ML18038A247

Niagara Mohawk Power Corp,1986 Annual Rept

ML18038A247
Person / Time
Site:	Nine Mile Point
Issue date:	12/31/1986
From:	Donlon W, Haehl J, Mangan C NIAGARA MOHAWK POWER CORP.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
(NMP2L-1013), NUDOCS 8704030486
Download: ML18038A247 (43)

Text

ACCESSION NBR-FAC IL':50-410 AUTH. NANE HAEHL>J. Q DONLON> M. J.

RECIP. MANE REQUL INFORMATION DISTRIBUT STEN (R IDS) 8704030486 DOC. DATE: 86/12/31 NOTARIZED:

NO Nine Nile Point Nucleav Stationi Unit 2i Niagara aloha AUTHOR AFFILIATION Niagara Nohatok Power Corp.

Niagav'a Mohawk PoMer Cov p.

RECIPIENT AFFILIATION DOCKET 05000410

SUBJECT:

"Niagav a Nohaek Power Corp'986 Annual Rept. "

DISTR IBUTION CODE:

N004D COPIES RECEIVED: LTR ENCL SI ZE:

TITLE: 50. 71(b ) Annual Financial Report NOTES:

RECIPIENT ID CODE/NAf'1E B4lR PD3 LA HAUQHEYiN COP IES LTTR ENCL 0

RECIPIENT ID CODE/MANE BMR PD3 PD COP IES LTTR MCL 1

0 INTERNAL AEOD/PTB SP EXTERNAL: LPDR EG FILE NRC PDR 01 1

1 TOTAL NUl]BER OF COPIES REQUIRED:

LTTR 8

ENCL 6

<":~LE)

)3 ll'""

",.~ci,"p

"."-'l< "(G~ ~:

"'~ )3:le.

'j'.Il)~F3 T3

" < " 0"(lc: 0 i')"i;."f;.'Xfflh'>"Gi>

nN

'z;,

", "i '.9(

~,.",>i ~ ~B:~

. "(..-~QO

,<0 l ~~+i:c" ~

J, ""fN

".f <7J' "I

~

. "'i

.")t"f 'I L">> '

Y

< t -1".h RGH

> t J;~

.g I'03

<~-VO k 'rilil:illO(l b~C >'l>>~

g'T~ ~'~'~:i'O'3; ~!"~ff~~i'~

i 'c'..!>~ "i t'-"C"E>Ai ll c >h M-l,'~ 'l.'""-lH

.,'iP hG;..a..3".

9"'". <."~[L."'~

'~',,v,.)-p l >Q

.'3.(, cJH.PA"I

~..~ <,~AQJt,d<",

.8'iÃii.9 I ')'3A

> qeR

<< l<n~

.<<" -l: r

< )

v><>>r>'i

><-'p~x>> '

r">3(

>a(JP.

I'>83 lilJ.~'..'~i3;)3H 3..~>.'138 0~'v()[o

. l(t~3D 801

"<tp~l.AYP.'"'2

~. VOQBR i<~i 1Acssfl'5 L(iVIIf~~

~

P>>

4i~

.3 l t i s l'(~i3. ""'i ~ ~)"

"HVARi'3'3'3 '<"'I

~ F,'t~'.;=..",H

~wf~j,~"<~ 3{lil33 <JX l4

~37)

>'t l""i,(93 =! <q BQ""

g(i': f t I

"~ '~J

<~'~":LIPID)RR RJ 'i1"l '>tl 8 iffy'~i<pl'<

J

> )(f I"

Lm V NIAfah A U MOHAWK NIAGARAMOHAWKPOWER CORPORATION/301 PLAINFIELDROAD, SYRACUSE, N.Y. 13212/TELEPHONE (315) 474-1511 March 31, 1987 (NMP2L 1013)

U.S.

Nuclear Regulatory Commission Attn:

Document Control Desk Washington, D.C.

20555 Re:

Nine Mile Point Unit 2 Docket No. 50-410 NPF-54 Gentlemen:

In accordance with Section 50.71(b) of the Commission's Regulations, enclosed are ten (10) copies of Niagara Mohawk Power Corporation's 1986 Annual Report.

Very truly yours, NIAGARA MOHAWK POWER CORPORATION C. V. Mangan Senior Vice President PEF/pns 2920G Enclosures'c:

Regional Administrator, Region I Mr.

W. A. Cook, Resident Inspector Ms.

E.

G. Adensam, Project Director 0~<

QIAGARAMOHAWKPOWER CORPORATION ANNUALREPORT 1986

'"The Mime MxlleTwo coxxstxxxctxoxx esca ls xxemtly behhxdk us. We xxom face t}xe fxxtUwevAtha fxxxxxxesojlve, dledlxcatedl to pvotecthxg axxdl zehxfoxchxg the fxxljlfxxxaxxcxajl stvexxgt1h ofouz coxxxpaxxy... "

8704030486 Sb1231 PDR ADOCK 05000410 I

PDR

eg Serving upstate New York Qur Corporate Mission

~ ELECTRIC

~ SERVICEAREA je Mees

~ ee e\\/Y O

sexes e

'Neee<~ee Yes'EW YORK STREE eeesssee Stowe late e eesesee FWe Seeses Eeseee ele Ranked as one the most prominent investor-owned utilities in the United States, Niagara Mohawk Power Corp. serves an area encompassing more than halfthe land mass ofNew York State. Our electric system extends from Lake Erie to New England's borders, from Canada to Pennsylvania, and meets the diversified needs ofmore than 1.4 millioncustomers. Our natural gas system serves 445,000 customers in central, east-ern and northern New York, nearly all withinour electric territory. Two Canadian companies, St. Lawrence Power Co.

and Canadian Niagara Power Company, Ltd., owned by our subsidiary, Opinac Investments, Ltd., provide energy to portions ofOntario. Other subsidiaries are Hydra-Co Enter-prises, Inc., N M Uranium, Inc., Niagara Mohawk Finance, N.V. and Opinac Energy, Ltd. Our corporate headquarters are at 300 Erie Boulevard West, Syracuse, N.Y. 13202.

