total value is $6.6 million (30 basis points) per year. The total would be allocated one half to a customer service performance inventive and the balance would be for a service reliability incentive. The company is not now providing high levels of service and it will continue to face serious financial pressures. In these circumstances, a strong incentive is appropriate. To ensure that the company remains focused on its service obligations during the Settlement term, this provision is adopted subject to the modification that the $6.6 million is doubled and all the maximum dollar penalties associated with various scored intervals are doubled accordingly. -73- CASES 94-E-0098 and 94-E-0099 CONCLUSION ---------- The terms of the Settlement and the Master Restructuring Agreement, summarized and discussed above, will offer a generally sound regulatory framework for Niagara Mohawk, its competitors, and its customers in the transition to fully competitive generation and energy services markets. Among other things, the Settlement and MRA reverse the upward spiral of rate increases experienced by ratepayers in the past and replace it with significant rate decreases. These rate reductions, brought about primarily by the company's absorption of up to $2 billion in revenue losses, savings from the MRA, and reduced taxes, avoid the need to consider the company's alternative pending request for a $3.25 million (10.5%) rate increase and the prospect of further rate increases driven by uneconomic power purchase contracts.1 The majority of the nominal revenue reductions will be enjoyed by the residential and commercial classes. At the same time, significant rate reductions will be implemented for large industrial and commercial customers, reductions which are essential to attract and retain jobs and boost the economy of upstate New York. Other important benefits include the company's prompt divestiture of its fossil and hydro generation and the restructuring of a substantial amount of IPP generation capacity to market pricing. In 1999, all customers will have the ability to choose their energy supplier. These benefits, in our view, would not be achieved by any of the alternatives that have been presented or that we are otherwise aware of, including the bankruptcy alternative and the various legislative proposals now pending. Having reviewed the Settlement's terms, the recommended decision, the parties' exceptions, the public's comments, and the Environmental Assessment Form prepared for us by our Staff, we find that there are several terms that are not satisfactory under the circumstances presented. They are discussed in detail above. - -------- 1 Niagara Mohawk's contractual commitments to the IPPs alone have been rising by $50 million per year. Tr. 13,040. -74- CASES 94-E-0098 and 94-E-0099 Such items include the terms for the proposed cost recovery shift from energy to customer charges for the residential and small commercial classes, the base period for implementing the S.C. 1 and S.C. 2 rate reductions, the prejudgment of a royalty treatment beyond the Settlement's term, the incentive for divestiture of non-Oswego fossil and hydro generation, service quality penalties, recovery of certain lost gas revenues and new gas costs, and the disposition of certain tax refunds. These and other terms of concern to us are adopted subject to the conditions or modifications described above or, in the case of the proposed customer charge increases, are not adopted at this time. With the modifications and conditions, the Settlement and Master Restructuring Agreement satisfy the objectives enumerated in Opinion No. 96-12 and meet the criteria states in our Settlement Guidelines. Accordingly, the terms of the Settlement and the Master Restructuring Agreement are adopted with all the modifications and changes discussed in this opinion and order. Inasmuch as those terms and our modifications and conditions are interrelated, if any term, modification, or condition is modified, vacated, or otherwise materially affected on judicial review, we may re-examine our entire decision. The Commission Orders: - --------------------- 1. The terms of the Niagara Mohawk Power Corporation PowerChoice Settlement Agreement, Exhibit 97-1 in these proceedings, including the revisions submitted by letters dated December 9, 1997 and February 13, 1998, and the supplements submitted by letters dated January 22 and 23, 1998, subject to the modifications and conditions described in this opinion and order, are adopted and incorporated as part of this opinion and order. 2. Niagara Mohawk Power Corporation is directed to cancel the suspended tariff amendments and supplements listed in Appendix B concurrent with the effective date of tariffs filed in -75- CASES 94-E-0098 and 94-E-0099 conjunction with the implementation of the PowerChoice Settlement Agreement, the PowerChoice Implementation Date. 3. The company is directed to file as soon as is reasonably possible, but not later than May 19, 1998, tariff amendments implementing the Settlement. The amendments shall become effective on not less than sixty (60) day's notice. The company shall serve copies of its compliance filing upon all parties to this proceeding. Any comments on the filing must be received at the Commission's offices within 45 days of service of the company's proposed amendments. The amendments shall not become effective on a permanent basis until approved by the Commission. The requirement of the Public Service Law that newspaper publication be completed prior to the effective date of the amendments is waived, but the company is directed to file with the Commission, not later than six weeks following the effective date of the amendments, proof that a notice of the changes set forth in the amendments and their effective date has been published for four consecutive weeks in a newspaper having general circulation in the service territory of the company. 4. Sections 4.5.1.2, 4.6.1.2 and 4.6.2.1 of the agreement addressing the rebalancing of customer and energy charges shall be modified as follows: Monthly customer charges for residential, small commercial non-demand and demand metered customers shall be fixed at $9.67, $14.65, and $27.22, respectively, at this time. The parties may address the customer charge/energy charge rebalancing issues presented in these proceedings commensurate with the review period preceding Commission approval of unbundled tariffs for these customers. 5. The primary tariff filings directed in Clause 3 above required to effectuate initial implementation of the PowerChoice Settlement Agreement shall include unbundled retail access tariffs for Customer Groups I and II, as defined in Sec.8.2 of the agreement, bundled (standard) tariffs for all remaining -76- CASES 94-E-0098 and 94-E-0099 customers not included in the above, and shall reflect the price reductions specified in Sec.4.0 of the agreement and otherwise described herein. Subsequent unbundled tariff filings for customers in Groups III, IV and V should be made at least ninety (90) days prior to each group's scheduled date for obtaining retail access. 6. Niagara Mohawk Power Corporation is directed to file by no later than April 3, 1998 a tariff amendment, to become effective on one day's notice on a temporary basis, to grandfather the electric rates applicable to on-site generators who can demonstrate that as of October 10, 1997 they had made a decision to proceed with and had a substantial investment in self-generation. The company shall serve copies of its proposal upon all parties to this proceeding. Any comments on the proposal must be received at the Commission's offices within 10 days of service of the company's proposal. The amendments shall not become effective on a permanent basis until approved by the Commission. The requirement of the Public Service Law that newspaper publication be completed prior to the effective date of the amendments is waived, but the company is directed to file with the Commission, not later than six weeks following the effective date of the amendments, proof that a notice of the changes set forth in the amendments and their effective date has been published for four consecutive weeks in a newspaper having general circulation in the service territory of the company. 7. Niagara Mohawk is authorized to file tariff amendments, to become effective on not less than one day's notice on a temporary basis, to implement the open access charges for municipalizations. Any comments on the proposal must be received at the Commission's office within 10 days of service of the company's proposal. The amendments shall not become effective on a permanent basis until approved by the Commission. The requirement of the Public Service Law that newspaper publication be completed prior to the effective date of the amendments is waived, but the company is directed to file with the Commission, not later than six weeks following the effective date of the -77- CASES 94-E-0098 and 94-E-0099 amendments, proof that a notice of the changes set forth in the amendments and their effective date has been published for four consecutive weeks in a newspaper having general circulation in the service territory of the company. 8. To the extent exceptions to the recommended decision issued in these proceedings on December 29, 1997 are not moot, or are otherwise granted, they are denied. 9. The potential environmental impacts of these terms are within the bounds and thresholds evaluated in the 1996 FGEIS, and, therefore, no further SEQRA action is necessary in these cases at this time. 10. Niagara Mohawk, in cooperation with Staff, shall monitor the environmental impacts of electric restructuring resulting from this order. 11. Niagara Mohawk is authorized to include the following decommissioning related activities in its cost of service for Nine Mile 1: rampdown, wet fuel storage, dry fuel storage, and radioactive dismantlement costs in the amount of $23,227,000 in each year commencing on April 1, 1998 through 2009, unless and until the Commission orders otherwise. The company is authorized to deposit $18,494,000 of its Nine Mile1 decommissioning authorization in a tax qualified nuclear decommissioning fund and $4,733,000 in a non-qualified nuclear decommissioning fund. The company is also authorized to include in its cost of service, the following decommissioning related activities for its 41% share of Nine Mile 2: rampdown, wet fuel storage, dry fuel storage, and radioactive dismantlement costs in the amount of $4,776,000 which it is authorized to deposit in each year commencing on April 1, 1998 through 2026 in a tax qualified nuclear decommissioning fund, unless and until the Commission orders otherwise. These plant decommissioning authorizations are based on plant specific studies escalated using the estimated escalation factors described below. The estimated decommission related activities of Nine Mile 1 and the company's 41% share of Nine Mile 2, in 1998 dollars, are $518 million and $262 million, respectively. Using an escalation -78- CASES 94-E-0098 and 94-E-0099 factor of 3.5%, the Nine Mile Unit 1 radioactive decommissioning costs are estimated to be approximately $901 million in 2009, and the company's share of the Nine Mile 2 radioactive decommissioning cost is estimated to be about $802 million in 2026. The funding assumptions are based upon the DECON method of decommissioning and are assumed to be incurred between 2009 and 2041 for Nine Mile 1 and between 2026 and 2045 for Nine Mile 2. These time periods presently represent the respective years over which each plant is assumed to be decommissioned. An after-tax trust fund earning rate of 6.3% was used for the Nine Mile 1 trust fund and a 6.9% rate for the Nine Mile 2 trust fund. All applicable costs collected from ratepayers shall be deposited by the company in external trust funds on a quarterly basis. 12. For each of the five years of the Settlement period, Niagara Mohawk Power Corporation is directed to defer any interest rate savings related to the senior subordinated notes or other debt instruments used to finance the MRA buyout. The savings will be calculated by comparing the actual interest rate(s) to the 8.5% interest rate forecasted for such debt as included in Appendix C of the Settlement. The savings will be included in Account 253, Other Deferred Credits, until such time as the Commission utilizes the deferred savings. 13. Niagara Mohawk Power Corporation shall submit a written statement of unconditional acceptance of the modifications and conditions contained in this opinion and order, signed and acknowledged by a duly authorized officer of the company by April 3, 1998. The company's statement should be filed with the Secretary of the Commission and served on the parties to these proceedings. 14. Cases 94-E-0098 and 94-E-0099 are continued. By the Commission, (SIGNED) JOHN C. CRARY Secretary -79- CASES 94-E-0098 and 94-E-0099 APPENDIX A Page 1 of 4 APPEARANCES ----------- FOR DEPARTMENT OF PUBLIC SERVICE STAFF: Elizabeth H. Liebschutz, Esq. and Jane C. Assaf, Esq. Staff Counsel, Three Empire State Plaza, Albany, New York 12223-1350. FOR NIAGARA MOHAWK POWER CORPORATION: M. Margaret Fabic, Esq., Chief Counsel, 300 Erie Boulevard West, Syracuse, New York 13202. Swidler & Berlin (by J. Phillip Jordan, Esq. and William B. Glew, Jr., Esq.), 3000 K Street, N.W., Suite 300, Washington DC 20007. Adams, Dayter & Sheehan, LLP. (by Timothy P. Sheehan, Esq.), 39 North Pearl Street, Albany, New York 12207. FOR SETTLING INDEPENDENT POWER PRODUCERS: Read and Laniado (by Howard J. Read, Esq. and Sam M. Laniado, Esq.), 25 Eagle Street, Albany, New York 12207. FOR NEW YORK STATE CONSUMER PROTECTION BOARD: James F. Warden, Jr., Esq., Five Empire State Plaza, Albany, New York 12223. FOR CITY OF COHOES: Peter Henner, Esq., P.0. Box 326, Clarksville, New York 1204l. FOR CITIES OF FULTON AND OSWEGO: Paul V. Nolan, Esq., 5515 North 17th Street, Arlington, Virginia 22205. FOR PUBLIC UTILITY LAW PROJECT: Gerald Norlander, Esq., 90 State Street, Albany, New York 12207. FOR NEW YORK STATE ELECTRIC & GAS CORPORATION: Huber, Lawrence & Abell (by Amy A. Davis, Esq.), 605 Third Avenue, New York, New York 10158. CASES 94-E-0098 and 94-E-0099 APPENDIX A Page 2 of 4 APPEARANCES ----------- FOR RETAIL COUNCIL OF NEW YORK: Cohen, Dax & Koenig, P.C. (by Paul Rapp, Esq.), 90 State Street, Albany, New York 12207. FOR MULTIPLE INTERVENORS AND STEAM HOST ACTION GROUP: Couch, White, Brenner, Howard & Feigenbaum (by Algird White, Esq., Leonard Singer, Esq., and Doreen Saia, Esq.), 540 Broadway, P.O. Box 22222, Albany, New York 12201-2222. FOR ENRON CAPITAL & TRADE RESOURCE CORP.: Bracewell & Patterson, L.L.P. (by Randall S. Rich, Esq.), 2000 K Street N.W., Suite 500, Washington, DC 20006. FOR NORCEN ENERGY RESOURCES LIMITED: Brady & Berliner (by Peter G. Hirst, Esq.), 1225 19th Street N.W., Washington DC 20036. FOR CONSOLIDATED NATURAL GAS TRANSMISSION CORPORATION: Whiteman, Osterman & Hanna (by Thomas O'Donnell, Esq. and Michael Whiteman Esq.), One Commerce Plaza, Albany, New York 12260. FOR FINGER LAKES CHAPTER, NECA, INC.: McMahon, Kublick, McGinty & Smith P.C. (by Jan Kublick, Esq.), 500 South Selina Street, Syracuse, New York 13202. FOR EMPIRE STATE DEVELOPMENT AND NEW YORK STATE DEPARTMENT OF ECONOMIC DEVELOPMENT: Gloria Kavanah, Esq., One Commerce Plaza, Room 931, Albany, New York 12245. FOR CITIZENS UTILITY BOARD: Robert Ceisler, 146 Washington Avenue, Albany, New York 12210. FOR ANR PIPELINE: William Malcolm, Esq., 500 Renaissance Center, Detroit, Michigan 48243. CASES 94-E-0098 and 94-E-0099 APPENDIX A Page 3 of 4 APPEARANCES ----------- FOR SITHE ENERGIES USA, INC.: Read and Laniado (by Craig M. Indyke, Esq.), 25 Eagle Street, Albany, New York 12207. FOR LOCAL 97, IBEW: Thomas P. Primero, Jr., Agent, 890 Third Street, Albany, New York 12206. Blitman & King (by Donald D. Oliver, Esq.), The 500 Building, 500 South Salina Street, Syracuse, New York 13202. FOR COASTAL GAS MARKETING COMPANY: Cullen & Dykman (by Gerard A. Maher, Esq.), 177 Montague Street, Brooklyn, New York 11201-3611. FOR NEW YORK STATE DEPARTMENT OF LAW: Richard W. Golden, Esq., 120 Broadway, New York, New York 10271. FOR U.S. EXECUTIVE AGENCIES: Robert A. Ganton, Esq., U.S. Department of Army, 901 North Stuart Street, Suite 713, Arlington, Virginia 22203-1837. FOR JOINT SUPPORTERS, CNG ENERGY SERVICES CORPORATION, AND NATIONAL ASSOCIATION OF ENERGY SERVICE COMPANIES: Ruben S. Brown, The E Cubed Company, 201 West 70th Street, Suite 41E, New York, New York 10023. FOR ENTRUST, LLC: David A. Schilling, President, 100 Clinton Square, Suite 450, 126 North Salina Street, Syracuse, New York 13202. FOR ROCHESTER GAS AND ELECTRIC CORPORATION, CENTRAL HUDSON GAS & ELECTRIC CORPORATION, AND LONG ISLAND LIGHTING COMPANY: Nixon, Hargrave, Devans & Doyle (by Richard N. George, Esq.), P.0. Box 1051, Clinton Square, Rochester, New York 14603. CASES 94-E-0098 and 94-E-0099 APPENDIX A Page 4 of 4 APPEARANCES ----------- FOR NEW YORK POWER AUTHORITY: Eric J. Schmaler, 1633 Broadway, New York, New York 10019. FOR WHEELED ENERGY POWER COMPANY OF NEW YORK: Joel Blau, 32 Windsor Court, Delmar, New York 12054. FOR NEW YORK POWER FORUM: Cohen, Dax & Koenig, P.C. (by John W. Dax), 90 State Street, Suite 1030, Albany, New York 12207. CASES 94-E-0098 and 94-E-0099 APPENDIX B Page 1 of 2 Amendments to Schedule P.S.C. No. 207 - Electricity Original Leaves Nos. 71-U, 101-B, 101-C, 101-D, 101-E, 101-F, 101-G, 101-H First Revised Leaves Nos. 79-N, 83-A7, 87-A4, 87-A5 Second Revised Leaves Nos. 70-C2, 70-H, 71-C, 79-0, 87-F2, 106-B, 165 Third Revised Leaves Nos. 97-A, 100, 151 Fourth Revised Leaves Nos. 57-A, 70-E, 106-A Fifth Revised Leaves Nos. 57-Bl, 70-I Sixth Revised Leaves Nos. 57-B, 105 Seventh Revised Leaves Nos. 57-C, 106 Eighth Revised Leaf No. 79-I Ninth Revised Leaf No. 79-F Eleventh Revised Leaf No. 83-A3 Twelfth Revised Leaf No. 83-A4 Thirteenth Revised Leaves Nos. 67, 79 Fifteenth Revised Leaf No. 55-B Seventeenth Revised Leaf No. 70-D Eighteenth Revised Leaf No. 2 Nineteenth Revised Leaf No. 55-A Twentieth Revised Leaf No. 101-A Twenty-First Revised Leaf No. 56 Twenty-Second Revised Leaves Nos. 58, 99, 102 Twenty-Third Revised Leaves Nos. 57, 98 Twenty-Sixth Revised Leaf No. 95 Twenty-Ninth Revised Leaf No. 85 Thirtieth Revised Leaf No. 103 Thirty-First Revised Leaves Nos. 87-C, 97, 101 Thirty-Fifth Revised Leaves Nos. 55, 104 Forty-First Revised Leaves Nos. 3, 89 Forty-Third Revised Leaf No. 81 Forty-Ninth Revised Leaf No. 83 Fifty-Fourth Revised Leaf No. 94 Fifty-Fifth Revised Leaf No. 80 Fifty-Sixth Revised Leaf No. 88 Fifty-Seventh Revised Leaf No. 84 Fifty-Eighth Revised Leaf No. 78 Supplements Nos. 207, 215, 217 and 223 to Schedule P.S.C. No. 207 - Electricity CASES 94-E-0098 and 94-E-0099 APPENDIX B Page 1 of 2 Amendments to Schedule P.S.C. 213 - Electricity (Street Lighting) First Revised Leaf No. 80 Second Revised Leaf No. 78 Third Revised Leaves Nos. 44, 79, 81, 84 Twelfth Revised Leaves Nos. 9, 47 Sixteenth Revised Leaf No. 55 Seventeenth Revised Leaf No. 20 Eighteenth Revised Leaf No. 49 Twenty-Fifth Revised Leaf No. 43 Twenty-Seventh Revised Leaf No. 46 Thirtieth Revised Leaf No. 45 Thirty-Fourth Revised Leaves Nos. 30, 33, 34, 36, 40, 41 Thirty-Fifth Revised Leaves Nos. 28-A, 31, 37 Thirty-Sixth Revised Leaves Nos. 5, 6, 26, 28 Thirty-Seventh Revised Leaves Nos. 27, 38, 39 Thirty-Eighth Revised Leaves Nos. 16, 32, 35 Thirty-Ninth Revised Leaves Nos. 15, 29 Fortieth Revised Leaf No. 13 Forty-Second Revised Leaf 14 Forty-Third Revised Leaf 25 Supplements Nos. 67, 68, 69 and 70 to Schedule P.S.C. No. 207 - Electricity CASES 94-E-0098 and 94-E-0099 APPENDIX C 617.20 State Environmental Quality Review ENVIRONMENTAL ASSESSMENT FORM PROJECT INFORMATION - -------------------------------------------------------------------------------- 1. APPLICANT/SPONSOR: NIAGARA MOHAWK POWER CORPORATION (NMPC) 2. PROJECT NAME: ELECT. RATE/RESTRUCTURING - CASE 94-E-0098, 94-E-0099 - -------------------------------------------------------------------------------- 3. PROJECT LOCATION: NMPC SERVICE TERRITORY Municipality NA County NA - -------------------------------------------------------------------------------- 4. PRECISE LOCATION: (Street address and road intersections, prominent landmarks, etc., or provide map) NA - -------------------------------------------------------------------------------- 5. PROPOSED ACTION IS: |_|New |_|Expansion |X|Modification/alteration - -------------------------------------------------------------------------------- 6. DESCRIBE PROJECT BRIEFLY: CASES 94-E-0952, 94-E-0098 AND 94-E-0099 - IN THE MATTER OF COMPETITIVE OPPORTUNITIES REGARDING ELECTRIC SERVICE, FILED IN CASE 93-M- 0229; PLANS FOR ELECTRIC RATE/RESTRUCTURING PURSUANT TO OPINION NO. 96-12; AND THE FORMATION OF A HOLDING COMPANY PURSUANT TO PSL, SS.SS. 70, 108 AND 110, AND CERTAIN RELATED TRANSACTIONS - ENVIRONMENTAL ASSESSMENT FORM. - -------------------------------------------------------------------------------- 7. AMOUNT OF LAND AFFECTED: NA Initially _________ acres Ultimately _________ acres - -------------------------------------------------------------------------------- 8. WILL PROPOSED ACTION COMPLY WITH EXISTING ZONING OR OTHER EXISTING LAND USE RESTRICTIONS? NA |_|Yes |_|No If No, describe briefly - -------------------------------------------------------------------------------- 9. WHAT IS PRESENT LAND USE IN VICINITY OF PROJECT? NA |_|Residential |_|Industrial |_|Commercial |_|Agricultural |_|Park/Forest/Open space |_|Other Describe: - -------------------------------------------------------------------------------- 10. DOES ACTION INVOLVE A PERMIT APPROVAL, OR FUNDING, NOW OR ULTIMATELY FROM ANY OTHER GOVERNMENTAL AGENCY (FEDERAL, STATE OR LOCAL)? |X|Yes |_|No If yes, list agency(s) name and permit/approvals: NYS PUBLIC SERVICE COMMISSION - -------------------------------------------------------------------------------- 11. DOES ANY ASPECT OF THE ACTION HAVE A CURRENTLY VALID PERMIT OR APPROVAL? |X|Yes |_|No If yes, list agency(s) name and permit/approval. STATIONARY SOURCES OWNED AND OPERATED BY NMPC HAVE VALID, APPROVED CERTIFICATES TO OPERATE. 