ML17053C413

Annual Financial Rept 1980

ML17053C413
Person / Time
Site:	Nine Mile Point
Issue date:	02/02/1981
From:	Donlon W, Haehl J NIAGARA MOHAWK POWER CORP.
To:
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ML17053C414	List: ML17053C413 ML18038A549
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NUDOCS 8103160467
Download: ML17053C413 (36)

Text

Niagara Mohawk Power Corporation 1980 Annual Report R H!A/1*g

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Our service area Niagara Mohawk Power Corp., one of the Nation's major investor-owned utilities, has the largest and most diverse service territory in New York State. A massive electric system, extending from Lake Erie to jkfew England's borders, to Canada and Pennsylvania, serves the energy needs of 1,360,000 customers.

A natural gas sys-tem serves 423,000 customers in central, eastern and northern New York, nearly all within the Company's electric service area. Two Canadian subsidiaries, St. Law-rence Power Co. and Canadian Niagara Power Company, Ltd., provide electric service to parts of southern Ontario. Cor-porate headquarters is 300 Erie Boule-vard West, Syracuse, NY 13202.

ELECTRIC SERVICE AREA Investor notes Annual Meeting The annual meeting of stockholders will be held on May 5, 1981 at the Company's main office in Syracuse. A formal notice of meeting, proxy statement and proxy form will be sent to holders of common stock in early April.

Transfer Agents Preferred Stock and Preference Stock.

Marine Midland Bank, NA.

140 Broadway, New York, N.Y. 10015 Common Stock:

Morgan Guaranty Trust Company of New York 30 W. Broadway, New York, N.Y. 10015 ktuk rkkk k

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-'v'-&"'EW YORK STATE Disbursing Agent Preferred, Preference and Common Stocks:

Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, N.Y. 13202 Stock Exchanges Common and Certain Preferred Series:

Listed on New York Stock Exchange Common Stock:

Also traded on Amsterdam (Netherlands),

Boston, Cincinnati, Detroit, Midwest, Pacific Coast and PBW stock exchanges.

The road ahead The cover montage features Niagara Mo-hawk people involved in planning.

Effective planning for the coming years and decades for the early 1980s and intermediate years to 2000 is an essen-tial part of the utility business.

Looking beyond the '90s, a whole new century lies ahead to test the Company and the Nation.

Reviewed in this Annual Report is a ka-leidoscope of positive activities and planning designed to keep in step with changing times. Niagara Mohawk is con-fident that it is on a sound course to meet the future and to continue providing for energy needs. The interests of our stock-

holders, consumers and employees dominate this vital planning mission as the new decade dawns.

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'EW YORK STATE GAS SERVICE AREA Ticker symbol: NMK Form 10-K Report A copy of the Company's Form 10-K re-port filed annually with the Securities and Exchange Commission is available after March 31, 1981 by writing the Treasurer at 300 Erie Boulevard West, Syracuse, NY 13202.

The information In this report is not given in connection with the sale of. or offer to buy. any security.

printed In U.S.A.

Highlights of 1980 Total operating revenues Income available for common stockholders Earnings per common share Dividends per common share Common shares outstanding(auerage)

Utilityplant(gross)

Gross additions to utilityplant Kilowatt-hour sales Electric customers at end of year Electric peak load (Itilotttatts)

Natural gas sales(deAatherms)

Gas customers at end of year Maximum day gas sendout(deitalherms) 1960

$1,777,115,000 S

133,201,000

$1.87

$1.50 71,257,000 54,563,309,000 8

378,503,000 32,588,000,000 1,360,000 5,403,000 101,321,000 423,000 740;594 1979

$ 1,516,503,000 128,186,000

$2.00

$ 1.44 63,976,000

$4,218,528,000 374,530,000 33,315,000,000 1,348,000 5,641,000 96,618,000 416,000 750,666

/o Change 17 4

(7) 4 11 8

1 (2) 1 (4) 5 2

(1)

The 1980 revenue dollar Residential customers 35'ndustrial customers 23'll others 11'nd where itwent Gas purchased 164 Income and other taxes 124 Retained in business 1g Interest and other costsnet 10'ommercial customers 31'uel for production of electricity and electricity purchased 36'epreciation 5II'.

Wages, salaries, employee benefits 12'ividends to stockholders Sg Contents 2

To our Stockholders:

4 Coming to grips with the future 5

Planning tomorrow's energy timetable 8

Research quest 10 Programing for the consumer 12 People in planning 14 Management's analysis 17 Stockholder matters 18 Report of management and accountants 19 Financial statements 31 Statistics 33 Officers, directors

John G. Haehi, Jr r,

William J. Donion To our stockholders:

Earnings declined by 13 cents to $ 1.87 per share of common stock in 1980, com-pared with $2.00 per share in 1979.

This earnings decrease reflects the interacting influences, largely beyond our direct control, of increasing inflation, high interest costs, economic recession and a reduction in electric sales to our own customers during the year. Such sales totaled 29.7 billionkilowatt-hours in 1980, against 30.3 billionKwh in 1979, the first decrease of this type experienced by Niagara Mohawk since 1975.

Gas sales rose 4.9 percent in 1980, compared to a decline last year. Allthese developments, combined with insufficient rate relief, ad-versely affected earnings.

The lower earnings resulted in the Company's current rate of return on common equity dropping to 10.8 percent well below the 14 percent au-thorized earlier by the N.Y. State Public Service Commission.

Such conditions mandate pursuing further rate increases to maintain dependability of energy ser-vice and adequate earnings for stock-holders.

We see the potential for recovery of earnings in 1981 from present depressed levels. As this report goes to press, we await a decision by the N.Y. State Public Service Commission in our pending rate case. As 1980 ended, the Administrative Law Judge issued a recommendation for increased rates totaling $ 160 million, approximately 70 percent of the total re-quested. He recommended that the Com-pany's rate of return on common equity be adjusted upward to 15.4 percent.

Because of the vital importance of pro-viding stockholders a fair return on their growing investment in the Company, in May 1980, the Board of Directors in-creased the annual common stock divi-dend by 8 cents per share, up 5.6 percent.

The Commission is currently in a period of new appointments and consid-eration of possible regulatory changes.

More realistic and reasonable regulatory treatment willbe no less than essential to enable Niagara Mohawk to earn the al-lowed rate of return and maintain finan-cial integrity. Our continuing to provide satisfactory service for consumers in fu-ture years will hinge in large part on the decisions and attitudes of our regulators.

"The Road Ahead" theme of this An-nual Report underscores the ever-in-creasing urgency of effective planning in our business.

We are striving to add a further degree of sophistication to our future-oriented work, designed to help us cope effectively with the volatile business conditions we experience.

Current 15-year load forecasts indicate annual electric growth at 1 to 1.5 percent.

While growth in our service territory has been static in recent years, industrial re-development efforts hold promise.

Financing in 1980, detailed in this re-port, totaled $266 million, including refi-nancing of $80 million of maturing debt.

In 1981, extensive financing to meet con-struction needs, including construction at Nine Mile Point Nuclear Unit No. 2 in particular, and to refund $ 140 million in bonds coming due during the year, is ex-pected to exceed

$400 million.

We now anticipate resuming construc-tion of Unit No. 2 at full scale starting in spring 1981, depending upon the final re-sults of reassessments, audits and studies initiated during the past year. Presently, the project is nearly one-third complete.

The success of Nine MilePoint Unit No.

1 has surpassed our brightest expecta-tions, bolstering our faith in nuclear technology for its dependability, safety, cost-effectiveness and contribution to oil displacement.

Niagara Mohawk's nuclear commitment lies deeply rooted in the early 1960s, when we first embarked on a plan to construct the unit. Performance at Nine MilePoint has enabled us to demon-strate the great potential that nuclear technology offers all upstate New York.

The pride our management and employees share in Unit No.

1 is the re-sult of more than a decade of commend-

, able operation.

Despite inflation and related cost spi-rals for all services and goods, the price of Niagara Mohawk service continues to rise at a rate lower than other living costs. Electricity and natural gas remain

~ outstanding values. Our residential elec-

'ric rates continue to be the lowest of any major New York State utility and below the national average.

In 1980, we engaged an independent consul tant to conduct a system-wide cus-tomer attitude survey which revealed, that Niagara Mohawk is considered reli-able by an overwhelming majority of our customers.

A substantial majority also

'ndicated the Company is "hard-working

, and friendly, that Niagara Mohawk does a good job of communicating and is willing to listen to consumers."

We are gratified

, by these perceptions a clear endorse-

~ ment of our service quality. The survey also stressed we must reassure consum-I ers we are doing everything possible to

'rotect them in terms of energy supply and price.

An example of our continuing such

~, protective efforts is the conversion of Al-bany Steam Station from oil to natural

gas, scheduled for fall 1981 completion.

'he changeover, subject to regulatory approvals, would equip the station with dual capability to burn either gas or oil, offering a most desirable combination of fuel-cost reduction and oil-displacement.

Our gas operations grew in 1980, at-

'"tracting 7,000 new customers.

Much of the increased consumption that normally follows additional customer attachments was offset by conservation measures and reduced gas usage. Average annual gas use per residential customer declined 2.8 percent in 1980, despite colder degree-day experience.

Settlement of the Massena municipal electric distribution system problem was reached on Jan'uary 6, 1981. We agreed to sell Massena, which undeniably had power to condemn, all facilities served in and about the Town for $7.7 million, thereby providing the most economic separation of facilities. The settlement represented reasonable value and there-by protected our stockholders'nterests.

Our newly restructured senior man-agement organization is consistent with our planning objectives. We are confident the Company's officers, management and employees are prepared as shown on the following pages to come fully and capably to grips with the challenges the future is sure to bring in the unsettled times in which we live and do business.

We sincerely appreciate the continuing loyalty and support of our stockholders, employees and customers.

John G. Haehl, Jr Chairman of the Board and Chief Executive Officer William J. Donlon President February 2, 1981

Coming to grips with the future Never before has planning required more concentrated effort and attention from Niagara Mohawk. Unpredictable events and forces of the 1970s are almost sure to persist through this decade, taking new variations, testing management's flex-ibility and presenting imposing chal-lenges to the most carefully laid plans.

Among the shifting trends the Com-pany must continue to cope with in the years ahead willbe the leveling-off of electric load growth, regulatory uncer-tainties and long "lead times" presently up to ten years or more involving con-struction of major generating installa-tions and other facilities. These problems are common to the electric utility industry.

In such a setting, and faced also with fluctuating social and economic trends and the complexities of financing, on-target planning is critical to Niagara Mo-hawk's well-being. This task today calls for increasingly farsighted planning and use of sophisticated and innovative re-sources and machinery for future decision-making strategies.

The Com-pany recognizes the need to capitalize on both "in-house" and external resources and agencies to help prepare as effi-ciently and accurately as humanly possi-ble for whatever variable conditions the future may bring.

Complex, computerized studies and surveys, analysis of statistics on the eco-nomics, demographics and energy-use Energy needs ofADMMillingCo. plant, recently converted from a retired cement production facilityto a substantial new flourand grain operation, are discussed by Consumer Relations Supervisor James W.

Keegan, left, and Richard A. Vercruysse, Plant Manager. Niagara Mohawk 115,000-volt feeder and customer's own sub-station, left, meet electric requirements of mill, near Hudson, New York.

patterns prevailing in the Company's ser-vice area are more essential than ever to equipping Niagara Mohawk to handle the challenges of the years ahead. As an out-growth of earlier planning by the Com-pany, three major computer-oriented sys-tems presently in the early stages offer significant promise in our efforts to maximize productivity and operating effi-ciency. The first will improve customer accounting procedures through a direct, on-line system with computer terminals at customer service locations. The sec-ond willenable construction and mainte-nance field supervisors to make more effective use of manpower and material resources for planning, estimating, scheduling and reporting their assigned projects. The third involves upgrading corporate accounting systems to provide, on a more current basis, expanded infor-mation and data on Company operations and finances, to aid in all types of plan-ning. It also willprovide an effective tool in administration of regulatory matters.

Another project, still in the embryo stage (the Energy Management System dis-cussed on page

7) will furnish Niagara Mohawk with the most current state-of-the-art system to control and coordinate generation, transmission and distribution facilities.

As we look down the road ahead with others in both the public and private sec-tors, the N.Y. State Energy Master Plan announced in 1980 with its proposed schedules and sites for principal genera-tion and transmission projects will be of greatest significance to Niagara Mohawk and other utilities in the N.Y. Power Pool.

't the same time, the Power Pool is per-forming its own studies, with economic and demographic models of future years, and the Public Service Commission has undertaken a detailed analysis of the state's total energy reliabilitypicture. The Company has

. implemented many planning-oriented recommendations from a study of management and opera-tions in the late 1970s, and a residential appliance saturation survey was con-ducted in 1980 to aid in forecasting elec-tric usage and to assess load manage-ment potential and energy conservation effects on our System.

Detailed up-to-date findings of the 1980 Census also are expected to be helpful in forecasting and future chartwork.

Presently, Niagara Mohawk's long-range electric sales forecast indicates yearly growth of about I to 1.5 percent in the Company's service area, a sign of its mature economy and energy conserva-tion practiced to an increasing extent since the early 1970s. While this is sharp-lyreduced from electric sales forecasts of a decade ago, the Company still must be prepared to meet projected increased power demands and oil displacement objectives.

The expectation is that new upturns in energy demands may be spurred by re-newed industrial and commercial activity as economic conditions improve in up-state New York. Growth already is being experienced near Buffalo and Syracuse, for example. Two automotive manufac-turers have begun expansion totaling

$480-million alone and impressive multi-million dollar research, restaurant and hotel, educational, aluminum pro-duction, beverage and other industrial developments were announced or under way throughout our service territory dur-ing the year.

In mapping plans and strategies for the natural gas side of the business, potential for sales growth continues to improve, but at moderate levels due to energy conservation by customers and continuing refinement by manufacturers of new gas appliances and equipment with greater efficiency. To meet gas

needs, 67 miles of new mains and other gas service facilities were installed during the year. About $6.2 million is earmarked for new gas facilities in 1981. Markets for this relatively low-cost, clean-burning fuel should broaden during the 1980s. ~

Planning tomorrow's energy timetable Consistent with long-standing plans to bring new electric generation sources on line in the 1980s, full-scale construction at Nine Mile Point Nuclear Unit No. 2 has been tentatively scheduled to resume in spring 1981. On this basis, completion is targeted for late 1986.

In 1980, the work force at the Lake On-tario project was reduced in large part to allow the sponsors time to re-examine work programing for the 1.08-million kilowatt unit in light of federal and state regulatory uncertainties and questions raised by the 1979 Three Mile Island nu-clear plant accident.

Together with the four other utility co-owners of the unit, the Company engaged independent engineering and management consultants early in 1980 to examine the status of engineering, con-struction and management systems at the project. A decision to return to full con-struction will be based on that review plus an assessment performed by con-sultants retained by the N.Y. State Public Service Commission covering essentially the same areas. It is anticipated that find-ings by the Commission's consultants will closely parallel those already reached in the utility-sponsored audit.

Preliminary reassessment indicates that construction costs to have Unit No. 2 ready for operation by late 1986 will appI'oximate

$2.4 billion, excluding fi-nancing costs. The previous $ 135-billion estimate was based on 1984 completion.