Niagara Mohawk is an energy company with diversified interests and resources committed to meeting customers'eeds through econom-ical products and services ofsuperior quality.

We are dedicated to providing a fairand equitable return to shareholders. In this period ofincreasing competition and chang-ing regulation, we willstrive to be the low-cost supplier ofreliable energy while develop-ing and marketing new products.

The dedicated, well-trained men and women ofNiagara Mohawk are the company's most valuable resource. The company's suc-cess is directly dependent on their efforts.

Management remains committed to retaining and motivating this talented, productive, ef-fective work force by providing reasonable compensation, incentives and a good working environment.

Niagara Mohawk seeks ways to improve the economic climate and well-being ofcitizens, industry and business within the com-munities itserves, and advocates regulatory and legislative changes that best serve the interests ofcustomers, employees and owners.

The company maintains high ethical stan-dards and strives foropen communications withall its constituencies.

Niagara Mohawk is dedicated to maintain-ing and further developing dependable energy resources and delivery systems that are safe, environmentally sound and technologically advanced.

Management willactively pursue strategies in support ofobjectives to accomplish this mission.

NATURALGAS U SERVICE AREA NEW YORK EEAEE

tNIAGIARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Highlights of 1986 Total operating revenues Income available forcommon stockholders Earnings per common share Dividends per common share Common shares outstanding (average)

Utilityplant (gross)..

1966 1985 Change

$ 2,660,319;000

$ 2,694,940,000 (1.3) 344,048,000 351,871,000 (2.2)

$2.71

$2.88 (5.9)

$2.08

$2.06 1.0 12?,076,000 122,215,000 4.0

$ 8,445,993,000

$ 7,640,905,000 10.5 Construction work in progress...

$ 2,820,044,000

$ 2,336,188,000 20.7 Gross additions to utilityplant..

774,062,000 771,120,000 0.4 Kilowatt-hour sales 34,347,000,000 35,296,000,000 (2.7)

Electric customers at end ofyear.

1,443,000 1,424,000 1.3 Electric peak load (kilowatts) 5,724,000 5,862,000 (2.4)

Natural gas transported (dekatherms)

Gas customers at end ofyear 4,868,000 445,000 440,000 1.1 Natural gas sales (dekatherms)...

95,947,000 108,420,000 (11.5)

Contents 2 To our stockholders 4 The year in review 11 Market price ofcommon stock and related stockholder matters 12 Management's discussion and analysis of financial condition 17 Consolidated financial statements 21 Notes to consolidated financial statements 33 Report ofindependent accountants 33 Report ofmanagement 34 Statistics 36 Directors, officers, corporate information Maximum day gas sendout (dekatherms) 786,165 774,033 1.6 EARNINGS ANDDIVIDENDS PAID PER COMMON SHARE RANGE ANDYEAR END MARKET PRICE OF COMMON STOCK

$ 1.76

$2.64

$2.77

$ 1.98

$2.84

$2.06

$2.88

$2.08 OMDENDS

$2.71 EARNINGS

$ 1 BS

$ 15yi

$15yi

$ 1749

$ 17%

St SVi

$25yi y

$16%

$ 1515 AT YEAR END RANGE 1982 1983 1984 1985 1986 1982 1983 1984 1985 1986 1986 REVENUE DOLLAR Residential customers 38II Commercial customers 34II Industrial customers 19II Allothers 9II ANDWHERE ITWENT Fuel fortho production of electricity 25II and electricity purchased Income and other taxes ISII Gas purchased 13'ages, salaries,employee benefits 12'ividends to stockholders

12II, Interest and othercosts-not 1 ttt Depreciation SII Retained In business

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES>

To our stockholders:

Earnings were $2.71 per share ofcommon stock in 1986, compared with $2.88 per share in 1985. This decrease resulted primarily from a reduction early in 1986 in earnings return on common equity allowed by the N.Y. State Public Service Commission from the 15.5 percent previously authorized to 13.5 percent.

We are especially concerned about this continued lowering ofauthorized return and early in 1987, as ongoing rate-case proceedings neared completion, we reinforced our petitions to the commission to grant us a fairreturn on equity. Recommendations by other parties in the rate case thus far have been signifi-cantly below the average return granted to utilities in other states leaving you, our shareholders, at a severe disadvantage.

Maintaining the dividend Atthe year end, we were pleased to pay our 148th consecutive dividend on our common stock since Niagara Mohawk's consolidation in 1950. Every effort is being made to maintain the current stock dividend level, despite pending regulatory uncertainties and the many challenges we face in bringing Nine Mile Point Nuclear UnitTwo to operational readiness.