12. AS A RESULT OF PROPOSED ACTION WILL EXISTING PERMIT/APPROVAL REQUIRE MODIFICATION? NA |_|Yes |_|No - -------------------------------------------------------------------------------- I CERTIFY THAT THE INFORMATION PROVIDED ABOVE IS TRUE TO THE BEST OF MY KNOWLEDGE Agency: NYS DEPARTMENT OF PUBLIC SERVICE Date: FEBRUARY 13, 1998 ----------------------------------- ------------------------ Signature /S/ JOHN SMOLINSKY - -------------------------------------------- - -------------------------------------------------------------------------------- PART II-ENVIRONMENTAL ASSESSMENT - -------------------------------------------------------------------------------- A. DOES ACTION EXCEED ANY TYPE 1 THRESHOLD IN 6 NYCRR, PART 617.4? If yes, coordinate the review process and use the FULL EAF. |_|Yes |X| No - -------------------------------------------------------------------------------- B. WILL ACTION RECEIVE COORDINATED REVIEW AS PROVIDED FOR UNLISTED ACTIONS IN 6 NYCRR, PART 617.6? If No, a negative declaration may be superseded by another involved agency. NA |_|Yes |_| No - -------------------------------------------------------------------------------- C. COULD ACTION RESULT IN ANY ADVERSE EFFECTS ASSOCIATED WITH THE FOLLOWING: (Answers may be handwritten, if legible.) C1. Existing air quality, surface or groundwater quality or quantity, noise levels, existing traffic patterns, solid waste production or disposal, potential for erosion, drainage or flooding problems? Explain, briefly: EXPECTED IMPACTS ARE WITHIN THE RANGE OF THRESHOLDS AND CONDITIONS SET FORTH IN THE FGEIS. C2. Aesthetic, agricultural, archaeological, historic, or other natural or cultural resources; or community or neighborhood character? Explain briefly: EXPECTED IMPACTS ARE WITHIN THE RANGE OF THRESHOLDS AND CONDITIONS SET FORTH IN THE FGEIS. C3. Vegetation or fauna, fish, shellfish or wildlife species, significant habitats, or threatened or endangered species? Explain briefly: EXPECTED IMPACTS ARE WITHIN THE RANGE OF THRESHOLDS AND CONDITIONS SET FORTH IN THE FGEIS. C4. A community's existing plans or goals as officially adopted, or a change in use or intensity of use of land or other natural resources? Explain briefly: EXPECTED IMPACTS ARE WITHIN THE RANGE OF THRESHOLDS AND CONDITIONS SET FORTH IN THE FGEIS. C5. Growth, subsequent development, or related activities likely to be induced by the proposed action? Explain briefly: EXPECTED IMPACTS ARE WITHIN THE RANGE OF THRESHOLDS AND CONDITIONS SET FORTH IN THE FGEIS. C6. Long term, short term, cumulative, or other effects not identified in C1-C5? Explain briefly: EXPECTED IMPACTS ARE WITHIN THE RANGE OF THRESHOLDS AND CONDITIONS SET FORTH IN THE FGEIS. C7. Other impacts (including changes in use of either quantity or type of energy)? Explain briefly: EXPECTED IMPACTS ARE WITHIN THE RANGE OF THRESHOLDS AND CONDITIONS SET FORTH in THE FGEIS. - -------------------------------------------------------------------------------- D. WILL THE PROJECT HAVE AN IMPACT ON THE ENVIRONMENTAL CHARACTERISTICS THAT CAUSED THE ESTABLISHMENT OF A CRITICAL ENVIRONMENTAL AREA (CEA)? |_|Yes |X|No If Yes, explain briefly: - -------------------------------------------------------------------------------- E. IS THERE, OR IS THERE LIKELY TO BE, CONTROVERSY RELATED TO POTENTIAL ADVERSE ENVIRONMENTAL IMPACTS? |_|Yes |X| No If Yes, explain briefly: - -------------------------------------------------------------------------------- PART III - DETERMINATION OF SIGNIFICANCE (To be completed by Agency) SEE THE ATTACHED ENVIRONMENTAL ASSESSMENT FORM NARRATIVE. - -------------------------------------------------------------------------------- STAFF RECOMMENDS THAT THE FINAL GENERIC ENVIRONMENTAL IMPACT STATEMENT (FGEIS) ISSUED ON MAY 3, 1996 (CASE 94-E-0952), WITH RESPECT TO THE PROPOSED ACTION OF ADOPTING A POLICY SUPPORTING INCREASED COMPETITION IN ELECTRIC MARKETS BE EXTENDED IN APPLICABILITY, WITHOUT MODIFICATION OR SUPPLEMENTATION, TO THE APPROVAL OF NEW NIAGARA MOHAWK POWER CORPORATION (THE CORPORATION) AGREEMENT AND SETTLEMENT ON THE GROUNDS THAT THE SIGNIFICANCE OF THE PROPOSAL'S ANTICIPATED ENVIRONMENTAL IMPACTS WILL NOT EXCEED THE THRESHOLD VALUES EXAMINED IN THE FGEIS. CONSEQUENTLY, NO FURTHER STATE ENVIRONMENTAL QUALITY REVIEW ACT (SEQRA) ACTION IS NECESSARY IN APPROVING THE PROPOSAL. STAFF FURTHER RECOMMENDS THAT A MONITORING PROGRAM BE INSTITUTED TO PROVIDE A RECORD OF CHANGES RESULTING FROM THE RESTRUCTURING PLAN'S IMPLEMENTATION TO ENABLE CONFIRMATION AND/OR EXPOSITION OF UNEXPECTED OUTCOMES AND THEIR SIGNIFICANCE, AND TO ASSURE THAT SPECIFIC MITIGATION MEASURES ARE IMPLEMENTED AS NEEDED. NYS DEPARTMENT OF PUBLIC SERVICE FEBRUARY 13, 1998 - ----------------------------------- -------------------------------------- Name of Lead Agency Date CHIEF, ENVIRONMENTAL COMPLIANCE AND JOHN H. SMOLINSKY OPERATIONS - ----------------------------------- -------------------------------------- Print or Type Name of Responsible Title of Responsible Officer Officer in Lead Agency /s/ John Smolinsky /s/ Martin - ----------------------------------- -------------------------------------- Signature of Responsible Officer Signature of Preparer (If different in Lead Agency from responsible officer) ENVIRONMENTAL ASSESSMENT FORM I. BACKGROUND On May 3, 1996, the Commission issued a Final Generic Environmental Impact Statement (FGEIS) in the Competitive Opportunities proceeding which addressed the environmental impacts of a policy supporting increased competition in electric markets. Alternative approaches to achieving electric competition, including a no-action alternative, were studied. In Opinion No. 96-121/ issued May 20, 1996, the Commission set forth its findings with respect to the FGEIS (p.76-81). The Commission determined that the likely environmental effects of a shift to a more competitive market for electricity are not fully predictable but that: In general, the proposed action will have environmental impacts that are modest or not distinguishable from those of alternative actions, including the no-action alternative ... Apart from the areas of substantial concern noted below, the FGEIS did not identify reasonably likely significant adverse impacts. With respect to air quality impacts related to oxides of nitrogen and sulfur, it appears likely that the retail or wholesale electric market structures would have greater impacts than the no-action alternative. It appears likely that, in the absence of mitigation measures, research and development in environmental and renewables areas would lose funding if competitive restructuring moves forward. In addition, there would likely be a decrease in the amount of cost-effective energy efficiency during any transition to wholesale or retail competition... In order to address the adverse environmental effects identified above on air quality, energy efficiency, and research and development, several mitigation measures will be employed as necessary. First, a system benefits charge will be used as appropriate to fund DSM and research and development in environmental and renewable resource areas during the transition to competition. Second, the competitive restructuring will be monitored closely to ensure that specific mitigation measures are implemented if needed. Finally, the Commission will support and assist efforts - -------- 1/ Cases 94-E-0952, et al., In the Matter of Competitive Opportunities Proceeding Regarding Electric Service, Opinion No. 96-12 (issued May 20, 1996). by New York State and federal agencies to ensure that adverse environmental impacts to the state's air quality from upwind sources of air contamination do not occur as a result of the movement toward competition. Notwithstanding the mitigation measures identified, the proposed action to restructure the electric industry may result in an unavoidable adverse environmental impact on air quality related to oxides of nitrogen and sulfur, loss of some DSM activity, loss of some research and development funding in the environmental and renewables areas, and displacement of workers and local economic loss where plants are closed. Nevertheless, weighing and balancing these likely environmental effects of the shift to competition in the electric industry in New York with social, economic, and other essential considerations, leads to the conclusion that implementing the proposed action toward greater competition is desirable. The Commission also recognized that individual utility proposals might bring to light new concerns. In Opinion No. 96-12,1/ and as further clarified in Opinion No. 96-17,2/, it required each utility to file with its restructuring plans an Environmental Assessment Form and a recommendation on further environmental review. The information to be provided was expected to assist the Commission in determining the need for additional mitigation measures with respect to company restructuring. On August 26, 1997, Niagara Mohawk submitted its Environmental Assessment Form (EAF) and SEQRA recommendation in connection with its initially proposed PowerChoice restructuring plan in Case 94-E-0098 and Case 94-E-0099. This proposal served as the basis for negotiations between the company, Staff and interested parties. On October 10, 1997, the company, Staff and many of the interested parties signed a restructuring settlement. On November 4, 1997, the company filed a supplement to its EAF which addressed the environmental implications of areas - -------- 1 Ibid, p. 78, n. 1. 2 Cases 94-E-0952, et al., Competitive Opportunities Proceeding Rehearing Petitions, Opinion No. 96-17 (issued October 24, 1996). -2- where the negotiated settlement differed from the original proposal. On November 12, 1997, Administrative Law Judge Bouteiller issued a procedural ruling which requested parties in Case 94-E-0098 to file initial comments on the supplemented EAF by December 3, 1997. Comments were received from the Steam Host Action Group (SHAG) and Multiple Intervenors (MI) on that date. No other parties submitted formal comments at that time. However, a number of parties, including the City of Oswego, commented on the EAF or on environmental issues in their briefs. SEQRA and Commission Approval of the Niagara Mohawk Restructuring Plan - Options Before the Commission - ------------------------------------------------------------------------ The FGEIS issued by the Commission in conformance with SEQRA in Case 94-E-0952, et al., addressed the following proposed action: "adoption of a policy supporting increased competition in electric markets, including a preferred method to achieve electric competition; and regulatory and ratemaking practices that will assist in the transition to a more competitive and efficient electric industry, while maintaining safety, environmental, affordability, and service quality goals."1/ Commission approval of Niagara Mohawk's proposed restructuring plan constitutes a "subsequent proposed action." SEQRA requirements with respect to this "subsequent proposed action" allow the Commission to pursue one of the four following options: 1. No further State Environmental Quality Review (SEQRA) compliance is required if a subsequent proposed action will be carried out in conformance with the conditions and thresholds established for such actions in the generic Environmental Impact Statement (EIS) or its findings statement. 2. An amended findings statement must be prepared if the subsequent proposed action was adequately addressed in the generic EIS but was not addressed or was not adequately addressed in the findings statement for the generic EIS. - -------- 1/ Cases 94-E-0952, et al., Competitive Opportunities Proceeding, Opinion No. 96-12 (issued May 20, 1996), p. 76. -3- 3. A negative declaration must be prepared if a subsequent proposed action was not addressed or was not adequately addressed in the generic EIS and the subsequent action will not result in any significant environmental impacts. 4. A supplement to the final generic EIS must be prepared if the subsequent proposed action was not addressed or was not adequately addressed in the generic EIS and the subsequent action may have one or more significant adverse environmental impacts.1/ The following environmental assessment will assist in choosing the appropriate option. The assessment is based on Niagara Mohawk's EAF, party comments submitted in response to the company's EAF, and on additional analysis by Department Staff. In addition, the EAF will consider certain generic comments raised by Public Interest Intervenors in its May 13, 1997 petition requesting that the Commission order the filing of supplemental environmental impact statements in all restructuring cases. The Assessment consists of: Section II - summarizes the proposed settlement agreement. Section III - summarizes the Environmental Assessment Form submitted by the company. Section IV - summarizes party comments on the company's EAF. Section V - Staff's analysis of the environmental impacts of the proposed settlement. Section VI - recommends mitigation and monitoring plan. Section VII - Staff's overall conclusions and recommendations. II. NMPC Proposed Restructuring Settlement -------------------------------------- Under the proposal, residential and smaller commercial customers would receive rate reductions phased in over the first three years of the settlement which would amount to an average reduction of 3.2% by the year 2000. Large industrial customers - -------- 1/ 6 NYCRR Part 617.10(d). -4- would receive reductions in their NMPC rates which would average 13% by the year 2000. The agreement requires the company to auction virtually all of its non-nuclear generation and prohibits the company and its subsidiaries from owning generation in New York in the future. The company's nuclear generation will be placed in a separate business unit but retained pending a statewide solution to the nuclear issue. The plan also provides for phase-in of retail access for all customers by December of 1999. A competitive transition charge (CTC) will be charged all customers in order to collect stranded costs. The plan establishes a $10 million fund which will be used for programs such as retraining, outplacement and early retirement of its employees to mitigate any employment impacts caused by the auction or retirement of its generating plants. Under the plan, the company would continue its current program to remediate pollution at coal gas production sites. The plan also provides for the continuation of low income programs and for the institution of a $15 million per year System Benefits Charge to be used for RD&D energy conservation and other public benefit programs. The company has also agreed to retire 5000 S02 allowances and to transfer ownership or conservation easements for a number of land parcels in the Adirondacks to New York State. In a separate but related action, the company negotiated an agreement (the Master Restructuring Agreement or MRA) with certain Independent Power Producers (IPPs) which are currently selling power to NMPC under "must run" contracts which are unfavorable to the company. This agreement will modify or terminate the contracts of the settling IPPs. A number of these IPPs also provide steam under contract to industrial customers (Steam Hosts). III. The NMPC Environmental Assessment Form (EAF) -------------------------------------------- On August 26, 1997, Niagara Mohawk filed an EAF covering the environmental impacts of NMPC's July 23 PowerChoice -5- Proposal. Subsequently, the company's proposal was modified as a result of settlement negotiations, culminating in an Agreement filed October 10, 1997. On November 4, 1997, the company filed a supplement to the EAF which addressed additional areas of environmental concern raised by details of the final settlement. In comprehensiveness and analytic depth, the NMPC EAF exceeds those submitted by other utilities in their restructuring cases. As the basis for much of its EAF, NMPC ran a series of PROMOD computer analyses which simulated plant dispatching under various scenarios associated with the PowerChoice Proposal. The scenarios differed from one another in terms of assumed demand levels, IPP operations, Demand Side Management levels, and the early retirement of nuclear and certain fossil units, but encompassed the likely range of outcomes from PowerChoice. The company compared these scenarios to an NMPC-generated "no-action" base case and to the PROMOD runs contained in the FGEIS. The company reports that the potential air quality impacts associated with the scenarios fell well within the limits projected in the FGEIS scenarios. The company argues that since existing generating facilities in New York have received permits which allow operation up to design capacity, and since operation at full design capacity was considered in the permitting process, changes in plant operation due to PowerChoice will not have significant aquatic or water quality effects beyond those already considered and found acceptable. The company notes that while PowerChoice will have overall beneficial effects on the State's economy, a more competitive environment could result in localized socio-economic impacts, including loss of employment and tax revenues, if some existing NMPC or IPP plants are retired earlier than they otherwise would have been. Other communities might benefit from the construction of new competitive plants. Statewide employment levels should rise as an indirect effect of lower electricity prices. The company's supplemented EAF also addressed the question of the indirect effect of the MRA on IPP steam hosts. -6- The company estimates that, at most, only 14 million mmBtu per year of steam production, or about 15% of the total IPP steam production, will be retired or mothballed as a result of the MRA. Only about 5% of that 14 million mmBtu is currently being used by steam hosts. Since this is only 0.07% of the over 1 billion mmBtu annual steam production in the NMPC system, the incremental air quality impacts of any changes in emissions resulting from steam hosts running less efficient boilers to replace IPP steam are immaterial and fall within the limits considered in the FGEIS. The company notes in its supplemented EAF that the donation of SO2 allowances, the $15 million per year SBC fund and the negotiated transfer of environmentally significant land parcels will result in environmental benefits not considered in the July 23 PowerChoice proposal. The company also states that the PowerChoice proposal will not affect the company's existing Site Investigation and Remediation (SIR) program--which is designed to identify and mitigate polluted sites owned by the company.1/ IV. Comments on the Niagara Mohawk EAF ---------------------------------- On November 4, 1997, NMPC submitted a supplemented EAF which addresses issues arising from the negotiated agreement. Comments on the EAF were received from the Steam Host Action Group (SHAG) and Multiple Intervenors (MI) on December 3, 1997. Other parties, including the City of Oswego, addressed environmental issues in their briefs. Comments Submitted on the Supplemented EAF - ------------------------------------------ SHAG's comments addressed only one issue--the potential socio-economic effects of changes in contracts between NMPC and certain IPPs on some industrial customers who purchase cogenerated steam from the IPPS. For a number of years, NMPC has - -------- 1/ These are primarily sites where coal gas was produced for illumination during the 19th century which were acquired by NMPC during the period of consolidation of smaller utilities which resulted in the creation of NMPC. -8- had "must run" contracts to purchase power at above market prices from a number of IPPs. Many of those IPPS have had "steam host" customers who purchased steam or hot water which was produced as a byproduct of electric generation. Part of the negotiated settlement is a Master Restructuring Agreement (MRA) which sets the ground rules whereby NMPC and certain of these IPPs will modify or terminate their contracts. SHAG states in its comments on the EAF that the termination of contracts between IPPs and NMPC may lead some IPPs to breach their contracts with the steam hosts. This might increase the costs of the steam hosts or disrupt their operations. In either event, layoffs and economic harm to communities containing the steam hosts might follow. SHAG states that these issues are not adequately addressed in the company's supplemented EAF and urges the Commission to take steps to mitigate the impacts of the MRA on its members. In its comments, MI states that the EAF adequately addresses all potential environmental impacts and that no further action under SEQRA is required. MI does support, however, SHAG's request that the Commission adopt measures to mitigate the potential effects of the MRA on steam hosts. Related Comments in Initial Briefs - ---------------------------------- Several parties also addressed the EAF, or environmental issues arising from the proposed settlement, in their initial briefs on the proposed settlement. PULP's position was that environmental matters had not been adequately considered in the proceeding to comply with the provisions of the State Environmental Quality Review Act (SEQRA), but did not specify in what ways the proceeding had failed. The initial briefs of SHAG referred to its comments (summarized above) on the EAF. The City of Oswego challenged both the SBC and renewable energy projects proposed in the settlement as wasteful and the company's proposed conservation land donations as illegal, and faulted the EAF for not dealing adequately with potential socio-economic impacts of power plant closures which -8- might result from the sale of NMPC generating units. The Cities of Fulton and Cohoes and the NYS Assessors Association adopted Oswego's comments on the EAF by reference in its initial brief. Empire State Development, while supporting the settlement, suggested that the Commission monitor the compliance of parties with provisions of the settlement which require good faith efforts to mitigate the effects of the MRA on steam hosts. The National Association of Energy Services Companies (NAESCO) endorsed the settlement in general and specifically singled out and supported the proposed level of system benefit spending and provisions in the settlement by which NMPC commits to investigating the use of DSM and distributed generation to mitigate T&D related problems. The Consumer Protection Board, while taking no position on the effects of divestiture on local community taxes and employment, did note that recent sale prices of generation assets in California indicated communities might see tax increases resulting from divestiture. In addition, it endorsed the establishment of an SBC at the level specified in the settlement and declined to take a position on the adequacy of the EAF. Multiple Intervenors recapitulated in the brief the environmental positions it took in its comments on the supplemented EAF. The Settling Independent Power Producers endorsed the settlement agreement and the MRA and opposed the positions of the City of Oswego and SHAG with regards to impacts of the settlement and the MRA. SIPP stated that they believed that the potential costs and