The cost difference results from this two-year deferral and greater inflation, modifications to meet new regulations and varied increases related to engineer-ing and construction work programs.

Similar cost hikes, for essentially the same

reasons, are common to nuclear facilities under construction elsewhere in the United States.

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Jl Despite reduced activity at Unit No. 2 in 1980, there was significant con-struction activity during the year. The 900-ton reactor pressure vessel and associated shielding were installed, while work on other key components pro-ceeded satisfactorily. When the plant goes into commercial operation, it will save from 20,000 to 30,000 barrels of im-ported oil daily. This willsave consumers hundreds of millions of dollars over the unit's life, compared to an oil-fired power producer of the same size.

Unit No. 2's ownership and future out-put are shared by Niagara Mohawk at 41%; Long Island Lighting Co., 18%; New York State Electric & Gas Corp., Iso, Rochester Gas and Electric Corp., 14%;

and Central Hudson Gas & Electric Corp.,

9%.

The next refueling of Nine Mile Point Nuclear Unit No. 1 is scheduled for spring 1981. This nuclear cornerstone in the Company's array of generation sources achieved another fine record of outstand-ing performance and reliabilityin 1980. In commercial service since 1969, the 610,000-kilowatt project has compiled a capacity factor of 85 percent in 1980. The plant operated for 338 days through 1980 (an availability factor of 92 percent). This places it among the top five percent of the nation's nuclear stations.

This spring's planned shutdown will entail partial reloading of the nuclear reactor, routine plant maintenance work and addition of further safety refinements.

During the year, Niagara Mohawk and three other New York State utilities continued to pursue recovery of amounts spent toward construction of a proposed 1.15-million kilowatt nuclear plant planned on Lake Ontario west of Oswego. The sponsors'oint intentions to build the Sterling plant were terminated early in 1980 when the N.Y. State Board on Electric Generation Siting and the Environment reversed itself and revoked the certificate for construction, granted World's largest land-based cranes hoist 900-ton reactor vessel 28 stories above Lake Ontario during installation at Nine Mile Point Nuclear Unit No. 2. Scene high-lights year's construction activity at the 1.08-million kilowatt power plant site.

in 1978. Earlier approval at the federal level was granted in 1977 when the Nu-clear Regulatory Commission issued a li-cense to construct Sterling after the util-ities had demonstrated that the site was environmentally acceptable and that necessary engineering and safety criteria had been met.

In se'eking recovery of its investment, the Company plans to spread the cost over several years to lessen the effect upon its customers.

Niagara Mohawk's share in Sterling is 22 percent.

NM Uranium, Inc., a southern Texas uranium mine in which Niagara Mohawk owns half interest, produced more than 500,000 pounds and sold to third parties

$ 14 million of uranium in 1980. United States Steel Corp. owns the other half and manages operation of the facility, the world's largest mining development of its kind.

The new Unit No. 6 at Oswego Steam Station began commercial operation on July 3, 1980. Under construction since 1972, more than a year before the OPEC I oil embargo, the 850,000-kilowatt unit went on line for a reasonable capital outlay $290 per installed kilowatt, excluding financing costs. This is sub-stantially less than for any generating

> plant planned in N.Y. State over the next decade. Capacity of Unit No. 6 is shared, with Niagara Mohawk receiving 646,000 kilowatts (76 percent) and Rochester Gas and Electric 204,000 kilowatts (24 per-cent) of net capability.

Because of uncertainty in electric load

'rowth, construction of the first 850,000-kilowatt unit at the planned Lake Erie i Generating Station is being delayed until the need for its capacity is more clearly determined. At hearings before the State Board on Electric Generation Siting and the Environment, the Company originally proposed an in-service date of 1985, with construction to begin in 1980. However, continuing load-growth studies now indi-cate that the need for power from Lake Erie's first unit would not occur until the 1990s. Early in 1980, the State Board cer-tified the LEGS site for the 1.7 million-kilowatt coal-fired installation, uncondi-tionally approving plans for the first unit but noting approval of a second unit would require proof of need by Niagara Mohawk or a group of utilities. Ultimately, the proposed station would save some 11 million barrels of imported oil yearly.

The Company plans to modify the oil-fired, 400,000-kilowatt Albany Steam Station to add natural gas, a

burning capability measure offering cost advantages as well as reducing usage of imported oil. Certain regulatory approv-als will be necessary for the changeover, which involves an investment of $7 mil-lion. A contract has been signed with our wholesale gas supplier to provide the fuel. The proposal calls for bringing Al-bany's four converted units on line in fall 1981 and operating primarily on gas, at least until late 1983. By that time, a final decision is expected to be formulated by the U.S. Department of Energy regarding conversion of Albany to coal, a modifica-tion that could cost well over $ 100 mil-lion, depending upon pollution abate-ment equipment required. Originally a coal-fired project, the station was con-verted to oil fuel for combined environ-mental and economic reasons in 1969.

However, since the OPEC embargo, Al-bany was cited by the Department of Energy as a prime candidate for conver-sion back to coal. Oil-fueled Niagara Mo-hawk generation units at Oswego have been ruled out for coal conversion for technical and cost reasons.

As part of a hydroelectric development and expansion plan scheduled through the 1980s, excavation work will continue during early 1981 in the renovation and enlargement of Granby Hydro Station on the Oswego River. Built in 1915, this 4,600-kilowatt "run-of-river" plant is being replaced with a new power house and two units that willmore than double its output to 10,000 kilowatts. Initial commercial service is set at 1983 for Granby, the first of 15 new or renovated hydro facilities which are part of a pro-gram to obtain increased, relatively lower-cost energy wherever feasible on rivers and streams in our service area.

ELECTRICITY GENERATED AND PURCHASED BY TYPE OF FUEL Hydro 34%

Nuclear 15%

Coal 20%

Various sources 10%

Oil 21%

Keyed to delivery of energy from generation sources to load growth

centers, the Company's power trans-mission system is undergoing a number of significant improvements and addi-tions. A major, $8.9-million, 345,000-volt transmission switching station was com-pleted and put into service at Elbridge, west of Syracuse, and progress was made on a new 230,000-volt underground cable in Buffalo and a 345,000-volt line from La-fayette, near Syracuse, to Oakdale, near Binghamton. The 65-mile line is being erected jointlywith New York State Elec-tric & Gas Corp., with Niagara Mohawk constructing the northerly 40 miles and NYSE&G the southern section.

Looking at transmission and distribu-tion of energy in the mid-1980s and be-yond, the Company has started designing an extensive Energy Management System (EMS) that willemploy the most sophisti-cated equipment and controls to further enhance and modernize power delivery throughout the upstate New York region.

In various planning stages since the late 1970s, EMS's base will be a new master power control center to be built in Syra-cuse, linked via computers to regional power control centers in Buffalo, Albany, central and northern New York. The sys-tem promises a more efficient use of existing power facilities, besides adding to their reliability.~

Research quest Energy research and development has in-creased from only $500,000 for project expenditures in 1970 to more than

$ 14 millionin 1980. R&Doccupies an increas-ingly strategic place in engineering, envi-ronmental and overall operations plan-ning. In recent years the Company has earned recognition for its initiative and pioneering in the research field.

To speculate on the 1990s, fully suc-cessful application of R&D projects now under way by Niagara Mohawk could re-sult in an estimated 16 percent yearly re-duction in fuels used for electric genera-tion, equal to saving more than 8.5 mil-lion barrels of imported oil. The Com-pany's own in-house research projects represent nearly 40 percent of the total funding for the R&Dprogram. These seek renewable energy resources, energy con-servation improvements and methods of reducing the effect of power generation and delivery upon the environment.

Foremost among in-house research accomplishments in 1980 was initial success with a sophisticated communica-tions demonstration, combining satel-lites, lasers and fiber optics technology. If applied throughout Niagara Mohawk's 24,000-square-mile electric System, the experiment could lead to reducing annual operating expenses by approximately

$5 million, in addition to improving high-speed

data, voice and video com-munications.

The project employs two orbiting Na-tional Aeronautics and Space Administra-tion satellites for transmittal of data con-cerning power operations, weather and Special antenna forsatellite research program is adjusted by Thomas L. lerlan, Communications Tester, at power trans-mission substation. Combining two orbit-ing NASAsatellites, advanced fiber optics and lasers, project promises to improve reliabilityof electric service and cut oper-ating costs. Niagara Mohawk is first elec-tric utilityto explore this communications frontier.

related conditions between the Com-pany's Power Control Center and a key electric switchyard in central New York.

At the same time, the project utilizes ca-bles containing hair-thin, computer-to-computer fiber optics.

Light originating from laser sources travels as signals through the fiber optics and is instantly "translated" into messages.

Each tiny fiber has the same communications ca-pacity as more than 200 copper wires in an ordinary telephone circuit and is unaf-fected by customary problems that peri-odically cause telephone interference.

The satellite/liber optics system shows significant promise, not only for its high linkup reliability value when storms threaten communications during power emergencies but for enhancement of energy management between major Northeastern power control centers and other important utilitylocations.

'In a far-reaching research mission with participants representing both gov-ernment and private sectors, construc-

,,tion.progressed to the, one-.third-mark. in" 1980 on an experimental Flue Gas Desul-furization (FGD) prototype at Niagara Mohawk's Huntley Station in Tonawanda, near Buffalo..The demonstration is to en-able power producers to burn lower cost, high-sulfur Eastern coal with little envi-

'onmental effect while offering consid-erable long-range cost advantages for electric consumers.

Costing up to $55 million, the five-year FGD study on one of Huntley's 100,000-kilowatt units is intended to re-move 90 percent of sulfur oxides dis-charged from stacks of large power plants burning higher sulfur coal. Sulfur oxides entrapped in the process are converted to pure marketable sulfur. In addition, disposal problems related to waste by-products are virtuallyeliminated because materials used by the "scrubber" are re-cycled in the process.

Niagara Mohawk is host utility and project manager of the FGD demonstra-tion. Co-sponsors include the Empire State Electric Energy Research Corp.

(ESEERCO) the research arm of the state's seven investor-owned utilities,)he U.S. Environmental Protection Agency, Electric Power Research Institute and Rockwell International Corp., developer of the FGD process. Long in the planning, the project has attracted nationwide attention. FGD may help in solving prob-lems linked with acid raina complex environmental concern arising in recent years.

In Niagara Mohawk's pursuit of alter-nate energy sources, plans also matured in 1980 to a stage where installation of a 10,000-kilowatt fuel cell demonstration unit at a Niagara Mohawk power genera-tion site is anticipated sometime in the mid-1980s. The Company and other util-ities have been committed to extensive fuel cell research since the 1960s, after successful results were experienced in the U.S. manned space program. Free of pollution, noise and vibration, the battery-like units are designed to sup-plement conventional methods. of power, production and.do not re'quire recharg-ing. Operation continues as long as air and a fuel containing hydrogen are fed to the cell electrodes.

A 4,800-kilowatt fuel cell prototype is scheduled at a New York City generation station in early 1981 and will supply power to customers of Con-solidated Edison Co. of New York, one of the nine utilities participating in the program.

Another innovative effort while also reducing gasoline usage was converting more than 80 Company vehicles to oper-ate on either compressed natural gas or gasoline. CNG compressor fillingstations were installed at two key service centers in Syracuse and Albany. When fullyoper-ational in 1981, this pilot project is ex-pected to reduce fleet motor fuel needs by 159,000 gallons per year. Considera-tion is already being given to expanding the project.

R&.D strides were achieved in a

number of varied projects in 1980 both independent studies by Niagara Mohawk as well as cooperative programs. These include:

'lympic Village Thermal Energy Stor-age and Load Management

~ Darrieus and Grumman Wind Turbines

~ Solid Polymer Water Electrolysis for Hydrogen Production

~ Community-Wide, Water-Source Heat Pump Applications

~ Selected Solar Energy Installation Monitoring

~ Wind-Poutered Pumped Hydroelectric Storage

~ Refuse-Derived Fuels for Potuer Co-generation

~ Synthetic Fuels Deoelopment

Programing for the consumer Because reliance on energy service is certain to continue growing in the com-ing years, the Company has responsibility to remain alert and sensitive to consum-ers'roblems.

Niagara Mohawk is constantly plan-ning, initiating and refining programs and services to help all categories of energy users residential, commercial and industrial in these inflationary times. It is especially sensitive to the difficulties of residential consumers, par-ticularly the elderly. Senior consumers are burdened more and more by soaring food, shelter, medical and energy costs.

It is a long tradition in the Company that Niagara Mohawk employees contrib-ute much personal time and effort help-ing people and bettering the communities in which they live. This volunteer work, which the Company encourages in the spirit of good citizenship, recognizes that a utility's prosperity is permanently geared to the socioeconomic well-being of its service area.

Direct services and programs initiated or receiving renewed emphasis during the year by Niagara Mohawk to help senior and other consumers with their energy concerns included:

~ Extended Due-Date Plan aids senior consumers in making bill payments, without penalty, after arrival of social security, social security insurance or disability income checks.

~ Budget Plan levels off seasonal "highs" in energy costs by spreading estimated annual costs into 12 nearly equal pay-ments.

~ Third-Party Notification permits a third party, designated by the customer, to receive any notices of service discon-nection because of non-payment of bills.

~ Life-Support Program assists consum-ers who use any type of electrically op-erated life-support equipment in the event of emergency outages or non-payment of bills.

Audience hears Nancy L. Hughes, Con-sumer Relations Representative, describe insulation and heat-saving measures at home energy conservation workshop in Buffalo. Hundreds of these informative seminars were conducted by Niagara Mohawk specialists across the Company's service area.

~ In-Home Serf/ice Calls by Niagara Mo-hawk personnel for check on gas or electric emergencies, at no charge.

~ Winter Referral Program, in coopera-tion with social service agencies, iden-tifies hardship cases and helps them obtain emergency bill payment aid.

The Company's long-standing efforts to help consumers save energy and control fuel bills were again evidenced in 1980, when more than $2.6 million in low-cost loans were arranged through the Home Energy Audit program, surpassing similar loan arrangement efforts by all other New York State utilities.

In the past two years since the audit concept took form, more than 76,000 customers have participated, requesting one of three types of home audits. These include inspections by Company special-ists (50 specialists were trained across the System) and recommendations on energy conservation measures. Also pro-vided are lists naming local contractors who will perform necessary improve-ments on customers'omes and informa-tion on obtaining low-cost energy con-servation loans, with liberal repayment terms. Well before the outset of the 1980 heating

season, Niagara Mohawk stepped-up a System-wide promotional campaign, advertising in newspapers, radio, television and in bill enclosures to generate public awareness of the Audit Program.

In addition to Home Energy Audit printed materials, consumers are pro-vided booklets, brochures, films, video-tapes and speakers programs on a broad selection of energy conservation topics.

Further",-'n the past year Company con-servation specialists presented "No-Cost/Low-Cost" energy workshops in all areas served. These informative evening sessions teach consumers how low-cost do-it-yourself projects can save energy and cut down fuel bills.