Our determination to achieve authorized earnings levels is evidenced by an extensive austerity program, initiated in 1986 with additional measures likelyto followthis year. A freeze on management salaries and the size ofthe workforce, abolition ofvacant positions, reduced overtime, redemption ofhigh-cost debt and other securities, and tightening ofexisting cost constraints these and other restrictions prevail throughout our business.

Nine MileTwo operation delayed by faulty valves We were disappointed in February when difficulties encountered with main steam-isolation valves com-pelled us to postpone the commercial operation date ofthe Nine MileTwo project. At this writing,every avenue is being pursued to rectify these problems, enabling us to expeditiously proceed toward produc-tion offirst power forour customers. Atpress time, the effect ofthe situation on the project schedule re-mains under continuing assessment.

Stockholders willbe kept advised ofdevelopments.

We have every confidence that Nine MileTwo, once in service, willearn recognition as a quality addition to New York State's energy picture. With the unit on line and in rates, Niagara Mohawk's residential elec-tric rates willcontinue to be the lowest among the state's major utilities, a fact in which we can take justifiable pride. As you know, Niagara Mohawk's share in the project is 41 percent.

Asettlement agreement forNine MileTwo, pro-posed jointlyby Niagara Mohawk and the unit's co-tenants, was approved in early October by the Public Service Commission. The agreement "caps" costs re-

i NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES coverable through customer rates at $4.16 billion.

Niagara Mohawk's share ofcosts disallowed would amount to approximately $ 1 billion,before reduction forfederal income tax benefits. Both the timing and the amount ofloss to be written offby the company are contingent upon pending regulatory decisions, loan covenants and final completion cost.

Rate recognition ofthe Nine MileTwo project and implementation ofthe cost settlement have been in-tegral parts ofour pending electric rate case, before the PSC since April 1986. We do not expect a final decision from the PSC on the rate case until March 1987, but we shall continue to keep stockholders in-formed through periodic reports. (More detailed dis-cussions ofNine MileTwo and related financial and regulatory affairs are presented on pages 4, 13, 29.)

Leading the way withinnovation Our financing activities in 1986 were highlighted by innovation, with impressive results. A"reverse dutch auction" tender offer(first-ever by a utility)resulted in the cost-effective retirement of$ 153 millionof high-coupon bonds (some as high as 15~/4 percent).

Cash proceeds from the sale/leaseback ofa newly con-structed high-voltage transmission facilitywere also used to retire high-cost long-term debt by another

$ 114 million,while a $6-millionreduction was achieved in preferred stock dividends through calls and refundings during the year.

Creative innovations our patented Power Donut' system and our PCB-removal process, forinstance, discussed on page 6 are generating practical bene-fits forboth the company and others in the energy industry. In all planning, we are intent on seeking new and better concepts, sometimes venturing to new frontiers oftechnology. The tangible results and pros-pects are discussed in the followingpages achievements which have earned Niagara Mohawk national recognition as a company ofinnovators. In the same bold spirit, we have embarked upon new marketing, diversification and competitive ventures to position ourselves for tomorrow's opportunities.

Confidence in our future Our confidence in charting a steady course through these often frustrating but ever-challenging times is rooted in the proven resourcefulness and resilience of the men and women ofNiagara Mohawk. The Nine MileTwo construction era is nearly behind us. We now face the future with a firmresolve, dedicated to protecting and reinforcing the fullfinancial strength ofour company and providing our customers the quality energy service they expect, at the lowest pos-sible price.

Our heartfelt thanks are extended to our stockhold-ers fortheir support, and to our fellowemployees for their sacrifices, hard work and continuing loyalty.

Joltn G. Haehl, Jr.

Chairman ofthe Board and ChiefExecutive Of/icer 1VilliantJ. Donlon President February 27, 1987 John G. Haehl, Jr.

WilliamJ. Donlon

4 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPAcAIESy The year in review Nine MileTwoapproaching its time A long-awaited milestone took place in October 1986 at the Nine MilePoint Nuclear UnitTwo project when the U.S. Nuclear Regulatory Commission issued a low-power license and loading ofthe plant's uranium fuel was completed in 14 days-one week ahead of schedule.

However, recurring problems with the unit's eight main steam-isolation valves subsequently required delaying initialstartup operations and, in late Feb-ruary, extensive tests ofthe valves were stillin prog-ress. The tests willhelp determine whether to modify the valves or replace them altogether, and until this situation is resolved the date ofthe plant's commer-cial service remains pending.

Once this condition is corrected, the unit is scheduled to "go critical"with initialnuclear fission achieved. Five weeks oftesting at low power willthen followand, after issuance ofa full-power license by the NRC, its output willbe brought up to 150,000 kilowatts. This willgradually be stepped-up to full power capacity during a series ofpower ascension tests and inspections.

With Nine MileTwo an operating nuclear station (the 104th to be licensed in the United States), this 1.08-million kilowatt addition to our power system and the New York Power Pool willmark the culmina-tion ofa long and arduous course. The project will serve nearly four millioncustomers ofits five par-ticipating utilitesthis decade and next, and well into the next century ahead. Nine MileTwo repre-sents modern nuclear technology, epitomizing the state of the art.

In October, 1986, an emergency exercise, involving New York State and Oswego County representatives and observed by the Nuclear Regulatory Commission, was conducted at Nine MileTwo. The realistic day-long drill,in which a radiological accident at the plant was simulated, was a requirement for licensing and received approval from the NRC.