disruption to industrial operations claimed by SHAG were exaggerated and could be mitigated by negotiations between SIPP and SHAG members without Commission involvement. Niagara Mohawk stated in its brief that the supplemented EAF it had submitted had fully satisfied the requirements of SEQRA. Generic Comments on Utility EAFs - -------------------------------- On May 13, 1997, the Public Interest Intervenors (PII) -9- moved for the Department of Public Service Staff to prepare supplemental environmental impact statements (SEISs) in several restructuring cases. At the time the petition was filed, Niagara Mohawk had not yet submitted an Environmental Assessment Form. In its petition, PII identified a number of claimed deficiencies in the EAFs which had been filed at that date. Some of PII's comments were generic in nature and, in our understanding, were intended to apply to all utilities; some were specific to particular utilities. Even though NMPC had not submitted an EAF at the time of the PII petition and even though PII did not comment on the NMPC EAF subsequently, Staff summarizes below generic points raised by PII in May which are generally relevant to the NMPC EAF. o PII noted that the FGEIS considered using a system benefits charge (SBC)--which would pay for certain energy efficiency, low income and R&D activities not likely to be undertaken by a deregulated utility--as a means of mitigating some environmental impacts. It asserted that the Commission made a decision in Opinion No. 96-12 that the SBC should be funded at approximately the current levels of activity and that the SBC charge proposed in several of the plans it reviewed were below this threshold. o While the system benefits charge is intended to provide for energy efficiency services (beyond those arising from market forces), it is anticipated that utilities will continue to offer some DSM services. PII asserts that some utilities' proposed DSM budgets will be lower than in previous years as a result of the restructuring plan and that will have negative environmental impacts. o PII noted that although the proposed agreements provided for transition to market pricing of generation, T&D services would remain under a traditional form of regulation. PII argued that traditional regulation contains inherent incentives for a utility to increase sales and inflate rate base and that the Commission is therefore required to order an SEIS. o Several settlements reviewed by PII include provision for a Competitive Transition Charge -10- (CTC) which would allow the company to recover certain non-marginal costs of utility electric plants. PII argued that, by providing a mechanism for the recovery of these costs, the agreement would subsidize the operation of utility plants, giving the companies an unfair price advantage when bidding energy sales to an ISO and result in those plants operating more than is economically efficient. Environmental impacts would ensue if the utility plants were run in lieu of other plants which are both more economically efficient and more environmentally benign. o PII noted that load pockets have been identified in several utilities' service territories and that construction of new transmission facilities may be required to mitigate these load pockets. PII asserted that these facilities will have environmental impacts which should be evaluated in an SEIS. Chief Administrative Law Judge Lynch considered the PII petition and reply comments by Staff and several other parties and recommended that "the final EAFs prepared for commission use in the Con Edison and O&R cases consider the potential environmental effects of T&D price cap regulation for Con Edison and the recovery of non-variable generation costs in T&D rates for Con Edison and O&R" but that "in all other respects, there is no reason to commence preparation of SEISs"1/ Nonetheless staff's analysis in Section V will address the issues raised by PII which are broadly relevant to NMPC. We note that several of the environmental groups represented by PII are signatories to the NMPC settlement agreement2/ and that neither PII nor any of its member - -------- 1/ Cases 94-E-0952, et al., Ruling on the Motion for Supplemental Environmental Impact Statements, (issued June 19, 1997), p. 17. 2/ The following PII members are signatories to the settlement: NRDC, PACE, the Adirondack Council, New York Rivers United and the Association for Energy Affordability. -11- environmental groups have commented on the NMPC EAF or raised environmental impact issues. V. Staff Analysis -------------- The FGEIS covered the significant generic issues connected with restructuring at considerable length. The following analysis will not recapitulate the material in the FGEIS. Instead, this analysis will deal with issues identified by Staff, by comments on the Niagara Mohawk EAF and with general comments offered by parties on other utility restructuring EAFs. The issues to be examined are primarily those for which it is reasonable to believe that unique features of the company's service territory or restructuring plan might result in environmental impacts not considered in the FGEIS or in excess of thresholds identified in the FGEIS. A. Effects of Restructuring on Overall Level of Electric Sales in Niagara Mohawks Service Territory ----------------------------------------- A key determinant of the incremental environmental impacts of restructuring the electric industry in New York is the effect of restructuring on the overall level of electric sales. This section of the FAF will address the question of whether any likely effect of the Niagara Mohawk restructuring plan would cause sales growth in excess of the levels contemplated in the Final Generic Environmental Impact Statement (FGEIS). There appear to be three realistic ways in which restructuring could have significant impacts on electric sales: reduced rates and price elasticity; effects of rate of return regulation; and reduced use of energy efficiency. The following paragraphs examine each of these effects. -12- 1. Price Elasticity Effects ------------------------ If electric prices drop as a result of utility rate reductions incorporated in restructuring agreements and/or as a result of competition among the utility and alternative suppliers, customers may make the economic decision to consume more electricity. This is a price elasticity effect. The FGEIs analysis included the preparation of a statewide "high sales" scenario based on estimated sales increases that could result from decreases in electric prices, given the best information then available to staff economists. The high sales scenario assumed that the compounding statewide electric sales growth would be about 2.2% per year. This scenario was compared to a FGEIS base case "evolving regulatory model" scenario. The base case assumed incremental sales growth of 1.2%. Thus, the additional incremental statewide sales growth likely to result from the high sales scenario compared to the no action base case was estimated as about 1.0% per year.1/ PROMOD simulation of comparative plant dispatching under these scenarios showed that, compared to the evolving regulatory model, the high sales model would result in a 2.9% increase in S02, emissions, a 5.5% increase in NOx and a 12% increase in C02 by 2012. The Commission determined that, although the FGEIS showed the possibility of detrimental incremental air quality impacts "consistent with the social, economic and other considerations, from among the reasonable alternatives available," the Commission's restructuring policy "avoids or minimizes adverse environmental impacts to the maximum extent - -------- 1/ To provide a sense of scale, estimated NYPP sales for 1996 were about 144,500 GWH and NMPC sales were 37,355 GWH. Under the FGEIS comparative scenarios, a 1.0% per year incremental growth rate would result in additional statewide sales of about 1,445 GWH in 1997 due to price elasticity and additional NMPC sales of about 374 GWH. -13- possible."1/ Niagara Mohawk accounted for roughly 26% of NYPP sales in 1996. In analyzing the significance of any potential incremental sales growth attributable to the Niagara Mohawk restructuring plan, it is reasonable to focus on Niagara Mohawk's pro rata share of the sales growth and impacts considered in the FGEIS and ask whether Niagara Mohawks incremental sales growth due to price elasticity effects resulting from restructuring would be likely to be significantly greater than the average statewide incremental sales growth due to restructuring. Recently, Staff of the Office of Energy Efficiency and Environment (OEEE), with the assistance of the Office of Regulatory Economics (ORE) of the DPS, performed an elasticity analysis using the rate reductions in the Niagara Mohawk settlement. The results (see Attachment A, Table B) show that the settlement rate reductions are likely to produce a 0.50% incremental annual increase in demand compared to the FGEIS base case over the same 15 year modeling period used in the FGEIS. This is only half the incremental sales increase modeled in the FGEIS high sales scenario. It is important to note that this elasticity analysis estimates only the additional sales growth which would result from the rate reductions in the settlement agreement. It does not consider other important factors, such as population growth, general economic growth and the prices of competitive energy sources, which also help to determine overall sales growth, and so should not be interpreted as a sales forecast. 2. Regulation of the T&D Utility ----------------------------- While the proposed settlement provides for a transition to a more competitive market for generation, the - -------- 1/ Cases 94-E-0952, et al., In the Matter of Competitive Opportunities Regarding Electric Service, Opinion and Order 96-12 (issued May 20, 1996), pg. 81. -14- T&D portion of Niagara Mohawk would remain a regulated utility with rate of return regulation. In its May 13, 1997 petition, PII argued that rate of return regulation gives the T&D utility incentives to promote sales and to build uneconomic rate base. According to PII, these incentives could result in environmental impacts which should be considered in a separate SEIS. For several years, a revenue decoupling mechanism (NERAM) was in effect for NMPC which was intended to remove the linkage between increased sales and increased company profits. However, in 1995 the Commission approved the discontinuation of the general NERAM revenue reconciliation mechanism, but allowed continuation of a limited mechanism for recovery of lost revenues due to DSM. As discussed below, the company's expenditures on DSM declined sharply after 1995. It did not request recovery of DSM lost revenues after that date. The Agreement proposes discontinuation of this DSM lost revenue recovery mechanism. Its discontinuation is unlikely to have a material effect on the company's already much reduced DSM programs or to act as an incentive to promote sales and to build an uneconomic rate base. 3. Lower Energy Efficiency Effect ------------------------------ For a number of years, the New York commission has encouraged utilities to promote end use energy efficiency (DSM). This encouragement has included review and approval of utility DSM plans and budgets and various incentive and cost recovery mechanisms. For all New York utilities, including Niagara Mohawk, the levels of DSM expenditures and energy savings have declined drastically in recent years. Niagara Mohawk's DSM expenditures peaked at $65.9 million in 1992 and its incremental annual DSM energy savings peaked at 324.6 GWH, also in 1992. By 1996, its DSM expenditures had declined to only $0.8 million and its DSM incremental energy savings goal had declined to only 29.9 GWH. While the company had budgeted $2.7 million for DSM in -15- 1997, by mid-year it had only spent about $0.1 million. We estimate 1997 incremental DSM savings at about 6 GWH based on mid-year achievements. The company plans to continue to offer limited DSM programs to customers, but no specific sum is included in the settlement for these activities. As discussed below, money is allocated for a System Benefits Charge (SBC) which will include energy efficiency programs. Staff examined the possibility that DSM budget reductions could reduce the energy conservation measures taken by NMPC customers and result in incremental increases in electric sales beyond the base case. In the FGEIS, the base case "evolving regulatory model" scenario and the "high sales" scenario included annual incremental Niagara Mohawk DSM energy savings of 112 GWH1/ for the years 1997 and beyond. Another scenario in the FGEIS estimated the sales and environmental impacts of halting all DSM activities; the sales and environmental impacts of this "No incremental utility DSM" scenario were shown to be much smaller than those of the "high sales scenario." The FGEIS did not consider a scenario that assumed both high sales and no incremental DSM, so Staff evaluated the plausibility that a realistic combination of low Niagara Mohawk DSM and high Niagara Mohawk sales growth could result in sales greater than those postulated in the FGEIS "high sales scenario." Staff has re-analyzed the impact of energy efficiency programs on NMPC sales growth using a value of 29.9 GWH for 1996, 6.0 GWH for 1997 and 0 GWH for the years 1998 through 2012 and compared that to the DSM impact analysis underlying the FGEIS high sales scenario. We calculate that, averaged over the FGEIS modeling period (1997 through 2012), the elimination of all energy efficiency sales reductions after 1997 would increase - -------- 1/ The assumed level of DSM was equivalent to the company's 1996 DSM goal. No provision was made in the base case for energy efficiency sales reductions resulting from programs funded by a system benefits charge. -16- sales by only 0.13% a year. This analysis probably overstates the effects of reductions in utility DSM programs on the availability of energy efficiency services for two reasons. First, as discussed below, the Agreement provides substantial funding for an SBC, much of which will be used to provide energy efficiency programs or information. Secondly, (as observed in the FGEIS) retail competition will result in the development of a competitive ESCO market in which some ESCO's will probably offer energy efficiency services as a way of distinguishing themselves from competitors. As discussed above, the price elasticity effects of the settlement rate reductions would increase sales by an average rate of 0.50% a year over the 15 year period compared to the FGEIS base case. If the effects of no DSM are added, the likely incremental sales increases due to the settlement are about 0.63%. This is well below the 1.0% incremental growth considered in the FGEIS high sales scenario. B. System Benefits Charge ---------------------- The settlement provides for an SBC funded at a level of $15 million a year. The City of Oswego has objected to the establishment of an SBC as wasteful. However, in adopting the FGEIS, the Commission found that an SBC is necessary to mitigate the environmental effects of the reduction in utility DSM programs and provide for the continuation of other important public benefit programs. In its May 13, 1997 comments, PII argued that restructuring agreements should provide for SBCs funded at the levels of utility DSM expenditures current when the Commission adopted the FGEIS. Staff believes that the proposed level of funding is compatible with the FGEIS and that no further analysis is required. C. Effect of Restructuring on Retirement or Construction of New Generation, Plant Dispatch or Fuel Purchase ------------------------------------- Another potential factor that could, in -17- NY12528: 98044.1 concept, affect New York's environment is the direct or indirect effect of the Niagara Mohawk restructuring plan on the mix of fuels burned or plants run to meet electric sales in Niagara Mohawk's territory. The following section will analyze whether there is any reason to believe that the Niagara Mohawk plan would result in impacts that are greater than or different in nature or causation from those already addressed in the FGEIS. 1. Construction of New Generating Plants ------------------------------------- Projections in the FGEIS suggest that new capacity will be required on the New York State system within several years. This capacity might be provided by constructing new facilities, repowering existing. plants, additional firm power imports or a combination of the above. It is also possible that some investors will find it attractive to construct new power plants (or refurbish existing less efficient plants) to compete as merchant plants in the new open power market being established by the Commission. If new or repowered plants in excess of 80 MW, or significant transmission construction is required, those projects will be subject to full environmental review under Articles X and VII of the Public Service Law. In any event, under current air quality regulations (particularly the emissions offset policies for NOx) construction of new facilities tends to improve air quality for critical emissions. 2. Transfer of Ownership of NMPC Non-Nuclear Generation ----------------------------- Under the Agreement, the company is required to auction its non-nuclear generation. The company has prepared an auction plan which will be the subject of a separate Commission proceedings. The potential environmental consequences of the auction are beyond the scope of this EAF. Staff will examine the auction plan and advise the Commission about whether a separate SEQRA analysis of the auction is required. -18- However, the City of Oswego and other parties have raised concerns about the possible effects of the settlement agreement on existing NMPC plants. It is possible to make some general observations about the possible environmental impacts of the divestiture of the company's generation assets. It is likely that the company's lowest cost generating facilities will be acquired by another owner. These plants may be operated in much the same fashion by the new owners as they have been by NMPC. In general, the permitting and licensing restrictions and environmental standards which apply to these plants under Niagara Mohawk's ownership will continue to apply. However, it is possible that competitive pressures will cause the new owners to seek to cut environmental expenditures in non-mandated areas. Such problems could be mitigated through specific agreements between NMPC and bidders if required by the auction plan. The company estimates that most plant staff will be retained by new owners, but it is possible that transfer of these low operating cost plants would result in replacement of some existing NMPC employees or a reduction in work force. The effect of divestiture on higher cost plants is more speculative. It is possible that new owners will acquire some or all of these less efficient plants and invest money to make them more competitive. Even plants with high operating costs may have significant advantages over "green field" sites in terms of existing transmission links and fuel access, as well as community acceptance and relative ease of environmental licensing. We note that Niagara Mohawk is currently in the early stages of an Article X licensing proceeding for the repowering of its Albany Steam Station. This application is intended expressly to increase the value of that facility to prospective bidders. The combination of incentives for prompt -19- auctioning of these sites and the opportunity for NMPC to recover much of its stranded costs may mean that currently inefficient plants will be available at reasonable prices to developers. The result could be a willingness to invest in plant refurbishment to make them competitive in the market. The transfer of ownership from a regulated utility to an unregulated owner may also provide an opportunity for the new owner to negotiate lower property tax payments--further improving the plant's competitiveness. 3. Retirement of NMPC Generating Facilities ---------------------------------------- If no market for a given facility is revealed by the auction, retirement of that facility is a likely outcome. However, retirement of a major NMPC generating facility could have a variety of local fiscal, economic, employment and other environmental impacts. The City of Oswego cited concerns about the potential local impacts of retirement of the Oswego Steam Station. The potential impact of early plant retirements was considered by the Commission in the FGEIS. The FGEIS concluded that accelerated retirement of less efficient plants is an unavoidable potential consequence of a more competitive electric industry. It further concluded that such changes could have significant adverse impacts on individuals and communities. Impacts discussed in the EAF included local economic impacts, decreased employment and reduced local tax revenues. While the EAF predicted that competition would lead to lower electric rates and an enhanced economy which would more than offset these impacts on a statewide basis, it stated that permanent displacement of some workers might result and that not all communities would share equally in the benefits of competition. In Opinion No. 96-12, the Commission determined that "adverse environmental impacts will be avoided or minimized to the maximum extent practicable by incorporating as conditions to the decision those mitigative measures that were identified as practicable." One measure adopted by the Commission was a charge to Staff to monitor -20- and, if indicated, mitigate specific impacts that may occur. The Settlement includes a commitment from the company to establish a $10 million fund which will be used for programs such as retraining, outplacement and early retirement of its employees to mitigate any employment impacts caused by the auction or retirement of its generating plants. The potential impacts on the City of Oswego, and other communities potentially affected, fall within the range considered in the FGEIS and no further analysis is required in this proceeding. 