Another successful program in 1980 was the Energy Management Action Pro-gram, created the previous year for major industrial and commercial customers. A total of more than 450 representatives from a cross-section of key industrial and business firms attended seminars and were awarded certificates in this special-ized program. The five-day sessions, con-ducted by Niagara Mohawk instructors, cover specific lighting, heating, load de-mand and energy monitoring unique to large energy users. Interest was so high in many areas that the sessions were over-subscribed.

To help guide and assist in identify-ing customer-related

problems, the Consumer Advisory Council on Energy Af-fairs provided many valuable insights and suggestions again in 1980. Independently, the 27 volunteer Council members, rep-resenting a broad cross-section of cus-tomer interests, drafted a "Consumer' Bill of Rights and Responsibilities" for distribution to legislators, regulatory agency leaders and news media. As in Issue is debated at task force meeting of Consumer Advisory Council on Energy Affairs.

Council members are volunteers from outside the Company and represent varied consumer and community interests. From left are Clarence Dart of Saratoga Springs, Ralph Falco of Syracuse, Chairman Sidney A. Sherwin, Jr., of Batavia, WilliamRoden of Trout Lake, Henry J. Osinski of Buffalo and Floyd Nolan of Pulaski.

MONTHLYRESIDENTIAL ELECTRIC COST FOR 500 KILOWATT-HOURS New YorkCity 561.37 Newark, NJ Boston, MA 51.06 46.31 NYState Avg. (not induding NM) 43.37'artford, CT 37.51 Phiiadeiphia, PA 35.15 Portland, ME 34.28 Los Angeles, CA 34.03 Oeveland,OH 31.88 National Avg.

29.14-Niagara Mohawk 25.75 Includes fuel and PASNY credit adiustments as applicable

'NMRatecepartmentasof December31.1980 "E.E.I. Report with Rates Effective 7/I/80 previous years, the Council's observa-tions and recommendations are proving highly significant in the Company's con-sumer relations and public affairs pro-graming. A notable example is Council guidance in developing some of the con-sumer programs described above.

In addition, the Council monitors legislative bills and proposals affecting consumers and energy policies and prepares rele-vant "issue papers" for release to news media from time to time.

As a further measure to identify with consumers, an extensive customer opin-ion and attitude survey was conducted in 1980 by an independent market opinion research firm. It was the first such survey in several years. Customer reactions cov-ered a wide spectrum, with the topics ranging from basic trust in Niagara Mohawk and opinions on the cost of elec-tricity and gas to nuclear power, envi-ronmental concern and municipal own-ership. A special committee is evaluating these attitude findings, both to analyze the general feelings customers have to-ward the Company and to guide the formulation of specific plans with regard to the positives and negatives identified.

In late 1980, the Public Service Com-mission approved the Company's time-of-use electric rate proposal.

Effective January 1, 1981, the new time-based rites are mandatory for large industrial and commercial users, but optional for resi-dential consumers.

It is expected that only large-use residential consumers could shift enough usage to off-peak times to benefit from the plan, while prin-cipal industrial and commercial custom-ers could realize as much as a 10 percent decrease in power costs. ~

People in planning As the Company prepares to meet obsta-cles and challenges along the road ahead, the unending task of employee training at Niagara Mohawk becomes more para-mount than ever in planning.

Efforts to develop and to refine employee skills and knowledge, all look-ing to the future, resulted in productivity and efficiency gains throughout the Com-pany's ranks in 1980. Formalized training courses focused upon consumer services (the latest teaches customer service people operation of a new, on-line cus-tomer system using cathode ray tube terminals and a new computerized tele-phone system),

management develop-ment, varied technical assignments, field instruction, new employee orientation, coping with personal stress and a host of other subjects.

Also, a fully equipped training center for formal instruction of fossil plant and nuclear station employ-ees was completed near the Oswego Steam Station.

In addition, the year saw planning-oriented achievements by the Company's Productivity Planning Department serving as an in-house "consultant" to upgrade use of manpower and physical resources through a new management uniform planning system. In this system, mathematical, physical and behavioral sciences are integrated with the latest industrial engineering methods to bring about productivity and cost-cutting improvements. Planning and operation of power transmission and distribution sys-tems were among key review assign-ments by Productivity Planning in 1980.

The department will continue to help management and supervisory employees streamline everyday planning, organizing, staffing and control work everywhere in the Corporation.

At the close of 1980, employees num-bered 9,700, about the same as in 1973, while the sales, scope of operations and number of customers served has grown significantly.

Rescue Squad members Ted Coller, right, and Kenneth Plum respond to accident call while on night ambulance duty in northern New YorkTown of Norfolk.

Coller, a Niagara Mohawk Station Mainte-nance Mechanic, is among many Company employees serving as medical emergency volunteers and contributing personal time toward the safety and well-being of their communities.

On June I, 1980, a new two-year con-tract went into effect with 12 local unions of System Council U-II, International Brotherhood of Electrical Workers (AFL-CIO). Provisions of the pact, all within Federal Wage Guidelines, affect some 7,600 in the work force and include yearly wage increases of 8.5 percent.

As one of upstate New York's largest employers, Niagara Mohawk recognizes its responsibility to provide equal job opportunities. The Company is continu-ing to improve representation of minority groups among its employees and, in the same light, has long been recognized for leadership in community volunteer proj-ects involving employment and job training.

Employees desiring to upgrade their formal education in job-related fields en-roll in a Company Aid-to-Education plan which provides substantial financial assistance.

About 800 employees took advantage of the Plan in 1980. The Cor-poration's Scholarship Program assists employees in providing their sons and daughters an opportunity to obtain a col-lege education or go on to graduate study in engineering, business and finance.

Four undergraduate scholarships, each with a total value of $8,000, are awarded annually, and one $5,000 graduate fellow-ship is granted every two years under the Program.

The Employee Saving Fund Plan is sub-scribed to by 6,700 or 76 percent of all eligible personnel. They allocate from 2 percent to 6 percent of their wages to-ward purchase of common stock or U5.

Government Bonds.

The Company matched employee contributions by 50 percent for a total $3,682,000 in 1980. The Plan holds 6,907,000 shares or 9X of the outstanding common stock. In addition, employees may make unmatched contri-butions of up to 4% of their wages.

The reorganized Public Affairs and Corporate Communications Department has broadened activities to better com-municate with stockholders and the pro-fessional investment community. For the third year, members of senior manage-ment made informative presentations to stockholders at regional meetings in key communities in upstate New York. The number of persons attending these ses-sions and their enthusiasm indicate that stockholders want the latest information on Niagara Mohawk and wish to hear its position on energy issues and current events. In further response to this need, the Company initiated its "In-the-Know" communications program in 1980 to keep stockholders updated on energy devel-opments, financial affairs and stockhold-er services. In addition, "NMKDigest," a newsletter distributed to security

analysts, brokers and interested stock-holders, is published periodically. For information on any of these activities, write John W. Powers, Treasurer, 300 Erie Boulevard West, Syracuse, NY 13202.

The Association of Investors in New York Utilities, Inc., formed in 1979 as a "grass roots" stockholder organization, already has grown to nearly 1,700 mem-bers, with the majority owning Niagara Mohawk shares.

AINYU is a non-profit, independent group of owners of stocks, bonds or other securities in investor-owned, tax-paying N.Y. State utilities.

Among its objectives through collective action are "protecting the financial integrity of utilities to assure continued supply of power at reasonable cost to consumers and at reasonable profit to owners." Other goals include "improving the regulatory climate of administrative bodies and to preserve the free-enterprise, tax-paying system in the gen-eration and distribution of power in New York State." Information on AINYU is available by writing to its corporate office at Old Camby Road, Verbank, NY 12585.

The proven success of the constantly growing Dividend Reinvestment and Stock Purchase Plan continued as par-

.ticipation rose 15 percent in 1980. Hold-ers of both common and preferred stock are eligible. The limit on optional cash investments has been increased to

$30,000 per year. Under the Plan, pur-chases of newly issued stock are made directly from the Company without in-curring brokerage commissions or ser-vice charges.

The purchases are made from the reinvestment of dividends and optional cash payments from the par-ticipants. The Plan also provides the Company funds for financing. In 1980, 39,000 participants, representing 18 per-cent of all common stockholders, in-vested

$ 18,909,000 in new common shares. Literature and application forms are available by writing NMPC Dividend Reinvestment

Plan, P.O. Box 131, Syra-cuse, NY 13201.

In another action to plan and to meet the challenges of managing the Corpo-ration in today's business climate, major modifications in our senior management structure were implemented in 1980.

Changes involved the election of John G.

Haehl, Jr., to Chairman of the Board and Chief Executive Officer and William J.

Donlon to succeed Mr. Haehl as Presi-dent. At the same time, Richard C. Clancy, John M. Endries and John M. Haynes were elected senior vice presidents. Donald L.

MacVittie was elected Vice President of Fossil Generation; Thomas E. Lempges, Vice President of Nuclear Generation; An-thony J. Baratta, Jr., Controller; John W.

Powers, Treasurer; and Richard N. Wes-cott, Assistant Treasurer.

Later in the year, Nicholas L. Prioletti, Jr., was elected an Assistant Controller. ~

Membership growth in Association of Investors in New York Utilities, Inc.,

is reviewed, from left, by AINYUExecutive Vice President John Howley, Vice Presidents Joseph L.

Ottenheimer and Karr Parker, Jr., Treasurer Ruth Kovacs and Presi-dent A. B. Wellborn. First formed in 1979 by secur-ity holders with interest in investor-owned utilities, AINYUhas grown to nearly 1,700 members.

Management's discussion and analysis of financial condition and results of operations Results of operations Niagara Mohawk's earnings in 1980 were

$ 1.87 per share, down $.13 from 1979, $.02 below those of 1978 and up $.13 from 1977 earnings when fewer shares were outstanding.

The decrease in the Company's earn-ings per share for 1980 from 1979 came primarily from a 2.1% decrease in electric sales to ultimate consumers; an increase of 19% (net of change in capitalization policy discussed below) in inflation-fed operating expenses; and a 14% rise in Federal income and other taxes. In addi-tion, financing costs were approximately 18% higher due to higher debt levels, caused by increased working capital and construction needs, and due also to his-torically high interest rates. These factors were only partially offset by new electric and gas rates, which became effective in March 1980. Also, the Company changed its capitalization policy with regard to certain other operation and maintenance expenses arising as a result of construc-tion activities. These costs are now being capitalized, whereas in prior years they were charged to other operation and maintenance expenses.

The impact of this change was to increase net income and earnings per share for the year ended December 31, 1980 by approximately

$4,700,000 and $.07 per share, respective-ly. The prospective impact of this change has been considered in the Company's pending rate proceeding.

The Company's Rate of Return on Equity fell to 10.8% for 1980 after showing a steady increase from 10.4% in 1977, to 11.1% in 1978 and to 11.4M in 1979. The Company's current Rate of Return on Equity is well below the 14.0% approved by the New York State Public Service Commission (PSC) for the rate year be-ginning March 1980. Recent awards have not provided an adequate return on equity or recovery of steadily increasing costs resulting from inflation, thus ne-cessitating annual petitions for rate increases.

The discussion and analysis that follows highlights items that have had a significant effect on operations during the three-year period. This discussion and analysis should be read in conjunction with the Notes to Consolidated Financial Statements and other financial and statistical information appearing elsewhere in this report and may not be indicative of future operations or earnings.

Electric revenues increased

$406 million or 41% over the three-year period. This increase is largely attributable to recovery of increased fuel and purchased power costs and, to a lesser extent, to rate relief, as indicated by the table below:

%P ELECTRIC Increase (decrease) from prior year In millions ofdollars Revenues 1980 1979 1978 Total Increase in base rates

$ 80.8

$ 24.5

$ 14.9

$120.2 Fuel and purchased power cost increases 69.9 108.8 (2.6) 176.1 Sales to ultimate consumers.............

1.1 20.7 16.7 38.5 Sales to other electric systems...........

23.2 23.7 0.8 47.7 Miscellaneous operating revenues.......

7.4 13.1 2.8 23.3

$182.4

$190.8

$ 32.6

$405.8 Electric kilowatt-hour sales were 32.6 billion in 1980, a decrease of 2.2% from 1979, reflecting both the effects of a recessionary economy in the Company's service area and conservation efforts by our customers. Details of the changes in our electric revenues and kilowatt-hour sales by customer group are highlighted in the table below:

Class of service Residential.......

Commercial......

Industrial.

Municipal service 1980

% increase (decrease) from prior year

%of electric 1980 1979 1978 revenues Revenues Sales Revenues Sales Revenues Sales 291%

132%

P7%

119%

17%

51%

2.9%

33.2 17.8 0.9 17.8 1.8 2.4 4.0 24.7 10.0 (6.2) 20.9 2.3 2.0 2.6 2.0 13.9 (0.4) 10.8 (0.7) 2.9 Total to ultimate consumers 89.0 14.0 (2.1) 16.5 2.0 3.2 3.1 Other electric systems.......

7.6 27.9 (3.3) 39.9 13.0 1.4 5.0 Miscellaneous..............

3.4 18.4

48.0

11.6 Total

.. 1P0.0%

15.1%

(2.2)%

18.7%

2.9%

3.3%

3.2%

Gas revenues increased

$ 146 million or 61% over the three-year period. As shown by the table below, this rise is almost entirely from increased costs of purchased gas recovered from customers through the purchased gas adjustment clause.

GAS Revenues Increase (decreasel from prior year In millions ofdollars 1980 1979 1978 Total Increase in base rates.........

$ 1.2

$ 4.6

$ 2.2 8.0 Purchased gas cost increases 67.3 42.3 9.8 119.4 Gas sales 9.7 (1.4) 9.9 18.2

$78.2

$45.5

$21.9

$ 145.6 Gas sales were 101.3 million dekatherms in 1980, a 4.9% increase from 1979. The changes in sales during the last three years generally follow the weather pattern offset by customer conservation efforts. The increase in 1980 industrial revenues and sales is attributable in part to an increase in boiler conversions from oil to gas. Changes in gas revenues and dekatherm sales by customer group are detailed in the table below:

Class of service 1980

% increase (decrease) from prior year

%of gas 1980 1979 1978 revenues Revenues Sales Revenues Sales Revenues Sales Residential Commercial Industrial....

54.6%

23.2 18.1 18.6%

(1 5)%

11 3%

(5 3)%

5 4%

25.2 1.8 17.0 (1.3) 18.0 13.7 50.3 26.5 42.7 9.5 10.5 4.7 Total to ultimate consumers 95.9 25.2 4.5 16.7 (1.8) 8.8 4.7 Other gas systems..........

3.5 34.4 12.4 46.0 9.2 22.6 13.0 Miscellaneous...............6 50.0 15.3 12.8 Total 100 0%

25.6%

4 9%

17 5%

(1.4)%

9.2%

5 0%

15

In summary, total operating revenues increased

$551 million, or 45% over the three-year period, this rise largely repre-sents recoveries of fuel and purchased gas costs through fuel adjustment clauses.

Through our energy and pur-chased gas adjustment clauses, costs of fuel, purchased power and gas pur-

chased, above or below the levels al-lowed in approved rate schedules, are billed or credited to customers.

