e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to


Commission	Registrant, State of Incorporation	I.R.S. Employer
File Number	Address and Telephone Number	Identification No.
1-2987	Niagara Mohawk Power Corporation	15-0265555
	(a New York corporation)
	300 Erie Boulevard West
	Syracuse, New York 13202
	315.474.1511

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The number of shares outstanding of each of the issuer’s classes of common stock, as of August 11, 2007, were as follows:


Registrant	Title	Shares Outstanding
Niagara Mohawk Power Corporation	Common Stock, $1.00 par value		187,364,863
	(all held by Niagara Mohawk
	Holdings, Inc.)

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Operations
(In thousands of dollars)
(UNAUDITED)


	Three Months Ended
	June 30,
	2007			2006

Operating revenues:
Electric	$	783,536		$	731,877
Gas		205,529			183,306

Total operating revenues		989,065			915,183

Operating expenses:
Purchased electricity		336,425			307,211
Purchased gas		135,332			114,529
Other operation and maintenance		191,548			177,065
Depreciation and amortization		53,993			52,237
Amortization of stranded costs and rate plan deferrals		120,733			98,729
Other taxes		55,625			56,587
Income taxes		14,291			24,563

Total operating expenses		907,947			830,921

Operating income		81,118			84,262
Other deductions, net		(1,052	)		(1,569	)

Operating and other income		80,066			82,693

Interest:
Interest on long-term debt		22,665			27,329
Interest on debt to associated companies		18,914			21,356
Other interest		7,396			5,039

Total interest expense		48,975			53,724

Net income		31,091			28,969

Dividends on preferred stock		406			406

Income available to common shareholder	$	30,685		$	28,563

Condensed Consolidated Statements of Comprehensive Income
(In thousands of dollars)
(UNAUDITED)


	Three Months Ended
	June 30,
	2007			2006

Net income	$	31,091		$	28,969
Other comprehensive income (losses), net of tax:
Unrealized gains (losses) on securities		351			(271	)
Hedging activity		(10,446	)		(5,343	)
Amortization of unrealized post-retirement benefit costs		12			—
Reclassification adjustment for losses included in net income		4,287			1,594

Total other comprehensive losses, net of tax		(5,796	)		(4,020	)

Comprehensive income	$	25,295		$	24,949

Per share data is not relevant because Niagara Mohawk’s common stock is wholly-owned by Niagara Mohawk Holdings, Inc.
The accompanying notes are an integral part of these financial statements

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Balance Sheets

(In thousands of dollars)

(UNAUDITED)


	June 30,		March 31,
	2007		2007

ASSETS
Utility plant, at original cost:
Electric plant	$	5,898,819	$	5,854,677
Gas plant		1,632,218		1,617,848
Common plant		290,059		288,837

Total utility plant		7,821,096		7,761,362
Less: Accumulated depreciation and amortization		2,355,205		2,318,967

Net utility plant		5,465,891		5,442,395

Goodwill		1,291,911		1,242,461
Other property and investments		48,378		47,506

Current assets:
Cash and cash equivalents		14,809		15,746
Restricted cash		83,160		37,648
Accounts receivable (less reserves of $134,430 and $126,619, respectively, and including receivables from associated companies of $11,621 and $10,232, respectively)		569,054		670,548
Materials and supplies, at average cost:
Gas storage		55,382		4,277
Other		26,162		27,926
Derivative instruments		—		7,945
Prepaid taxes		26,975		75,573
Current deferred income taxes		112,839		107,774
Regulatory asset – swap contracts		215,177		221,540
Other		8,309		14,595

Total current assets		1,111,867		1,183,572

Regulatory and other non-current assets:
Regulatory assets:
Merger rate plan stranded costs		2,139,253		2,220,179
Swap contracts regulatory asset		—		46,500
Regulatory tax asset		110,660		100,765
Deferred environmental remediation costs		397,197		397,407
Pension and post-retirement benefit plans		1,020,794		1,028,129
Loss on reacquired debt		50,089		51,975
Other		306,583		379,257

Total regulatory assets		4,024,576		4,224,212
Other non-current assets		25,148		26,609

Total regulatory and other non-current assets		4,049,724		4,250,821

Total assets	$	11,967,771	$	12,166,755

The accompanying notes are an integral part of these financial statements.

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Balance Sheets

(In thousands of dollars)

(UNAUDITED)


	June 30,			March 31,
	2007			2007

CAPITALIZATION AND LIABILITIES
Capitalization:
Common stockholder’s equity:
Common stock ($1 par value)
Authorized - 250,000,000 shares
Issued and outstanding - 187,364,863 shares	$	187,365		$	187,365
Additional paid-in capital		2,913,384			2,913,384
Accumulated other comprehensive loss		(5,854	)		(58	)
Retained earnings		998,980			976,688

Total common stockholder’s equity		4,093,875			4,077,379
Preferred equity:
Cumulative preferred stock ($100 par value, optionally redeemable)
Authorized - 3,400,000 shares
Issued and outstanding - 411,715 shares		41,170			41,170
Long-term debt		1,249,247			1,249,194
Long-term debt to affiliates		1,200,000			1,200,000

Total capitalization		6,584,292			6,567,743

Current liabilities:
Accounts payable (including payables to associated companies of $28,977 and $37,767, respectively)		232,872			330,976
Customers’ deposits		37,981			37,819
Accrued interest		30,476			56,625
Accrued taxes		88,964			30,343
Short-term debt to affiliates		460,800			395,300
Current portion of liability for swap contracts		215,177			221,540
Current portion of long-term debt		—			200,000
Derivative instruments		28,510			—
Other		117,944			105,886

Total current liabilities		1,212,724			1,378,489

Other non-current liabilities:
Accumulated deferred income taxes		1,644,205			1,694,047
Liability for swap contracts		—			46,500
Employee pension and other benefits		950,775			996,006
Liability for environmental remediation costs		397,197			397,407
Nuclear fuel disposal costs		160,195			158,196
Cost of removal regulatory liability		355,448			350,073
Deferred credits related to income taxes		71,532			—
Other		591,403			578,294

Total other non-current liabilities		4,170,755			4,220,523

Commitments and contingencies (Note C)		—			—

Total capitalization and liabilities	$	11,967,771		$	12,166,755

The accompanying notes are an integral part of these financial statements.