4. Effect of Competitive Transition Charge (CTC) on Plant Dispatch --------------------------------------- The proposed Settlement includes a provision which will allow the company to partially recover its above-market generation costs through a non-avoidable CTC charge. In its motion filed on May 13, 1997 in Case 96-E-0952, PII contended that since potential competitors will not receive a similar income stream, companies receiving a CTC would offer generation to the ISO at a subsidized and uneconomic price. This, PII asserted, could result in a company operating less efficient and dirtier plants than the competitive plants which would have operated in the absence of the CTC. However, under the provisions of the proposed settlement, collection of NMPC's stranded costs is not dependent on operating a Niagara Mohawk plant (i.e., is not marginal revenue). Both Niagara Mohawk and any competitors would face the same short term decision criterion. They would maximize profits (or minimize losses) on existing facilities by selling on the market whenever the clearing price equals or exceeds their marginal operating costs--as they themselves calculate marginal costs given their best information. While not addressed in any filed comments, some parties in public hearings have objected to the collection of the CTC from customers who choose to install solar panels or other renewable technologies to -21- supply their power but remain connected with the company for back-up. They contend that, by increasing their costs, the CTC slows the development of renewable energy and incrases environmental impacts. It appears to Staff that even-handed application of the CTC merely puts all power sources on an even footing. Since the CTC costs avoided by installers of renewable equipment would be ultimately born by other ratepayers or company stockholders, special exemptions from the CTC would constitute an indirect and uneconomic subsidy. If subsidies for renewables are in the public interest, they can be provided directly through the SBC or through legislative action. 4. Fuel Burned by Niagara Mohawk ----------------------------- Various Niagara Mohawk units have the capacity to burn either coal, oil or gas within existing air quality limits. Decisions about which fuel to burn at these facilities will continue to be based on economic considerations and unrelated to restructuring regardless of ownership. D. Effects of the MRA ------------------ For a number of years the company has been locked into "must run" contracts requiring it to purchase power, whenever offered, at above-market prices. Most of these plants are either small hydro-electric facilities or modern gas-fired cogenerators. In July of 1997, the company reached a Master Restructuring Agreement with 29 IPPs representing 80% of the company's above-market costs. Under the MRA, the settling IPPs agreed to "restructure, amend or replace" their current contracts in return for payments from NMPC, purchase by NMPC or other contract modifications. 1. Potential Air Quality Impacts of Changes in IPP Contracts -------------------------------- It is not feasible to predict how the operation of each of these plants will be changed by the MRA. However, in general, the MRA could impact the operation of the settling IPP plants through changes in the dispatch of the IPPs -22- and changes in steam sales to steam hosts. According to NMPC estimates, at most about 15% of the total IPP steam production would be retired or moth balled due to the MRA. The remainder will continue operating but will either enter into bilateral contracts or bid into the market on a basis that reflects true marginal costs. The FGEIS examined the possibility that all the "must run" IPP contracts in New York State would be renegotiated so that these plants would be economically dispatched. The model used for the FGEIS showed that economic dispatch of IPPs would result in increased S02 emissions and decreased NOx and C02 emissions, relative to the base case, during most of the study period. However, during the later years of the period, economic dispatch of IPPs would result in lower S02 emissions. In Opinion No. 96-12, which adopted the FGEIS, the Commission observed that the analysis of retail market structures (which included consideration of economic dispatch of IPPs) forecast that competition would result in greater air quality impacts than the no action alternative, but that moving towards competition was still desirable when these effects were balanced against the likely economic benefits of the policy. The proposed MRA would have smaller effects than those reported in the FGEIS since the FGEIS assumed that all the IPPs in the state with "must run" contracts would be economically dispatched, while the MRA affects only some of the IPPs having contracts with NMPC. It should be noted that, although there is likely to be a temporary increase in S02 emissions resulting from the MRA, NMPC has agreed to permanently donate 5,000 S02 allowances to the Adirondack Council for retirement. Many of the IPP units affected by the MRA have steam hosts which currently purchase byproduct steam or hot water from generating activities. To the extent that IPPs are retired or mothballed, the steam hosts may have to build new auxiliary boilers or refurbish retired boilers. Niagara Mohawk, in its EAF, estimates that the steam host steam requirements -23- directly affected by retirement of settling IPPs would represent only about 0.8% of total IPP steam production. In addition, it is possible that changes in the operation of an IPP1/ due to renegotiation of contracts with NMPC could result in a higher steam price or limited steam availability and thus cause increased operation of auxiliary boilers. These single purpose boilers could be less efficient and somewhat more polluting than the cogeneration units they replace. In general, we would assume that the indirect air quality impacts of increased operation of new or existing auxiliary steam host boilers would have only marginal air quality impacts since most steam hosts currently served by an adjacent gas fired IPP would probably have relatively easy physical access to clean burning natural gas to feed their own boilers2 and since the amount of steam involved is relatively low in the context of this assessment. 2. Potential Socio-economic Impacts of Interruption of Steam Supply to Steam Hosts ----------------------------------------------- As noted above, it is possible that the MRA, which modifies or terminates contracts between NMPC and a number of IPPs, may affect the price or availability of steam or hot water currently provided by these IPPs to industrial steam hosts. This could have a variety of impacts on the costs or operations of the steam hosts. For example: - steam prices charged to the steam hosts could rise because of changes in the cogenerators' revenue structure; - steam hosts may have to change production schedules because cogenerators operate less frequently or less regularly; - -------- 1 For example, if a cogenerator which formerly ran around the clock under a "must run" contract, moved to a more limited or irregular operating regime under economic dispatch. 2 The possible economic and employment impacts of changes or discontinuation of IPP steam sales to steam hosts will be discussed in another section of this EAF. -24- - steam may no longer be available from cogenerators who cease operation; - the installation or refurbishment of auxiliary boilers to replace cogenerated steam may result in higher capital and operating costs or in disruption of steam host operations during the period of permitting and construction. Such changes could have short term effects on profits, worker incomes, employment and local economies if, for example, production curtailments and layoffs or reduced shifts were required during a transition period. Long term local socio-economic impacts might result if the steam host saw a major permanent change in its capital or operating costs which made it less competitive in the market. These adverse local socio-economic impacts would be balanced by positive socio-economic impacts on a larger scale. In many cases, IPPs sought out steam hosts primarily to become "qualifying facilities" (QFs) under the Public Utilities Regulatory Policy Act of 1978 (PURPA) and thus eligible for legislatively mandated above-market price must-run contracts with Niagara Mohawk. As a result of the MRA, these plants will be dispatched economically based on their marginal costs. The resulting improvement in economic efficiency will lower costs and benefit ratepayers and the state's economy. This is not to say that the local economic disruption which might be caused by the MRA is inconsequential. However, it is likely that such impacts can be adequately mitigated. We note that the parties to the settlement have committed (section 13.8) to "pursue diligently ways to minimize any economic or operational difficulties due to changes in IPP steam production which could occur as a result of the MRA..." E. Effect of Restructuring Plan on Construction of New Transmission Facilities -------------------------------------------- In its EAF, Niagara Mohawk states that no new transmission facilities are required to implement the October 10 agreement. it is possible, however, that load pockets could -25- occur within the franchise in certain combinations of load and weather. Load pockets are of potential concern in a competitive environment because the owner of facilities in the load pocket could exercise market power during load pocket conditions unless there were sufficient competing generation sources within the load pocket. In many areas of the NMPC franchise there is a mix of generating facilities owned by NMPC and IPPs. Where this diversity of ownership occurs, the exercise of market power is less likely to occur. However, ownership of NMPC facilities is likely to change within the next few years because NMPC has committed to auctioning its non-nuclear generation. Conceivably the ownership of generation could become more dispersed in some areas (lessening market power concerns) and more concentrated in other regions (increasing the potential market power of owners). Additional transmission could be constructed by the regulated T&D utility to prevent the exercise of market power. The construction of new transmission facilities can be anticipated to have a variety of environmental impacts. These were discussed generically in the FGEIS. However, any construction of significant new transmission would require environmental review and approval by the Public Service Commission under Article VII of the Public Service Law. Under this law the Commission is obligated to weigh the costs and benefits of the transmission addition and to consider alternatives. In many situations, the Commission could take other steps to relieve or prevent market power which would not have incremental environmental impacts. For example, it could impose requirements on Niagara Mohawk's auction process which would limit the amount of generation any one bidder could buy in a potential load pocket, or could require purchasers to enter into special contracts with the T&D utility which would limit or index prices which could be charged during load pocket conditions. In some situations the Commission might encourage T&D utilities to offer targeted DSM programs to prevent the -26- exercise of market power. In Section 7.2(l) of the settlement, the company committed itself to evaluate and implement cost effective alternatives to major T&D projects including DSM and distributed generation. F. Miscellaneous Environmental Issues ---------------------------------- 1. Remediation of Coal Gas Sites ----------------------------- For several years the company has been conducting a site remediation program designed primarily to clean up environmental damage at old coal gas sites which the company had acquired during its consolidation. Section 2.6.5.2 of the settlement commits the company to continue this effort. No incremental environmental impacts are anticipated. 2. Environmentally Significant Lands Owned By Niagara Mohawk --------------------------------- The company currently owns extensive undeveloped land associated primarily with its hydro facilities. Some portions of this land have considerable ecological or scenic value. Divestiture of these hydro facilities could result in the development of these lands and the loss of their ecological values. However, in sections 7.2 (iv through x) the company commits to donate or sell conservation and development right easements to the State of New York for these critical parcels. No incremental negative environmental impacts are anticipated. 3. Environmental Disclosure ------------------------ Various parties suggested that some customers in a competitive power market may wish to consider environmental values in their power purchase decisions. In the absence of reliable and consistently presented information on the generation sources used by suppliers, customers may be unable to make informed decisions based on environmental as well as economic considerations. A well defined environmental disclosure program would encourage the use of environmentally responsible generation sources. Section 7.2 (xvi) of the settlement states that the company and Staff have agreed to "...work with load serving entities and others to develop and implement, where feasible, meaningful and cost effective, an approach to providing -27- customers with fuel mix and emission characteristics of the generation sources relied upon by the load serving entity." VI. Mitigation of Impacts--Monitoring --------------------------------- It is important to note that the FGEIS explicitly recognized that "the likely environmental effects of a shift to a more competitive market for electricity are not fully predictable1/ due to the absence of precedence, complexity of the New York electric industry, future regulatory activities, including those of other states and the federal government, and the nature and degree of market response. The same uncertainty persists with respect to Niagara Mohawk's restructuring plan. In Opinion 96-12 (Opinion and Order Regarding Competitive Opportunities for Electric Service), the Commission made certain "findings" pursuant to the State Environmental Quality Review Act. The Commission determined that "...adverse environmental impacts will be avoided or minimized to the maximum extent practicable by incorporating as conditions to the decision those mitigative measures that were identified as practicable; . . . These mitigation measures are: (1) monitoring environmental impacts; (2) system benefits charge; and (3) assisting efforts undertaken by other agencies to address interstate pollution transport." Staff analysis of the Niagara Mohawk restructuring plan shows that its implementation would result in environmental effects which would most likely be less than the impact values assessed in the FGEIS. To address any uncertainty and to evaluate unknown outcomes, a monitoring program, as envisioned in the FGEIS should be developed. Environmental impacts which could be monitored are described in Section 6.2.3 of the Final Generic Environmental Impact Statement (FGEIS) issued May 3, 1996 in Case 94-E-0952 (Competitive Opportunities Regarding Electric Service). In addition, this EAF discuss a number of activities and environmental changes that would be important to monitor during - ------------------- 1 FGEIS, p. 77. -28- the transition to competition. Examples of environmental issues that could require monitoring include: o imported electricity from the midwest, o SO2 and NOX emissions, o retirement of Niagara Mohawk power plants, o in-state and out-of-state purchased generation, o fuel mixture of generation, o reduction in environmental RD&D, o loss of environmentally significant land, o new electric and gas transmission line construction, o acid precipitation in the Adirondacks and Catskills, and o mitigation of load pockets. The proposed environmental monitoring plan currently being developed by Staff will be organized around the major environmental impacts considered in the FGEIS and this EAF, including information necessary for analysis of any restructuring environmental impacts, confirmation of expected impacts and exposition of unexpected outcomes and their significance. Staff anticipates Niagara Mohawk's cooperation in the development and implementation of this monitoring plan. VII. Conclusions ----------- We have considered the proposed October 10 settlement agreement and have analyzed the potential impacts of that agreement on the environment. We have compared these likely impacts to those addressed in the FGEIS. Our analysis has been broadly framed and has looked at limiting cases in order to encompass any modifications to that agreement likely to be adopted by the Commission. In our analysis we have also considered issues raised by other parties commenting on the Niagara Mohawk EAF. We conclude that the Niagara Mohawk restructuring plan would not result in significant new environmental impacts not considered in the FGEIS, nor would it result in impacts likely to be greater than those considered in the FGEIS. Therefore no SEIS is required under the provisions of SEQRA. Staff recommends that the Commission determine that -29- no further SEQRA compliance is required with regard to the transitional restructuring plan for this company. Although no further SEQRA compliance is required before Commission action on the NMPC restructuring agreement, the Commission should institute mechanisms for monitoring and, if indicated, mitigating some of the potential impacts of restructuring. Staff is developing a proposed monitoring plan for the Commission's consideration. In the future, the Commission will be asked to act on NMPC's detailed auction plan. Staff is considering the potential impacts of the auction plan and will advise the Commission on the possible need for an EAF on that action. -30- ATTACHMENT Page 1 of 4 APPENDIX IMPACT OF POSSIBLE RATE DECREASES ON SALES GROWTH Several of the potential impacts of deregulation examined in the Final Generic Environmental Impact Statement (FGEIS) are a result of the increased sales that are expected to accompany deregulation. Rate reductions, which are a primary driver of the increased sales, are not considered explicitly in the FGEIS; rather it was assumed that, beginning in 1997, sales would increase by an additional 1% per year for 15 years. That is, if statewide growth without deregulation is 1.2% per year (as was assumed in the FGEIS evolving regulatory model), growth with deregulation would be 2.2%. In each of the restructuring cases, specific rate reductions are now being considered. Using price elasticity of demand, these proposed rate reductions now permit the calculation of an estimate of increased sales to be expected from restructuring. The following tables (developed by the Office of Energy Efficiency and Environment with the assistance of the Office of Regulatory Economics) consider both short-run elasticity (the increase in sales which occurs immediately after the rate reduction) and long-run elasticity (increases which occur in subsequent years). No other growth inducing factors are included, so the analysis only reflects the incremental impact of rate changes. The first step in the calculation (Table F) is to determine the weighted average elasticities based on the elasticities for each sector (industrial, commercial and residential) and the fraction of the utility' load in each sector (sales weight). Also, the average price reduction per year is calculated based on the expected rate decrease for each sector and the sales weight. Five price reduction scenarios (A through E) are considered. Scenario B is based on the price reductions from the Agreement and is the scenario used in the EAF. Other scenarios explore alternative hypothetical rate reductions. Tables A through E then calculate the year by year increase in sales due to competition (short-run, long-run and total), the cumulative change in sales, and the annual average rate of sales growth. Residential Delta (Res Delta) is the possible residential rate reduction considered in the table; Percent Total Impact per Year (%TI/Yr) is the average price reduction per year from Table F. The end of the five year settlement period and the end of the 15 year modeling period are highlighted. ATTACHMENT Page 2 of 4 NIAGARA MOHAWK PRICE ELASTICITY IMPACT -------------------------------------- Sales ch = (price elasticity * % price ch) + lambda * (sales ch lag 1) A. %Res Delta %Tl/Yr Lambda SR Elas LR Elas 1.0 1.35 0.71 0.33 1.14 Cumu- Annual Year SR Sales LR Sales Total lative Rate - ---- -------- -------- ----- ------ ---- 1998 0.439 0.000 0.439 0.439 0.44 1999 0.439 0.313 0.752 1.191 0.59 2000 0.439 0.537 0.976 2.167 0.72 2001 0.000 0.697 0.697 2.865 0.71 2002 0.000 0.498 0.498 3.363 0.66 2003 0.000 0.356 0.356 3.718 0.61 2004 0.000 0.254 0.254 3.973 0.56 2005 0.000 0.182 0.182 4.154 0.51 2006 0.000 0.130 0.130 4.284 0.47 2007 0.000 0.093 0.093 4.376 0.43 2008 0.000 0.066 0.066 4.442 0.40 2009 0.000 0.047 0.047 4.490 0.37 2010 0.000 0.034 0.034 4.523 0.34 2011 0.000 0.024 0.024 4.548 0.32 2012 0.000 0.017 0.017 4.565 0.30 B. %Res Delta %T1/Yr Lambda SR Elas LR Elas 3.2 2.31 0.71 0.33 1.14 Cumu- Annual Year SR Sales LR Sales Total lative Rate ---- -------- -------- ----- ------ ---- 1998 0.751 0.000 0.751 0.751 0.75 1999 0.751 0.536 1.287 2.037 1.01 2000 0.751 0.919 1.670 3.707 1.22 2001 0.000 1.193 1.193 4.899 1.20 2002 0.000 0.852 0.852 5.751 1.12 2003 0.000 0.608 0.608 6.360 1.03 2004 0.000 0.435 0.435 6.794 0.94 2005 0.000 0.310 0.310 7.105 0.86 2006 0.000 0.222 0.222 7.326 0.79 2007 0.000 0.158 0.158 7.485 0.72 2008 0.000 0.113 0.113 7.598 0.67 2009 0.000 0.081 0.081 7.679 0.62 2010 0.000 0.058 0.058 7.736 0.57 2011 0.000 0.041 0.041 7.778 0.54 2012 0.000 0.029 0.029 7.807 0.50 ATTACHMENT Page 3 of 4 NIAGARA MOHAWK Sales ch = (price elasticity * % price ch) + lambda * (sales ch lag 1) C. %Res Delta %Tl/Yr Lambda SR Elas LR Elas 5.0 2.73 0.71 0.33 1.14 Cumu- Year SR Sales LR Sales Total lative Rate ---- -------- -------- ----- ------ ---- 1998 0.887 0.000 0.887 0.887 0.89 1999 0.887 0.633 1.520 2.407 1.20 2000 0.887 1.086 1.973 4.380 1.44 2001 0.000 1.409 1.409 5.789 1.42 2002 0.000 1.006 1.006 6.795 1.32 2003 0.000 0.719 0.719 7.514 1.21 2004 0.000 0.514 0.514 8.028 1.11 2005 0.000 0.367 0.367 8.394 1.01 2006 0.000 0.262 0.262 8.656 0.93 2007 0.000 0.187 0.187 8.844 0.85 2008 0.000 0.134 0.134 8.977 0.78 2009 0.000 0.095 0.095 9.073 0.73 2010 0.000 0.068 0.068 9.141 0.68 2011 0.000 0.049 0.049 9.190 0.63 2012 0.000 0.035 0.035 9.224 0.59 D. %Res Delta %Tl/Yr Lambda SR Elas LR Elas 7.0 3.64 0.71 0.33 1.14 Cumu- Annual Year SR Sales LR Sales Total lative Rate ---- -------- -------- ----- ------ ---- 1998 1.185 0.000 1.185 1.185 1.18 1999 1.185 0.846 2.031 3.215 1.59 2000 1.185 1.451 2.635 5.850 1.91 2001 0.000 1.882 1.882 7.733 1.88 2002 0.000 1.344 1.344 9.077 1.75 2003 0.000 0.960 0.960 10.037 1.61 2004 0.000 0.686 0.686 10.723 1.47 2005 0.000 0.490 0.490 11.213 1.34 2006 0.000 0.350 0.350 11.563 1.22 2007 0.000 0.250 0.250 11.813 1.12 2008 0.000 0.179 0.179 11.992 1.03 2009 0.000 0.128 0.128 12.119 0.96 2010 0.000 0.091 0.091 12.210 0.89 2011 0.000 0.065 0.065 12.275 0.83 2012 0.000 0.046 0.046 12.322 0.78 ATTACHMENT Page 4 of 4 NIAGARA MOHAWK Sales ch = (price elasticity * % price ch) + lambda * (sales ch lag 1) E. %Res Delta %T1/Yr Lambda SR Elas LR Elas 9.0 4.55 0.71 0.33 1.14 Cumu- Annual Year SR Sales LR Sales Total lative Rate ---- -------- -------- ----- ------ ---- 1998 1.477 0.000 1.477 1.477 1.48 1999 1.477 1.055 2.532 4.010 1.99 2000 1.477 1.809 3.286 7.296 2.37 2001 0.000 2.347 2.347 9.643 2.33 2002 0.000 1.677 1.677 11.319 2.17 2003 0.000 1.198 1.198 12.517 1.98 2004 0.000 0.855 0.855 13.372 1.81 2005 0.000 0.611 0.611 13.983 1.65 2006 0.000 0.436 0.436 14.419 1.51 2007 0.000 0.312 0.312 14.731 1.38 2008 0.000 0.223 0.223 14.954 1.27 2009 0.000 0.159 0.159 15.113 1.18 2010 0.000 0.114 0.114 15.226 1.10 2011 0.000 0.081 0.081 15.308 1.02 2012 0.000 0.058 0.058 15.366 0.96 F. LARGE SMALL RES/ WGTED PRICE IND IND/COM OTHER AVG PER YR --- ------- ----- --- ------ Sales Weight 0.31 0.32 0.37 SR Price Elas. 0.43 0.31 0.25 0.33 LR Price Elas. 1.28 1.17 0.99 1.14 Price Red. A 10.00 2.00 1.00 4.11 1.35 Price Red. B 13.31 5.56 3.22 7.10 2.31 Price Red. C 15.00 6.00 5.00 8.42 2.73 Price Red. D 20.00 8.00 7.00 11.35 3.64 Price Red. E 25.00 10.00 9.00 14.28 4.55 Lambda (1- SR Elas/LR Elas): 0.71 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No.__________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT K