Operation ofthe new plant willbe the responsibil-ityofa staff ofmore than 200 highly trained specialists, including 36 who hold senior reactor operator licenses and 24 with reactor licenses. Most of these professionals have extensive backgrounds in the U.S. nuclear industry.

Looking ahead, the station is scheduled for a 10-week shutdown for maintenance and NRC inspections in late 1988. Itwillthen be brought back on line until its firstscheduled outage for refueling in 1989.

During its lifetime, Nine MileTwo is expected to generate electricity equivalent to more than 400 mil-lion barrels ofimported oil,withbillionsofdollars in fuel savings.

Niagara Mohawk is principal partner and manag-ing agent ofthe project, owning 41% ofNine Mile Two. Long Island Lighting Co. and New YorkState Electric and Gas Corp. hold 18% each; Rochester Gas and Electric Corp. 14% and Central Hudson Gas and Electric Corp. 9%.

Further information in more detail on Nine Mile Two's costs, financing and regulatory developments are presented in the Management Discussion and Analysis on page 13 and in Note 10 to financial state-ments on page 29.

Nine MileOne continuing nuclear leadership Our Nine MilePoint Unit One was cited by the Utility Data Institute in 1986 as the third lowest-cost nuclear power producer and fourth lowest-cost steam-electric plant in the nation.

During the year, this pioneering nuclear develop-ment, designed and engineered in-house by Niagara Mohawk, and in service since 1969, produced 3.1 bil-lion kilowatt-hours ofelectricity, representing a sav-ings of $72 millionand $37 millionrespectively, com-pared withoil and coal-fired power generation.

Early in the year, Unit One "coasted down" to 70 percent ofits rated power before shutdown and the start ofits scheduled biennial refueling and mainte-nance. While 200 ofits 532 uranium fuel bundles were replaced with fresh inserts, the most significant facet ofthe shutdown was replacement ofmore than 246 miles oftubing used to condense steam from the unit's turbine. Some 13,000 ofthese 100-foot long, 1 i/4-inch tubes were part ofUnit One's original equipment in use since 1969. The15-week outage also enabled the plant staff to complete many other routine replacements and additions.

Nine MileOne lived up to its reputation as a de-pendable power performer by remaining available for generation 90 percent ofthe time since its return to service after the refueling outage. The next such out-age is not scheduled until spring 1988.

Also during 1986, our Nuclear Division moved from our corporate headquarters in downtown Syracuse to new leased offices in the suburban Town ofSalina, just north ofSyracuse, due to a need foradditional office space.

Cost-containment campaign started In autumn, the company announced its most sweep-ing cost-containment program in more than a decade, the result ofserious financial problems imposed upon

( NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Niagara Mohawk by recent inadequate rate-case awards and the settlement ofthe Nine MilePoint Nuclear UnitTwo prudency case.

The austerity campaign thus far includes a freeze on management salaries and an ongoing review in all departments to consolidate and reduce the size ofthe workforce. Operation review teams also were formed to identify additional areas ofpotential improve-ments in costs and revenues. In addition, a plan for unpaid personal leaves, part-time work arrange-ments, reduction ofnon-emergency overtime work and other belt-tightening measures were undertaken.

The program emphasizes that every effort possible must be made so that the company can continue to provide quality service to customers at the lowest possible cost and to protect the interests ofNiagara Mohawk stockholders.

Life-extension forfossil-fueled stations Throughout the year, the Fossil Generation Depart-ment continued a life-extension program at our coal and oil-firedgenerating plants. The long-term objec-tive is to lengthen the useful lifeofexisting generating

'nits to defer the need for new generation capacity.

Studies by Niagara Mohawk's Research and De-velopment Department, the Empire State Electric Research Corp. and Electric Power Research Institute have determined that itcan be far more cost-effective to refurbish and modernize existing plants than to install new units.

The life-extension entails performing detailed in-spections ofcritical components ofeach unit. Their remaining years are assessed, and a dollar/time schedule is formulated to implement the improve-ments and repairs needed to lengthen their operation.

Late in 1986, special computer software went into service to help fossil station operators upgrade the on-line efficiency ofeach generating unit at coal, oilor gas-fired power stations. Specific data (temperatures, ELECTRICITYGENERATED ANDPURCHASED BYTYPE OF FUEL,1966 Hydro 31%

Various sources 25%

Coal 16'/o Oil 16/o Nuclear 11%

Natural gas 1%

pressures, fuel-consumption rates, etc.) are automati-cally collected from each unit and continuously transmitted to Energy Management System compu-ters in Syracuse. This data is processed and guidance information instantly transmitted and displayed in the control room to help make proper adjustments and "fine-tuning" refinements on the units while they continue to operate.

Ahigh-water hydro year Abnormally high rainfall enabled our hydroelectric stations to generate 4.1 billionkilowatt-hours in 1986, the highest in 10 years and a welcome development forconsumers. The abundant waterpower generation helped hold other electric power-production costs down, thus reducing fuel-adjustment charges on cus-tomers'ills.

Niagara Mohawk operates 77 hydro stations on up-state New Yorkwaterways, more than any other util-ity in the free world. During the year, we continued to pursue plans to renovate or develop various hydro installations for a total of 150,000 kilowatts by the late 1990s. By 1995 we must relicense 11 hydro facilities encompassing 35 individual power plants.