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Cash Flows
(In thousands of dollars)

(UNAUDITED)


	Three Months Ended June 30,
	2007			2006

Operating activities:
Net income	$	31,091		$	28,969
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		53,993			52,237
Amortization of stranded costs and rate plan deferrals		120,733			98,729
Provision for deferred income taxes		(38,448	)		(8,621	)
Changes in operating assets and liabilities:
Net accounts receivable		101,494			127,544
Materials and supplies		(49,341	)		(33,783	)
Accounts payable and accrued expenses		(85,884	)		(41,985	)
Accrued interest and taxes		53,490			9,770
Pension and other post-retirement benefits		(45,231	)		(20,106	)
Prepaid taxes		48,598			13,345
Other, net		62,121			65,646

Net cash provided by operating activities		252,616			291,745

Investing activities:
Construction additions		(72,582	)		(68,218	)
Change in restricted cash		(45,512	)		(31,648	)
Other investments		(872	)		508
Other, net		319			(4,319	)

Net cash used in investing activities		(118,647	)		(103,677	)

Financing activities:
Dividends paid on preferred stock		(406	)		(406	)
Reductions in long-term debt		(200,000	)		(275,000	)
Borrowings of short-term debt to affiliates		98,000			86,000
Repayments of short-term debt to affiliates		(32,500	)		—

Net cash used in financing activities		(134,906	)		(189,406	)


Net decrease in cash and cash equivalents		(937	)		(1,338	)
Cash and cash equivalents, beginning of period		15,746			10,847

Cash and cash equivalents, end of period	$	14,809		$	9,509


Supplemental disclosures of cash flow information:
Interest paid	$	80,018		$	86,538
Income taxes paid (refund received)	$	(33,120	)	$	11,564

The accompanying notes are an integral part of these financial statements.

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

Niagara Mohawk Power Corporation and subsidiary companies (the Company), in the opinion of management, have included all adjustments (which include normal recurring adjustments) necessary for a fair statement of the results of operations for the interim periods presented. The March 31, 2007 Condensed Consolidated Balance Sheet data included in this quarterly report on Form 10-Q was derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2007. The June 30, 2007 Condensed Consolidated Balance Sheet included in this Form 10-Q is unaudited, as it does not contain all of the footnote disclosures contained in the Company’s Annual Report on Form 10-K. These financial statements and the notes thereto should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2007.

Due to weather patterns in the Company’s service territory, electric sales tend to be substantially higher in summer and winter months and gas sales tend to peak in the winter. Notwithstanding other factors, the Company’s quarterly net income will generally fluctuate accordingly. The Company’s earnings for the three-month period ended June 30, 2007 may not be indicative of earnings for all or any part of the balance of the fiscal year.

The Company is a wholly owned subsidiary of Niagara Mohawk Holdings, Inc. (Holdings) and, indirectly, of National Grid plc.

Reclassifications:

Certain amounts from prior years have been reclassified in the accompanying consolidated financial statements to conform to the current year presentation.

New Accounting Standards:

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure for uncertain tax positions taken or expected to be taken in income tax returns. The cumulative effect of applying the provision of this interpretation is required to be reported separately as an adjustment to the opening balance of retained earnings in the year of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on April 1, 2007. See Note G – Income Taxes.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” which provides enhanced guidance for using fair value measurements in financial reporting. While the standard does not expand the use of fair value in any new circumstance, it has applicability to several current accounting standards that require or permit entities to measure assets and liabilities at fair value. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States of America (GAAP) and expands disclosures about fair value measurements. The Company is currently evaluating SFAS No. 157 and at this time cannot determine the full impact that the potential requirements may have on its financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of SFAS No. 115.” This statement permits companies to choose to measure many financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is evaluating the impact that the adoption of SFAS No. 159 will have on its financial statements.

NOTE B – RATE AND REGULATORY ISSUES

General: The Company’s financial statements conform to GAAP, including the accounting principles for rate-regulated entities with respect to its regulated operations. The Company applies the provisions of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” In accordance with SFAS No. 71, the Company records regulatory assets (expenses deferred for future recovery from customers) and regulatory liabilities (revenues collected for future payment of expenses or for return to customers) on the balance sheet. The Company’s regulatory assets were approximately $4.2 billion as of June 30, 2007 and $4.4 billion as of March 31, 2007. These regulatory assets are probable of recovery under the Company’s Merger Rate Plan (MRP) and Gas Multi-Year Rate and Restructuring Agreement. The Company is earning a return on most of its regulatory assets under its MRP. The Company believes that the prices it will charge for electric service in the future, including the Competitive Transition Charges (CTCs), will be sufficient to recover and earn a return on the MRP’s stranded regulatory assets over their planned amortization periods, assuming no unforeseen reduction in load or bypass of the CTCs. The Company’s ongoing electric business continues to be rate-regulated on a cost-of-service basis under the MRP and, accordingly, the Company continues to apply SFAS No. 71 to it. In addition, the Company’s Independent Power Producer (IPP) contracts, and the Purchase Power Agreements entered into when the Company exited the power generation business, continue to be the obligations of the regulated business.