Tuesday, July 14, 1998 ANSWER Page 1 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== C Adams, Town of Jefferson Elec Trans Perpetual C Adams, Town of Jefferson Electric Perpetual C Adams, Town of Jefferson Gas Perpetual C Adams, Village of Jefferson Electric Perpetual C Adams, Village of Jefferson Gas Perpetual C Albion, Town of Jefferson Electric Perpetual C Albion, Town of Oswego Electric Perpetual C Alexandria Bay, Village of Jefferson Electric Perpetual C Alexandria, Town of Jefferson El. Spec.Loc. Perpetual C Alexandria, Town of Jefferson Gas & Electric Perpetual C Altamont, Town of Franklin Electric Perpetual C Altmar, Village of Oswego Electric Perpetual C Amboy, Town of Oswego Electric Perpetual C Annsville, Town of Oneida El. Trans/Dist. Perpetual C Antwerp, Town of Jefferson Electric Perpetual C Antwerp, Village of Jefferson Electric Perpetual C Ava, Town of Oneida Electric Perpetual C Baldwinsville, Village of Onondaga Electric Perpetual C Baldwinsville, Village of Onondaga Gas Perpetual C Baldwinsville, Village of Onondaga Gas Trans Sp Lo Perpetual C Baldwinsville, Village of Onondaga Gas Trans/Dist. Perpetual C Baldwinsville, Village of Onondaga Gas-Correction Perpetual C Bangor, Town of Franklin Gas & Electric Perpetual C Belmont, Town of Franklin Elec. Ltd. Area Perpetual C Black Brook, Town of Clinton Electric Perpetual C Black River, Village of Jefferson Electric Perpetual C Black River, Village of Jefferson Gas Perpetual C Bloomingdale, Village of Essex Electric Perpetual C Bombay, Town of Franklin El. Ltd. Area Perpetual C Bombay, Town of Franklin Electric 8/14/2015 99 years C Boonville, Town of Oneida Elec. Trans. Perpetual C Boonville, Town of Oneida Electric Perpetual C Boylston, Town of Oswego El. Trans.(map) Perpetual C Boylston, Town of Oswego Electric Not Shown C Brandon, Town of Franklin Electric Perpetual C Brasher, Town of St. Lawrence Electric Perpetual C Brighton, Town of Franklin Electric Perpetual C Brownville, Town of Jefferson El. Trans/Dist. Perpetual C Brownville, Town of Jefferson Electric 50 Years C Brownville, Town of Jefferson Gas Perpetual C Brownville, Village of Jefferson Electric Not Shown C Brownville, Village of Jefferson Electric Perpetual C Brownville, Village of Jefferson Electric 4/18/38 10 years C Brownville, Village of Jefferson Gas Perpetual C Brushton, Village of Franklin Electric Perpetual C Brutus, Town of Cayuga Electric Perpetual C Camden, Town of Oneida El. Trans/Dist. Perpetual C Camden, Village of Oneida El. Trans/Dist. Perpetual C Camillus, Town of Onondaga El. Trans/Dist. Perpetual C Camillus, Town of Onondaga EI.Trans.Sp.Loc Perpetual C Camillus, Town of Onondaga Gas Trans/Dist Perpetual C Camillus, Town of Onondaga Gas-correction Perpetual C Camillus, Village of Onondaga Electric Perpetual C Camillus, Village of Onondaga Gas Perpetual C Camillus, Village of Onondaga Gas-correction Perpetual C Canastota, Village of Madison Electric Perpetual C Canastota, Village of Madison Gas 2/27/54 50 years C Canastota, Village of Madison Gas & Electric Perpetual C Canastota, Village of Madison Gas & Electric 14/14/52 50 Years C Canton, Town of St. Lawrence El. Spec. Loc. Perpetual C Canton, Town of St. Lawrence Elec Spec Loc Not Stated C Canton, Town of St. Lawrence Elec Spec Loca Perpetual C Canton, Town of St. Lawrence Electric Perpetual C Canton, Town of St. Lawrence Electric 8/6/27 10 Years, Rnwb. C Canton, Village of St. Lawrence Electric Perpetual C Cape Vincent, Town of Jefferson Gas & Electric Perpetual C Cape Vincent, Village of Jefferson Electric Perpetual
Tuesday, July 14, 1998 ANSWER Page 2 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== C Carthage, Village of Jefferson Electric Perpetual C Carthage, Village of Jefferson Gas Perpetual C Castorland, Village of Lewis Electric Not Shown C Cazenovia, Town of Madison El. Tran.Sp.Loc. Perpetual C Cazenovia, Town of Madison Electric Perpetual C Cazenovia, Town of Madison Gas Perpetual C Cazenovia, Town of Madison Gas Trans/Dist. Perpetual C Cazenovia, Village of Madison Electric Perpetual C Cazenovia, Village of Madison Gas Perpetual C Central Square, Village of Oswego Electric Perpetual C Champion, Town of Jefferson Electric Perpetual C Champion, Town of Jefferson Gas Perpetual C Chaumont, Village of Jefferson Electric & Gas Perpetual C Chittenango, Village of Madison Electric Perpetual C Chittenango, Village of Madison Gas Perpetual C Cicero, Town of Onondaga El Trans Sp Loc Perpetual C Cicero, Town of Onondaga El Trans/Dist. Perpetual C Cicero, Town of Onondaga El. trans sp lo Perpetual C Cicero. Town of Onondaga Electric Perpetual C Cicero, Town of Onondaga Gas Trans/Dist Perpetual C Clare, Town of St. Lawrence Electric Perpetual C Clay, Town of Onondaga El Trans Sp Lo Perpetual C Clay, Town of Onondaga El. Trans/Dist Perpetual C Clay, Town of Onondaga Electric Perpetual C Clay, Town of Onondaga Gas Trans/Dist Perpetual C Clayton, Town of Jefferson Electric Perpetual C Clayton, Village of Jefferson Electric Perpetual C Clayville, Village of Oneida Electric Perpetual C Clayville, Village of Oneida Gas Trans/Dist. Perpetual C Cleveland, Village of Oswego Electric Perpetual C Clifton, Town of St. Lawrence Electric Perpetual C Clinton, Village of Oneida El Trans Sp Loc Perpetual C Clinton, Village of Oneida Gas/El Trs/Dst. Perpetual C Cold Brook, Village of Herkimer Electric Perpetual C Cold Brook, Village of Herkimer Gas Perpetual C Colton, Town of St. Lawrence Electric Perpetual C Colton, Town of St. Lawrence Electric 7/14/18 Five Years C Colton, Town of St. Lawrence Electric 7/12/23 Five Years C Columbia, Town of Herkimer Elec Ltd Area Perpetual C Constable, Town of Franklin Electric Perpetual C Constableville, Village of Lewis Electric Perpetual C Constantia, Town of Oswego Electric Perpetual C Copenhagen, Village of Lewis Electric Perpetual C Cornwall, Township of Stormont Electric 7/5/46 20 years C Cornwall, Township of Stormont Electric 4/18/52 5 yrs frm order C Cornwall, Township of Stormont Electric 9/19/57 5 years C Cortland, City of Cortland Electric 1/l/23 25 years C Cortland, City of Cortland Electric 4/30/2001 50 Years C Cortlandville, Town of Cortland Elec.Trs.Sp.Loc Perpetual C Cortlandville, Town of Cortland Electric Perpetual C Croghan, Town of Lewis Electric Perpetual C Croghan, Village of Lewis Electric Perpetual C Cuyler, Town of Cortland El Trns Sp Loc Perpetual C Cuyler, Town of Cortland Electric Perpetual C Danube, Town of Herkimer Elec Ltd Area Perpetual C Danube, Town of Herkimer Gas Ltd Area Perpetual C DeRuyter, Town of Madison Electric Perpetual C DeRuyter, Town of Madison Gas Perpetual C DeRuyter, Village of Madison Electric Perpetual C DeRuyter, Village of Madison Gas Trans/Dist. Perpetual C Deerfield, Town of Oneida El.Trans.Sp.Loc Perpetual C Deerfield, Town of Oneida Elec Spec Loc Perpetual C Deerfield, Town of Oneida Electric Perpetual C Deerfield, Town of Oneida Gas Perpetual C Deferiet, Village of Jefferson Electric Perpetual C Deferiet, Village of Jefferson Gas Perpetual C Dekalb, Town of St. Lawrence Elec Spec Loc Perpetual C Dekalb, Town of St. Lawrence Electric Perpetual
Tuesday, July 14, 1998 ANSWER Page 3 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== C Denmark, Town of Lewis Elec. Trans. Perpetual C Denmark, Town of Lewis Electric Perpetual C Depeyster, Town of St. Lawrence Electric Perpetual C Dewitt, Town of Onondaga Elec Spec Loc 5/1/06 5 Years C Dewitt, Town of Onondaga Elec. Trans. Perpetual C Dewitt, Town of Onondaga Electric Perpetual C Dewitt, Town of Onondaga Gas Spec Loc Perpetual C Dewitt, Town of Onondaga Gas Trs Sp Loc Perpetual C Dexter, Village of Jefferson Electric Perpetual C Dexter, Village of Jefferson Electric 10/17/26 20 Years C Dexter, Village of Jefferson Gas No Term Shown. C Diana, Town of Lewis Electric Perpetual C Diana, Town of Lewis Electric (Map) Perpetual C Dickinson, Town of Franklin Electric Perpetual C Dolgeville, Village of Herkimer Electric Perpetual C Dolgeville, Village of Herkimer Electric 11/21/37 25 years C Dolgeville, Village of Herkimer Gas Perpetual C Duane, Town of Franklin Electric Perpetual C East Syracuse, Village of Onondaga Electric Perpetual C Eastwood, Village of Onondaga El. Trans/Dist. Perpetual C Eastwood, Village of Onondaga Gas Spec Loc. Perpetual C Edwards, Town of St. Lawrence El. Trans/Dist. Perpetual C Edwards, Town of St. Lawrence Elec Spec Loc. Perpetual C Edwards, Town of St. Lawrence Electric Perpetual C Edwards, Village of St. Lawrence El Trans/Dist. No term shown C Elbridge, Town of Onondaga El Tr/Dst Spec Perpetual C Elbridge, Town of Onondaga Electric Perpetual C Ellisburg, Town of Jefferson Electric Perpetual C Ellisburg, Town of Jefferson Gas Perpetual C Ellisburg, Village of Jefferson Electric Perpetual C Evans Mills, Village of Jefferson Electric C Evans Mills, Village of Jefferson Gas Perpetual C Fabius, Town of Onondaga Electric Perpetual C Fabius, Town of Onondaga Electric (Map) Perpetual C Fabius, Town of Onondaoa Gas Corr. Note Shown C Fabius, Town of Onondaga Gas Trans/Dist Perpetual C Fabius, Village of Onondaga Electric Perpetual C Fabius, Village of Onondaga Gas Corr. None Shown C Fabius, Village of Onondaga Gas Trans/Dist Perpetual C Fairfield, Town of Herkimer Elec Ltd Area Perpetual C Fairfield, Town of Herkimer Electric Perpetual C Fayetteville, Village of Onondaga Electric Perpetual C Fayetteville, Village of Onondaga Gas Perpetual C Fenner, Town of Madison El Trns Spec. Perpetual C Fenner, Town of Madison Electric Perpetual C Fine, Town of St. Lawrence Electric Perpetual C Florence, Town of Oneida El Trans/Dist. Perpetual C Floyd, Town of Oneida El. Trans/Dist. Perpetual C Floyd, Town of Oneida Gas Perpetual C Forestport, Hamlet of Oneida El Trans/Dist, Perpetual C Forestport, Town of Oneida El Trans/Dist. Not shown C Forestport, Town of Oneida El Trans/Dist. Perpetual C Fort Covington, Town of Franklin Electric Perpetual C Fort Covington, Village of Franklin Electric Perpetual C Fowler, Town of St. Lawrence Electric Perpetual C Frankfort, Town of Herkimer Electric Perpetual C Frankfort, Town of Herkimer Gas Perpetual C Frankfort, Village of Herkimer El Tr. Spec Loc Perpetual C Frankfort, Village of Herkimer El Tr. Spec Loc Perpetual C Frankfort, Village of Herkimer Gas Perpetual C Franklin, Town of Franklin Electric Perpetual C Fulton, City of Oswego El E Side River Perpetual C Fulton, City of Oswego El W Side River 6/13/98 99 years C Fulton, City of Oswego El W Side River 6/12/2037 50 years C Fulton, Village of Oswego Gas Perpetual C Galen, Town of Wayne Electric Perpetual C Geddes. Town of Onondaga El Tr Spec Loc. Perpetual C Geddes, Town of Onondaga El Trans/Dist Perpetual
Tuesday, July 14, 1998 ANSWER Page 4 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== C Geddes, Town of Onondaga Electric Perpetual C Geddes, Town of Onondaga Electric 9/25/27 Ten Years C Geddes, Town of Onondaga Gas Trans/Dist Perpetual C German Flatts, Town of Herkimer Electric Perpetual C German Flatts, Town of Herkimer Gas Perpetual C Glen Park, Village of Jefferson Electric Perpetual C Glen Park, Village of Jefferson Gas Perpetual C Gouverneur, Town of St. Lawrence El Spec. Loc. Perpetual C Gouverneur, Town of St. Lawrence El. Spec Loc. Perpetual C Gouverneur, Town of St. Lawrence El. Spec. Loc. Perpetual C Gouverneur, Town of St. Lawrence El. Trans/Dist. Perpetual C Gouverneur, Town of St. Lawrence Elec Spec. Loc. Perpetual C Gouverneur, Village of St. Lawrence Electric Perpetual C Granby, Town of Oswego El. Bridge Rgts Perpetual C Granby, Town of Oswego Electric Perpetual C Granby, Town of Oswego Gas Perpetual C Greig, Town of Lewis Electric Perpetual C Hammond, Town of St. Lawrence El. Ltd. Area Perpetual C Hammond, Village of St. Lawrence Electric Perpetual C Hannibal, Town of Oswego Electric Perpetual C Hannibal, Town of Oswego Gas Perpetual C Hannibal, Village of Oswego Electric Perpetual C Hannibal, Village of Oswego Gas Perpetual C Harrietstown, Town of Franklin Electric Perpetual C Harrisburg, Town of Lewis Electric Perpetual C Harrisville, Village of Lewis Electric Perpetual C Hastings, Town of Oswego El. Spec. Loc. Perpetual C Hastings, Town of Oswego Electric Perpetual C Henderson, Town of Jefferson Electric Perpetual C Herkimer, Town of Herkimer El Spec. Loc. Perpetual C Herkimer, Town of Herkimer El. Spec. Loc. Perpetual C Herkimer, Town of Herkimer Electric Perpetual C Herkimer, Town of Herkimer Gas Perpetual C Herkimer, Village of Herkimer Electric Perpetual C Herkimer, Village of Herkimer Gas Perpetual C Hermon, Town of St. Lawrence Electric Perpetual C Hermon, Town of St. Lawrence Electric Supply current* C Hermon, Village of St. Lawrence Electric Perpetual C Hermon, Village of St. Lawrence Electric 9/29/33 10 w/ren. priv. C Herrings, Village of Jefferson Electric Perpetual C Herrings, Village of Jefferson Gas Perpetual C Heuvelton, Village of St. Lawrence Electric Perpetual C Highmarket, Town of Lewis Electric Perpetual C Holland Patent, Village of Oneida El. Trans/Dist. Perpetual C Holland Patent, Village of Oneida Gas Trans/Dist. Perpetual C Homer, Town of Cortland El. Tr Spec Loc Perpetual C Homer, Town of Cortland El. Trans/Dist. Perpetual C Homer, Town of Cortland Electric 11/10/52 25 years C Homer, Village of Cortland Electric Perpetual C Homer, Village of Cortland Electric 6/22/48 25 years C Hopkinton, Town of St. Lawrence Electric Perpetual C Hounsfield, Town of Jefferson Electric Perpetual C Hounsfield, Town of Jefferson Gas Perpetual C Ilion, Village of Herkimer El Tr Spec Loc. Perpetual C Ilion, Village of Herkimer Gas Perpetual C Ilion, Village of Herkimer Gas Spec. Loc. Perpetual C Indian Lake, Town of Hamilton El Spec. Loc. Perpetual C Kirkland, Town of Oneida El Trans/Dist 1/30/2005 50 years C Kirkland, Town of Oneida Electric Perpetual C Kirkland, Town of Oneida Gas & Elec. Perpetual C Kirkland, Town of Oneida Gas & Elec. 1/31/55 50 years C Kirkland, Town of Oneida Gas Trans/Dist 1/30/2005 50 years C Lacona, Village of Oswego Electric Perpetual C Lacona, Village of Oswego Gas Perpetual C Lafayette, Town of Onondaga Electric Perpetual C Lafayette, Town of Onondaga Gas Corr. None Shown C Lafayette, Town of Onondaga Gas Trans/Dist Perpetual C Lawrence, Town of St. Lawrence Electric Perpetual
Tuesday, July 14, 1998 ANSWER Page 5 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== C Lee, Town of Oneida Electric Perpetual C Lee, Town of Oneida Gas Trans/Dist. Perpetual C Lenox, Town of Madison El Trans/Dist. Perpetual C Lenox, Town of Madison Gas Trans/Dist. Perpetual C Leray, Town of Jefferson Electric Perpetual C Leray, Town of Jefferson Gas Perpetual C Lewis County Lewis County Electric Various Frnchs C Lewis, Town of Lewis Electric Perpetual C Leyden, Town of Lewis El Trans (Plan) Perpetual C Leyden, Town of Lewis El Trans/Dist C Leyden, Town of Lewis Electric Perpetual C Lincklaen, Town of Chenanqo Electric Perpetual C Lincoln, Town of Madison El Trans/Dist Perpetual C Lincoln, Town of Madison Electric Perpetual C Lincoln, Town of Madison Electric None shown C Lincoln, Town of Madison Gas Perpetual C Lincoln, Town of Madison Gas Trans Only Perpetual C Lisbon, Town of St. Lawrence El Spec. Loc. Perpetual C Lisbon, Town of St. Lawrence Elec Spec Loc Perpetual C Lisbon, Town of St. Lawrence Electric Perpetual C Litchfield, Town of Herkimer El Ltd. Area Perpetual C Little Falls, City of Herkimer El Trans Sp Loc 9/10/68 50 years C Little Falls, City of Herkimer Electric Perpetual C Little Falls, City of Herkimer Electric 11/20/56 50 years C Little Falls, City of Herkimer Gas None shown C Little Falls, City of Herkimer Gas 5/16/1868 15 years C Little Falls, Town of Herkimer El Spec. Loc. Perpetual C Little Falls, Town of Herkimer El Tr Spec Loc. Perpetual C Little Falls, Town of Herkimer Electric Perpetual C Little Falls, Town of Herkimer Gas Perpetual C Liverpool, Village of Onondaga El Trans/Dist. Perpetual C Liverpool, Village of Onondaga Gas Perpetual C Long Lake, Town of Hamilton Electric Perpetual C Lorraine, Town of Jefferson Electric Perpetual C Louisville, Town of St. Lawrence Electric Perpetual C Lowville, Town of Lewis Electric Perpetual C Lowville, Village of Lewis Electric Perpetual C Lyme, Town of Jefferson Gas & Elec Perpetual C Lyons Falls, Village of Lewis Electric Perpetual C Lyons, Town of Wayne Electric Perpetual C Lyons, Village of Wayne Electric Perpetual C Lyonsdale, Town of Lewis El Trans/Dist C Lyonsdale, Town of Lewis Electric Perpetual C Lysander Onondaga Gas Trans. Perpetual C Lysander, Town of Onondaga El Trs/Dst Loc. Perpetual C Lysander, Town of Onondaga Electric Perpetual C Lysander, Town of Onondaga Gas Perpetual C Macomb, Town of St. Lawrence Electric Perpetual C Macomb, Town of St. Lawrence Electric see remarks C Macomb, Town of St. Lawrence Electric (Map) no term shown C Madrid, Town of St. Lawrence El Spec. Loc. Perpetual C Madrid, Town of St. Lawrence Electric Perpetual C Malone, Town of Franklin Electric Perpetual C Malone, Village of Franklin Electric Perpetual C Malone, Village of Franklin Electric 17/22/1891 5 years C Malone, Village of Franklin Electric 4/8/47 40 years C Malone, Village of Franklin Gas Perpetual C Manheim, Town of Herkimer Electric Perpetual C Manheim, Town of Herkimer Gas Perpetual C Manlius, Town of Onondaga El Spec. Loc. Perpetual C Manlius, Town of Onondaga Electric Perpetual C Manlius, Town of Onondaga Gas Perpetual C Mannsville, Village of Jefferson Electric Perpetual C Mannsville, Village of Jefferson Gas Perpetual C Marcellus, Town of Onondaga El Trans. only Perpetual C Marcy, Town of Oneida El Trs Ltd Area Perpetual C Marcy, Town of Oneida El. Ltd. Area Perpetual C Marcy, Town of Oneida Electric Perpetual
Tuesday, July 14, 1998 ANSWER Page 6 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== C Marcy, Town of Oneida Gas Perpetual C Martinsburg, Town of Lewis El Spec. Loc. Perpetual C Martinsburg, Town of Lewis Electric C Martinsburg, Town of Lewis Electric Perpetual C Martinsburg, Town of Lewis Electric 6/17/75 50 years C Massena, Town of St. Lawrence Electric Perpetual C Massena, Village of St. Lawrence Electric Perpetual C McGraw (formerly McGrawville), Village of Cortland Electric 12/7/05 see remarks C Mentz, Town of Cayuga Electric Perpetual C Mexico, Town of Oswego Electric Perpetual C Mexico, Town of Oswego Gas Perpetual C Mexico, Village of Oswego Electric Perpetual C Mexico, Village of Oswego Gas Perpetual C Middleville, Village of Herkimer Electric Perpetual C Minetto, Town of Oswego El Spec. Loc. Perpetual C Minetto, Town of Oswego Electric (Only) Perpetual C Minetto, Town of Oswego Gas Perpetual C Minoa, Village of Onondaga Electric Perpetual C Minoa, Village of Onondaga Gas Perpetual C Minoa, Village of Onondaga Gas Trans/Dist Perpetual C Mohawk, Village of Herkimer El Trs Spec Loc Perpetual C Mohawk, Village of Herkimer Gas Perpetual C Moira, Town of St. Lawrence Electric Perpetual C Montague, Town of Lewis Electric Perpetual C Montezuma, Town of Cayuga Electric Perpetual C Morehouse, Town of Hamilton El Trans/Dist Perpetual C Morristown, Town of St. Lawrence El. Spec. Loc. Perpetual C Morristown, Town of St. Lawrence Electric Perpetual C Morristown, Village of St. Lawrence Electric Perpetual C Munnsville, Village of Madison El Trans/Dist Perpetual C Norfolk, Town of St. Lawrence El Trans Sp Loc Perpetual C Norfolk, Town of St. Lawrence Electric Perpetual C Norfolk, Town of St. Lawrence Electric 10/2/42 20 years C North Elba, Town of Essex Electric Perpetual C North Syracuse, Village of Onondaga Electric Perpetual C North Syracuse, Village of Onondaqa Gas Perpetual C Norway, Town of Herkimer Electric Perpetual C Norwood, Village of St. Lawrence El Trans Sp Loc Perpetual C Norwood, Village of St. Lawrence Electric 10/l/42 20 years C Norwood, Village of St. Lawrence Electric 2/11/79 50 years C Norwood, Village of St. Lawrence Electric 2/12/2004 25 years C Ogdensburg, City of St. Lawrence El Spec Loc Perpetual C Ogdensburg, City of St. Lawrence El Spec Loc 2/24/26 20 years C Ogdensburg, City of St. Lawrence El Trans Sp Loc Perpetual C Ogdensburg, City of St. Lawrence Electric Perpetual C Ogdensburg, City of St. Lawrence Gas Perpetual C Ohio, Town of Herkimer Electric Perpetual C Oneida Castle, Village of Oneida Electric Perpetual C Oneida Castle, Village of Oneida Gas Perpetual C Oneida, City of Madison Gas 7/l/39 15 years C Oneida, City of Madison Gas Spec Loc 6/30/2004 Perpetual C Oneida, Village of Madison Electric Perpetual C Onondaga Indian Nation Onondaga Electric 2/8/2039 99 years C Onondaga, Town of Onondaga Electric Perpetual C Onondaga, Town of Onondaga Gas Perpetual C Onondaga, Town of Onondaga Gas Spec Loc Perpetual C Ontario, Province of None Shown Electric 10/27/47 20 years C Ontario, Province of Stormont Electric 10/5/70 20 years C Oppenheim, Town of Fulton Electric Perpetual C Oriskany, Village of Oneida Electric Perpetual C Oriskany, Village of Oneida Gas Trans/Dist Perpetual C Orleans, Town of Jefferson Electric Perpetual C Orleans, Town of Jefferson Gas/Elec Sp Loc Perpetual C Orwell, Town of Oswego Electric Perpetual C Osceola, Town of Lewis El Ltd Area Perpetual C Osceola, Town of Lewis Elec Trans/Dist Perpetual C Osnabruck, Township of Stormont Electric 2/8/57 20 years C Oswegatchie, Town of St. Lawrence El Spec Loc Perpetual