One application seeks to re-develop five separate power installations on the Oswego River alone.

Atyear end, a new 32,000-kilowatt hydro facility was completed and brought on line at Glen Park on the Black River. Itwas the first project where Niagara Mohawk sought "outside" proposals from private concerns for the independent construction and long-term operation ofa power facility,an arrangement that offers the company avoided costs and eliminates development costs. Energy produced at Glen Park is sold exclusively by a private developer under contract to Niagara Mohawk. Asimilar agreement with a sec-ond private developer, Synergics, Inc. ofMaryland, was reached in 1986, involvingconstruction and op-eration ofa 2,600-kilowatt plant slated for 1987 startup at Union Falls on the Saranac River.

A fisheries-keyed research venture, being watched nationwide, was initiated on the Salmon River in Oswego County in 1986 by Niagara Mohawk with the U.S. Fish and WildlifeService, N.Y. State Department ofEnvironmental Conservation and Empire State Electric Research Corp. The program focuses upon salmon and trout habitat, while examining stream-flowhydraulics, temperatures and other river charac-teristics with the objectives ofmore efficient and cost-effective methods offisheries management on hydro waterways. Acomputer model is a part ofthis effort, in which a number ofother U.S. utilities in-

6 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPA<NIESi volved in the licensing and operation ofhydro plants have expressed interest.

Energy research ventures Another year ofsolid research gains was again achieved by Niagara Mohawk in 1986. Working inde-pendently on "in-house" projects and jointlywith other energy interests, including the nationwide Elec-tric Power Research Institute and Gas Research Insti-tute, a number ofexploratory projects progressed to practical utilityapplications. At the same time, ac-tivities were broadened in various research areas.

One project demonstrating both environmental and economic promise was the successful development of a solution to the problem ofprocessing polychlori-nated biphenyls (PCBs). In a procedure patented by Niagara Mohawk in 1986, PCB-contaminated oil used in electrical transformers can now be recovered for re-use in "clean" forma welcome breakthrough in toxic waste technology.

This novel concept has been demonstrated and ap-proved for commercial use by both the U.S. Environ-mental Protection Agency and N.Y. State Department ofEnvironmental Conservation. Achemical process, the project involves a mobile treatment unit that can be transported from site-to-site to remove PCBs. Pres-ently, Niagara Mohawk is negotiating with several prominent hazardous-waste contracting firms to sell the rights ofthis new technology, making its benefits available to other utilities and industry.

Asimilar research venture was initiated in 1986 to remove toxic waste from soils. Withsupport from several industry groups, Niagara Mohawk is evaluat-ing a number ofinnovative techniques for the on-site remediation oftoxic waste. Initialwork in 1986 looked at one approach forbiological treatment. This process focuses on enhancing the natural biodegrada-tion by growing harmless organisms and injecting them into the soil to cause unwanted chemicals to decompose naturally, but at a highly accelerated rate.

Also during the year, an experimental "clean coal" power-plant research project planned jointlyby Niagara Mohawk with the N.Y. State Energy Re-search and Development Authorityand other energy innovators at the company's Dunkirk Steam Station was selected for funding support by the U.S. Depart-ment ofEnergy. Planned is a 5,000-kilowatt demon-stration unit at the western New Yorksite, among nine major concepts named by the department as the most promising choices to undergo large-scale test-ing. The new unit willtest a simplified gas-from-coal concept to generate power, using a steam-injected turbine. The most attractive feature is the project's ability to function economically and reliably withvir-tually no sulfur emissions from the plant's stack, a primary goal in efforts to reduce acid rain concerns.

The demonstration is also intended to reduce the number ofcomponents normally used to make such a concept workable. Construction ofthe unit willbegin in late 1987, withoperation scheduled for 1990 91.

New power control center in western New York Further evidence ofour dedication to meeting future energy needs economically and efficientlywas the ac-tivation in late December ofa new Regional Power Control Center in Buffalo, the latest addition to Niag-ara Mohawk's extensive Energy Management Sys-tems (EMS). The center is similar to our main Power Control Center in Syracuse but is responsible solely forhigh-voltage transmission and distribution facilities in western New York. The center is equipped with a 100-foot wide dynamic mapboard and the most modern electronics and computer facilities for anticipating and dispatching energy to nearly one-halfmillioncustomers in western New York. Asimi-lar control center is presently under construction in Watertown for the Northern Region and another is planned for the Capital Region in Albany. Their design and function willfollowthose ofthe western Power Control Center.

Significant power transmission projects during the year included completion ofa 345,000-volt transmis-sion line to carry power from the new Nine MilePoint Nuclear UnitTwo from our Volney station some 65 miles southeast to Marcy near Utica. This double cir-cuit links Nine MileTwo with Niagara Mohawk's cross-state energy system and the New Yorkpower grid. The sale and leaseback ofthe Volney-Marcy line to a private firmfor $ 128 millionwas consummated in November. Proceeds from this transaction were applied to reduce high-cost debt.