In the event the Company determines, as a result of lower than expected revenues and (or) higher than expected costs, that its net regulatory assets are not probable of recovery, it can no longer apply the principles of SFAS No. 71 and would be required to record an after-tax, non-cash charge against income for any remaining unamortized regulatory assets and liabilities. If the Company could no longer apply SFAS No. 71, the resulting charge would be material to the Company’s reported financial condition and results of operations.
The Company noted no such changes in the regulatory environment that would cause a change in the financial condition and results of operations.

Deferral Audit: As reported in the Company’s Form 10K, Niagara Mohawk and the other parties to the deferral audit associated with the Company’s second CTC reset executed and filed with the New York State Public Service Commission (PSC) on March 23, 2007, a Stipulation of the Parties (Stipulation) setting forth the resolution of these issues associated with the deferral audit. PSC approved this stipulation on July 19, 2007 without change.

Certain deferral account balances as of June 30, 2005 remain subject to audit by the Department of Public Service Staff (Staff). The Stipulation also clarifies going forward procedures for recording, reporting and auditing of certain other deferrals authorized for recovery.

Third CTC reset and Deferral Account filings: The next biannual deferral account filing included in the third CTC reset was made on August 1, 2007 for deferral balances as of June 30, 2007 and projected deferrals through December 31, 2009. The deferral account recoveries proposed in the third CTC reset are approximately $136 million per year over the two years (approximately $272 million over the two year period). This represents a reduction of $64 million per year over the $200 million per year currently being collected under the second CTC reset. These deferral recoveries are subject to audit by the Staff and further updates and adjustments in the proceeding. Any differences in the deferrals from this approved recovery level would be reflected in the next CTC reset that takes effect after 2009.

Service Quality Penalties: In connection with its MRP, the Company is subject to maintaining certain service quality standards. Service quality measures focus on eleven categories including safety targets related to gas operations, electric reliability measures related to outages, residential and business customer satisfaction, meter reads, customer call response times, and administration of the Low-Income Customer Assistance Program. If a prescribed standard is not satisfied, the Company may incur a penalty, with the penalty amount applied as a credit or refund to customers.

The MRP includes provisions related to frequency and duration of outages that might cause penalties to be doubled under certain circumstances when penalties have been incurred in the current year and two of the last four years. If such a circumstance existed, the $4.4 million penalties for exceeding the standards for outage frequency or duration could be doubled to $8.8 million unless the Company demonstrates to PSC that it has taken appropriate action to improve service quality under the affected standard. Once the doubling penalty provision has been triggered, the Company could be subject to the doubled penalty in the current year and any subsequent year of the MRP. In calendar year 2006, the Company incurred a $4.4 million penalty related to outage frequency, which it recorded in fiscal year 2007. Similar penalties were incurred in the three prior years. Based on this performance and consistent with the terms of the MRP, the PSC on June 29, 2007 issued a show cause order as to whether the penalty associated with the frequency of outages should be doubled to $8.8 million per year. The Company has filed a response, suggesting an alternative approach.

NOTE C – COMMITMENTS AND CONTINGENCIES

Environmental Contingencies: The normal ongoing operations and historic activities of the Company are subject to various federal, state and local environmental laws and regulations. Like many other industrial companies, the Company’s transmission and distribution businesses use or generate some hazardous and potentially hazardous wastes and by-products. Under federal and state Superfund laws, potential liability for the historic contamination of property may be imposed on responsible parties jointly and severally, without fault, even if the activities were lawful when they occurred.

The U.S. Environmental Protection Agency (EPA), New York Department of Environmental Conservation (DEC), as well as private entities have alleged that the Company is a potentially responsible party under state or federal law for the remediation of an aggregate of approximately 86 sites, including 47 which are Company-owned. The Company’s most significant liabilities relate to former manufactured gas plant (MGP) facilities formerly owned or operated by the Company’s previous owners. The Company is currently investigating and remediating, as necessary, those MGP sites and certain other properties under agreements with the EPA and DEC.

The Company believes that obligations imposed on the Company because of the environmental laws will not have a material result on operations or its financial condition. The Company’s MRP provides for the continued application of deferral accounting for variations in spending from amounts provided in rates related to these environmental obligations. As a result, the Company has recorded a regulatory asset representing the investigation, remediation and monitoring obligations it expects to recover from ratepayers.

The Company is pursuing claims against other potentially responsible parties to recover investigation and remediation costs it believes are the obligations of those parties. The Company cannot predict the success of such claims, however. As of June 30, 2007 and March 31, 2007, the Company had accrued liabilities related to its environmental obligations of $397 million. The high end of the range of potential liabilities at June 30, 2007, was estimated at $519 million.

Acquisition:

In 2006, National Grid plc, the ultimate parent of the Company, announced the proposed acquisition of KeySpan Corporation (KeySpan) for $7.3 billion together with the assumption of approximately $4.5 billion of debt. This would significantly expand its operations in the northeastern US as KeySpan is the fifth largest distributor of natural gas in the US and the largest in the northeast US, serving 2.6 million customers in New York, Massachusetts and New Hampshire. KeySpan also operates an electricity transmission and distribution network serving 1.1 million customers in New York under a long-term contract with the Long Island Power Authority. KeySpan’s other interests include 6.6 GW of generation capacity, together with a small portfolio of non-regulated, energy-related services, and strategic investments in certain gas pipeline, storage and liquefied natural gas assets. The planned combination of its current US operations with those of KeySpan would result in National Grid plc becoming the third largest energy utility in the US.