On February 29, 1980, the PSC ap-proved rate increases to provide the Company additional annual revenues of

$ 122,577,000 (11.5X) for electric and

$3,263,000 (1.0%) natural gas. These new rates became effective March 7, 1980. In addition, the PSC ordered the flow-through to customers of $21.6 million in income tax refunds and interest (see Note 10 of the Notes to Consolidated Financial Statements) of which $6.8 millionwas re-funded during 1980.

Further rate action, made necessary by a recessionary economy, record inflation and unprecedented high interest rates, was requested on April 18, 1980 when the Company filed for an annual increase of

$231 million, including $ 214 million (14.1%) electric and

$ 17 million (4.2%)

gas. In December 1980, a PSC Administra-tive Law Judge recommended rate in-creases of $ 149.7 million (9.5%) electric and $ 11 million(2.5%) gas or about 70%

of what the Company had requested.

Be-cause of the nearly year-long regulatory process for any rate proceeding, any in-crease determined by the PSC willnot be reflected in the Company's operations until the second quarter of 1981.

In 1980, fuel and purchased power costs continued to increase sharply, from

$404 million in 1977, to $411 million in 1978, to $540 million in 1979 and to $644 million in 1980. The continued increases result primarily from higher coal, oil and purchased power costs and changes in the mix of generation resources.

(See Electric and Gas Statistics-Electricity generated and purchased).

The average cost per ton of coal burned was $41.95 in 1980 compared to $39.08 in 1979, $37.11 in 1978 and

$34.00 in 1977; the average cost per barrel of oil burned was $23.72 in 1980 compared to $16.34 in 1979, $ 12.58 in 1978 and $ 12.94 in 1977. The average unit cost of purchased power was 13.6 mills per kilowatt-hour in 1980 compared to 12.1 mills in 1979, 8.8 mills in 1978 and 7.9 mills in 1977. In addition, the Com-pany's Nine Mile Point Nuclear Station Unit No.

1 was out of service for several months in 1979 for scheduled refueling and maintenance. This scheduled outage required the replacement of low-cost nu-clear generation with fossil fuel genera-tion and purchased power.

The total cost of gas purchased by the Company from Consolidated Gas Supply Corp. rose 41% in 1980, 249'n 1979 and 11% in 1978. These increases are primar-ily the result of deregulation of wellhead prices which increased the Company's cost per dekatherm purchased to $2.59 in 1980 from $2.00 in 1979, $ 1.57 in 1978 and

$ 1.52 in 1977.

Other operation and maintenance ex-penses increased 7.2% in 1980, 14.5% in 1979 and 4.8% in 1978, as a result of in-creases in wages and associated benefits, higher costs charged by our suppliers and increased levels of maintenance, par-tiallyoffset by a change in the Company's capitalization policy discussed previous-ly. In May 1980, the Company entered a two-year labor agreement providing for increased wages and supplementary ben-efitss of 9.64% and 9.25% in June 1980 and 1981, respectively. The increase in other operation and maintenance expenses in 1979 was also attributable, in part, to the refueling of Nine Mile Point Nuclear Sta-tion Unit No. 1, discussed above.

In July 1980, the Company placed its Oswego Steam Station Unit No. 6 in commercial operation. This oil-fired unit, of which 24% is owned by Rochester Gas and Electric Company, was completed at a cost to the Company of approximately

$239.5 million, including allowance for funds used during construction (AFC).

The effect of adding this unit to our plant in service is reflected in increased depre-ciation expense.

Federal and Canadian income taxes rose in 1980, 1979 and 1978 as a result of increased operating income and an in-crease in the amounts on which deferred taxes are provided. The increase in other taxes in these same three years is due principally to higher property taxes re-sulting from property additions and higher state and local gross income taxes resulting from increased revenues.

The Company's revenues and costs of operation over the past three years show substantial increases in several respects, due primarily to the effect of general in-flation and higher fuel costs. Inflation has eroded the purchasing power of the dol-lar, as measured by the Consumer Price Index, to about three-fourths of its 1978 value. The Company is especially sensi-tive to inflation because of the large amount of capital it m'ust raise to finance its construction program and because its prices are regulated using a rate base that reflects the historical cost of its plant.

When this apparently substantial growth in operating revenues is adjusted for the current purchasing power of the dollar, a more realistic picture for the three-year period is presented. Adjusted to 1980 dol-lars, operating revenues increased in 1980 from 1977 by $ 110 million or 7%,

while net income declined substantially due to the effects of depreciation stated in terms of the current cost of plant in service. Over the same period cash divi-dends per share declined

$.29 when the relative purchasing power of the dollar is considered. Inflation information in Note 11 of the Notes to Consolidated Financial Statements indicates the approximate ef-fect of inflation on these and certain other aspects of the Company's opera-tions and financial position.

Liquidity and capital resources As is common in the utility industry, internal funds generated from operations are insufficient to meet the Company's capital requirements.

Therefore, signif-icant funds from external sources are re-quired on an annual basis. External capi-tal needs are first met through utilization of short-term borrowing arrangements, including bank lines of credit, commer-cial paper and bankers acceptances.

These short-term borrowings are repaid through the issuance of securities, includ-ing intermediate and long-term debt, pre-ferred and preference stocks and com-mon stock.

Capital resources from internal and ex-ternal sources are used to pay for the Company's construction program, work-ing capital needs, maturing debt issues and sinking fund provisions of outstand-ing debt and preferred stocks. Sources and uses of funds during the past three years are reported in the Consolidated Statement of Changes in Financial Posi-tion at page 21.

The Company presently has bank cred-it arrangements aggregating

$300 million.

At December 31, 1980, $ 123.3 million of such arrangements were in use. The Company generally issues long-term debt secured by a mortgage on the Company's properties.

In 1980, the Company also borrowed

$80 million under new seven-year bank revolving credit and term loan borrowing agreements (of a total amount available under these agreements of $90 million). Preferred stock issues in recent years have typically been of $25 par value and redeemable at specified dates and prices. Common stock is sold through periodic public offerings as well as under the Company's Dividend Reinvestment,

Employee Savings Fund and Employee Stock Ownership plans.

During 1980, Niagara Mohawk com-pleted

$265,650,000 of financing as de-tailed below and increased short-term debt by $41.3 million.

Seven-Year Bank Revolving Credit and Term Loan;Borrowing

$ 80,000,000 12.95% First Mortgage Bonds (1) 66,350,000 9.75% Preferred Stock 25,500,000 Common Stock (2) 93,800,000

$265,650,000 (1) Excludes

$ 13,650,000 scheduled for March 1981 delivery at the same interest rate.

(2) Includes public sale of 4 million shares at

$ 14.125 per share and proceeds from sales through dividend reinvestment, employee sav-ings fund and employee stock ownership plans at varying prices.

Approximately $99.5 million of these funds were used to pay maturing bonds and to provide for sinking fund require-ments. Total financing for 1981 is esti-mated to exceed

$400 million. Of this

amount, requirements for maturing bonds and preferred stock sinking funds total approximately $ 149.5 million.

The Company has endeavored to strengthen its capitalization structure through the reduction of long-term debt as a percent of total capitalization. The proportion of long-term debt to total cap-italization has decreased from 49.0% at the end of 1978 to 48.0% at the end of 1980 while common equity as a percent of total capitalization has increased from 36.9% from the end of 1978 to 39.4% in 1980.

Construction and other capital re-quirements continue to increase.

Net additions for construction and nuclear fuel, excluding financing costs, totaled

$319.7 million in 1980, $316.9 million in 1979 and $271.3 million in 1978. In recent years, the largest cost component of con-struction programs has been the cost of new generating stations. The Company's Oswego Steam Station Unit No. 6 attained commercial operation status in July, 1980. The principal new station presently

~

under construction is Nine Mile Point Unit No. 2, scheduled for completion in late 1986, in which the Company had in-vested about

$400 million through De-cember 31, 1980 (See Note 12 of Notes to Consolidated Financial Statements). Out-lays associated with construction of this nuclear unit, along with other facilities requirements, are expected to increase overall construction expenditures in fu-ture years.

Financial resources provided internally from operations consist of net income, adjusted for non-cash expenses, such as depreciation, amortization of nuclear fuel and deferred income taxes, and non-cash income, such as allowance for funds used during construction (AFC). AFC repre-sents the financing costs of the Com-pany's.construction program and is added to the cost of construction until such time as the capital projects are completed, and is then recovered through depreciation included in rates charged to customers. While financial re-sources from operations, as determined above, have been increasing in recent years, such increases have not kept pace with the Company's construction and other requirements, thus necessitating increasing amounts of outside financing.

The Company and other investor-owned utilities have filed testimony with the PSC to seek regulatory policy changes which would improve cash flow. Addi-tionally, the Company is seeking ade-quate overall earnings levels and cash flow improvements in its periodic rate filings.

The Company's requirement for funds may be affected by possible increases in construction costs brought on by infla-tion and regulatory requirements, among other factors. Continued increases in in-ternally generated funds and their ade-quacy in relation to the Company's needs depend partly on the results of current and future rate cases and the extent to which increased rates can be translated into improved earnings.

The cost and availability of external sources of funds will be affected by the retention and maintenance of an adequate credit rating by the Company and conditions in the fi-nancial markets. Financial market condi-tions, among other factors, influence the timing and types of securities to be of-fered, repayment terms and the decision to place such offerings privately with in-vestors or publicly through underwriters.

Any of these factors could have an ad-verse effect on the Company's ability to fullyimplement its intended construction and financing programs. The Company willcontinue to explore and utilize other methods of financing, such as the Euro-dollar market, tax exempt financing methods, leasing of equipment and simi-lar non-traditional sources of funds.

However, management believes that tra-ditional sources of funds willprovide the majority of its needs.a Market price of common stock and related stockholder matters The Company's common stock and cer-tain of its preferred series are listed on the New York Stock Exchange. The com-mon stock is also traded on the Amster-dam (Netherlands),

Boston, Cincinnati, Detroit, Midwest, Pacific Coast and PBW stock exchanges.

The ticker symbol is "NMK."

Preferred and common stock dividends were paid on March 31, June 30, Septem-ber 30 and December

31. The Company presently estimates that 65% of the 1980 and 1979 common stock dividends is a return of capital and therefore is not tax-able as dividend income for income tax purposes.

The remaining percentage on common dividends and 100% of preferred stock dividends are taxable as dividend income.

The table below shows dividends per share for our common stock and quoted market prices:

1980 1st quarter 2nd quarter 3rd quarter 4th quarter Dividend paid Price range per share High Low

$.36

$ 13

$ 10'/2 38 14'/4 107/e

.38 14 12 38 12'/e 10

$1.50 1979 1st quarter 2nd quarter 3rd quarter 4th quarter

$.36

$ 15e/e

$ 13'/2

.36 14'/e 13

.36 147/e 123/4

.36 14 12

$1.44 While the Company intends to con-tinue the practice of paying cash divi-dends quarterly, declarations of future dividends are necessarily dependent upon future earnings, financial require-ments and other factors, including re-strictions in governing instruments.

The holders of Common Stock are enti-tled to one vote per share and may accumulate their votes for the election of Directors. Whenever dividends of Pre-ferred Stock are in default in an amount equivalent to four fullquarterly dividends and therafter until all dividends thereon are paid or declared and set aside for payment, the holders of such stock can elect a majority of the Board of Directors.

Whenever dividends on any issued Pref-erence Stock are in default in an amount 17

equivalent to six full quarterly dividends and thereafter until all dividends thereon are paid or declared and set apart for payment, the holders of such stock can elect two members of the Board of Direc-tors. No such dividends are now in arrears.

Upon any dissolution, liquidation or winding up of the Company's

business, the holders of Common Stock are entitled to receive pro rata all of the Company's assets remaining and available for distri-bution after the full amounts to which holders of Preferred and Preference Stock, having priority over Common Stock, are entitled have been satisfied.

The indenture securing the Company's mortgage debt provides that surplus shall be reserved and held unavailable for the payment of dividends on Common Stock to the extent that expenditures for main-tenance and repairs plus provisions for depreciation do not equal 2.25% of de-preciable property as defined. Such pro-visions have never restricted the Com-pany's surplus.

About 211,000 stockholders presently own common shares of Niagara Mohawk and 11,000 hold preferred and preference stock. The chart below summarizes common stockholder ownership by size of holding:

Size of holding Total Total shares (Shares) stockholders held Report of management The consolidated financial statements of Niagara Mohawk Power Corporation and its subsidiaries were prepared by and are the responsibility of management.

Finan-cial information contained elsewhere in this Annual Report is consistent with that in the financial statements.

To meet its responsibilities with re-spect to financial information, manage-ment maintains and enforces a system of internal accounting controls, which is de-signed to provide reasonable assurance, on a cost effective basis, as to the integ-rity, objectivity and reliability of the fi-nancial records and protection of assets.

This system includes communication through written policies and procedures, an organizational structure that pro-vides for appropriate division of respon-sibilityand the training of personnel. This system is also tested by a comprehensive internal audit program. In addition, the Company has a Code of Conduct which requires all employees to maintain the highest level of ethical standards and re-quires key management employees to formally affirm their compliance with the Code.

The financial statements have been examined by Price Waterhouse & Co., the Company's independent accountants, in accordance with generally accepted au-diting standards.

As part of their exam-ination, they made a study and evaluation of the Company's system of internal ac-counting control. The purpose of such study was to establish a basis for reliance thereon in determining the nature, timing and extent of other auditing procedures that were necessary for expressing an opinion as to whether the financial statements are presented fairly. Their examination resulted in the expression of their opinion which follows this report.

The independent accountants'xamina-tion does not limit in any way manage-ment's responsibility for the fair presen-tation of the financial statements and all other information, whether audited or unaudited, in this Annual Report.

The Audit Committee of the Board of Directors, consisting of three directors who are not employees, meets regularly with management, internal auditors and Price Waterhouse & Co., to review and discuss internal accounting

controls, audit examinations and financial report-ing matters. Price Waterhouse

&. Co. and the Company's internal auditors have free access to meet individuallywith the Audit Committee at any time, without manage-ment present.a 1 to 99 100 to 999 1,000 or more 60,081 142,628 8,089 2,049,822 33,600,937 39,580,385 Report of independent accountants 210,798 75,231,144 PRICE WATERHOUSE &. CO.

To the Stockholders and the Board of Directors of Niagara Mohawk Power Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and retained earnings and of changes in financial position present fairly the financial position of Niagara Mohawk Power Corporation and its subsidiaries at December 31, 1980 and 1979, and the results of their operations and the changes in their financial position for each of the three years in the period ended December 31, 1980, in conformity with generally accepted accounting princi-ples consistently applied. Our examinations of these statements were made in accor-dance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

Syracuse, New York January 28, 1981

Consolidated statement of income and retained earnings NIAGARAMOHAWKPOWER CORPORATION AND SUBSIDIARIES Operating revenues:

Electric Gas For the year ended December 31 ~

1980

$1,393,467 383,648 In thousands of dollars 1979

$1,211,068 305,435 1978

$1,020,313 259,935 Operating expenses:

Operation:

Fuel for electric generation Electricity purchased Gas purchased Other operation expenses (Note 1)

Maintenance(Note 1)

Depreciation (Note 2)

Federal and Canadian income taxes (Note 10)

Other taxes Operating income Other income and deductions:

Allowance for other funds used during construction (Note 1)

Federal income tax credits (Note 1)

Other items (net) income before interest charges interest charges:

interest on long-term debt Other interest.