In conjunction with transmission technology and Niagara Mohawk's diversification efforts to broaden its earnings sources, the company formed a 50-50 jointventure corporation with Product Development Services, Inc. ofFairfield, Conn., to market a one-of-a-kind line-monitoring concept invented and patented through our research program. The new firm,NITECH, Inc. willsell, install and provide sup-port services forour Power Donut'system, a trademark used by Niagara Mohawk for this equip-ment. The Power Donut sensor-so named for its shape automatically measures vitalconditions af-fecting load-carrying capacity oftransmission lines,

s &DIAG'ARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES voltage, temperature, current and environmental conditions in which the lines function. Such data is relayed from the device to power control facilities, allowing dispatchers to more effectively utilize exist-ing transmission facilities and equipment. Three U.S.

utilities have installed these Power Donut systems and three others placed orders withNITECHby the year end.

An eventful and promising year fornatural gas Expansion ofthe Army's Fort Drum in northern New Yorklargest "stateside" militarybase-expansion here in the U.S. in more than 40 years-resulted in construction ofa major new linkin our natural gas system in 1986, Niagara Mohawk's largest gas project since the early 1960s.

The base is being enlarged to accommodate the re-located 10th Division (LightInfantry) with the popu-lation in and around Fort Drum expected to more than double to some 30,000 by 1990. To meet antici-pated gas demands, the company has installed more than 20 miles ofpipeline, in the area and further plans are under way to extend gas service to communities west and north ofthe nearby CityofWatertown.

Also in 1986, the company purchased approxi-mately 25 percent ofits gas supply in the "spot" mar-ket for the first time as the result offederal changes opening pipelines for transportation. These pur-chases, combined with declining rates, have lowered costs to our more than 445,000 gas customers. While "spot" purchases have been conducted on a tempo-rary basis, they likelywillbecome a permanent way ofacquiring a portion ofgas supplies forour custom-ers in the years ahead.

We are also progressing with plans for a new Gas Energy Management System employing the latest techniques and technologies forobtaining cost-effective gas supplies. Scheduled for implementation in 1988, the concept willinclude computerized flow modeling, remote-control ofselect gas facilities, monitoring and control ofpeak load periods, main-replacement priorities, computerized property rec-ords, records-information dispatch and other auto-mated functions. Serving as the hub forall these op-erations willbe a new Gas Energy Management Con-trol Center, similar to and located near our electric EMS Control Center in Syracuse. Targeted for opera-tion by the 1988 heating season, the center willover-see the 6,300 miles ofpipelines and all regulator sta-tions in the Niagara Mohawk gas system.

In 1986, Niagara Mohawk gas researchers devel-oped a unique "mechanical main tee." This plastic tee connector willbe used to attach plastic gas service laterals to gas mains and should reduce installation costs considerably. The patented device willbe intro-duced for nationwide distribution in May f987.

New oiland gas ventures in western Canada Our young Canadian subsidiary, Opinac Energy, Ltd.,

posted another impressive year after successfully drilling 17 new oilwells and 36 new natural gas wells in 1986. These and other drillingventures have been pursued jointlyby Opinac withother industry partners working in the western provinces.

Opinac produced more than $ 1 million(U.S.) of crude oil and natural gas during the year, with plans calling for an expenditure of $ 11 millionforcontinua-tion ofthis exploration and development program in the western Canada sedimentary basin in British Col-umbia, Alberta, Saskatchewan and Manitoba in 1987.

Since its formation in 1983, Opinac based in Cal-gary, Alberta has discovered and developed more than 50-billion cubic feet ofnatural gas and 1.2-millionbarrels ofproven crude-oil reserves with a combined value ofmore than $21 million.

As with all Niagara Mohawk subsidiaries, Opinac is fullyindependent and not subsidized in any way by the customers ofits parent corporation. This joint exploration company and three other Canadian firms are subsidiaries ofOpinac Investments, Ltd. of Toronto, itselfa whollyowned Niagara Mohawk sub-sidiary. The others are Canadian Niagara Power Company, Ltd., which generates and distributes power to a portion ofOntario's Niagara Peninsula; St. Lawrence Power Company, distributor ofelectric-ity to Cornwall, Ontario; and Opinac Holdings, Ltd.

Rewarding year for Hydra-Co A banner year with increasing national perspective was reported by our whollyowned Hydra-Co Enter-prises, Inc., an independent cogeneration subsidiary ofNiagara Mohawk. In 1986 alone, some 61,000 kilowatts ofhydroelectric production were brought on line in New York State and a 5,000-kilowatt gas-fired cogeneration plant was completed at LittleFalls by Hydra-Co withvarious energy partners. Other projects are planned across the nation.

A major project announced in 1986 by Hydra-Co under a joint agreement with th'e Babcock 8z Wilcox Company is the proposed rehabilitation ofthe former AlliedChemical Company's power-generating plant in Solvay, near Syracuse. When completed in 1988 the coal-fired facilitywillhave an 80,000-kilowatt capacity, its total cost estimated at $ 87 million.

8 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPAGNIES i In Maine, Hydra-Co is planning development of some 77,000-kilowatts in both hydro and wood-fueled cogeneration. Regulatory action is pending on Hydra-Co power projects to yield some 6,300 kilowatts in Vermont and New York State, while cogeneration agreements are being negotiated in New Jersey and Oklahoma. Other hydro plants are envisioned by the subsidiary in California, Oregon and New England.

Hydra-Co, based in Syracuse, was formed in 1981 to participate in the development, ownership and opera-tion ofcogeneration, alternate-energy and small power-production installations.

Vitalityin the economy Success with a special economic development rate (EDR) created especially forelectric industrial and commercial customers in 1985 led to the introduction ofa similar rate for gas customers in 1986.