National Grid plc has made significant progress towards completion of this acquisition and has achieved several important milestones. National Grid plc has obtained clearances from the Federal Trade Commission in respect of the Hart-Scott-Rodino Antitrust Improvements Act, from the Committee on Foreign Investment in the US and by the Federal Energy Regulatory Commisson (FERC), and received approval from both National Grid plc and KeySpan shareholders. National Grid plc and KeySpan have signed an agreement with the Long Island Power Authority in principle regarding amended contracts, which is subject to approval by the Attorney General of New York. On July 12, 2007, the New Hampshire Public Utilities Commission approved the merger and an associated comprehensive settlement agreement among National Grid plc and its indirect subsidiary Granite State Electric Company, an affiliate of the Company, KeySpan Corporation and its subsidiary EnergyNorth Natural Gas, Inc., Staff of the New Hampshire Public Utilities Commission, and the Office of Consumer Advocate which was submitted to the Commission on May 15, 2007. In New York, a Merger & Gas Revenue Requirement Joint Proposal (Joint Proposal) dated July 6, 2007, was executed by and among KeySpan Corporation, The Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery New York, KeySpan Gas East Corporation d/b/a KeySpan Energy Delivery Long Island, National Grid plc, Niagara Mohawk Power Corporation, the Staff of the New York State Department of Public Service, the New York State Consumer Protection Board, the City of New York, the Natural Resources Defense Council, Pace Energy Project, the Public Utility Law Project, the Association for Energy Affordability, the International Brotherhood of Electrical Workers, Locals 1049 & 1381, and the International Brotherhood of Electrical Workers, Local 97 (collectively referred to herein as “the Signatory Parties”), recommending approval of the merger. The Joint Proposal is subject to the approval of the New York Public Service Commission and a decision by the New York Public Service Commission on the Joint Proposal is anticipated on August 22, 2007. Closing is anticipated soon thereafter.

In connection with the pending acquisition with KeySpan, National Grid and KeySpan are seeking voluntary non-union workforce reductions through the voluntary early retirement offer (VERO) to 700 non-union employees in selected areas in both companies in June 2007, including employees of the Company. Eligible employees must have been working in a targeted area as of April 13, 2007 and be age 52 or older with seven or more completed years of service as of September 30, 2007. The VERO is contingent upon the closing of the merger. As of the August 8, 2007 enrollment deadline, approximately 82 percent of eligible employees elected to accept the VERO. The Company cannot reasonably estimate the amount of its VERO-related costs at this time.

NOTE D – SEGMENT INFORMATION

Segmental information is presented in accordance with management responsibilities and the economic characteristics of the Company’s business activities. The Company is primarily engaged in the business of the purchase, transmission and distribution of electricity and the purchase, distribution, sale and transportation of natural gas in New York State. The Company’s reportable segments are electric-transmission, electric-distribution including stranded cost recoveries associated with the divesture of the Company’s generating assets under deregulation, and gas-distribution. Certain information regarding the Company’s segments is set forth in the following tables. Corporate assets consist primarily of other property and investments, cash, restricted cash, current deferred income taxes and unamortized debt expense. General corporate expenses, property common to the various segments, and depreciation of such common properties have been fully allocated to the segments based on labor or plant, using a percentage derived from total labor or plant amounts charged directly to certain operating expense accounts or certain plant accounts.


	Electric-Distribution
			Stranded Cost				Gas-		Electric -		Total
(In thousands of dollars)	Distribution		Recoveries		Total		Distribution		Transmission			Segments

Three Months Ended:
June 30, 2007
Operating revenue	$	646,821	$	70,782	$	717,603	$	205,529	$	65,933	$	989,065
Operating income before income taxes		27,194		25,911		53,105		19,672		22,632		95,409
Depreciation and amortization		34,898		54		34,952		10,059		8,982		53,993
Amortization of stranded costs and rate plan deferrals		34,650		82,266		116,916		—		3,817		120,733

June 30, 2006
Operating revenue	$	603,789	$	66,225	$	670,014	$	183,521	$	61,648	$	915,183
Operating income before income taxes		27,808		38,964		66,772		18,535		23,518		108,825
Depreciation and amortization		33,690		54		33,744		9,794		8,699		52,237
Amortization of stranded costs and rate plan deferrals		33,999		63,984		97,983		—		746		98,729


	Electric-Distribution
			Stranded Cost				Gas-		Electric -				Total
(In thousands of dollars)	Distribution		Recoveries		Total		Distribution		Transmission		Corporate		Segments

June 30, 2007
Goodwill	$	742,078	$	—	$	742,078	$	227,874	$	321,959	$	—	$	1,291,911
Total assets		5,951,673		2,234,226		8,185,899		2,032,913		1,683,668		65,291		11,967,771

March 31, 2007
Goodwill	$	713,397	$	—	$	713,397	$	219,468	$	309,596	$	—	$	1,242,461
Total assets		6,167,150		2,371,781		8,538,931		1,960,316		1,637,755		29,753		12,166,755

NOTE E – CHANGES IN EQUITY ACCOUNTS


	Gain								Total
	On								Accumulated
	Available-								Other
	for-Sale		Pension			Cash Flow			Comprehensive
(In thousands of dollars)	Securities		Liability			Hedges			Income (Loss)

March 31, 2007 balance, net of tax ⁽¹⁾	$	1,456	$	(1,269	)	$	(245	)	$	(58	)
Unrealized gains on securities		351		—			—			351
Hedging activity		—		—			(10,446	)		(10,446	)
Amortization of post-retirement benefit costs				12						12
Reclassification adjustment for losses included in net income		109		—			4,178			4,287