Allowance for borrowed funds used during construction (Note 1)

Net income Dividends on preferred stock Balance available for common stock Dividends on common stock Retained earnings for the year Miscellaneous charges (Note 6)

Retained earnings at beginning of year Retained earnings at end of year 1,777,115 462,573 181,223 276,680 221,879 100,470 92,210 43,498 186,830 1,565,363 211,752 38,209 15,651 5,995 59,855 271,607 115,809 13,766 (20)60?)

108,968 162) 639 29,438 133,201 106,967 26)234 403,945 S

430)179 1,516,503 380,101 159,453 196,711 200,917 99,857 84,212 34,646 166,666 1,322,563 193,940 39,063 13,782 524 53,369 247,309 105,399 4,416 (18,536) 91,279 156,030 27,844 128,186 92,136 36,050 367,895 403,945 1,280,248 311,000 99,536 158,229 181,995 80,759 80,683 31 123 152,550 1,095,875 184,373 28,971 11,690 1,545 42,206 226,579 99,874 1,573 (16,030) 85,417 141,162 28,660 112,502 81,261 31,241 (1,180) 337,834 367,895 Average number of shares of common stock outstanding (in thousands)

Per average share of common stock:

Balance available for common stock Dividends paid.

() Denotes deduction.

71,257 S

1.87 S

1.50 63,976 S

200 1.44 59,661 S

1.89 1.36'/z

Consolidated balance sheet NIAGARAMOHAWKPOWER CORPORATION AND SUBSIDIARIES At December 31, ln thousands ofdollars 1980 1979 ASSETS Utilityplant, at original cost (Note 3 and Page 31)

Less accumulated depreciation and amortization (Note 2)

Other property and investments Current assets:

Cash, including time deposits of $1,809 and $650, respectively Accounts receivable (less allowance for doubtful accounts of

$2,800 and $2,400, respectively)

Materials and supplies, at average cost:

Coal and oil for production of electricity Other Prepayments Deferred debits:

Unamortized debt expense Deferred recoverable energy costs Other

$4,563,309 1,232,675 3,330,634 16,451 13,829 198,150 107,508 48,175 9,187 376,849 14>041 61,839 9,005 84,885

$3,808,819

$4,218,528 1,110,563 3,107,965 16,149 8,527 179,490 109,278 35,543 6,709 339,547 14,124 44,170 6,982 65,276

$3,528,937 CAPITALIZATIONAND LIABILITIES Capitalization (Note 6):

Common stockholders'quity:

Common stock$ 1 par value; authorized 85,000,000 shares; issued 75,231,144 shares and 67,952,043 shares, respectively Premium on capital stock Capital stock expense Retained earnings (Page 19)

Redeemable preferred stock (Note 7 and Page 30)

Non-redeemable preferred stock (Page 30).

Long-term debt (Page 30)

Total capitalization Current liabilities:

Short-term debt (Note 4).

Long-term debt due within one year (Page 30)

Sinking fund requirements on redeemable preferred stock (Note 7)

Accounts payable Customers'eposits Accrued taxes Accrued interest Accrued vacation pay Other Deferred credits:

Income tax refunds (Note 10)

Other Mandated refunds to customers (Note 10)

Accumulated deferred Federal income taxes (Note 10).

Commitments and contingencies (Note 12)

( ) Denotes deduction, 20 75,231 802,954 (10,363) 430,179 1,298,001 205,924 210,000 1,443,607 3,157,532 123,300 142,500 6,950 144,876 4,952 27l837 32)818 16,406 16,568 516,207 1,772 9,064 10,836 25,326 98,918

$3,808,819 67,952 716,386 (10,558) 403,945 1,177,725 189,650 210,000 1,443,056 3,020,431 82,040 88,500 6,950 118,727 4,934 25,537 30,727 14,569 17,315 389,299 21,606 11,933 33,539 85,668

$3,528,937

Consolidated statement of changes in financial position NIAGARAMOHAWKPOWER CORPORATION AND SUBSIDIARIES For the year ended December 31, Financial resources were provided by:

Operations:

Net income Charges (credits) to income not requiring (not providing) working capital Depreciation Allowance for funds used during construction Amortization of nuclear fuel Provision fordeferred Federal income taxes (net)

Outside financing:

Sale of common stock Sale of preferred stock Sale of mortgage bonds Borrowings under revolving credit and term loan agreements (Note 14)

Increase (decrease) in short-term debt Other sources:

Sale of utilityplant (Note 5)

Deferred recoverable energy costs Mandated refunds to customers (Note 10)

Income tax refunds.

Sale of uranium (Note 3)

(Increase) decrease in working capital other than short-term debt (see be/ow)

Miscellaneous (net)

Total resources provided 1980

$162,639 92,210 (58,816) 48,829 20,895 265,757 93,823 25,500 661350 80,000 41I260 306,933 (17,669)

(6,758) 13,983 48,346 113 38,015

$610,705 ln thousands of dollars 1979

$156,030 84,212 (57,599) 28,090 14,566 225,299 75,266 118,500 58,040 251,806 (16,204) 35,987 33,660 5,313 58,756

$535,861 1978

$141,162 80,683 (45,001) 27,107 7,955 211,906 70,462 74,000 31,500 (15,200) 160,762 34,955 (3,015) 1,885 22,006 (5,049) 50,782

$423,450 Financial resources were used for:

Construction additions Nuclear fuel Allowance for funds used during construction Net additions Reduction of long-term debt Reduction of preferred stock (Note 6).

Dividends Totalresources used

$341,237 37,266 (58,816) 319,687 145,387 9$226 136,405

$610,705

$347,544 26,986 (57,599) 316,931 90,000 8,950 119,980

$535,861

$277,758 38,522 (45,001) 271,279 10,450 31,800 109,921

$423,450 (Increase) decrease in working capital other than short-term debt:

Cash Accounts receivable Income tax refund claims.

Coal and oil for production of electricity Other materials and supplies Long-term debt due within one year Sinking fund requirements on redeemable preferred stock Accounts payable Accrued taxes and interest Other (net)

(5,302)

(18,660) 1,770 (12,632) 54,000 26,149 4,391 (1,370)

$ 48,346 2,259 (52,271)

(39,046)

(5,807) 78,050 5,150 31,873 5,475 7,977

$ 33,660 (4,207)

(5,364) 8,391 9,710 (3,369) 200 7,823 4,349 4,473

$ 22,006 21

Notes to consolidated financial statements NOTE 1. Summary of Significant Accounting Policies The Company is subject to regulation by the New York State Public Service Commission (PSC) and the Federal Energy Reg-ulatory Commission (FERC) with respect to its rates for service and the maintenance of its accounting records. The Company's accounting policies conform to generally accepted accounting principles, as applied to regulated public utilities, and are in accordance with the accounting requirements and ratemaking practices of the regulatory authorities. (See Note 12.)

Principles oi Consolidation:

The consolidated financial statements include the Company and its three wholly-owned subsidiaries.

All significant intercompany balances and trans-actions have been eliminated.

UtilityPlant: The cost of additions to utility plant and of re-placements of retirement units of property is capitalized. Cost includes direct material, labor, overhead and an allowance for funds used during construction (AFC). The cost of current re-pairs and maintenance is charged to expense. Whenever utility plant is retired, its original cost, together with the cost of re-moval, less salvage, is charged to accumulated depreciation.

Other Operation and Maintenance Expenses:

During 1980, the Company changed its capitalization policy with regard to certain Engineering, Quality Assurance and Transmission and Distribu-tion costs arising as a result of construction activities, thus achieving a more proper capitalization of these costs. This change in capitalization policy, net of Federal income taxes, resulted in an increase in net income for 1980 of approximately

$4,700,000

($.07 per share).

The prospective impact of this change has been considered in the Company's pending rate proceeding.

Allowance for Funds Used During Construction:

The Com-pany capitalizes AFC in amounts equivalent to the cost of funds devoted to plant under construction. AFC rates are determined in accordance with FERC and PSC regulations. As a result of rate proceedings, the Company began computing AFC at a rate which is reduced to reflect the income tax effect of the borrowed funds component of AFC, for its Oswego Steam Station Unit ¹6 and Nine Mile Point Nuclear Station Unit ¹2 on December 1,

1976 and for capitalized costs associated with its investment in N M Uranium, Inc. on July 1, 1978 (See Note 3). The AFC rates in effect during the three-year period ended December 31, 1980 were:

AFC Net of tax rate AFC rate January 1, 1978 through December 31, 1978...

9.00'/o 7.20'/o January 1, 1979 through October 31, 1979.....

9.25 7.50 November 1, 1979 through December 31, 1979.

9.60 7.75 January 1, 1980 through February 29, 1980.... 10.00 7.90 March 1, 1980 through June 30, 1980......... 11.00 8.40 July 1, 1980 through September 30, 1980...... 10.00 8.20 October 1, 1980 through December 31, 1980... 10.25 8.30 AFC is segregated into its two components, borrowed funds (which are reflected in the Interest Charges section of the in-come statement) and other funds (which are reflected in the Other Income and Deductions section of the income statement).

Depreciation and Nuclear Generating Plant Decommission-ing Costs: For accounting purposes, depreciation is computed on the straight-line basis using the estimated useful lives by classes of depreciable property. For Federal income tax pur-22 poses, the Company computes depreciation using accelerated methods and shorter allowable depreciable lives.

As a result of a PSC rate decision, estimated decommission-ing costs (costs to take the plant out of service in the future) of the Company's Nine Mile Point Nuclear Station Unit ¹1 began to be recovered in rates and charged to operations in July 1978 through revised depreciation charges. The change in the annual nuclear plant depreciation rate, from 4.00'/o to 4.33'/o, reflects an increase in the estimated service life of the plant from 25 to 30 years and the establishment of an allowance for decommission-ing costs at the annual rate of 1'k of the plant's cost. Prior to July 1978, decomissioning costs were not charged to current opera-tions and were not recognized in rates charged to customers.

There is no assurance that the additional revenues provided by the decommissioning allowance will ultimately aggregate a

sufficient amount to decommission the plant. The Company be-lieves that decommissioning costs, if higher than currently pro-vided, willultimately be recovered in the rate process, although no such assurance can be given.

Amortization of Nuclear Fuel: The cost of nuclear fuel, plus estimated disposai cost, is charged to operating expenses on the basis of the quantity of heat produced for the generation of electric energy. These costs are charged to customers through base rates or through the fuel adjustment clause.

Until June 1979, the Company had assumed that spent nuclear fuel would be disposed of by reprocessing and that uranium recovered through such reprocessing would have value. At that time, be-cause of proposed Federal action and because there is no re-processing facility in operation, the Company abandoned its re-processing plans in favor of a permanent storage assumption.

The Company believes that nuclear fuel disposal costs, which may be higher than presently estimated, will continue to be re-covered in the rate process, although no such assurance can be given.

Revenues:

Revenues are based on cycle billings rendered to certain customers monthly and others bi-monthly. The Company does not accrue revenues for energy consumed and not billed at the end of any fiscal period. The Company's tariffs include elec-tric and gas adjustment clauses under which energy and pur-chased gas cost, respectively, above or below the levels allowed in approved rate schedules are billed or credited to customers.

The Company, as authorized by the PSC, charges operations for energy and purchased gas cost increases in the period of recov-ery. The PSC has periodically authorized the Company to make changes in its electric adjustment clause. As a result of such

changes, a portion of deferred energy costs would not be recov-ered under the normal operation of the electric adjustment clause. However, the Company has been permitted to amortize and bill such portions to customers, through the electric ad-justment clause, over 36 months from the effective date of each change.

Federal income Taxes: The general policy, in accordance with PSC requirements, is to flow through the tax effect of timing differences between book and taxable income, that is, to record only income taxes currently payable. However, deferred taxes are provided on benefits realized from the class life system of depreciation permitted under the Revenue Act of 1971 (shorter depreciable lives, repair allowance and cost of removal), on de-ferred energy and purchased gas costs, on nuclear fuel disposal costs and on certain other items, as approved by the PSC (see Notes 3 and 10). No deferred taxes are provided for other depre-ciation differences (including accelerated methods of depre-ciation), except under necessity certificates in prior years, or for other items (such as taxes, a portion of AFC, pensions and cer-

tain other employee benefits) which are deductions currently for tax purposes but capitalized for accounting purposes.

The benefits resulting from an increase in the investment tax credit from 4'/o to 10'/o and from the change in the limitation on the amount of credit which may be claimed in any year have been deferred and are being amortized over the book life of the property which gives rise to such credits. One-halt of the 4'/o investment tax credits realized have been allocated to Other Income and Deductions, consistent with PSC directives. For the major proje'cts specified in the AFC section above, tpe imputed tax benefit of the borrowed funds component of AFC has been credited to Other Income and Deductions.

As directed by the PSC, the Company deferred a portion of the increase in Federal income taxes for the year 1978 associated with the tax gain on the sale of a portion of its interest in the Roseton Steam Station. The PSC authorized the Company to recover such increased taxes through its electric adjustment clause over a one-year period commencing July 1978.

Oswego Steam Station Unit ¹6 attained in-service status for Federal income tax purposes in 1979 and generated investment tax credits amounting to $14,400,000. During 1979, the year in which these credits would normally be recognized under the Company's previously described Federal Income Tax account-ing policies, the Company deferred the effect of these credits, subject to the final decision of the PSC in a pending rate case where the treatment of such credits was at issue. The effect of such deferral on the 1979 results of operations was to increase tax expense and thereby decrease income by $6,500,000 ($.10 per share). In accordance with a February 1980 PSC Opinion and Order and consistent with the Company's 1979 deferral, the deferred investment tax credits attributable to the 4'/0 portion are being amortized over three years and, effective July 1, 1980, the additional 6/o portion is being amortized over the book life of the plant.

Amortization of Debt Issue Costs: The premium or discount on long-term debt issues is amortized ratably over the lives of the issues.

Pension Plans: The cost of pension plans is based upon cur-rent costs, amortization of unfunded past service benefits over periods ranging from 15 to 40 years and amortization over 15 years of unfunded past service benefits arising from plan amendments.

The Company's policy is to fund pension costs accrued.

NOTE 2. Depreciation The total provision for depreciation, including amounts charged to clearing accounts, was $93,848,000 for 1980,

$86,178,000 for 1979 and $83,117,000 for 1978. The percentage relationship between the total provision for depreciation and average depreciable property was 2.7'/o in each year. The Com-pany makes depreciation studies on a continuing basis and, when considered appropriate, adjusts the rates of its various classes of depreciable property. Such adjustments are subject to PSC approval.

NOTE 3.

N M Uranium, Inc.

During 1976, through a wholly-owned subsidiary, NM Ura-nium, Inc. (NMU), the Company purchased a 50 percent un-divided interest in uranium deposits and associated mining equipment to be held by a jointly-owned mining venture. The venture is an operating arrangement whereby the Company pays its share of the capital and operating costs and in turn receives its proportionate share of production. Although acquis-ition of this interest was made primarily to provide a more as-sured future supply of nuclear fuel for the Nine Mile Point Nu-clear Station Units ¹1 and ¹2, the Company has indicated it would sell a portion of the output to reduce net assets and asso-ciated carrying charges.