Economic development rate incentives have been widely accepted by area industry and in several instances have been the key to encouraging firms to remain in our service area rather than moving elsewhere.

The electric EDR has already been utilized by 54 separate accounts with 49 companies in our 37-county service territory. This has produced a more-than 192.6-million kilowatt-hour increase in sales-or added revenues totaling nearly $ 12 millionyearly.

Also significant, along with this energy sales growth, is the resulting growth in employment, with some 3,100 new jobs resulting in upper New York State.

During the year, our Economic Development De-partment took part in a number ofpositive new inno-vations to retain businesses and attract new firms to upstate New York. Among these are an "incubator business" initiative to assist those getting offto a start; a computerized inventory ofavailable building sites and industrial parks; and a venture-capital "network" for matching skills and business prospects withentrepreneurial firms seeking prospects in the regions we serve.

Thinking customer Strong emphasis was maintained throughout the year on our "ThinkCustomer!" campaign aimed at helping the many persons and communities we serve. To this end, seven new consumer-oriented initiatives were under way or in finalplanning in 1986, as follows:

4 Consumer advocates in the Capital, Central and Frontier Regions willwork withcustomers having difficultypaying bills by counseling and referring them to available human-service agencies.

~ Senior ombudsman willdirectly assist elderly customers with their energy problems with the company.

4 Energy conservation programs fornon-profit agencies-will provide funds and staff support to community foundations to assist them in securing State Energy Office funds for energy conservation programs.

4 Senior I.D. program encourages customers 60 years and over to register with the company for special protection, relative to their energy needs.

4 Heat/Cold Stress Program-a locally focused pro-gram conducted jointlywithcoalitions ofagencies to disseminate health information on stress from summer and winter weather extremes.

Large-print billsforvisually impaired provides upon request, bills withabove-normal sized type for customers with visual problems.

4 Energy Savgo Abingo-like game withenergy-saving tips, created for widespread use by senior citizen groups and other organizations.

Assistance programs already available to customers increased in popularity during the year. Among these are our Community Conservation Grant, Energy Con-servation Bank, Home Energy Level Payment, Third Party Notification, LifeSupport and Extended Pay-ment Plan programs. These, no doubt, contributed to improved favorability ratings accorded the company in a series ofcustomer attitude surveys in recent years.

One ofour most positive and visible assistance pro-grams is the Care &Share Energy Fund. It assists the elderly, disabled or those experiencing a medical emergency by helping them pay for their emergency energy needs. In conjunction with the American Red Cross which administers Care &Share directlythe fund has helped some 2,770 needy families pay energy bills and make essential home energy improvements.

This program is solely supported by contributions from our stockholders, customers and employees.

Under Niagara Mohawk's Savingpower campaign, some 24,000 customers highest forany year and for any other utilityreceived home energy conservation surveys by the company's specially trained techni-cians in 1986. Many customers followed through by obtaining financial assistance and low-interest loans from lending institutions to implement needed con-servation improvements.

, NIACsARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 9

MONTHLYRESIDENTIALELECTRIC COST FOR 500 KILOWATT-HOURS New Yor Cjt P lladel Ia P NY State Av

. not lncludin NM

• Newark Cleveland OH Ha lord CT Boston MA atlonal vera e-Los An eles C

Nla ara ohawk Includes fuel and PASNY credit adjustment as applicable.

'NM Rate Department 1/87.

-U.S. Depanment of Enerpy 10/88, Allother supplied by utilitywhich serves city. with rates and fuel effective 1/87.

$65.05 58.75 55.42 54.12 4757 46.80 45.79 40.75 39.43 37.60 Wherever possible, our customer communications make note ofthe fact that Niagara Mohawk's residen-tial electric rates remain the lowest among New York State's major utilities.

People in the mainstream A far-reaching self-evaluation and action process in-volving all employees is in progress and has become a principal theme in Niagara Mohawk's total future planning. Evolving into our People-Related Values Program, this is the outgrowth ofa 1985 survey of more than 8,000 employees representing nearly 76 percent ofthe workforce the first employee survey ever at Niagara Mohawk.

The immediate response to the survey's findings was revision ofour Corporate Mission Statement and Strategic Plan to more accurately stress the impor-tance ofemployee contributions to the company's success. Aspecial task force on people-related values was formed, with 50 employees recruited from both union and management to address employee concerns and make specific recommendations to management.

Teams were also organized to pursue specific prob-lems and find answers to them. Members were drawn from a cross-section ofthe company. Areas ofconcern included decision-making, employee communications and recognition, teamwork and development. Pres-ently, we are creating a management model intended to foster improved communication ofNiagara Mohawk's mission and purpose at all levels, step.up employee commitment through more decisive decision-making and encourage a higher leadership profile withinwork groups. Asteering committee was appointed by senior management to track implemen-tation and progress ofthis extensive employee relations and participation effort through 1987 and the coming years.

At the end of 1986, Niagara Mohawk's workforce totaled approximately 11,400. About 8,600 or 76 per-cent are members of 12 local unions forming System Council U-11 ofthe International Brotherhood of Electrical Workers (AFL-CIO).

Management changes in 1986 included the election ofGerald D. Garcy to vice president power con-tracts, and Richard E.A. Duffyto vice president public affairs and corporate communications, suc-ceeding Kermit E. Hill,who retired. Attorney Gary J.

Lavine was elected assistant general counsel.