June 30, 2007 balance, net of tax	$	1,916	$	(1,257	)	$	(6,513	)	$	(5,854	)

The deferred tax benefit (expense) on other comprehensive income for the following periods was:


	Three Months Ended
	June 30,
(In thousands of dollars)	2007			2006

Unrealized gains (losses) on securities	$	(234	)	$	181
Hedging activity		6,964			3,562
Amortization of Pension and PBOP costs		(8	)		—
Reclassification adjustment for gains included in net income		(2,858	)		(1,063	)

	$	3,864		$	2,680



⁽¹⁾		The fiscal year ended March 31, 2007 accumulated other comprehensive income (AOCI) balance has been adjusted by a $1.3 million reduction related to the fiscal year 2007 adoption of SFAS No. 158. In the fiscal year 2007 Annual Report on Form 10-K, the impact of this adjustment was presented as a 2007 activity and therefore was included in comprehensive income. However, it should have been reported as a direct reduction of accumulated other comprehensive income in the changes in equity accounts disclosed as an adjustment in the reporting period and excluded from comprehensive income. The March 31, 2007, AOCI balance reported in the fiscal year 2007 Annual Report on Form 10-K was properly stated.

NOTE F – EMPLOYEE BENEFITS

As discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, the Company provides benefits to retirees in the form of pension and other postretirement benefits. The qualified defined benefit pension plan covers substantially all employees meeting certain minimum age and service requirements. Funding policy for the retirement plans is determined largely by the Company’s settlement agreements with the PSC and what is recovered in rates. However, the Company will contribute no less than the minimum amounts that are required under the Pension Protection Act of 2006. The pension plan’s assets primarily consist of investments in equity and debt securities. In addition, the Company sponsors a non-qualified plan (i.e., a plan that does not meet the criteria for tax benefits) that covers officers, certain other key employees and former non-employee directors. The Company provides certain health care and life insurance benefits to retired employees and their eligible dependents. These benefits are subject to minimum age and service requirements. The health care benefits include medical coverage and prescription drug coverage and are subject to certain limitations, such as deductibles and co-payments.

The benefit plans’ costs charged to the Company during the three-month period ended June 30, 2007 and 2006 include the following:


							Other Postretirement
(In thousands of dollars)	Pension Benefits						Benefits
For the Three Months Ended June 30,	2007			2006			2007			2006

Service cost	$	6,821		$	7,492		$	4,339		$	4,538
Interest cost		16,695			18,285			19,492			18,959
Expected return on plan assets		(18,735	)		(16,121	)		(11,023	)		(11,642	)
Prior service cost		809			819			3,647			3,647
Amortization of net loss		7,416			7,841			8,109			7,894

Net periodic benefit cost	$	13,006		$	18,316		$	24,564		$	23,396


Estimated contributions for fiscal year 2008	$	342,000					$	—

NOTE G – INCOME TAXES

In July 2006, the FASB issued FIN 48. FIN 48 prescribes guidance to address inconsistencies among entities with the measurement and recognition in accounting for income tax positions for financial statement purposes. Specifically, FIN 48 establishes criteria for the timing of the recognition of income tax benefits. FIN 48 requires the financial statement recognition of an income tax benefit when the Company determines that it is more-likely-than-not that the tax position will be ultimately sustained.

The total amount of gross unrecognized tax benefits at March 31, 2007 was $52.5 million. Upon adoption of FIN 48 on April 1, 2007, the Company recorded an adjusting entry for unrecognized tax benefits totaling $71.5 million, of which $17 million had been previously reflected as a deferred tax liability. The adjusting entry also included $49.5 million which was recorded to goodwill because it related to a pre-acquisition period of the Company. Of the total gross unrecognized tax liability, $6.8 million would impact the effective tax rate, if recognized. In addition, the Company has accrued for total interest of $31.1 million, gross. During the quarter ended June 30, 2007, the Company recorded interest expense of $2.6 million, gross.

Effective as of April 1, 2007, the Company recognizes interest accrued related to uncertain tax positions in interest income or interest expense and related penalties, if applicable, in operating expenses. In prior reporting periods, the Company recognized such accrued interest and penalties in income tax expense. No penalties were recognized during the three months ended June 30, 2007.

As of June 30, 2007, the Company is under examination by the Internal Revenue Service (IRS) for the fiscal years ending March 31, 2003 and March 31, 2004. New York State is currently auditing the Company for the fiscal years ending March 31, 2003 through March 31, 2005. The Company expects the IRS to complete their fieldwork on the current audit within the next twelve months. As a result, it expects to pay $2 million of total gross unrecognized tax benefits.

On April 9, 2007, New York State enacted its 2007 — 2008 budget, which included amendments to the state income tax. Those amendments include a reduction in the corporate net income tax rate to 7.1 percent from 7.5 percent, and the adoption of a single sales factor for apportioning taxable income to New York State. Both amendments are effective January 1, 2007. The Company has evaluated the effects of the amendments and believes that the amendments will not have a material effect on its financial position, cash flows or results of operation.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION

This report and other presentations made by Niagara Mohawk Power Corporation (the Company) contain certain statements that are neither reported financial results nor other historical information. These statements are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Throughout this report, forward-looking statements can be identified by the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “projected,” “believe,” “hopes,” or similar expressions. Because these forward-looking statements are subject to assumptions, risks and uncertainties, actual future results may differ materially from those expressed in or implied by such statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to:

(a)		the impact of further electric and gas industry restructuring;

(b)		changes in general economic conditions in New York;

(c)		federal and state regulatory developments and changes in law, including those governing municipalization and exit fees;

(d)		changes in accounting rules and interpretations, which may have an adverse impact on the Company’s statements of financial position, reported earnings and cash flows;

(e)		timing and adequacy of rate relief;

(f)		failure to achieve reductions in costs or to achieve operational efficiencies;

(g)		failure to retain key management;

(h)		adverse changes in electric load;

(i)		acts of terrorism;

(j)		unseasonable weather, climatic changes or unexpected changes in historical weather patterns; and

(k)		failure to recover costs currently deferred under the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation,” as amended, and the Merger Rate Plan (MRP) in effect with the New York State Public Service Commission (PSC).