In connection therewith, during 1980 and 1979 the Company sold uranium produced by NMU for approximately $14,000,000 and $36,000,000, respectively.

The Company expects to sell additional portions of the NMU output in the future, subject to market conditions. The investment in the subsidiary, which includes costs incurred since acquisition and AFC, has been reduced by the proceeds from the sale of ura-nium, net of tax. Such investment totaled

$73,800,000 and

$72,000,000 at December 31, 1980 and 1979, respectively, and is included in the consolidated financial statements as part of the nuclear fuel component of utilityplant.

On September 8, 1978, the PSC issued an order approving the Company's investment in NMU, its guaranty of certain NMU notes and permitting, with prior approval, such subsequent ad-vances as may be necessary to finance the uranium project.

Further, effective July 1, 1978, all benefits associated with NMU accounting-tax timing differences have been deferred. The ap-proval was subject to the condition that rates which the PSC will approve in the future willreflect the cost of NMU uranium at the lower of cost or the market price. Subject to PSC approval, the comparison of cost to market will be on an aggregate basis over the life of the project.

Recently, because of unsettled conditions in the uranium in-dustry, the market price of uranium continues to be depressed below levels anticipated by the Company at the time of its in-vestment. The market price of uranium has fallen to $27.00 per lb. at December 31, 1980 from approximately $43.00 per lb. dur-ing 1979. Management is continually evaluating the status of this mining operation to assure maximum recovery of the Com-pany's investment. However, due to regulatory restrictions on the extent to which the costs of uranium produced by this min-ing operation will be allowed in future rates and due to the current market price level, a substantial portion of the Com-pany's investment may not be recoverable.

NOTE 4. Short-term Debt and Compensating Balances At December 31,

1980, the Company had available

$300,000,000 of bank credit arrangements consisting of a

$70,000,000 contractual commitment with several banks under Credit Agreements, lines of credit of $105,000,000, and a Bank-ers Acceptance Facility Agreement of $125,000,000. All of these arrangements are renewable on an annual basis. The Credit Agreement and most of the lines of credit require the Company to maintain compensating balances which are averaged over time. Net of "float," approximately $1,900,000 ot cash at De-cember 31, 1980 represented compensating balances.

The Company has elected to pay fees in lieu of maintaining compen-sating balances on its other lines of credit. The Bankers Accep-tance Facility Agreement provides for the payment of fees only upon the issuance of each acceptance.

Acceptances are used to finance the fuel oil inventory for one of the Company's generat-ing stations.

In March 1979, the Company entered into arrangements with Oswego Facilities Trust (OFT) providing for OFT to finance the acquisition of a fuel oil storage terminal at Oswego, New York and for construction of certain railroad loading and unloading facilities associated with the terminal. OFT has a $25,000,000 Letter of Credit Facility and Revolving Credit Agreement which are used to support its commercial paper obligations. The Com-pany is obligated, under a Distribution Contract with OFT, to make certain payments for its use of these facilities and to pur-chase, or otherwise arrange for, the disposition of the facilities 23

At December 31:

Short-term debt:

Notes payable

$ 26,000 Commercial paper, including Oswego Facilities Trust 57,300 Bankers Acceptances...............

40,000 68,040 14,000 Weighted average interest rate(1)

For year ended December 31:

Dailyaverage outstanding.......

Dailyweighted average interest rate(1)...............

Maximum amount outstanding..

(1) Excluding compensating balances and fees.

$123,300

$ 82,040 17.53%

13.85%

$ 93,327

$ 35,888 13.78'/o 11.40%

$175,660

$ 102,100 NOTE 5. Jointly-Owned Generating Facilities The following table reflects the Company's share of jointly-owned generating facilities at December 31, 1980. The Company is required to provide financing for the unit in process of con-struction and for any additions to the units in service. The Com-pany's share of expenses associated with the Roseton units and Oswego Steam Station Unit ¹6, which attained commercial op-eration status on July 3, 1980, are included in the appropriate operating expenses in the consolidated statement of income.

In thousands ofdollars Construction Percentage Utility Accumulated work in ownership plant depreciation progress Roseton Steam Station Units ¹1 and 2 (a) 30

$101,848

$ 17,118 1,970 Oswego Steam Station Unit ¹6(b) 76 Nine Mile Point Nuclear Station Unit ¹2(b) (c) (d) 41 (a)

The Company sold to Central Hudson Gas and Electric Corporation i/i of its original 40/o ownership for book value of approximately

$30,400,000 in 1978. Central Hudson is obligated to acquire an addi-tional i/8 of the Company's original interest in this unit in 1982.

(b)

In 1978, the Company sold certain common facilities associated with these units, for book value ol approximately $4,600,000.

(c)

See Note 12.

(d)

Excludes amounts spent for nuclear fuel.

NOTE 6. Capital Stock Premium on capital stock increased

$86,500,000 in 1980,

$69,500,000 in 1979 and $65,400,000 in 1978 from the sale of 7,279,101, 5,771,766 and 5,057,636 shares of common stock, re-spectively. As a result of the foregoing, and as a result of the 1980 issuance of 1,020,000 shares of $25 par value preferred stock, second 9.75% series, the 1978 issuance of 1,600,000 shares of $25 par value preferred stock, 8.375% series and the issuance of 1,360,000 shares of $25 par value preference stock, 7.75% series, capital stock expense increased

$400,000 in 1980,

$200,000 in 1979 and $600,000 in 1978.

In 1978, $30,000,000 (300,000 shares) of 11.75% series pre-ferred stock was redeemed.

In accordance with a PSC directive, the $3,500,000 call premium on the redemption was charged to capital stock expense and is being amortized over the life of the 24 upon the termination of the Trust. The Letter of Credit Facility and Revolving Credit Agreement of OFT require payment of fees which are based upon the amount of commercial paper out-standing.

The following table summarizes additional information applicable to short-term debt:

In thousands ofdollars 1980 1979 7.75% preference series.

Expenses of issuing the 11.75% pre-ferred series of $ 1,200,000 were charged to retained earnings.

NOTE 7. Sinking and Debt Retirement Fund Requirements of Redeemable Preferred Stock and Mortgage Bonds Certain of the Company's preferred and preference stock series and mortgage bonds provide for a mandatory sinking fund for annual redemption, at par, as follows:

Number of shares or principal amount inthousands of dollars Commencing Preferred $ 100 par value:

7 45% Series..........

10.60% Series..........

Preferred $25 par value:

8.375% Series.........

9.75% Series..........

9.75%Second Series..

Preference $25 par value:

7.75% Series..........

Mortgage Bonds:

10.20% Series due March1,2005......

8.35% Series due August1,2007.....

8.625% Series due December1,2007 9.50% Series due December 1,2003..

9.95% Series due September1,2004 12.95% Series due October1,2000....

18,000 June30,1977 20,000 March 31, 1980 100,000 April 1, 1983 66,000 October1,1980 204,000 April 1, 1986 140,000* September 30, 1980

$1,500 March 1, 1978 750 August 1, 1982 2,000 December1,1983 2,941 December1,1987 5,000 September 1, 1985 5,333 September 30, 1986

• Increases to 160,000 shares at September 30, 1982 and 240,000 shares at September 30, 1984.

These series also have optional sinking funds through which the Company may redeem, at par, a like amount of additional shares or bonds (limited to 120,000 shares of the 7.45% series and 300,000 shares of the 9.75% series). The option to redeem additional amounts is not cumulative.

The Company's five-year mandatory sinking fund redemption requirements are as follows:

In thousands of dollars 1981 1982 1983 1984 1985 Preferred Stock

$100 par value:

7.45%......

10.60%......

$25 par value:

8.375%.....

9.75%......

Preference Stock

$25 par value:

775%......

$1,800

$1,800

$ 1,800

$ 1,800

$ 1,800 2,000 2,000 2,000 2,000 2,500 2,500 2,500 1,650 1,650 1,650 1,650 1,650 3,500 4,000 4,000 6,000 6,000

$6,950

$9,450

$11,950

$13,950

$13,950 Mortgage Bonds 10.20% Series..

8.35% Series..

8.625% Series 9.95% Series..

$1,500 750

$1,500 750 2,000

$1,500

$1,500 750 750 2,000 2,000 5,000

$ $2,250

$4,250

$4,250

$9,250

'Requirements for 1981 have been met by advance purchases during 1980.

The remaining series of mortgage bonds provide for a debt retirement fund whereby payment requirements may be made in lieu of cash, by the certification of additional property, the waiver of additional bonds or the retirement of outstanding bonds. The 1980 requirements for these series were satisfied by the certification of additional property. The Company antic-ipates that the 1981 requirements for these series will be satis-fied by other than payment in cash.

Total sinking and debt retirement fund requirements of mort-gage bonds aggregated

$ 10,400,000 for the year ended De-cember 31, 1980 and, based upon the mortgage,'bonds then outstanding, are

$ 10,400,000,

$ 11,150,000,

$ 13,150,000,

$ 13,150,000 and $18,150,000 for the years 1981 through 1985, respectively.

NOTE 8. Pension Plans The Company and its subsidiaries have non-contributory pen-sion plans covering substantially all their employees. The total pension cost was $32,100,000 for 1980, $28,900,000 for 1979 and

$25,700,000 for 1978 (of which $8,500,000 for 1980, $6,800,000 for 1979 and $5,800,000 for 1978 was included in construction costs).

Preliminary studies indicate that the accumulated plan bene-fits, as determined by consulting actuaries, and plan net assets for the Company's plans at December 31, 1980 are as follows:

In thousands ofdollars Actuarial present value of accumulated plan benefits:

Vested Non-vested Total Net assets available for plan benefits

$244,000 10,000

$254,000

$248,000 The weighted average assumed rate of return used in deter-mining the actuarial present value of accumulated plan benefits was 7%.

As prescribed by Statement of Financial Accounting Stan-dards No. 36, effective in 1980, the above table summarizes accumulated plan benefits attributable to employee wage levels and service rendered through December 31, 1980. These amounts do not take into consideration expected future service and applicable actuarial assumptions which are considered in funding the Company's ongoing pension plans.

NOTE 9. Information Regarding the Electric and Gas Businesses The Company is engaged in the electric and gas utility businesses.

Certain information regarding these segments is set forth in the following table. General corporate expenses, prop-erty common to both segments and depreciation of such com-r mon property have been allocated to the segments in accor-dance with practices established for regulatory purposes. Identi-fiable assets include net utilityplant, materials and supplies and deferred recoverable energy costs. Corporate assets consist of other property and investments, cash, accounts receivable, pre-payments, unamortized debt expense and other deferred debits.

In thousands ofdollars 1979 1980 Operating revenues: Electric..

Gas Total Operating income before taxes: Electric Gas Total Pretax operating income, including AFC: Electric..

Gas..

Total Income taxes Other income and deductions Interest charges Net income Depreciation: Electric Gas..

Total.

Construction expenditures (including nuclear fuel):

Electric Gas Total.

Identifiable assets: Electric Gas Total Corporate assets Total assets

$1,393,467 383,648

$1,777,115 235,811 19,439 255,250 294,039 20,027 314,066 43,498 21,646 129,575 162,639 82,188 10,022 92,210 347,182 31,321 378,503

$3,203,737 3441419 3,548,156 260,663

$3,808,819

$1,211,068 305,435

$1,516,503 200,718 27,868 228,586 257,954 28,231 286,185 34,646 14,306 109,815 156,030 74,957 9,255 84,212 351,972 22,558 374,530

$2,981,005 315,951 3,296,956 231,981

$3,528,937

$1,020,313 259,935

$1,280,248 188,236 27,260 215,496 233,006 27,491 260,497 31,123 13,235 101,447 141,162 71,750 8,933 80,683 301,583 14,697 316,280

$2,717,224 294,667 3,011,891 177,221

$3,189,112 25

NOTE 10. Federal and Canadian Income Taxes

'urrent Federal Tax Expense:

The current Federal tax ex-pense for 1979 includes credits of $2,600,000 for investment tax credit generated in 1979 and carried back to 1978.

Income Tax Refunds:

In 1974, 1975 and 1978, the Company received retunds resulting primarily from the adoption of the "guide-line" method of depreciation. These retunds, including interest net ot tax, less principally amounts representing prior tax deficiencies paid, were recorded in Deferred Credits and totaled approximately $21,600,000 at December 31, 1979.

In a PSC Opinion and Order issued in February 1980, the Commission ordered the flow-through to customers ot the

$21,600,000 (Electric customers $13,300,000, Gas custom-ers$8,300,000). The entire amount, together with other man-dated items and related tax eftects, was recorded in Mandated Retunds to Customers and, commencing in March 1980, is being refunded to electric customers over three years and to gas customers over two years.

Income Tax Assessment:

In October 1972, the Company paid a net assessment ot $16,800,000 for the years 1957 through 1962 relating to the deductions taken for the loss of the Company's water rights at Niagara Falls terminated in connection with the redevelopment of Niagara power by the Power Authority of the State of New York. The Company has instituted suit tor recovery of this amount.

Investment Tax Credits: The Company has deferred the net benefit of investment tax credits of approximately $8,000,000

($.11 per share), $15,100,000 ($.24 per share),

$6,900,000 ($.12 per share) for the years ended December 31, 1980, 1979 and 1978, respectively, in accordance with the general policy as stated in Note 1.

The Company has unused credits at December 31, 1980 of approximately $26,500,000 which may be utilized to reduce cur-rent tax expense in subsequent years, of which $14,100,000 ex-pires in 1986 and $ 12,400,000 expires in 1987.

The following represents the U.S. and Canadian components of income before income taxes:

In thousands ofdollars 1980 1979 1978 United States................

$185,026

$172,215

$156,725 Canada 10,769 9,527 7,838 Consolidating eliminations....

(5,309)

(4,848)

(3,968)

Income before income taxes

$190,486

$ 176,894

$160,595 Summary Analysis:

In thousands ofdollars 1980 1979 1978 Components ot Federal and Canadian income taxes Current tax expense:

Federal Canadian.

Deterred Federal income tax expense Income taxes included in operating expenses Federal income tax credits included in Other Income and Deductions Total.

Timing differences resulting in deferred Federal income taxes (Note 1)

Depreciation Cost ot removal of property Investment tax credit Recoverable energy and purchased gas costs Necessity certificates Nuclear fuel disposal cost Sales and loans ot nuclear fuel.

Sterling abandonment Gain on Roseton sale Other Deterred Federal income taxes (net)

Reconciliation between Federal and Canadian income taxes and the tax computed at prevailing U.S. statutory rate on income before income taxes Computed tax Reduction attributable to flow-through ot certain tax adjustments:

Depreciation Allowance for funds used during construction Taxes, pensions and employee benefits capitalized for accounting purposes Real estate taxes on an assessment date basis Investment tax credit Deterred taxes provided at other than the statutory rate...........