Tuesday, July 14, 1998 ANSWER Page 7 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== C Oswegatchie, Town of St. Lawrence Elec Spec Loc 11/23/35 20 years C Oswegatchie, Town of St. Lawrence Electric 1 frm lighting C Oswego, City of Oswego Elec Spec Loc Perpetual C Oswego, City of Oswego Electric Perpetual C Oswego, City of Oswego Gas Perpetual C Oswego, Town of Oswego Elec Spec Loc. Perpetual C Oswego, Town of Oswego Electric Perpetual C Oswego, Town of Oswego Gas Trans/Dist. Perpetual C Otisco, Town of Onondaga Elec Spec Loc. Perpetual C Otisco, Town of Onondaga Gas Perpetual C Palermo, Town of Oswego Electric Perpetual C Palermo, Town of Oswego Gas Perpetual C Pamelia, Town of Jefferson El Trans/Dist Perpetual C Pamelia, Town of Jefferson Gas Perpetual C Paris, Town of Oneida Electric Perpetual C Paris, Town of Oneida Gas Trans/Dist Perpetual C Parish, Town of Oswego Electric Perpetual C Parish, Village of Oswego Electric Perpetual C Parishville, Town of St. Lawrence Electric Perpetual C Philadelphia, Town of Jefferson El Not Exclusiv Perpetual C Philadelphia, Town of Jefferson El Tr Penstock Perpetual C Philadelphia, Town of Jefferson Electric Perpetual C Philadelphia, Village of Jefferson El Tr Spec Loc. Perpetual C Phoenix, Village of Oswego El Tr Spec Loc. Perpetual C Phoenix, Village of Oswego Electric Perpetual C Phoenix, Village of Oswego Gas Perpetual C Phoenix, Village of Oswego Gas Trans/Dist Perpetual C Piercefield, Town of St. Lawrence Electric Perpetual C Pierrepont, Town of St. Lawrence Elec Spec Loc. Perpetual C Pierrepont, Town of St. Lawrence Electric Perpetual C Pinckney, Town of Lewis Electric Perpetual C Pitcairn, Town of St. Lawrence Electric Perpetual C Poland, Village of Herkimer El. Trans./Dist Perpetual C Poland, Village of Herkimer Electric (Plan) 6/l/56 49 years C Poland, Village of Herkimer Gas Perpetual C Pompey, Town of Onondaga El. Spec. Loc. Perpetual C Pompey, Town of Onondaga Electric Perpetual C Pompey, Town of Onondaga Gas Perpetual C Port Leyden, Village of Lewis Electric Perpetual C Potsdam, Town of St. Lawrence El. Spec. Loc. Perpetual C Potsdam, Town of St. Lawrence Electric Perpetual C Potsdam, Village of St. Lawrence El Trans Sp Loc Perpetual C Potsdam, Village of St. Lawrence Electric Perpetual C Preble, Town of Cortland Electric Perpetual C Prospect, Village of Oneida Electric Perpetual C Prospect, Village of Oneida Gas Trans/Dist. Perpetual C Pulaski, Village of Oswego Electric Perpetual C Pulaski, Village of Oswego Gas Perpetual C Redfield, Town of Oswego Electric Perpetual C Remsen, Town of Oneida El. Trans/Dist. Perpetual C Remsen, Village of Oneida Electric Perpetual C Remsen, Village of Oneida Gas Trans/Dist. Perpetual C Rensselaer Falls, Village of St. Lawrence Electric C Richland, Town of Oswego Electric Perpetual C Richland, Town of Oswego Gas Perpetual C Richville, Village of St. Lawrence Electric Perpetual C Rodman, Town of Jefferson Electric None Shown. C Rodman, Town of Jefferson Electric None Shown. C Rome, City of Oneida Gas & Electric Perpetual C Rossie, Town of St. Lawrence Electric C Rossie, Town of St. Lawrence Electric None Shown. C Rossie, Town of St. Lawrence Electric Perpetual C Russell, Town of St. Lawrence El. Spec. Loc. Perpetual C Russell, Town of St. Lawrence Electric Perpetual C Russia, Town of Herkimer Electric Perpetual C Rutland, Town of Jefferson Gas Perpetual C Rutland, Town of Jefferson Gas & El Trans. Perpetual C Sackets Harbor, Village of Jefferson El. Trans/Dist. Perpetual
Tuesday, July 14, 1998 ANSWER Page 8 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== C Sackets Harbor, Village of Jefferson Electric 5/8/55 50 years C Sackets Harbor, Village of Jefferson Gas Perpetual C Salina, Town of Onondaga El. Spec. Loc. Perpetual C Salina, Town of Onondaga Electric Perpetual C Salina, Town of Onondaga Gas Perpetual C Salina, Town of Onondaga Gas Spec. Loc. Perpetual C Salisbury, Town of Herkimer Electric Perpetual C Salisbury, Town of Herkimer Gas Perpetual C Sandy Creek, Town of Oswego Electric Perpetual C Sandy Creek, Town of Oswego Gas Perpetual C Sandy Creek, Village of Oswego Electric Perpetual C Sandy Creek, Village of Oswego Gas Perpetual C Santa Clara, Town of Franklin Electric Perpetual C Saranac Lake, Village of Essex/Franklin Electric Perpetual C Saranac, Town of Clinton Electric Perpetual C Savannah, Town of Wayne Electric Perpetual C Savannah, Village of Wayne Electric Perpetual C Schroeppel, Town of Oswego El Tr Spec Loc. Perpetual C Schroeppel, Town of Oswego Elec. Trans.Map Perpetual C Schroeppel, Town of Oswego Electric Perpetual C Schroeppel, Town of Oswego Gas Not Shown C Schroeppel, Town of Oswego Gas Perpetual C Schuyler, Town of Herkimer El Sp Loc-Plan Perpetual C Schuyler, Town of Herkimer Electric Perpetual C Schuyler, Town of Herkimer Gas Perpetual C Scott, Town of Cortland Electric Perpetual C Scriba, Town of Oswego Electric Perpetual C Scriba, Town of Oswego Gas Perpetual C Seneca Falls, Town of Seneca Electric Perpetual C Sherrill, City of Oneida Gas 10/9/78 50 years C Sherrill, City of Oneida Gas 2/12/81 50 years frm 12 C Sherrill, City of Oneida Gas 2/3/2031 50 Years C Skaneateles, Town of Onondaga Electric Perpetual C Skaneateles, Town of Onondaga Gas Perpetual C Skaneateles, Village of Onondaga El Tr Spec Loc. Perpetual C Skaneateles, Village of Onondaga Gas Perpetual C Solon, Town of Cortland Electric Perpetual C Solvay, Village of Onondaga El Spec. Loc. Perpetual C Solvay, Village of Onondaga El Tr Lim Area Perpetual C Solvay, Village of Onondaga El Tr Spec Loc. Perpetual C Solvay, Village of Onondaga Electric Perpetual C Solvay, Village of Onondaga Gas Perpetual C St. Armand, Town of Essex Electric Perpetual C St. Lawrence County St. Lawrence Electric Not Shown C St. Regis Indian Reservation Franklin El. Spec. Loc. 10/2/2045 99 years C St. Regis Indian Reservation Franklin Electric 10/2/2045 99 years C Steuben, Town of Oneida El Trans/Dist. Perpetual C Stockbridge, Town of Madison El Trans/Dist. Perpetual C Stockholm, Town of St. Lawrence EI.Tr.Spec.Loc. Perpetual C Stockholm, Town of St. Lawrence Electric NotShown C Stockholm, Town of St. Lawrence Electric Perpetual C Stratford, Town of Fulton El. Ltd. Area Perpetual C Sullivan, Town of Madison El. Spec. Loc. Perpetual C Sullivan, Town of Madison El. Trans. Perpetual C Sullivan, Town of Madison El. Trans/Dist. Perpetual C Sullivan, Town of Madison Electric Perpetual C Sullivan, Town of Madison Gas Perpetual C Syracuse, City of Onondaga Elec. Subwav Perpetual C Syracuse, City of Onondaga Electric Perpetual C Syracuse, City of Onondaga Gas Perpetual C Syracuse, City of Onondaga Steam,HW,HA,Ga Perpetual C Theresa, Town of Jefferson El. Ltd. Area Perpetual C Theresa, Town of Jefferson Electric Perpetual C Theresa, Village of Jefferson Electric 4/23/00 5 years w/opt. C Throop, Town of Cayuga Electric Perpetual C Trenton, Town of Oneida El. Trans/Dist. Perpetual C Trenton, Town of Oneida Gas C Trenton, Village of Oneida Electric Perpetual
Tuesday, July 14, 1998 ANSWER Page 9 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== C Trenton, Village of Oneida Gas Trans/Dist. Perpetual C Truxton, Town of Cortland El Tr Spec. Loc. Perpetual C Truxton, Town of Cortland Electric Perpetual C Tully, Town of Onondaga Electric Perpetual C Tully, Town of Onondaga Gas Perpetual C Tully, Town of Onondaga Gas Corr. Not Shown C Tully, Village of Onondaga Electric Perpetual C Tully, Village of Onondaga Gas Perpetual C Tully, Village of Onondaga Gas Corr. Not Shown. C Tupper Lake, Village of Franklin El Trans Lines Perpetual C Turin, Town of Lewis El. Trans/Dist. C Turin, Town of Lewis Elec (Blueprnt) Perpetual C Turin, Town of Lewis Elec. (Map) Not Shown C Turin, Town of Lewis Electric Perpetual C Turin, Town of Lewis Electric 11/5/75 50 years C Turin, Village of Lewis Electric Perpetual C Tyre, Town of Seneca Electric Perpetual C United Stormont, Dundas, Glengarry Cos as above Electric 20 years C United Stormont, Dundas, Glengarry Cos as above Electric 1/29/46 20 years C United Stormont, Dundas, Glengarry Cos as above Electric 6/20/66 20 years C Utica, City of Oneida El Tr Spec. Loc. Perpetual C Utica, City of Oneida Electric Perpetual C Utica, City of Oneida Gas Perpetual C Van Buren, Town of Onondaga El. Spec. Loc. Perpetual C Van Buren, Town of Onondaga El. Trans/Dist. Perpetual C Van Buren, Town of Onondaga Gas Perpetual C Vernon, Town of Oneida Elec Spec. Loc. Perpetual C Vernon, Town of Oneida Elec Trans/Dist Perpetual C Vernon, Town of Oneida Gas Trans/Dist Perpetual C Vernon, Village of Oneida Electric Perpetual C Vernon, Village of Oneida Electric 5/13/34 20 years C Vernon, Village of Oneida Gas Trans/Dist Perpetual C Verona, Town of Oneida Elec Spec. Loc. Perpetual C Verona, Town of Oneida Elec Trans/Dist Perpetual C Verona, Town of Oneida Electric Perpetual C Verona, Town of Oneida Gas 1/31/2004 50 years C Vienna, Town of Oneida Elec Spec. Loc. Perpetual C Vienna, Town of Oneida Elec Spec. Loc. 12/3/26 5 years C Virgil, Town of Cortland Elec Tr Sp Loc. Perpetual C Virgil, Town of Cortland Electric Perpetual C Volney, Town of Oswego El Tr Spec Loc Perpetual C Volney, Town of Oswego Elec Bridge Rts Perpetual C Volney, Town of Oswego Electric Perpetual C Volney, Town of Oswego Gas Perpetual C Waddington, Village of St. Lawrence Electric Perpetual C Wampsville, Village of Madison Electric Perpetual C Wampsville, Village of Madison Gas Trans/Dist Perpetual C Waterloo, Town of Seneca Electric Perpetual C Watertown, City of Jefferson El Trans/Dist. 9/16/2003 50 years C Watertown, City of Jefferson Electric 9/17/53 50 years C Watertown, City of Jefferson Gas Perpetual C Watertown, City of Jefferson Gas 12/23/2003 50 years C Watertown, City of Jefferson Gas & Steam Perpetual C Watertown, Town of Jefferson Steam, Gas, El. Perpetual C Watertown, Town of Jefferson Electric Perpetual C Watertown, City of Jefferson Gas Perpetual C Watson, Town of Lewis Electric Perpetual C Watson, Town of Lewis Electric 5/26/76 50 years C Waverly, Town of Franklin Electric Perpetual C Webb, Town of Herkimer El Spec. Loc. Perpetual C West Carthage, Village of Jefferson Electric Perpetual C West Carthage, Village of Jefferson Gas Perpetual C West Monroe, Town of Oswego Electric Perpetual C West Monroe, Town of Oswego Gas Perpetual C West Turin, Town of Lewis Elec. Trans. Perpetual C West Turin, Town of Lewis Electric Perpetual C Western, Town of Oneida Electric Perpetual C Western, Town of Oneida Gas Perpetual
Tuesday, July 14, 1998 ANSWER Page 10 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== C Westmoreland, Town of Oneida El. Trans/Dist. Perpetual C Westmoreland, Town of Oneida El. Trans/Dist Perpetual C Westmoreland, Town of Oneida Electric No term listed C Westmoreland, Town of Oneida Gas Trans/Dist. Perpetual C Westville, Town of Franklin Electric Perpetual C Whitesboro, Village of Oneida El. Spec. Loc. Perpetual C Whitesboro, Village of Oneida Electric Perpetual C Whiteboro, Village of Oneida Gas Perpetual C Whitestown, Town of Oneida Electric Perpetual C Whitestown, Town of Oneida Gas Perpetual C Williamstown, Town of 0swego El.Trans/Dist. Perpetual C Wilna, Town of Jefferson Electric Perpetual C Wilna, Town of Jefferson Gas Perpetual C Worth, Town of Jefferson El.Trans/Dist. Perpetual C Worth, Town of Jefferson Electric Perpetual C Yorkville, Village of Oneida Electric None shown. C Yorkville, Village of Oneida Gas Perpetual ======== ======================================== =================== ========================== ============== ====================
Tuesday, July 14, 1998 ANSWER Page 1 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== E City of Albany Albany Electric Not Limited E City of Amsterdam Montgomery Electric Not Limited E City of Hudson Columbia Electric Not Limited E City of Hudson Columbia Electric 6/4/61 50 years E City of Johnstown Fulton Gas & Electric Not Limited E City of Rensselaer Rensselaer Gas & Electric Not Limited E City of Schenectady Schenectady Electric Not Limited E City of Troy Rensselaer Electric Not Limited E City of Utica Oneida Electric Not Limited E City of Watervliet Albany Electric Not Limited E City of Watervliet Albany Gas & Electric Not Limited (was Village of W. Troy) E Town of Amsterdam Montgomery Electric Not Limited E Town of Argyle Washington Electric Not Limited E Town of Arietta Hamilton Electric Not Limited E Town of Athens Greene Electric Not Limited E Town of Ballston Saratoga Electric Not Limited E Town of Benson Hamilton Electric Not Limited E Town of Berne Albany Electric Not Limited E Town of Bethlehem Albany Electric Not Limited E Town of Bleecker Fulton Electric Not Limited E Town of Blenheim Schoharie Electric Not Limited E Town of Bolton Warren Gas & Electric Not Limited E Town of Broadalbin Fulton Electric Not Limited E Town of Broome Schoharie Electric Not Limited E Town of Brunswick Rensselaer Electric Not Limited E Town of Caldwell Warren Electric Not Limited E Town of Cambridge Washington Electric Not Limited E Town of Canajoharie Montgomery Electric Not Limited E Town of Carlisle Scoharie Electric Not Limited E Town of Carmel Putnam Electric Not Limited E Town of Caroga Fulton Electric Not Limited E Town of Catskill Greene Electric Not Limited E Town of Cazenovia Madison Electric Not Limited E Town of Charleston Montgomery Electric Not Limited E Town of Charlton Saratoga Electric Not Limited E Town of Chatham Columbia Electric Not Limited E Town of Cherry Valley Otsego Electric Not Limited E Town of Chester Warren Gas & Electric Not Limited E Town of Claverack Columbia Electric Not Limited E Town of Clermont Columbia Electric Not Limited E Town of Clifton Park Saratoga Electric Not Limited E Town of Clinton Clinton/Dutches Electric Not Limited E Town of Cobleskill Schoharie Electric Perpetual E Town of Coeymans Albany Electric Not Limited E Town of Colonie Albany Electric Not Limited E Town of Corinth Saratoga Electric Not Limited E Town of Cortlandville Cortland Electric Not Limited E Town of Coxackie Greene Electric Not Limited E Town of Crown Point Essex Electric 1/17/2015 99 years E Town of Cuyler Cortland Electric Not Limited E Town of Danube Herkimer Electric Not Limited E Town of Day Saratoga Electric Not Limited E Town of Decatur Otsego Electric Not Limited E Town of Deerfield Oneida Electric Not Limited E Town of Dresden Yates Electric Not Limited E Town of Duanesburg Schenectady Electric Not Limited E Town of East Fishkill Dutchess Electric Not Limited E Town of East Greenbush Rensselaer Electric Not Limited E Town of Easton Madison Electric Not Limited E Town of Edinburgh Saratoga Electric Not Limited E Town of Ephratah Fulton Electric Not Limited E Town of Esopus Ulster Electric Not Limited E Town of Esperance Schoharie Electric Not Limited E Town of Fabius Onondaga Electric Not Limited E Town of Fenner Madison Electric Not Limited E Town of Florida Montgomery Electric Not Limited E Town of Fort Ann Washington Electric Not Limited
Tuesday, July 14, 1998 ANSWER Page 2 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== E Town of Fort Edward Washington Electric Not Limited E Town of Fulton Scoharie Electric Not Limited E Town of Gallatin Columbia Electric Not Limited E Town of Galway Saratoga Electric Not Limited E Town of German Flats Herkimer Electric Not Limited E Town of Germantown Columbia Electric Not Limited E Town of Ghent Columbia Electric Not Limited E Town of Glen Montgomery Electric Not Limited E Town of Glenville Schenectady Electric Not Limited E Town of Grafton Rensselaer Electric Not Limited E Town of Granville Washington Electric Not Limited E Town of Greenfield Saratoga Electric Not Limited E Town of Greenport Columbia Electric Not Limited E Town of Greenport Columbia Electric 10/4/17 Surrendered E Town of Greenwich Washington Electric Not Limited E Town of Guilderland Albany Electric Not Limited E Town of Hadley Saratoga Electric Not Limited E Town of Hague Warren Electric & Gas Not Limited E Town of Halfmoon Saratoga Electric Not Limited E Town of Halfmoon Saratoga Electric & Gas Not Limited E Town of Hampton Washington Electric Not Limited E Town of Hartford Washington Electric Not Limited E Town of Herkimer Herkimer Electric Not Limited E Town of Homer Cortland Electric Not Limited E Town of Hoosick Rensselaer Electric Not Limited E Town of Hope Hamilton Electric Not Limited E Town of Horicon Warren Gas & Electric Not Limited E Town of Hyde Park Dutchess Electric Not Limited E Town of Indian Lake Hamilton Electric Not Limited E Town of Jackson Washington Electric Not Limited E Town of Johnsburg Warren Electric Not Limited E Town of Johnstown Fulton Electric Not Limited E Town of Kent Putnam Electric Not Limited E Town of Kinderhook Columbia Electric Not Limited E Town of Kingsbury Washington Electric Not Limited E Town of Kirkland Oneida Electric Not Limited E Town of Knox Albany Electric Not Limited E Town of LaGrange Dutchess Electric Not Limited E Town of Lake Pleasant Hamilton Electric Not Limited E Town of Lenox Madison Electric Not Limited E Town of Lincoln Madison Electric Not Limited E Town of Little Falls Herkimer Electric Not Limited E Town of Livingston Columbia Electric Not Limited E Town of Luzerne Warren Electric Not Limited E Town of Malta Saratoga Electric Not Limited E Town of Manheim Herkimer Electric Not Limited E Town of Marcy Oneida Electric Not Limited E Town of Maryland Otsego Electric Not Limited E Town of Mayfield Fulton Electric Not Limited E Town of Mayfield Fulton Electric 8/17/2025 99 years E Town of Middleburgh Schoharie Electric Not Limited E Town of Milan Dutchess Electric Not Limited E Town of Milton Ulster Electric Not Limited E Town of Minden Montgomery Electric Not Limited E Town of Minerva Essex Electric Not Limited E Town of Mohawk Montgomery Electric Not Limited E Town of Moreau Saratoga Electric Not Limited E Town of Moriah Essex Electric 2/28/2015 99 years E Town of Nassau Rensselaer Electric Not Limited E Town of Nelson Madison Electric Not Limited E Town of New Baltimore Greene Electric Not Limited E Town of New Scotland Albany Electric Not Limited E Town of Niskayuna Schenectady Electric Not Limited E Town of North Greenbush Rensselaer Electric Not Limited E Town of North Hudson Essex Electric Not Limited E Town of Northampton Fulton Electric Not Limited E Town of Northumberland Saratoga Electric Not Limited E Town Of Oppenheim Fulton Electric Not Limited
Tuesday, July 14, 1998 ANSWER Page 3 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== E Town of Palatine Montgomery Electric Not Limited E Town of Perth Fulton Electric Not Limited E Town of Petersburg Rensselaer Electric Not Limited E Town of Phillipstown Putnam Electric Not Limited E Town of Pittstown Rensselaer Electric Not Limited E Town of Pleasant Valley Dutchess Electric Not Limited E Town of Poestenkill Rensselaer Electric Not Limited E Town of Princetown Schenectady Electric Not Limited E Town of Providence Saratoga Electric Not Limited E Town of Putnam Washington Electric Not Limited E Town of Putnam Valley Putnam Electric Not Limited E Town of Queensbury Warren Gas & Electric Not Limited E Town of Richmondville Schoharie Electric Not Limited E Town of Root Montgomery Electric Not Limited E Town of Roseboom Otsego Electric Not Limited E Town of Rosendale Ulster Electric Not Limited E Town of Rotterdam Schenectady Electric Not Limited E Town of Sand Lake Rensselaer Electric Not Limited E Town of Saratoga Saratoga Electric Not Limited E Town of Saugerties Ulster Electric Not Limited E Town of Schaghticoke Rensselaer Electric Not Limited E Town of Schodack Rensselaer Electric Not Limited E Town of Schoharie Schoharie Electric Not Limited E Town of Schroon Essex Electric Not Limited E Town of Schuyler Herkimer Electric Not Limited E Town of Seward Scoharie Electric Not Limited E Town of Sharon Scoharie Electric Not Limited E Town of St. Johnsville Montgomery Electric Not Limited E Town of Stark Herkimer Electric Not Limited E Town of Stephentown Rensselaer Electric Not Limited E Town of Stillwater Saratoga Electric Not Limited E Town of Stockbridge Madison Electric Not Limited E Town of Stockport Columbia Electric Not Limited E Town of Stony Creek Warren Electric Not Limited E Town of Stratford Fulton Electric Not Limited E Town of Stuyvesant Columbia Electric Not Limited E Town of Sullivan Madison Electric Not Limited E Town of Summit Scoharie Electric Not Limited E Town of Tachkanic Columbia Electric Not Limited E Town of Thurman Warren Electric Not Limited E Town of Ticonderoga Essex Electric Not Limited E Town of Truxton Cortland Electric Not Limited E Town of Ulster Ulster Electric Not Limited E Town of Vernon Oneida Electric Not Limited E Town of Verona Oneida Electric Not Limited E Town of Virgil Cortland Electric Not Limited E Town of Wappinger Dutchess Electric Not Limited E Town of Warrensburg Warren Electric Not Limited E Town of Waterford Saratoga Electric Not Limited E Town of Waterford Saratoga Gas & Electric Not Limited E Town of Wells Hamilton Electric Not Limited E Town of Westmoreland Oneida Electric Not Limited E Town of Westport Essex Electric Not Limited E Town of White Creek Washington Electric Not Limited E Town of Whitehall Washington Electric Not Limited E Town of Whitesboro Oneida Electric Not Limited E Town of Whitestown Oneida Electric Not Limited E Town of Wilton Saratoga Electric Not Limited E Town of Worcester Otsego Electric 11/15/2007 100 years E Town of Wright Schoharie Electric Not Limited E Village (now City) of Cohoes Albany Electric Unknown E Village (now City) of Glens Falls Warren Electric Not Limited E Village (now City) of Gloversville Fulton Electric Not Limited E Village (now City) of Oneida Madison Electric Not Limited E Village (now City) of Saratoga Springs Saratoga Gas & Electric Not Limited E Village of Altamont Franklin Electric Not Limited E Village of Ames Montgomery Electric Not Limited E Village of Argyle Washington Electric Not Limited