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, Niagara Mohawk Power Corporation does not undertake any obligation to revise any statements in this report to reflect events or circumstances after the date of this report.

The Business: The Company’s primary business driver is the long-term rate plan with state regulators through which the Company can earn and retain certain amounts in excess of traditional regulatory allowed returns. The plan provides incentive returns and shared savings allowances, which allow the Company an opportunity to benefit from efficiency gains identified within operations. Other main business drivers for the Company include the ability to streamline operations, enhance reliability and generate funds for investment in the Company’s infrastructure.

CRITICAL ACCOUNTING POLICIES

Certain critical accounting policies are based on assumptions and conditions that, if changed, could have a material effect on the financial condition, results of operations and liquidity of the Company. See the Company’s Annual Report on Form 10-K for the period ended March 31, 2007, Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Critical Accounting Policies” for a detailed discussion of these policies.

RESULTS OF OPERATIONS

EARNINGS

Net income for the three months ended June 30, 2007 increased by $2 million compared to the same period in the prior fiscal year. This was partly due to decreases in income taxes and interest expenses offset by increases in other operation and maintenance expense. See the following discussions of revenues and operating expenses for more detailed explanation.

REVENUES

Electric

The Company’s electricity business encompasses the transmission and distribution of electricity including the recovery of stranded costs. Rates are based on historical or forecasted costs, and the Company earns a return on its assets, including a return on the stranded costs associated with the divestiture of the Company’s generating assets under deregulation. Since the start of electricity deregulation in the state of New York, retail electric customers have been migrating to competitive suppliers for their electric commodity requirements. Commodity costs are passed through directly to customers.

Electric revenue includes:

	•		Retail sales — delivery charges and recovery of purchased power costs from customers who purchase their electric supply from the Company.

	•		Delivery only sales – charges for only the delivery of electricity for customers who purchase their power from competitive electricity suppliers.

	•		Sales for resale – sales of excess electricity to the New York Independent System Operator at the market price of electricity. Any gains or losses on sales for resale are passed through directly to customers.

Gas

The Company is also a gas distribution company that services customers in cities and towns in central and eastern New York. The Company’s gas rate plan allows it to recover all gas commodity costs (i.e., the purchasing, interstate transportation and storage of gas for sale to customers) from customers (similar to the recovery of purchased electricity).

Gas revenue includes:

	•		Retail sales – changes for the distribution (transportation) and the purchase of gas commodity to customers who purchase their gas supply from the Company.

	•		Transportation revenue – charges for the transportation of gas to customers who purchase their gas commodity from other suppliers.

	•		Off-System wholesale sales – wholesale sales of gas commodity to entities that are not distribution system customers and not retail gas users.

Electric revenues increased $52 million during the three months ended June 30, 2007 compared to the same period in the prior fiscal year. The increase was primarily due to an overall increase in kWh deliveries of 3.4 percent and an increase in the cost of electricity that was passed on to customers. The sales volume increase was primarily a result of milder weather in the prior fiscal year compared to the same period in the current fiscal year. Also contributing to the increase was $17 million due to the recovery of the MRP deferral account recovery. In fiscal 2006, the Company implemented a $100 million rate increase during the nine month period ended December 31, 2006 to recover MRP deferrals. The Company implemented a second rate increase of $200 million effective January 1, 2007 for calendar year 2007. The increase also includes a $5 million increase in stranded cost revenues reflecting recovery that will continue to occur unevenly at levels that increase over the ten-year term of the plan ending on December 31, 2011. MRP deferral and stranded cost recoveries do not impact net income since the Company recognizes an equal and offsetting amount of amortization expense. These increases in electric revenues were partially offset by the impact of customers migrating to competitive suppliers for their commodity requirements.

Gas revenues increased by $22 million for the three months ended June 2007, compared to the same period in the prior fiscal year. The increase was primarily due to increased volumes of gas sold both on-system to the Company’s system customers and off-system for resale in interstate commerce.


Change in Gas Revenues
Period Ended June 30, 2007
	Three
(In millions of dollars)	Months

Cost of purchased gas	$	21
Delivery revenue		1

Total	$	22

The volume of gas sold for the three months ended June 30, 2007, excluding transportation of customer-owned gas, increased 1.5 million Dth, or 13.3 percent, compared to the same period in the prior fiscal year. This increase was primarily due to milder weather in the prior fiscal year as compared to the same period in the current fiscal year.

OPERATING EXPENSES

Purchased electricity increased by $29 million during the three months ended June 30, 2007 compared to the same period in the prior fiscal year. Of the $29 million increase in purchased electricity, approximately $11 million of the increase was contributed by increased volume and approximately $18 million was contributed by increased purchase price. The increase in the volume of electricity purchased of 0.2 billion kWh, or 3.6 percent was primarily caused by colder weather in the current fiscal year compared to the same period in the prior fiscal year. Increased purchased electricity costs do not affect electric margin or net income because the Company’s rate plan allows full recovery from customers. The increase in purchased electricity was partially offset by the impact of customer migration for their energy supply.