Other Federal and Canadian income taxes

$ 1,492 5,460 6,952 36,546 43>498 (15>651)

$27,847

$12>834 (127) 7,985 7,236 (700)

(12,383)

(1,304) 5,195 2,159

$20,895

$87>624 8,616

'7,056 11,429 3,458 1,289 743 7,186 59,777

$27,847

$ 1,618 4,680 6,298 28,348 34,646 (13,782)

$20,864

$ 8,227 (1,010) 15,149 (239)

(700)

(5,388)

(5,678) 3,962 243

$ 14,566

$81,372 13,329 26,496 10,202 2,178 2,775 6,752 (1,224) 60,508

$20,864

$ 7,608 3,870 11,478 19,645 31,123 (11,690)

$ 19,433

$22,753 2,310 6,899 7,012 (700)

(28,411)

(3,962) 2,054

$ 7,955

$77,086 13,931 21,601 8,537 560 10,874 1,824 326 57,653

$19,433 26

NOTE 11. Supplementary Information to Disclose the Effects Continued inflation, resulting in a decline in the purchasing power ot the dollar, is one of our nation's principal concerns.

Inflation has an enormous impact on all sectors ot the economy, including consumers, wage earners, investors, government and industry.

The Company's consolidated financial statements are based on historical events and transactions when the purchasing power of the dollar was substantially ditferent than at the pres-ent. The effects of inflation on most utilities, including Niagara of Changing Prices (Unaudited)

Mohawk, are most signiticant in the areas of depreciation and utility plant and amounts owed on borrowed funds.

In recognition of the fact that users of financial reports need to have an understanding of the effects of inflation on a busi-ness enterprise, the following supplementary information is supplied for the purpose of providing certain intormation about the eftects of both general inflation and changes in specific prices. It should be viewed as an estimate of the approximate effect of inflation, rather than as a precise measure.

Statement ofincome from continuing operations adjusted forchanging prices forthe year ended December 31, 1980 ln thousands oldollars Conventional Constant dollar Current cost historical cost average 1980 dollars average 1980 dollars Operating revenues Fuel for electric generation Electricity purchased Gas purchased Depreciation Other operating and maintenance expenses Federal and Canadian income taxes Interest charges Other income and deductions net

$1,777,115 462,573 181,223 276,680 92,210 509,179 43,498 108,968 (59,855) 1,614,476

$1,777,115 462,573 181,223 276,680 230,881 509,179 43,498 108,968 (59,855) 1,753,147

$1,777,115 462,573 181,223 276,680 285,729 509,179 43,498 108,968 (59,855) 1,807,995 Income (loss) from continuing operations (excluding reduction to net recoverable cost)

Increase in specitic prices (current cost) ot utilityplant held during year'*

Increase (reduction) to net recoverable cost Effect of increase in general price level 162,639 23,968' (30,880) 424,206

$ (255,294) 144,928 (769,580)

Excess ot increase in general price level over increase in specific prices after increase to net recoverable cost (200,446)

Gain from decline in purchasing power of net amounts owed.............

209,546 209,546 Net (45,748) 9,100

'Including the reduction to net recoverable cost, the income (loss) from continuing operations on a constant dollar basis would have been $(231,326) for 1980.

• 'AtDecember 31 ~ 1980, current cost of utility plant, net of accumulated depreciation, was $6,940,885 while historical cost or net cost recoverable through depreciation was $3,443,376.

Constant dollar amounts attempt to adjust for general infla-tion and represent historical costs stated in terms ot dollars of equal purchasing power, as measured by the Consumer Price Index for all Urban Consumers. Current cost amounts reflect the changes in specific prices ot plant from the date the plant was acquired to the present and differ from constant dollar amounts to the extent that specific prices have increased more or less rapidly than prices in general.

The current cost of utilityplant net of accumulated deprecia-tion and amortization, represents the estimated cost of replac-ing existing plant assets in kind. Since existing utilityplant is not expected to be replaced precisely in kind due to technological

changes, current cost does not necessarily represent the re-placement cost of the Company's utilityplant. The portion of the accumulated amortization relating to disposal costs of nuclear fuel was not used in the calculation of current costs but rather reclassified to a monetary liability. In most cases, current costs were determined by indexing surviving plant dollars by the Handy-Whitman Index of Public Utility Construction Costs.

However, when an account could not be indexed by Handy-Whitman, other appropriate indices were used.

The current year's provision for depreciation and amortization on the con-stant dollar and current cost amounts of utilityplant was deter-mined by applying the Company's average annual depreciation rates to the indexed plant amounts.

Fuel inventories, the cost of fuel used in generation, and elec-tricity and gas purchased have not been restated from their his-torical cost in nominal dollars. The recovery of energy and pur-chased gas costs are limited to historical costs through the op-eration of the Company's electric and gas adjustment clauses.

For this reason fuel inventories and deterred recoverable energy costs are effectively monetary assets.

Income taxes have not been adjusted.

The Company is subject to the jurisdiction of regulatory com-missions in the determination of a fair rate of return on its investment. Current ratemaking policy provides for the recovery ot historical costs. Therefore, any difference between the histor-ical cost of utility plant and utility plant stated in terms of con-stant dollars or current cost not presently includible in rates as depreciation, is reflected as an increase (reduction) to net recoverable cost. While the ratemaking process gives no recog-nition to the current cost of replacing utilityplant, based on past practices, the Company believes it willbe allowed to earn on the increased cost of its net investment when replacement of facilities actually occurs.

To properly reflect the economics of rate regulation in the 27

Statement of Income from Continuing Operations, the increase (reduction) of net utilityplant to net recoverable cost should be adjusted by the gain from the decline in purchasing power of net amounts owed on borrowed funds. During a period of inflation, holders of monetary assets sutter a loss of general purchasing power while holders of monetary liabilities experience a gain.

The gain from the decline in purchasing power of net amounts owed is primarily attributable to the substantial amount of debt which has been used to finance utilityplant. Since the deprecia-tion on this plant is limited to the recovery of historical costs, the Company does not have the opportunity to realize a holding gain on debt and is limited to recovery only of the embedded cost of debt capital.

Five year comparison ofselected supplementary For the year ended December 31, Operating revenues Historical costinformation adjusted forgeneralinflation Income (loss) from continuing operations (excluding reduction to net recoverable cost)

Income (loss) per common share (after dividend require-ments on preferred stock and excluding reduction to net recoverable cost)

Net assets at year-end at net recoverable cost............

Current costinformation Income (loss) from continuing operations (excluding reduction to net recoverable cost)

Income (loss) per common share (after dividend require-ments on preferred stock and excluding reduction to net recoverable cost)

Excess of increase in general price level over increase in specific prices after reduction to net recoverable cost..

Net assets at year-end at net recoverable cost...........

financial data adjusted foreffects of changing prices ln thousands olaverage 1980 dollars 1980 1979 1978 1977 1976

$1,777,115

$1,721,587

$1,617,017

$1,666,861

$1,559,298 S

23,968 61,087 S

(0.08) 0.46

$1,443,657

$ 1,481,401 (30,880)

(2,286)

S (0.85)

(0.53) 200,446 286,916

$1,443,657

$1,481,401 Generalinformation Gain from decline in purchasing power of net amounts owed S

209,546 241,426 Cash dividends declared per common share................

S 1.50 1.63 1.72 1.79 1.79 Market price per common share at year-end.................

S 11.13 14.34 17.68 21.25 20.82 Average consumer price index 246.8 217.4 195.4 181.5 170.5 NOTE 12. Commitments and Contingencies Construction Program: The Company presently estimates that the construction program for the years 1981 through 1983 will require approximately $964,000,000, excluding AFC and certain overheads capitalized. By years the estimates are $289,000,000,

$327,000,000 and $348,000,000, respectively. At December 31

~

1980, substantial construction commitments existed, including those for the Company's share of Unit P2 at Nine Mile Point Nuclear Station.

Sterling Nuclear Station: As a result of a January 1980 deci-sion by the New York State Board on Electric Generation Siting and the Environment to vacate the construction permit it had previously issued because it could no longer find a public need for the proposed jointly-owned Sterling Nuclear Station generat-ing facility, the project was discontinued. Through December 31, 1980, the Company's costs associated with its 22% interest in the project, when reduced for Federal income taxes, approx-imated $15,000,000. The Company, together with the other co-owners, has petitioned the PSC to seek recovery of these and all subsequently incurred costs associated with cancellation of this project. The PSC is currently holding hearings to determine the proper accounting treatment and ratemaking principles to be applied to the loss arising from regulatory rejection of this proj-ect. AIIcosts are subject to a detailed audit during a later phase of the PSC's review of the petition. The PSC has permitted the Company to accrue AFC on the discontinued project and has determined that costs incurred through January 1978

($11,000,000) were prudently incurred in principle. The PSC has deterred a determination on costs incurred subsequent to January 1978 ($4,000,000) and whether all costs should be shared between ratepayers and stockholders until further phases of their review are completed. While management be-lieves all costs are fullyrecoverable, no such assurance can be given.

Nine Mile Point Nuclear Station Unit 421 Construction ac-tivities at this unit were slowed during 1980 pending completion of an overall project reevaluation.

In early 1980, independent engineering and management consultants were engaged by the co-owners to review the project's estimated cost and scheduled in-service date, together with the status of engineering, con-struction and management systems at the project. Preliminary results indicate a new project cost, based on a 1986 commercial operation date, of approximately

$2,214 per kilowatt (for an estimated total cost to the Company of $984 million)~ exclusive of allowance for funds used during construction and the cost of nuclear fuel. The increase from the November 1978 estimate

($1,248 per kilowatt; $554 million total cost to the Company) is attributable to a two-year extension of the in-service date from 1984 to 1986 and greater inflation, changes being made to ac-commodate new regulatory requirements in part resulting from the Three Mile Island incident, and various increases associated with the engineering and construction work programs.

During 1980, the New York State Public Service Commission 28

authorized an audit of the Nine Mile Point Unit ¹2 project cover-ing essentially the same areas as the co-owner initiated assess-ment. A report on the PSC mandated audit results is expected in early 1981. The resumption of full scale construction is antici-pated in the spring of 1981, depending on the results of re-assessments and audits initiated during the past year.

Long-term Contracts for the Purchase of Electric Power: At January 1, 1981 the Company had contracts to purchase electric power from the following generating facilities owned by the Power Authority of the State of New York (PASNY):

Expiration Purchased

'stimated date of capacity annual Facility contract in Kw.

capacity cost St. Lawrence hydroelectric project...

Niagara Falls hydroelectric project...

Blenheim-Gilboa-pumped storage generating station......

FitzPatricknuclear plant 1985 115,000

$ 1,380,000 1990 1,122,432 13,469,000 2002 550,000 11,220,000 year-to-141,000'1,310,000 year basis 1,928,432

$37,379,000

'127,000 Kw. for winter of 1981-82 The purchased capacities shown above are based on the con-tracts currently in effect. The estimated annual capacity costs are subject to price escalation and are exclusive of applicable energy charges.

Litigation: Several electric customers have brought suit against the Company and PASNY requesting that certain power purchased from PASNY be allocated exclusively for their benefit and are asking monetary damages for the difterence between rates charged by the Company and rates that would otherwise have been charged if this power had been furnished to them since the initiation ot the suit in 1978 and tor the six years prior thereto. In the opinion of management, the ultimate liability, if any, resulting from this suit willnot materially affect the consoli-dated financial statements of the Company.

FERC Audit: During 1979, the statf of FERC conducted a com-pliance audit of the Company covering the years 1973 through 1978. All of the adjustments proposed by FERC have been re-solved except certain adjustments concerning the base cost of nuclear fuel on which AFC should be applied. The resolution of these adjustments has been deferred pending the development of generic rulemakings by the FERC concerning accounting for nuclear fuel. If the associated recommended adjustments are sustained by FERC, the resulting reduction in retained earnings would approximate $ 13,000,000 through 1978 and $24,000,000 through 1980. The Company believes that the adjustments are not justified and is contesting them. The recommended adjust-ments result from FERC staff taking exception to regulatory accounting treatment prescribed by the PSC, the Company's primary rate setting body. Although FERC has ratemaking juris-diction over only 10% of the Company's electric revenues, rep-resenting sales to other electric systems and revenues from transmission of energy, it has the power to prescribe books of account on which reports to stockholders are based. Due to the extensive jurisdiction which the PSC has over the Company's atfairs, it is the opinion of the Company that the financial state-ments based on the requirements of the PSC represent the proper presentation ot the financial position and the results of operations ot the Company.

December 31 1980 1979 1978 September 30 1980 1979 1978 June 30 1980 1979 1978 March 31 1980 1979 1978

$479,512 416,066 321,788

$379,705 335,944 276,442

$425,238 352,107 309,666

$492,660 412,386 372,352

$52,085 41,570 33,881

$37,742 34,?64 37,571

$57,729 50,114 47,976

$64,196 67,492 64,945

$37,756

$.41 28,005

.31 26,977

.32

$26,020

$.25 25,511

.29 27,273

.32

$44,701

$.54 41,878

.56 35,527

.49

$54,162

$.69 60,636

.86 51,385

.78 NOTE 14. Revolving Credit and Term Loan Agreements During 1980, the Company entered into several seven-year revolving credit and term loan agreements with seven banks aggregating

$90 million. Borrowings are initially made under two to three year revolving credit periods. Balances outstanding at the end of the revolving credit period are converted to four to five year term loans. The Company pays fees in'lieu of maintain-ing compensating balances for the availability of these credit arrangements.

Interest on borrowings during the revolving cred-it period approximate the domestic floating prime rate or, under a Eurodollar option, '/2% above the London Interbank Offered Rate. Amounts converted to term loans are payable in equal installments during the remaining term of the agreements.

There are no penalties tor early termination or prepayment of these loans. At December 31, 1980, revolving credit loans amounted to $80,000,000 with interest at the domestic floating prime rate.

29 NOTE 13. Quarterly Financial Data (Unaudited)

Operating revenues, operating income, net income and earn-ings per common share by quarters for 1980, 1979 and 1978 are shown in the following table. The Company, in its opinion, has included all adjustments (consisting only of normal recurring accruals except for giving effect to the deferral of Oswego Unit

¹6 investment tax credit during the quarter ending December 31, 1979see Note 1) necessary for a fair presentation of the results of operations for the quarters. Due to the seasonal nature of the utility business, the annual amounts are not generated evenly by quarter during the year.

ln thousands oldollars Operating Operating Net Earnings per revenues income income common share Quarters ended

Long-term debt In thousands ofdollars At December 31, 1980 l979 In thousands oldollars At December 31 ~

1980 1979 First Mortgage Bonds:

2s/4'/o Series due January 1, 1980..

27/e'/o Series due October 1, 1980..

12.6'/o Series due October 1, 1981..

3'/s'/o Series due December 1, 1981 3>/z'/o Series due February 1, 1983 3>/4'/o Sedes due October 1, 1,983..

3~/e'/o Series due August 1, 1984...

10s/e'/o Series due September 1, 1985 3s/s'/o Series due May 1, 1986......

47/s'/o Series due September 1, 1987 37/e'/o Series due June 1, 1988.....

4s/4'/o Series due April 1, 1990.....

4>/z'/o Series due November 1, 1991 4s/s'/o Series due December 1, 1994 57/s'/o Series due November 1, 1996 6>/4'/o Series due August 1, 1997...

6>/2'/o Series due August 1, 1998...

9~/s'/o Series due December 1, 1999 12.95'/o Series due October 1, 2000

,7'/s'/o Series due February 1, 2001 7'/e'./o Series due February 1, 2002 7'/4'/o Series due August 1, 2002...