Tuesday, July 14, 1998 ANSWER Page 4 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== E Village of Athens Greene Electric Not Limited E Village of Ballston Spa Saratoga Electric Not Limited E Village of Broadalbin Fulton Electric 8/17/2025 99 years E Village of Cambridge Washington Electric Not Limited E Village of Canajoharie Montgomery Electric Not Limited E Village of Canastota Madison Electric Not Limited E Village of Castleton-on-Hudson Rensselaer Electric Not Limited E Village of Cherry Valley Otsego Electric Not Limited E Village of Cobleskill Schoharie Electric 2/23/77 30 years E Village of Cobleskill Schoharie Electric 2/6/2002 25 years E Village of Corinth Saratoga Electric Not Limited E Village of Delanson Schenectady Electric Not Limited E Village of Esperance Schoharie Electric Not Limited E Village of Fonda Montgomery Electric Not Limited E Village of Fort Ann Washington Electric Not Limited E Village of Fort Edward Washington Electric Not Limited E Village of Fort Johnson Montgomery Electric Not Limited E Village of Fort Plain Montgomery Electric Not Limited E Village of Fultonville Montgomery Electric Not Limited E Village of Galway Saratoga Electric Not Limited E Village of Green Island Albany Electric Not Limited E Village of Greenwich Washington Electric Not Limited E Village of Hagaman Montgomery Electric Not Limited E Village of Hoosick Falls Rensselaer Electric Not Limited E Village of Hudson Falls Washington Electric 11/8/05 Surrendered E Village of Hudson Falls Washington Gas & Electric 6/1/97 50 years E Village of Kinderhook Columbia Electric Not Limited E Village of Lake George Warren Electric Not Limited E Village of Menands Albany Electric Not Limited E Village of Middleburgh Schoharie Electric Not Limited E Village of Munnsville Madison Electric Not Limited E Village of Nassau Rensselaer Electric Not Limited E Village of Nelliston Montgomery Electric Not Limited E Village of Northville Suffolk Electric Not Limited E Village of Oneida Castle Oneida Electric Not Limited E Village of Palatine Bridge Montgomery Electric Not Limited E Village of Port Henry Essex Electric 6/19/2005 99 years E Village of Richmondville Schoharie Electric Not Limited E Village of Schaghticoke Rensselaer Electric Not Limited E Village of Schenevus Otsego Electric Not Limited E Village of Schoharie Schoharie Electric Not Limited E Village of Schuylerville Saratoga Electric Not Limited E Village of Scotia Schenectady Electric Not Limited E Village of Sharon Springs Schoharie Electric Not Limited E Village of South Glens Falls Saratoga Electric Not Limited E Village of Speculator Hamilton Electric Not Limited E Village of St. Johnsville Montgomery Electric Not Limited E Village of Ticonderoga Essex Electric Not Limited E Village of Valatie Columbia Electric Not Limited E Village of Valley Falls Rensselaer Electric Not Limited E Village of Vernon Oneida Electric Not Limited E Village of Victory Mills Saratoga Electric Not Limited E Village of Voorheesville Albany Electric Not Limited E Village of Wampsville Madison Electric Not Limited E Village of Waterford Saratoga Electric Not Limited E Village of Westport Essex Electric Not Limited E Village of Whitehall Washington Electric Not Limited ======== ======================================== =================== ========================== ============== ====================
Tuesday, July 14, 1998 ANSWER Page 1 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== W City of Batavia Genesee El Trans & Dist 4/1/2006 50 years W City of Buffalo Erie El Trans & Dist Perpetual W City of Dunkirk Chautauqua El Trans & Dist 4/l/2007 50 years W City of Jamestown Chautauqua El Trans & Dist Perpetual W City of Lackawanna Erie El Trans & Dist Perpetual W City of Lockport Niagara El Hydro Perpetual W City of Lockport Niagara El Transmission 3/l/89 50 years W City of Niagara Falls Niagara El Trans & Dist Perpetual W City of North Tonawanda Niagara El Trans & Dist 1/6/99 25 years W City of Rochester Monroe El Trans & Dist Perpetual W City of Salamanca Cattaraugus El Transmission 2/27/2024 50 years W City of Salamanca Cattaraugus El Transmission 6/7/2027 50 years W City of Tonawanda Erie El Trans & Dist Perpetual W Seneca Nation of Indians Allegany Res. Cattaraugus El Substation 2/19/2031 40 years W Seneca Nation of Indians Allegany Res. Cattaraugus El Transmission 2/19/2031 40 years W Seneca Nation of Indians Cattaraugus Cattaraugus El Trans & Dist Permanent W Tonawanda Nation of Seneca Indians Erie/Genesee El Trans & Dist 4/26/2035 99 years W Tonawanda Nation of Seneca Indians Erie/Genesee El Transmission 5/24/2022 99 years W Town of Alabama Genesee El Trans & Dist Perpetual W Town of Albion Orleans El Trans & Dist Perpetual W Town of Alexander Genesee El Trans & Dist Perpetual W Town of Allegany Cattaraugus El Trans & Dist Perpetual W Town of Alma Allegany El Trans & Dist Perpetual W Town of Amherst Erie El Trans & Dist Perpetual W Town of Amity Allegany El Trans & Dist Perpetual W Town of Andover Allegany El Trans & Dist Perpetual W Town of Arcade Wyoming El Transmission Perpetual W Town of Arcadia Wayne El Trans & Dist Perpetual W Town of Arkwright Chautauqua El Trans & Dist Perpetual W Town of Ashford Cattaraugus El Trans & Dist Perpetual W Town of Attica Genesee El Trans & Dist Perpetual W Town of Avon Livingston El Trans & Dist Perpetual W Town of Barre Orleans El Trans & Dist Perpetual W Town of Batavia Genesee El Trans & Dist Perpetual W Town of Bergen Genesee El Trans & Dist Perpetual W Town of Bethany Genesee El Trans & Dist Perpetual W Town of Boston Erie El Transmission Perpetual W Town of Brant Erie El Trans & Dist Perpetual W Town of Brighton Monroe El Trans & Dist Perpetual W Town of Busti Chautauqua El Trans & Dist Perpetual W Town of Byron Genesee El Trans & Dist Perpetual W Town of Caledonia Livingston El Trans & Dist Perpetual W Town of Cambria Niagara El Trans & Dist Perpetual W Town of Canadice Ontario El Trans & Dist Perpetual W Town of Carlton Orleans El Trans & Dist Perpetual W Town of Carroll Chautauqua El Trans & Dist Perpetual W Town of Carrollton Cattaraugus El Trans & Dist Perpetual W Town of Centerville Allegany El Trans & Dist Perpetual W Town of Charlotte Chautauqua El Trans & Dist Perpetual W Town of Chautauqua Chautauqua El Trans & Dist Perpetual W Town of Cheektowaga Erie El Trans & Dist Perpetual W Town of Chili Monroe El Trans & Dist Perpetual W Town of Clarence Erie El Trans & Dist Perpetual W Town of Clarendon Orleans El Trans & Dist Perpetual W Town of Clarkson Monroe El Trans & Dist Perpetual W Town of Clarksville Allegany El Trans & Dist Perpetual W Town of Clymer Chautauqua El Trans & Dist Perpetual W Town of Cold Spring Cattaraugus El Trans & Dist Perpetual W Town of Collins Erie El Trans & Dist Perpetual W Town of Concord Erie El Trans & Dist Perpetual W Town of Concord Erie El Transmission Perpetual W Town of Conesus Livingston El Trans & Dist Perpetual W Town of Covington Wyoming El Trans & Dist Perpetual W Town of Cuba Allegany El Trans & Dist Perpetual W Town of Darien Genesee El Trans & Dist Perpetual W Town of Dunkirk Chautauqua El Trans & Dist 4/14/2007 50 years W Town of East Hamburg Erie El Transmission Perpetual
Tuesday, July 14, 1998 ANSWER Page 2 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== W Town of East Otto Cattaraugus El Trans & Dist Perpetual W Town of Eden Erie El Trans & Dist Perpetual W Town of Elba Genesee El Trans & Dist Perpetual W Town of Elko Cattaraugus El Trans & Dist Perpetual W Town of Ellery Chautauqua El Trans & Dist Perpetual W Town of Ellicott Chautauqua El Trans & Dist Perpetual W Town of Ellicottville Cattaraugus El Trans & Dist Perpetual W Town of Evans Erie El Trans & Dist Perpetual W Town of Farmersville Cattaraugus El Trans & Dist Perpetual W Town of Farmington Ontario El Trans & Dist Perpetual W Town of Franklinville Cattaraugus El Trans & Dist Perpetual W Town of Freedom Cattaraugus El Trans & Dist Perpetual W Town of French Creek Chautauqua El Trans & Dist Perpetual W Town of Friendship Allegany El Trans & Dist Perpetual W Town of Gaines Orleans El Trans & Dist Perpetual W Town of Gates Monroe El Trans & Dist Perpetual W Town of Genesee Allegany El Trans & Dist Perpetual W Town of Geneseo Livingston El Trans & Dist Perpetual W Town of Gerry Chautauqua El Trans & Dist Perpetual W Town of Grand Island Erie El Trans & Dist Perpetual W Town of Great Valley Cattaraugus El Trans & Dist Perpetual W Town of Groveland Livingston El Trans & Dist Perpetual W Town of Hamburg Erie El Trans & Dist Perpetual W Town of Hamlin Monroe El Trans & Dist Perpetual W Town of Hanover Chautauqua El Trans & Dist Perpetual W Town of Harmony Chautauqua El Trans & Dist Perpetual W Town of Hartland Niagara El Trans & Dist Perpetual W Town of Henrietta Monroe El Trans & Dist Perpetual W Town of Hinsdale Cattaraugus El Trans & Dist Perpetual W Town of Humphrey Cattaraugus El Trans & Dist Perpetual W Town of Independence Allegany El Trans & Dist Perpetual W Town of lschua Cattaraugus El Trans & Dist Perpetual W Town of Kendall Orleans El Trans & Dist Perpetual W Town of Kiantone Chautauqua El Trans & Dist Perpetual W Town of Leroy Genesee El Trans & Dist Perpetual W Town of Lewiston Niagara El Trans & Dist Perpetual W Town of Lima Livingston El Trans & Dist 3/6/2013 50 years W Town of Little Valley Cattaraugus El Trans & Dist Perpetual W Town of Livonia Livinston El Trans & Dist Perpetual W Town of Lockport Niagara El Trans & Dist Perpetual W Town of Lyndon Cattaraugus El Trans & Dist Perpetual W Town of Macedon Wayne El Trans & Dist Perpetual W Town of Manchester Ontario El Trans & Dist Perpetual W Town of Mansfield Cattaraugus El Trans & Dist Perpetual W Town of Mendon Monroe El Trans & Dist Perpetual W Town of Middlebury Wyominq El Trans & Dist Perpetual W Town of Mina Chautauqua El Trans & Dist Perpetual W Town of Mount Morris Livingston El Transmission Perpetual W Town of Murray Orleans El Trans & Dist Perpetual W Town of New Albion Cattaraugus El Trans & Dist Perpetual W Town of New Hudson Allegany El Trans & Dist Perpetual W Town of Newfane Niagara El Trans & Dist Perpetual W Town of Newstead Erie El Trans & Dist Perpetual W Town of Niagara Niagara El Trans & Dist Perpetual W Town of North Collins Erie El Trans & Dist Perpetual W Town of North Harmony Chautauqua El Trans & Dist Perpetual W Town of Oakfield Genesee El Trans & Dist Perpetual W Town of Ogden Monroe El Trans & Dist Perpetual W Town of Olean Cattaraugus El Trans & Dist Perpetual W Town of Orangeville Wyoming El Trans & Dist Perpetual W Town of Orchard Park Erie El Transmission Perpetual W Town of Otto Cattaraugus El Trans & Dist Perpetual W Town of Palmyra Wayne El Trans & Dist Perpetual W Town of Pavilion Genesee El Trans & Dist Perpetual W Town of Pembroke Genesee El Trans & Dist Perpetual W Town of Pendleton Niagara El Trans & Dist Perpetual W Town of Perrysburg Cattaraugus El Trans & Dist Perpetual W Town of Phelps Ontario El Trans & Dist Perpetual
Tuesday, July 14, 1998 ANSWER Page 3 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== W Town of Pittsford Monroe El Trans & Dist Perpetual W Town of Poland Chautauqua El Trans & Dist Perpetual W Town of Pomfret Chautauqua El Trans & Dist 5/9/2005 60 years W Town of Porter Niagara El Trans & Dist Perpetual W Town of Portland Chautauqua El Trans & Dist Perpetual W Town of Portville Cattaraugus El Trans & Dist Perpetual W Town of Randolph Cattaraugus El Trans & Dist Perpetual W Town of Red House Cattaraugus El Trans & Dist Perpetual W Town of Richmond Ontario El Trans & Dist Perpetual W Town of Ridgeway Orleans El Trans & Dist Perpetual W Town of Riga Monroe El Trans & Dist Perpetual W Town of Ripley Chautauqua El Trans & Dist Perpetual W Town of Royalton Niagara El Trans & Dist Perpetual W Town of Rush Monroe El Trans & Dist Perpetual W Town of Salamanca Cattaraugus El Trans & Dist Permanent W Town of Sardinia Erie El Transmission Permanent W Town of Scio Allegany El Trans & Dist Permanent W Town of Shelby Orleans El Trans & Dist Perpetual W Town of Sheridan Chautauqua El Trans & Dist Perpetual W Town of Sherman Chautauqua El Trans & Dist Perpetual W Town of Somerset Niagara El Trans & Dist Perpetual W Town of South Valley Cattaraugus El Trans & Dist Perpetual W Town of Stafford Genesee El Trans & Dist Perpetual W Town of Stockton Chautauqua El Trans & Dist Perpetual W Town of Sweden Monroe El Trans & Dist Perpetual W Town of Tonawanda Erie El Trans & Dist Perpetual W Town of Wellsville Allegany El Transmission Perpetual W Town of West Bloomfield Ontario El Trans & Dist Perpetual W Town of West Seneca Erie El unknown No further info W Town of Westfield Chautauqua El Transmission Permanent W Town of Wethersfield Wyoming El Transmission Permanent W Town of Wheatfield Niagara El Trans & Dist 11/29/72 60 years W Town of Wheatland Monroe El Trans & Dist Permanent W Town of Willing Allegany El Trans & Dist Permanent W Town of Wilson Niagara El Trans & Dist Permanent W Town of Wirt Allegany El Transmission Permanent W Town of Yates Orleans El Trans & Dist Permanent W Town of York Livingston El Trans & Dist Permanent W Town of Yorkshire Cattaraugus El Trans & Dist Permanent W Tuscarora Nation of Indians Niagara El Trans & Dist 10/18/2036 99 years W Tuscarora Nation of Indians Niagara El Transmission 3/7/98 10 years W Village of Akron Erie El Transmission Perpetual W Village of Albion Orleans El Trans & Dist Perpetual W Village of Alexander Genesee El Trans & Dist Perpetual W Village of Allegany Cattaraugus El Trans & Dist Perpetual W Village of Andover Allegany El Trans & Dist Perpetual W Village of Angola Erie El Trans & Dist Perpetual W Village of Arcade Wyoming El Transmission Perpetual W Village of Attica Genesee El Trans & Dist Perpetual W Village of Avon Livingston El Trans & Dist Perpetual W Village of Barker Niagara El Trans & Dist Perpetual W Village of Bemus Point Chautauqua El Trans & Dist Perpetual W Village of Bergen Genesee El Trans & Dist No Franchise W Village of Blasdell Erie El Trans & Dist 10/27/97 25 years W Village of Brockport Monroe El Trans & Dist 12/6/87 50 years W Village of Caledonia Livingston El Trans & Dist Perpetual W Village of Cassadaga Chautauqua El Trans & Dist Perpetual W Village of Cattaraugus Cattaraugus El Trans & Dist Perpetual W Village of Celoron Chautauqua El Transmission Perpetual W Village of Churchville Monroe El Trans & Dist Perpetual W Village of Clifton Springs Ontario El Trans & Dist Perpetual W Village of Corfu Genesee El Trans & Dist Perpetual W Village of Cuba Allegany El Trans & Dist Perpetual W Village of Delevan Cattaraugus El Trans & Dist Perpetual W Village of Depew Erie El Trans & Dist 5/6/2006 50 years W Village of East Randolph Cattaraugus El Trans & Dist Perpetual W Village of Elba Genesee El Trans & Dist Perpetual W Village of Ellicottville Cattaraugus El Trans & Dist Perpetual
Tuesday, July 14, 1998 ANSWER Page 4 Frandist Franarea Franco Frantype Endate Franterm ======== ======================================== =================== ========================== ============== ==================== W Village of Falconer Chautauqua El Transmission 4/17/91 25 years W Village of Farnham Erie El Trans & Dist Perpetual W Village of Franklinville Cattaraugus El Trans & Dist Perpetual W Village of Fredonia Chautauqua El Trans & Dist Perpetual W Village of Holly Orleans El Transmission Perpetual W Village of Honeoye Falls Monroe El Trans & Dist Perpetual W Village of Kenmore Erie El Trans & Dist Perpetual W Village of Lakewood Chautauqua El Trans & Dist Perpetual W Village of Lancaster Erie El Trans & Dist 9/9/2006 50 years W Village of Lasalle Niagara El Trans & Dist Perpetual W Village of Leroy Genesee El Trans & Dist Perpetual W Village of Lewiston Niagara El Trans & Dist Perpetual W Village of Lima Livingston El Trans & Dist Perpetual W Village of Limestone Cattaraugus El Trans & Dist Perpetual W Village of Livonia Livingston El Trans & Dist Perpetual W Village of Lyndonville Orleans El Trans & Dist Perpetual W Village of Macedon Wayne El Trans & Dist Perpetual W Village of Machias Cattaraugus El Trans & Dist Perpetual W Village of Manchester Ontario El Trans & Dist Perpetual W Village of Mayville Chautauqua El Transmission Perpetual W Village of Mayville Chautauqua El Transmission 9/24/2012 99 years W Village of Medina Orleans El Transmission Perpetual W Village of Middleport Niagara El Trans & Dist Perpetual W Village of Newark Wayne El Trans & Dist Perpetual W Village of North Collins Erie El Trans & Dist Perpetual W Village of North Olean Cattaraugus El Trans & Dist Perpetual W Village of Oakfield Genesee El Trans & Dist Perpetual W Village of Olean Cattaraugus El Trans & Dist Perpetual W Village of Palmyra Wayne El Trans & Dist Perpetual W Village of Perrysburg Cattaraugus El Trans & Dist Perpetual W Village of Phelps Ontario El Trans & Dist Perpetual W Village of Portville Cattaraugus El Trans & Dist Perpetual W Village of Randolph Cattaraugus El Trans & Dist 10/11/2014 50 years W Village of Sherman Chautauqua El Trans & Dist Perpetual W Village of Silver Creek Chautauqua El Transmission Perpetual W Village of Sinclairville Chautauqua El Trans & Dist Perpetual W Village of Sloan Erie El Trans & Dist Perpetual W Village of Wellsville Allegany El Trans & Dist Perpetual W Village of Westfield Chautauqua El Transmission Permanent W Village of Williamsville Erie El Trans & Dist Permanent W Village of Youngstown Niagara El Trans & Dist 4/l/2001 25 years ======== ======================================== =================== ========================== ============== ====================
UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION NIAGARA MOHAWK ) POWER CORPORATION ) Docket No.__________________ APPLICATION FOR AUTHORITY TO IMPLEMENT PROPOSED CORPORATE RESTRUCTURING -------------------------------------- EXHIBIT L (Form of Notice for Federal Register) UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION Niagara Mohawk Power Corp. ) Docket No. __________________ NOTICE OF FILING (_________, 1998) Take notice that on _________, 1998, Niagara Mohawk Power Corporation ("Niagara Mohawk") tendered for filing pursuant to Section 203 of the Federal Power Act an application for Commission approval to effect a corporate reorganization which involves the creation of a holding company and the transfer of certain contracts, all as more fully set forth in the application. Any person desiring to be heard or to protest said filing should file a motion to intervene or protest with the Federal Energy Regulatory Commission, 888 First Street, N.E. Washington, D.C. 20426, in accordance with Rules 211 and 214 of the Commission's Rules of Practice and Procedure (18 C.F.R. Sec. 385.211 and Sec. 385.214). All such motions or protests should be filed on or before ____________. Protests will be considered by the Commission in determining the appropriate action to be taken, but will not serve to make protestants parties to the proceedings. Any person wishing to become a party must file a motion to intervene. Copies of the filing and supporting documents are on file with the Commission and are available for public inspection. David P. Boergers Acting Secretary EX-99.8 10 NRC APPLICATION UNDER ATOMIC ENERGY ACT Exhibit 22 UNITED STATES OF AMERICA BEFORE THE NUCLEAR REGULATORY COMMISSION NIAGARA MOHAWK ) Docket Nos. Unit 1-50-220, Unit 2-50-410 POWER CORPORATION ) Operating License Nos. DPR-63, NPF-69 REQUEST FOR CONSENT TO INDIRECT TRANSFER OF CONTROL OVER THE NINE MILE 1 AND 2 OPERATING LICENSES IN CONNECTION WITH CREATION OF A NEW HOLDING COMPANY I. INTRODUCTION Niagara Mohawk Power Corporation ("NMPC" or the "Company"), pursuant to 10 C.F.R. ss. 50.80, hereby requests Nuclear Regulatory Commission ("NRC" or the "Commission") consent to the indirect transfer of control over NMPC's interest in Operating License Nos. DPR-63 and NPF-69 (collectively, the "Operating Licenses") for, respectively, Unit No. 1 ("Nine Mile 1") and Unit No. 2 ("Nine Mile 2") (collectively, the "facilities") of the Nine Mile Point Nuclear Power Station located in Scriba, New York. NMPC is a 100% owner of Nine Mile 1 and a 41% co-owner of Nine Mile 2. NMPC operates both facilities. Commission approval is necessary in order to allow the creation of a new holding company structure for NMPC. The restructuring will not affect NMPC's position, responsibility or commitment as owner and operation of the facilities. NMPC respectfully submits that the proposed indirect transfer of control over the Operating Licenses is consistent with applicable provisions of law, Commission regulations, and Commission orders and will not affect NMPC's qualifications as a licensee. Accordingly, the request should be granted. II. DESCRIPTION OF THE NEW HOLDING COMPANY STRUCTURE Under the proposed holding company structure, NMPC will become a wholly-owned subsidiary of a new holding company, Niagara Mohawk Holdings, Inc. ("Holdings"), a New York corporation. Each share of NMPC's common stock will be exchanged for one new share of Holdings common stock. NMPC's outstanding preferred stock will not be exchanged but will continue as shares of NMPC's preferred stock. The corporate restructuring will result in a change in the identity of the direct holder of NMPC's common stock, but no change in the beneficial owners of that equity, who will merely exchange their NMPC shares for shares in Holdings. The corporate restructuring is more fully described in the Form S-4 Registration Statement for Niagara Mohawk Holdings, Inc. with Amendments, dated May 29, 1998, a copy of which is attached hereto as Exhibit 1. NMPC common shareholders approved the corporate restructuring as their Annual Meeting on June 29, 1998. III. BACKGROUND NMPC is a registered public utility incorporated under the laws of New York State. NLMPC is engaged principally in the generation, purchase, transmission, distribution, and sale of electricity and the purchase, distribution, sale, and transportation of gas. Nine Mile 1 and 2 are among the electric generating facilities owned by NMPC. NMPC supplies electricity at both retail and wholesale. -2- NMPC utility operations are subject to regulation by the New York Public Service Commission (the "NYPSC") pursuant to New York's Public Service Law (the "PSL"). The NYPSC's jurisdiction includes supervision over NMPC's retail rates. Further, NMPC is a "public utility" as defined in Section 201(e) of the Federal Power Act, 16 U.S.C. Sec. 824(e). NMPC sells electric energy at wholesale to, and transmits electric energy in interstate commerce for, other electric utilities under rate schedules and tariffs approved by the Federal Energy Regulatory Commission ("FERC"). By virtue of the regulatory authority exercised by these agencies over NMPC's rates for electricity, NMPC is an "electric utility" as defined in 10 C.F.R. Sec. 50.2. In addition to its utility operations, NMPC owns an unregulated subsidiary, Opinac North American, Inc. ("Opinac NA"), which, in turn, owns Opinac Energy Corporation,1/ Plum Street Enterprises, Inc. and Plum Street Energy Marketing (a subsidiary of Plum Street Enterprises) (collectively, the "non-utility subsidiaries"), which participate principally in energy-related services. Canadian Niagara Power Co., LTD ("CNP") is owned 50% by Opinac Energy Corporation. CNP owns a 99.9% interest in Canadian Niagara Wind Power Company Inc. and Cowley Ridge Partnership, respectively, which together operate a wind power joint venture in the Province of Alberta, Canada. NMPC also has several other subsidiaries