Purchased gas expense increased $21 million for the three months ended June 30, 2007, compared to the same period in the prior fiscal year. This increase was primarily a result of an increase in the volume of gas purchased for system customers and an increase of $8 million in the cost of gas purchased for off-system sales. These costs do not affect gas margin because the Company’s rate plan allows full recovery from customers.

Other operation and maintenance expense increased $14 million for the three months ended June 30, 2007 compared to the same period in the prior fiscal year. The table below details the components of the fluctuations.


Period Ended June 30, 2007
	Three
(In millions of dollars)	Months

Energy management assessments	$	3
Bad debt expense		3
Storm costs		5
Consultants and contractors		3

Total	$	14

Energy management assessments represent amounts assessed by the New York State Energy Research Development Agency for state-wide renewable energy initiatives and electric system benefit programs. Any increases or decreases in these assessments results in an offsetting adjustment to revenues.

Bad debt expense increased because of higher revenues billed to customers as a result of colder February and March months than in the prior fiscal year.

The Company is allowed to recover from customers the costs of major storms in which the costs and/or number of customers affected exceed certain specified thresholds. Non-recoverable storm costs are composed of: (1) the first $8 million of costs, cumulatively, associated with major storms, and (2) the costs of each storm thereafter that do not qualify as a major storm as defined in the Company’s rate plan. Non-recoverable storm costs increased due to a higher incidence of severe storms that occurred in the current fiscal year as compared to the prior year that did not qualify for recovery from customers.

The increase in consultants and contractor costs is primarily due to increased tree trimming costs associated with the Company’s reliability improvement program. In addition, the Company has been utilizing more external vendors in response to merger integration initiatives.

Amortization of stranded costs and rate plan deferrals increased $22 million during the three months ended June 30, 2007 compared to the same period in the prior fiscal year. The increase is primarily due to increased MRP deferral recoveries and stranded cost revenues as described in the electric revenue section. Under the MRP, the stranded cost regulatory asset is amortized unevenly at levels that increase over the ten-year term of the plan ending on December 31, 2011. The change in the amortization of stranded costs and deferral account balance is included in the Company’s revenues and does not impact net income.

Income taxes decreased $10 million for the three months ended June 30, 2007 compared to the same period in the prior fiscal year. The decrease was primarily due to lower book pretax income.

NON-OPERATING EXPENSES

Interest charges decreased $5 million for the three months ended June 30, 2007 compared to the same period in the prior fiscal year. The decrease is primarily due to decreased long-term debt outstanding.

LIQUIDITY AND CAPITAL RESOURCES

Short-term liquidity. At June 30, 2007, the Company’s principal sources of liquidity included cash and cash equivalents of $15 million and accounts receivable of $569 million. The Company has a negative working capital balance of $101 million primarily due to short-term debt due to affiliates of $461 million and accounts payable of $233 million. As discussed below, the Company believes it has sufficient cash flow and borrowing capacity to fund such deficits as necessary in the near term and to cover its debt requirements.

Net cash provided by operating activities were $253 million for the three months ended June 30, 2007. The primary activities affecting operating cash flows are:

•

depreciation and amortization of $54 million.

•

amortization of stranded costs and rate plan deferrals of $121 million in accordance with the MRP.

•

decrease in accounts receivable of $101 million.

•		increase in accrued interest and taxes of $53 million.

These increases were partially offset by:

•

increase in materials and supplies of $49 million primarily due to a higher level of gas storage.

•

decrease in accounts payable and accrued expenses of $86 million.

Net cash used in investing activities was $119 million for the three months ended June 30, 2007 compared to $104 million during the same period in the prior fiscal year. This was primarily a result of increases in

construction additions of $73 million at June 30, 2007 compared to $68 million at June 30, 2006 and restricted cash of $46 million at June 30, 2007 compared to $32 million at June 30, 2006.

Net cash used in financing activities was $135 million for the three months ended June 30, 2007 compared with $189 million during the same period in the prior fiscal year. The decrease was primarily due to lower debt repayment of $200 million at June 30, 2007 compared to $275 million at June 30, 2006. This was partially offset by increased repayment on borrowings of short-term debt from affiliates of $33 million at June 30, 2007 with no comparable repayment at June 30, 2006.

Long-term liquidity. The Company’s total capital requirements consist of amounts for its construction program, working capital needs and maturing debt issues. See the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Liquidity and Capital Resources” for further information on long-term commitments.

OTHER REGULATORY MATTERS

Deferral Audit: As reported in the Company’s Form 10K, Niagara Mohawk and the other parties to the deferral audit associated with the Company’s Second CTC Reset executed and filed with the New York State Public Service Commission (PSC) on March 23, 2007, a Stipulation of the Parties (Stipulation) setting forth the resolution of these issues associated with the deferral audit. PSC approved this stipulation on July 19, 2007 without change.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in the Company’s market risk or market risk strategies during the three months ended June 30, 2007. For a detailed discussion of market risk, see the Company’s Annual Report on Form 10-K for fiscal year ended March 31, 2007, Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

ITEM 4. CONTROLS AND PROCEDURES

The Company has carried out an evaluation under the supervision and with the participation of its management, including the Chief Financial Officer and President, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives. Based on that evaluation, it was determined that these disclosure controls and procedures are effective in providing reasonable assurance that the information required to be disclosed in reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported as and when required and accumulated and communicated to the Company’s management, including the Chief Financial Officer and President, as appropriate, to allow timely decisions regarding disclosure.