125>000 15,000 25,000 40,000 25,000 47,000 30,000 50,000 50,000 50,000 40,000 40,000 45,000 40,000 60,000 75,000 66,350 65,000 80,000 80,000 40,000 40,000

.1 25,000 15,000 25,000 40,000 25,000 47,000 30,000 50,000 50,000 50,000 40,000 40,000 45,000 40,000 60,000 75,000 65,000 80,000 80,000 8>/4'/o Series due December 1, 2003 9>/z'/o Series due December 1, 2003 9.95'/o Series due September 1, 2004 10.2'/o Series due March 1, 2005.....

8.35'/o Series due August 1, 2007....

Ss/s'/o Series due December 1, 2007 Paul Smith's Electric Light &Power &

Railroad Company First Mortgage Bonds:

5'/2 /o Series due May 1, 1985.......

Promissory Note, 8 lo Series Adue June 1, 2004 Revolving Credit and Term Loan Agreements ( Note 14)

Notes payable:

7s/4'/o due November 1, 1980......

Prime rate plus >/2'/o (not to exceed 7>/2'/o) due in equal quarterly install-ments through April 1, 1984.......

Unamortized premium.............

80>000 50,000 100,000 41,113 75,000 50,000 450 46,600 80,000 8,750 5,844 80,000 50,000 100,000 44,000 75,000 50,000 450 46,600 6,000 11,250 6,256 Total long-term debt...............

1,586,107 1,531,556 Less long-term debt due within one year 142,500 88,500

$1,443,607

$1,443,056 Preferred stock Cumulative preferred stock, authorized 3,400,000 shares, $ 100 par value and 9,600,000 shares, $25 par value Cumulative preference stock, authorized 4,000,000 shares, $25 par value Redemption price per share (Before adding accumulated dividends)

In thousands of dollars Eventual At December 31 ~

1980 1979 December 31, 1980 minimum Non-redeemable (optionally redeemable)

Preferred $100 par value 3.40'/o Series; 200,000 shares...........

3.60'/o Series; 350,000 shares...........

3.90'/o Series; 240,000 shares...........

4.10'/o Series; 210,000 shares...........

4.85'/o Series; 250,000 shares...........

5.25/o Series; 200,000 shares...........

6.10'/o Series; 250,000 shares...........

7.72'/o Series; 400,000 shares...........

$ 20>000 35,000 24,000 21,000 25,000 20,000 25,000 40,000

$ 20,000 35,000 24,000 21,000 25,000 20,000 25,000 40,000

$103.50 104.85 106.00 102.00 102.00 102.00 103.00 107.37

$103.50 104.85 106.00 102.00 102.00 102.00 101.00 102.36

$210,000

$210,000 Redeemable (mandatorily redeemable Note 7)

Preferred $100 par value 7.45'/o Series; 528,000 and 546,000 shares....

10.60'/o Series; 357,240 and 380,000 shares....

Preferred $25 par value 8.375% Series; 1,600,000 shares.............

9.75'/o Series; 1,134,000 and 1,200,000 shares 9.75'/o Series(Second);

1,020,000 shares.....

Preference $25 par value 7.75'/o Series; 1,220,000 and 1,360,000 shares

$ 52,800 35,724 40,000 28,350 25,500 30,500

$ 54,600 38,000 40,000 30,000 34,000 105.77 110.60 100.00 102.65 25.00 26.87 25.00 26.9275'5.00 25.00 30 212,874 196,600 Less sinking fund requirements........ ~....

~

6,950 6,950

$205,924

$189,650

'Not redeemable until April 1 ~ 1983,

• • Notredeemable until October 1 ~ 1981.

Summary of utilityplant At December 31, In thousands ofdollars 1980 1979 Utilityplant:

Electric plant................

Nuclear tuel (Note 3)..........

Gas plant Common plant...............

Construction work in progress

$3,223,017 230,780 390,237 67,474 651,801 5

9 1

14 206,206 367,652 63,920 721,217 71

$2,859,533 Total utilityplant.............

$4,563,309 100

$4,218,528 Selected financial data Operations: (000's)

Operating revenues Income from continuing operations 1980

$1,777,115 162,639 1979

$1,516,503 156,030 1978

$1,280,248 141,162 1977

$1,225,832 123,832 1976

$1,077,230 108,449 Common stock data:

Book value per share at year-end Earnings per average common share from continuing operations Dividends paid per common share

$17.25 1.87 1.50

$17.33 2.00 1.44

$17.14 1.89 1.36'/s

$16.95

$16.55 1.74 1.61 1.31'/2 1.24 Capitalization: (000's)

Common equity Non-redeemable preferred stock Redeemable preterred stock Long-term debt

$1,298,001 210,000 205,924 1)443) 607

$1,177,725 210,000 189,650 1,443,056

$1,065,976 968,236 922,735 210,000 240,000 240,000 198,600 126,400 128,200 1,414,997 1,394,387 1,268,269 Total First mortgage bonds maturing within one year Total 3,157,532 3,020,431 140,000 80,000 3,297,532 3,100,431 2,889,573 2,729,023 2,559,204 2,889,573 2,729,023 2,559,204 Capitalization ratios: (including firstmortgage bonds maturing within oneyear):

Common stock equity Preterred stock Long-term debt Financial ratios:

Ratio of earnings to fixed charges Ratio ot earnings to fixed charges and preterred stock dividends Other ratios-% of operating revenues:

Fuel and purchased power Purchased gas Maintenance and depreciation Taxes Operating income Balance available for common stock...........

Ratio of depreciation reserve to gross utilityplant Ratio of mortgage bonds to net utilityplant.......

39 4%

12.6 48.0 2.43 1.93 36.2 15.6 10.8 13.0 11.9 7.5 27.0 43.4 38.0%

12.9 49.1 2.61 2.03 35.6 13.0 12.1 13.3 12.8 8.5 26.3 47.0 36.9%

14.1 49.0 2.58 1.95 32.1 12.4 12.6 14.3 14.4 8.8 26.2 46.7 35 5%

13.4 51.1 2.49 1.90 33.0 11.6 13.2 14.0 14.7 8.0 25.6 48.6 36.0%

14.4 49.6 2.35 1.82 31.6 11.6 13.3 13.9 15.4 7.9 25.3 47.4 Miscellaneous: (000's)

Gross additions to utilityplant Total utilityplant Accumulated depreciation and amortization..

Total assets 378,503 4,563,309 1,232,675 3,808,819 374,530 4,218,528 1,110,563 3,528,937 316,280 3,905,374 1,021,417 3,189,112 289,931 3,647,274 935,212 3,019,054 282,702 3,377,306 854,033 2,816,300 31

Electric and gas statistics Electric capabillty Thermal Coal fuel Huntley, Niagara River..

Dunkirk, Lake Erie.....

785 10 600 8

785 785 585 585 Total coal fuel Residual oilfuel Albany, Hudson River....

Oswego, Lake Ontario...

Roseton, Hudson River..

Middle distillate oilfuel 20 Combustion turbine and diesel units.........

Total oilfuel 1,385 18 1,370 1,370 400 5

400 400 1,821 24 1,200 1

~190 357 5

360 360 310 4

354 354 2,888 38 2,314 2,304 Nuclear fuel Nine MilePoint, Lake Ontario....

Purchased firm contract Power Authority FitzPatrick, Lake Ontario......

610 8

141 2

610 610 154 176 Total nuclear fuel Total thermal sources..

Hydro Owned and leased hydro stations (81).

Purchased firm contracts Power AuthorityNiagara River....

Power Authority-St. Lawrence River..............

Power Authority Blenheim-Gilboa Pumped Storage Plant..........

Other 751 10 764 786 5,024 66 4,448 4,460 733 10 733 733 1,122 15 1,122 1,122 115 1

115 115 550 7

75 1

550 550 76 76 Thousands ofkilowatts AtJanuary I, 1981 o/o 1980 1979 1980 Electric sales(Miflionsofkw hrs)

Residential........

8,330 Commercial.......

9,361 Industrial.........

11,703 Municipal service..

273 Other electric systems.........

2,921 1979 8,269 9,279 12,471 274 3,022 1978 8,127 9,117 12,187 276 2,675 32,382 319,667 333,862 258,649 21,515 59,445 27,175

$1,393,467

$1,211,068

$1,020,313 Electric customers (Average)

Residential........

1,217,214 Commercial.......

131,210 Industrial.........

2,896 Other.............

3,222 1,206,469 130,119 2,906 3,189 1,354,542 1,342,683 1,197,060 128,481 2,873 2,257 1,330,671 Residential (Average)

Annual kw-hr.use-per customer......

Cost to customer per kw-hr..........

Annual revenue per customer......

6,843 6,854 4.86/

4.33tt

$332.64

$296.58 6,790 3.93lt

$267.04 32,588 33,315 Electric revenues (Thousands ofdoifars)

Residential........ $

404,899 357,818 Commercial.......

463,315 393,173 Industrial.........

344,063 312,833 Municipal service..

27,147 23,832 Other electric systems.........

106,429 83,188 Miscellaneous.....

47,614 40,224 Total hydro sources 2,595 34 2,596 2,596 1980 1979 1978 Total capability'.

7,619 100 7,044 7,056 Electric peak load during year..

1980 5,403 1979 1978 5,641 5,485 Electricity generated and purchased (Millionsofkw-hrs.)

1980

/o I979

/o 1978

'/o Thermal Generated Coal............

Oil..............

Nuclear.........

Purchased Nuclear from Power Authority Total thermal 7,213 20 7,275 20 7,016 20 71392 21 8,534 24 8,691 25 4I538 13 3,005 8

4,467 13 934 2

722 2

886 2

20,077 56 19,536 54 21,060 60

'Available capability can be increased during heavy load periods by purchases from neighboring interconnected systems.

Hydro station capability is based on average December stream-flow conditions.

51,895 23,415 17,109 4,199 96,618

$176,567 71,139 46,260 10,014 1,455

$383,648

$305,435 Gas customers (Average)

Residential........

388,720 Commercial.......

29,682 Industrial.........

530 Other.............

2 383,617 29,009 525 2

418,934 413,153 Gas sales (Thousands ofdekatherms)

Residential........

51,121 Commercial.......

23,833 Industrial.........

21,647 Other gas systems 4,720 101,321 Gas revenues(Thousandsofdoffars)

Residential........

$209,416 Commercial.......

89,088 Industrial.........

69,506 Other gas systems 13,455 Miscellaneous.....

2,183 54,793 23,734 15,630 3,845 98,002

$158,599 60,794 32,422 6,858 1,262

$259,935 382,691 28,451 522 2

411,666 Hydro Generated.........

Purchased from Power Authority Total hydro...

Other purchased power various sources.......

Total generated and purchased 3,175 9

3,641 10 3,472 10 8,925 25 8,263 23 8,563 24 12,100 34 11,904 33 12,035 34 3,616 10 4,621 13 2,118 6

35,793 100 36,061 100 35,213 100 Residential (Average)

Annual use per customer (dekathefms).............

131.5 135.3 Cost to customer (per dekathorm)...........

$4.10

$3.40 Annual revenue per customer...........

$538.73

$460.27 Maximum day gas send out (dekatherms).....

740,594 750,666 143.2

$2.89

$414.43 655,408 32

Officers Directors BOARD COMMITTEES Executive Committee John G. Haehl, Jr. ~ Chairman Edmund M. Davis Edwin F. Jaeckle Frank P. Piskor Baldwin Maull John H. Terry, Secretary Compensation Committee Baldwin Maull~ Chairman Edwin F. Jaeckle Edmund M. Davis Audit Committee Edward W. Duffy,Chairman Lewis A. Swyer Frank P. Pjskor Committee on Corporate Public Policy Frank P. Piskor, Chairman Martha H. Northrup Lewis A. Swyer Finance Committee Donald B. Riefler, Chairman John G. Wick Edmund M. Davis James Bartlett Executive Vice President, Syracuse Thomas J. Brosnan Consultant (formerly Vice President Research and Development, Environmental Matters), Syracuse Edmund M. Davis Partner, Hiscock, Lee, Rogers, Henley & Barclay, attorneys-at-law, Syracuse WilliamJ. Donlon President, Syracuse Edward W. Duffy Chairman of the Board and Chief Executive Officer, Marine Midland Banks, lnc., a bank holding company, Buffalo John G. Haehl, Jr.

Chairman of the Board and Chief Executive Officer, Syracuse Edwin F. Jaeckle Senior Partner, Jaeckle, Fleischmann &Mugel, attorneys-at-law, Buffalo Lauman MartIn Consultant (formerly Senior Vice President and General Counsel),

Syracuse Baldwin Maull Director of various corporations, New York Martha Hancock Northrup Housewife, former President, Grouse-Irving Memorial Hospital Board, Syracuse Frank P. Plskor President, St. Lawrence University, Canton Donald B. Riefler Chairman, Sources and Uses of Funds Committee, Morgan Guaranty Trust Company of New York, commercial bank, New York Lewis A. Swyer President, L.A.Swyer Company, Inc., builders and construction managers, Albany John G. Wick President and Chief Executive Officer, Merchants Insurance Group, Buffalo John G. Haehl, Jr.

Chairman of the Board and Chief Executive Officer WilliamJ. Donion President, James Bartlett Executive Vice President Richard C. Clancy Senior Vice President John M. Endrles Senior Vice President John M. Haynes Senior Vice President James J. Miller Senior Vice President John H. Terry Senior Vice President, General Counsel and Secretary Richard F. Torrey Senior Vice President Donald P. Disc Vice President-Engineering John J. Ehllnger Vice President Employee Relations William C. Franklin Vice President Purchasing John P. Hennessey Vice President Management Systems and Services Thomas E. Lempges Vice President Nuclear Generation Donald L. MacVittle Vice President Fossil Generation Eugene J. Morel Vice President-Administrative Services and Risk Management James F. Morrell Vice President-Corporate Planning Gerald K. Rhode Vice President System Project Management Kenneth A.Tramutoia Vice President Rates Robert M. Cleary, Jr.

Vice President and General ManagerWestern Division Raymond Kolarz Vice President and General ManagerCentral Division Richard H. Kukuk Vice President and General ManagerEastern Division Anthony J. Baratta, Jr.

Controller John W. Powers Treasurer Edward P. Gueth, Jr.

Assistant General Counsel Herman B. Noll Assistant General Counsel Nicholas L. Priolettl, Jr.

Assistant Controller Adam F. Shaffer Assistant Controller Henry B. Wightman, Jr.

Assistant Controller Harold J. Bogan Assistant Secretary Joseph F. Cleary Assistant Secretary Frederick C. McCall, Jr.

Assistant Secretary Richard N. Wescott Assistant Treasurer

T NIAGARA U MOHAWK 300 ERIE BOULEVARD WEST SYRACUSE, NEW YORK 13202

~W MW(

1''K I

1 4

1 j

I With downtown Syracuse in foreground and central New York hillcountry as distant backdrop, new Carrier Dome appears in pale glow as evening arrives in city. Multipurpose Syracuse University sports arena has air-supported roof. Dome's electric needs are met by two Niagara Mohawk 13,200-volt feeders.