including NM - ------------------------ 1/ Opinac Energy Corporation is an exempt holding company under Section 3(a)(5) of the Public Utility Holding Company Act of 1935. Opinac Energy Corporation, 52 S.E.C. Docket 1475 (1992). -3- Uranium Inc., NM Holdings, Inc., Moreau Manufacturing Corp., Beebee Island Corp., and NM Receivables Corp. II. Subject to the approval of NMPC shareholders and various regulatory approvals, including the approval of this Commission, NMPC proposes to form the holding company structure discussed above, whereby NMPC will become a subsidiary of Holdings, a New York corporation. As part of the proposal, certain of NMPC's non-utility subsidiaries will be transferred to Holdings. The resulting corporate structure will more clearly separate NMPC's regulated and non-regulated businesses. This separation is consistent with federal and state initiatives for the restructuring of the electric utility industry.2/ It is also consistent with a Settlement Agreement (the "Settlement"), dated October 10, 1997, among the Staff of the NYPSC, NMPC, and other parties which provides for fundamental changes to the structure of NMPC's business. Among other things, the Settlement calls for NMPC to divest all of its hydro and fossil generation assets. NMPC's nuclear assets will remain part of its regulated business. NMPC will continue to distribute electricity through its transmission and distribution systems, but, by the end of 1999, all of NMPC's customers will be able to choose their electricity supplier in a competitive market. - -------------------- 2/ E.g., Order No. 888: Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services By Public Utilities, 75 F.E.R.C. Para. 61,080 (1996), reaff'd and clarified, Order No. 888-A, 78 (footnote continued next page) -4- Electric rates will be unbundled into separate charges for transmission, distribution, customer service, electric supply, and a non-bypassable competitive transition charge (the "CTC"). NMPC's nuclear costs will be subject to cost-of-service regulation. Finally, the Settlement allows NMPC to form, at its election, the holding company structure discussed herein. The Settlement was approved by the NYPSC on March 20, 1998.3/ The Settlement is more fully described in the Settlement Order, a copy of which is attached hereto as Exhibit 2. More generally, the holding company structure will enable Holdings to engage in unregulated businesses without obtaining the prior approval of the PSC, thereby enabling Holdings to pursue unregulated business opportunities in a timely manner. Under the new corporate structure financing of unregulated activities of Holdings and its non-utility subsidiaries will not require PSC approval. In addition, the capital structure of each non-utility subsidiary may be appropriately tailored to suit its individual business. Also, under the holding company structure, Holdings, would not need PSC approval to issue debt or equity securities to finance the acquisition of the stock or assets of other companies. The ability to raise capital for acquisitions without prior PSC approval should allow competition on a level basis with other potential acquirers, some of which are already holding companies. Under a holding company structure, the issuance of debt or equity securities by Holdings to finance the acquisition of stock or assets - --------------------- (footnote continued) F.E.R.C. Para. 61,220 (1997); NYPSC Opinion 96-12, Cases 94-E-0952, et al., Opinion and Order Regarding Competitive Opportunities for Electric Service (1996). 3/ Niagara Mohawk Power Corp., Cases 94-E-0098 and 94-E-0099, et al., Opinion and Order Adopting Terms of Settlement Agreement Subject to Modification and Conditions (1998) (the "Settlement Order"). -5- of another company should not adversely affect Niagara Mohawk's capital devoted to and available for regulated utility operations. The holding company structure separates the operations of regulated and unregulated businesses. As a result, it provides a better structure for regulators to assure that there is no cross-subsidization of costs or transfer of business risk from unregulated to regulated lines of business. A holding company structure also is preferred by the investment community because it makes it easier to analyze and value individual lines of business. Moreover, the use of a holding company structure provides legal protection against the imposition of liability on regulated utilities for the results of unregulated business activities. In short, the holding company structure is a highly desirable form of conducting regulated and unregulated businesses within the same corporate group. IV. EFFECT OF NEW HOLDING COMPANY STRUCTURE The transfer of direct common equity ownership of NMPC to Holdings involves a change of legal ownership of NMPC and, therefore, a technical change in the control of NMPC and its interest in the Operating Licenses, which transfer of control is subject to prior consent of the Commission. See 42 U.S.C. ss. 2234 and 10 C.F.R. ss. 50.80(a). The corporate restructuring will have a minimal effect on the underlying ownership of NMPC because the existing shareholders of NMPC will continue to control NMPC indirectly, and NMPC will continue to hold the Operating Licenses. -6- After the corporate restructuring, NMPC will continue to be an electric utility engaged in the transmission, distribution and, through Nine Mile 1 and 2, the generation of electricity. NMPC will continue to be the owner of Nine Mile 1 and the co-owner of Nine Mile 2 and will continue to operate both facilities. No actual transfer of the ownership interest in Nine Mile 1 and 2 or the Operating Licenses will be effected by the corporate restructuring. Further, NMPC will continue to recover the costs of owning and operating the plants on a modified cost-of-service basis through the non-bypassable CTC and will continue to be regulated by the NYPSC and the FERC. Thus, pursuant to 10 C.F.R. ss. 50.80(c), the corporate restructuring will not affect NMPC's qualifications as a licensee for Nine Mile 1 and 2, will not affect the status of NMPC as an "electric utility," and is otherwise consistent with applicable provisions of law, Commission regulations, and Commission orders. V. REGULATORY APPROVALS The proposed corporate restructuring requires the approval of the NYPSC, the SEC pursuant to the Public Utility Holding Company Act of 1935 and the FERC. The Settlement, which includes a description of the corporate restructuring, has been approved by the NYPSC in the Settlement Order. Concurrent with the filing of this Application, NMPC is filing applications with the FERC and the SEC for approval to effect the proposed corporate restructuring. Additionally, a compliance filing with the NYPSC will be required consistent with the -7- Settlement and the Settlement Order. No similar application is required to be filed with any other State or federal regulatory body. VI. NUCLEAR REGULATORY COMMISSION REVIEW To assist the NRC in its review of this request, NMPC is providing information with respect to the following areas which have been the focus of the NRC's review in prior cases involving the creation of holding companies over NRC licensees: 1. The new holding company structure will not impair NMPC's ability to carry out its responsibilities under its NRC licenses, or otherwise affect the financial health of NMPC. The corporate restructuring will not have an adverse impact on NMPC's ability to fulfill its responsibilities under its NRC licenses. Specifically, the corporate restructuring will not adversely affect the ability of NMPC to meet its financial obligations with respect to the facilities' future operating and capital requirements or to meet its funding obligations with respect to the eventual nuclear decommissioning of the facilities. The NRC recently addressed the future restructuring of the electric utility industry and voiced concerns that NRC licensed entities continue to have access to adequate funds so that funds are available for safe reactor operation and the payment of decommissioning costs. E.g., -8- Final Policy Statement on the Restructuring and Economic Deregulation of the Electric Utility Industry, 62 Fed. Reg. 44071 (1997). With respect to both financial qualification reviews for operating license applicants and decommission funding assurance reviews, the NRC has distinguished between an "electric utility" and other licensees. As defined in 10 C.F.R. Sec. 50.2, an "electric utility" is an entity that generates or distributes electricity the costs of which are recovered by rates set by the entity itself or by a separate regulatory authority. Investor-owned utilities, such as NMPC, are included within the meaning of "electric utility." The underlying rationale for different treatment is that rate regulators typically allow an electric utility to recover prudently incurred costs of generating, transmitting and distributing electric services. The NRC recently proposed revisions to the definition of "electric utility" in its proposed rulemaking regarding Financial Assurance Requirements for Decommissioning Nuclear Power Reactors, 62 Fed. Reg. 47588 (1997). The Commission proposed to revise its definition of "electric utility" to introduce additional flexibility prior to the deregulation of the electric industry. The Commission noted that the key component of the revised definition is that a licensee's rates are established either through cost-of-service mechanisms or through other non-bypassable charge mechanisms, such as the CTC proposed under the NMPC/NYPSC Settlement. -9- The corporate restructuring will not change the status of NMPC as an "electric utility," as defined in 10 C.F.R. ss. 50.2. After the holding company structure is complete, NMPC will retain its nuclear assets and will continue to be a public utility subject to regulation by the NYPSC with respect to, among other things, its retail rates. NMPC will continue to recover the costs of owning and operating the plants on a cost-of-service basis. In addition, FERC will continue to regulate NMPC's transmission and wholesale electric rates. Thus, NMPC will remain an "electric utility," as defined in both the Commission's current and proposed regulations. With regard to the divesture of NMPC's non-nuclear generating assets, which will be effected by auction, and in accordance with Commission practice, NMPC agrees to notify the Commission 60 days in advance of any transfer of assets having a depreciated book value exceeding ten percent (10%) of NMPC's consolidated net utility plant, as recorded on NMPC's book of accounts. The transfer of such generating assets has already been approved by the NYPSC in the Settlement Order. 2. The new holding company structure will not adversely affect the management of NMPC's nuclear operations or its technical qualifications. The new holding company structure retains NMPC as a discrete and separate entity. No responsibility for nuclear operations within NMPC will be changed by the corporate restructuring. Officer responsibilities at the holding company level will be primarily administrative and financial in nature and will not involve operational matters relating to Nine -10- Mile 1 and 2. After the corporate restructuring, NMPC will continue to be responsible for the facilities' day-to-day operations and the technical qualifications required by the Operating Licenses. No NMPC nuclear management positions will be changed as a pre-requisite or direct result of the corporate restructuring. 3. The new holding company structure will not result in NMPC becoming owned, controlled or dominated by an alien, a foreign corporation, or a foreign government. At the time the restructuring becomes effective, Holdings will become the sole holder of NMPC's common stock, and the current holders of NMPC's common stock will become holders of the common stock of Holdings on a share-for-share basis. Therefore, immediately following the implementation of the holding company structure, the common stock of Holdings will be owned by the previous holders of NMPC's common stock in the same proportions in which they held NMPC's common stock. Based upon currently available information, shares of NMPC's common stock held in foreign accounts represent less than 0.1 percent (0.1%) of the total outstanding shares of NMPC. Further, all members of the Boards of Directors of NMPC and Holdings will be United States citizens. Thus, the corporate restructuring will not result in NMPC being owned, controlled or dominated by foreign interests. -11- VII. THE NEW HOLDING COMPANY STRUCTURE WILL HAVE NO SIGNIFICANT ENVIRONMENTAL EFFECT As discussed above, the new holding company structure will have no significant effect on the operation of Nine Mile 1 and 2. There will be no physical or operational changes to the facilities as a result. It will not affect the qualifications or the organizational affiliation of the personnel who operate and maintain the facilities. Further, it will not increase the probability or consequences of accidents, no changes will be made in the types of effluents that may be released offsite, and there will be no significant increase in the allowable individual or cumulative occupational radiation exposure. The corporate restructuring would not affect non-radiological effluents of the facilities and would have no other environmental impact. Accordingly, NMPC requests that the Commission issue and publish a finding of no significant radiological environmental impact pursuant to 10 C.F.R. Sec. 51.31 and 51.35. VIII. CONCLUSION Based upon the foregoing, NMPC respectfully requests that the Commission consent to the indirect transfer of control described herein. The common shareholders approved the reorganization on June 29, 1998. Approvals from the NYPSC, the SEC and FERC are anticipated by October 15, 1998. NMPC respectfully requests NRC action on this application by October 1, 1998. -12- Respectfully submitted, NIAGARA MOHAWK POWER CORPORATION By: /s/ John H. Mueller -------------------------------- John H. Mueller Senior Vice-President and Chief Nuclear Officer Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, New York 13202 [tel/fax nos.] Dated: July 22, 1998 -13- UNITED STATES OF AMERICA BEFORE THE NUCLEAR REGULATORY COMMISSION NIAGARA MOHAWK POWER ) Docket Nos. POWER CORPORATION ) Operating License Nos. STATE OF NEW YORK ) COUNTY OF ___________ )ss.: AFFIDAVIT OF ______________ _____________, being duly sworn, states that __ is the ______________ of Niagara Mohawk Power Corporation ("NMPC"); that __ is authorized on the part of NMPC to sign and file with the Nuclear Regulatory Commission the foregoing request; and that said request is true and correct to the best of ___ knowledge, information and belief. ---------------------------------- SUBSCRIBED and SWORN to before me, a Notary Public, this __ day of _________, 1998. -------------------------- Notary Public My Commission Expires: - -------------------- -14- EXHIBIT REFERENCE SHEET EXHIBIT # DESCRIPTION METHOD OF FILING - ------- ----------- ---------------- 1 Form S-4 Registration Statement Filed with the Securities and for Niagara Mohawk Holdings, Inc. Exchange Commission on May 29, with Amendments dated May 29, 1998 1998 2 Settlement Agreement Filed with Niagara Mohawk 8K, October 17, 1997, Exhibit 99-1 EX-99.9 11 FEDERAL REGISTER NOTICE FORM Exhibit No. 24 UNITED STATES OF AMERICA BEFORE THE SECURITIES AND EXCHANGE COMMISSION Niagara Mohawk Holdings, Inc. File No. _____________ NOTICE OF FILING Take notice that on July __, 1998, Niagara Mohawk Holdings, Inc., a New York corporation ("Holdings"), filed an application seeking authorization from the Commission under Sections 3(a)(1), 9(a)(2) and 10 of the Public Utility Holding Company Act of 1935 (the "1935 Act" or "Act"), in connection with the proposed corporate reorganization of Niagara Mohawk Power Corporation ("Niagara Mohawk"), a New York electric and gas utility company. The application requests authorization (i) to acquire all of the outstanding shares of common stock of Niagara Mohawk ("Niagara Mohawk Common Stock") pursuant to a Plan of Exchange ("Plan of Exchange"), and (ii) to engage in the proposed transactions described in the application, which will result in Holdings indirectly owning or controlling all of the outstanding Niagara Mohawk Common Stock, 86% of the outstanding common stock of Beebee Island Corporation ("Beebee Island"), a New York corporation, 67% of the outstanding common stock of Moreau Manufacturing Corporation ("Moreau"), a New York corporation, and 50% of Canadian Niagara Power Company Limited ("CNP"), a Canadian corporation, each of which is an "electric utility company" for purposes of the 1935 Act. In addition, the application requests an order exempting Holdings and each of its subsidiary companies from all provisions of the 1935 Act (except for Section 9(a)(2) thereof). Under the terms of the Plan of Exchange, all of the outstanding shares of common stock of Holdings ("Holdings Common Stock"), which will then be owned by Niagara Mohawk, will be canceled and all of the outstanding shares of Niagara Mohawk Common Stock will be exchanged on a share-for-share basis for Holdings Common Stock ("Share Exchange"). Upon consummation of the Share Exchange, each person who owned Niagara Mohawk Common Stock immediately prior to the Share Exchange will own a corresponding number of shares and percentage of the outstanding Holdings Common Stock, and Holdings will own all of the outstanding shares of Niagara Mohawk Common Stock. As an additional aspect of the proposed holding company restructuring, after the effective time of the Share Exchange, certain of Niagara Mohawk's existing non-utility subsidiaries will be transferred to Holdings and become subsidiaries of Holdings. Niagara Mohawk's principal non-utility subsidiaries participate in real estate development of property formerly owned by Niagara Mohawk (NM Holdings), and in energy-related services (Opinac North America, Inc. and its subsidiaries). In addition, Niagara Mohawk holds a single-purpose subsidiary, NM Receivables Corp. II, established to facilitate the sale of an undivided interest in a designated pool of customer receivables. Niagara Mohawk, a regulated public utility incorporated under the laws of the State of New York, is engaged principally in the business of generating, purchasing, transmitting and distributing electricity, and purchasing, transporting and distributing natural gas. Niagara Mohawk is currently exempt from registration as a holding company under Section 3(a)(2) of the - 2 - 1935 Act because it is predominantly a public utility company whose operations are confined to New York State. Holdings was incorporated under the laws of the State of New York for the purpose of carrying out the proposed transactions described in this application. Holdings is currently a direct, wholly-owned subsidiary of Niagara Mohawk. Holdings does not currently own any utility assets and currently is not a "public utility company" or a "holding company" for purposes of the 1935 Act. Holdings, which will indirectly own or control all of the outstanding common stock of Niagara Mohawk, 86% of the outstanding common stock of Beebee Island, 67% of the outstanding common stock of Moreau and 50% of CNP after the effective time of the Share Exchange, will require Commission approval under Section 9(a)(2) of the 1935 Act. In addition, Holdings is seeking a Commission order declaring it exempt from all provisions of the Act except Section 9(a)(2). The shares of Niagara Mohawk Preferred Stock issued and outstanding immediately prior to the Share Exchange will not be converted or otherwise affected by the Share Exchange and will continue as equity securities of Niagara Mohawk with the same preferences, designations, relative rights, privileges and powers, and subject to the same restrictions, limitations and qualifications, as were applicable to such securities prior to the Share Exchange. - 3 - The Share Exchange will not result in any change in the outstanding indebtedness of Niagara Mohawk which will continue to be obligations of Niagara Mohawk after the Share Exchange. Niagara Mohawk's first mortgage bonds will continue to be secured by a first mortgage lien on all of the properties of Niagara Mohawk that are currently subject to such lien. Such indebtedness will be neither assumed nor guaranteed by Holdings in connection with the Share Exchange. The reorganization is an integral part of implementation of the comprehensive rate and restructuring plan for Niagara Mohawk that was recently approved by the New York State Public Service Commission ("PSC"), hereinafter referred to as PowerChoice. PowerChoice is intended to further the PSC's stated goals in restructuring the utility industry in New York State into a competitive energy marketplace. See PSC Opinion No. 96-12 in Case 94-E-0952 issued May 20, 1996 (168 P.U.R. 4th 515). The proposed holding company structure is intended to provide Niagara Mohawk and its subsidiaries with the financial and regulatory flexibility to compete more effectively in an increasingly competitive energy industry by providing a structure that can accommodate both regulated and unregulated lines of business. Holdings asserts that, following the consummation of the proposed restructuring, it would be a public-utility holding company entitled to an exemption under Section 3(a)(1) of the Act because it and each of its public-utility subsidiaries from which it would derive a material part of its income would be incorporated in the State of New York, would be predominately intrastate in character and would carry on their business substantially within the State of New York. - 4 - All interested persons are referred to the application for complete statements of the proposed reorganization summarized above. The application is available for public inspection through the Commission's Office of Public Reference. Interested persons wishing to comment or request a hearing on the application should submit their views in writing by __________, _____, to the Secretary, Securities and Exchange Commission, Washington, DC 20549, and serve a copy on the relevant applicants at the address specified above. Proof of service (by affidavit or, in the case of an attorney at law, by certificate) should be filed with the request. Any request for hearing shall identify specifically the issues of fact or law that are disputed. A person who so requests will be notified of any hearing, if ordered, and will receive a copy of any notice or order issued in the matter. After said date, the application, as filed or as amended, may be granted. - 5 - -----END PRIVACY-ENHANCED MESSAGE-----