During the most recent fiscal quarter, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 1A. RISK FACTORS

This Report on Form 10-Q contains certain statements that are neither reported financial results nor other historical information. These statements are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Because these forward-looking statements are subject to assumptions, risks and uncertainties, actual future results may differ materially from those expressed in or implied by such statements. We have identified the following risk factors that could have a material adverse effect on our business, financial condition, results of operations or future prospects, or your investment in our securities. Not all of these factors are within our control. In addition, other factors besides those listed below may have an adverse effect on the Company. Any forward-looking statements should be considered in light of these risk factors and the cautionary statement set out at the beginning of Management’s Discussion and Analysis on page 15 of this report.

Regulatory and environmental risks

Changes in law or regulation could have an adverse effect on our results of operations.
Our business is heavily regulated, and changes in law or regulation could adversely affect us. Regulatory decisions concerning, for example, whether licenses or approvals to operate are renewed and the level of permitted revenues could have an adverse impact on our results of operations, cash flows and financial condition. Our rate plan provides for deferral and recovery of the effects of any externally imposed accounting changes, and changes in federal and state rates, laws, regulations and precedents governing taxes that increase or decrease our costs or revenues from electric operations by more than $2 million per year, or by an amount that exceeds 1 percent of annual gas earnings. However, these deferred amounts are subject to regulatory review and audit. This is discussed in more detail in Note B to the Financial Statements.

Breaches of or changes in environmental or health and safety laws or regulations could expose us to claims for financial compensation and adverse regulatory consequences, as well as damaging our reputation. Aspects of our activities are potentially dangerous, such as the operation and maintenance of electricity lines and the transmission and distribution of natural gas. Energy delivery companies also typically use and generate in their operations hazardous and potentially hazardous products and by-products. In addition, there may be other aspects of our operations that are not currently regarded or proved to have adverse effects but could become so, for example, the effects of electric and magnetic fields. We are subject to laws and regulations relating to pollution, the protection of the environment and how we use and dispose of hazardous substances and waste materials. We are also subject to laws and regulations governing health and safety matters including air quality, water quality, waste management, natural resources and the health and safety of the public and our employees. Any breach of these obligations, or even incidents relating to the environment or health and safety that do not amount to a breach, could adversely affect the results of operations and our reputation.

Changes to the regulatory treatment of commodity costs may have an adverse effect on the results of operations.

Changes in commodity prices could potentially affect our energy delivery businesses. Our rate plan permits us to pass through virtually all of the increased costs related to commodity prices to consumers. However, if this ability were restricted, it could have an adverse effect on our operating results.

Operational risks

Network failure or the inability to carry out critical non-network operations may have significant adverse impacts on both our financial position and our reputation.

We may suffer a major network failure or may not be able to carry out critical non-network operations. Operational performance could be adversely affected by a failure to maintain the health of the system or network, inadequate forecasting of demand or inadequate record keeping. This could cause us to fail to meet agreed standards, and even incidents that do not amount to a breach could result in adverse regulatory action and financial consequences, as well as harming our reputation. In addition to these risks, we are subject to other risks that are largely outside of our control such as the impact of weather or unlawful acts of third parties. Weather conditions can affect financial performance, and severe weather that causes outages or damages infrastructure will adversely affect operational and potentially, business performance. Terrorist attack, sabotage or other intentional acts may also physically damage our infrastructure or otherwise significantly affect our activities and, as a consequence, affect the results of operations.

Our reputation may be harmed if customers suffer a disruption to their energy supply even if this disruption is outside of our control.

We are responsible for transporting available electricity and gas and, for those customers that have not chosen another supplier, we are also responsible for acquiring and providing electricity and gas which we procure from commodity suppliers. However, where there is insufficient supply, no matter the cause, our role is to manage the system safely, which, in extreme circumstances, may require us to disconnect consumers.

Our results of operations depend on a number of factors including performance against regulatory targets and the delivery of anticipated cost and efficiency savings.

Earnings maintenance and growth will be affected by our ability to meet regulatory efficiency targets. To meet these targets, we must continue to improve managerial and operational performance. Under our rate plan, earnings will be affected by our ability to deliver integration and efficiency savings. Earnings also depend on meeting service quality standards. To meet these standards, we must improve service reliability and customer service. If we do not meet these targets and standards, both the results of operations and our reputation may be harmed.


	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

Condensed Consolidated Statements of Operations and Comprehensive Income		3

Condensed Consolidated Statements of Retained Earnings		4

Condensed Consolidated Balance Sheets		5

Condensed Consolidated Statements of Cash Flows		7

Notes to Unaudited Condensed Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3. Quantitative and Qualitative Disclosures About Market Risk		19

Item 4. Controls and Procedures		20

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		20

Item 1A. Risk Factors		20

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22

Item 3. Defaults upon Senior Securities		22

Item 4. Submissions of Matters to a Vote of Security Holders		22

Item 5. Other Information		22

Item 6. Exhibits		22

Signature		23

Exhibit Index		24


	NIAGARA MOHAWK POWER CORPORATION
Date: August 14, 2007	By	/s/ Paul J. Bailey
		Paul J. Bailey
		Authorized Officer and Controller and Principal Accounting Officer


Exhibit
Number		Description
RR		Niagara Mohawk Current Report on Form 8-K dated August 7, 2007

*10(gg)		Service Agreement by and between National Grid USA and Cheryl A. LaFleur dated August 1, 2007

*31.1		Certification of Principal Executive Officer

*31.2		Certification of Principal Financial Officer

*32		Certifications Pursuant to 18 U.S.C.1350


*		Filed herewith