We were deeply saddened in November over the death ofJames F. Aldrich,vice president regional operations.

Strategy forcompetition diversity Competition and regulatory challenges are altering the business environment for the nation's utilities as never before. Niagara Mohawk is responding to this shifting climate with positive and dynamic measures for both the stockholder and the consumer.

The company recognizes, above all, the need to re-main competitive by providing continuing low-cost energy service ofthe highest quality. But at the same time we are exploring the possibilities ofextending our "core business" to other related services, markets and ventures. Recent tangible results ofexpansion/

diversification are our Power Donut'monitoring system currently being nationally advertised and marketed by NITECH; the sale oftechnology rights forour patented PCB-removal concept; heat pump

10 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES research/development/promotion; and the creation and growth ofNiagara Mohawk energy subsidiaries in both the U.S. and Canada.

Our guiding document for the future is our Corpo-rate Strategic Plan, amended to emphasize competi-tive opportunities.

Various levels ofmanagement and all departments take part in the collective strategic planning process by evaluating situations facing Niagara Mohawk and adjusting the plan forproper direction to best employ our resources. Direction is set forth in our Corporate Mission Statement (see inside front cover) and in published corporate objectives.

Alldepartments working together on strategic planning have helped to solidify the spirit of teamwork itselfa substantial reward from our Corporate Strategic Plan as we view the century ahead.

Investor communications a two-way exchange An increasingly diverse mixofinstitutional and in-dividual investors owns Niagara Mohawk common stock. To meet their growing needs forinformation in this media age, our Investor Relations Department has intensified "two-way"communications with stockholders and the investment community.

Aprime example was the marked rise in the popu-larityofour toll-free telephone service available to all shareholders. This channel provides direct access to account information and quick answers to questions on the company's operations and related matters. In addition, regional stockholders meetings, rotated yearly throughout our service territory, continue to be an effective means ofcommunication and promote an informal, person-to-person exchange ofideas between management and shareholders. Further, the company has re-vamped its "Inthe Know"publications pro-gram. "Inthe Know" is specifically tailored to indi-vidual investors and supplements information routinely provided in our annual and quarterly re-ports. Stockholders interested in more comprehensive information about the company can join the growing number of"In the Know"readers by calling the toll-free number listed on the inside back cover or by writ-ing the Investor Relations Department in Syracuse.

As we continue to face challenging times, our com-munication efforts with the investment community continue to receive the support and endorsement of senior management. In addition to direct, personal contact with institutional investors, a number of broker and security analyst meetings were held throughout the U.S. in 1986. These sessions provided members ofthe investment community the opportu-nity to obtain first-hand from company leaders the information needed to make informed, factual rec-ommendations about our securities.

Dividend Reinvestment Plan popular in '86 Participation in our Dividend Reinvestment and Common Stock Purchase Plan is a popular method to increase stock ownership in Niagara Mohawk. At year-end 1986, some 66,600 plan participants held approximately 10.7 millionshares ofthe company's common stock, representing 8.4 percent ofthe out-standing common shares. One ofthe features ofthe plan allows customers ofNiagara Mohawk to buy stock through the company and become plan partici-pants. Since this modification in April1985, some 7,700 customers have purchased about 600,000 com-mon shares. Despite recent changes to federal tax legislation, this allows shareholders a unique, cost-effective savings method.

In the firstquarter of 1986, in response to changing capital needs, the company made a number of changes in the plan. However, the plan remains in effect and all holders ofNiagara Mohawk common or preferred stock are eligible and invited to participate.

In the past, stock added to each participant's divi-dend reinvestment plan account was newly-issued shares purchased directly from the company. Effec-tive March 1, 1986, Niagara Mohawk appointed an agent to purchase shares ofstock on the open market forparticipants'ccounts.

The purchase price ofthe stock allocated to plan participants is the average price paid by the agent on the open market. In addi-tion to the reinvestment ofdividends, the plan allows optional cash payments up to $5,000 per calendar quarter to be applied toward the purchase ofaddi-tional common stock. Allbrokerage fees and commis-sions associated with the purchase ofshares in the open market continue to be paid by the company.

Acopy ofthe new plan prospectus, which discusses the changes in greater detail, was mailed to plan par-ticipants in February 1986. Ifyou have any questions about the plan or wish to obtain a copy ofthe prospec-tus, please call our Shareholder Services Department at the appropriate toll-free number foryour area.

NI'AGJIIIRA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Market Price ofCommon Stock and Related Stockholder Matters 1966 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Dividend paid Price range per share High Low

- $.52

$247/8

$195/8

.52 25'/2 193/4

.52 247/8 19'/4

.52 19'/8 15'/2

$2.08 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

$.50

$18

$163/8

.52 2fRfI 175/8

.52 217/8 17'/2

.52 21 175/8

$2.06 The Company's common stock and cer-tain of its preferred series are listed on the New York Stock Exchange. The common stock is also traded on the Boston, Cin-cinnati, Midwest, Pacific and Philadelphia stock exchanges.

The ticker symbol is "NMK".

Preferred and common stock dividends were paid on March 31, June 30, Sep-tember 30 and December 31. The Com-pany presently estimates that none of the 1986 common or preferred stock div-idends will constitute a return of capital and therefore they are subject to Federal income tax as ordinary income.

The table below shows dividends per share for the Company's common stock and quoted market prices:

While the Company intends to con-tinue the practice of paying cash div-idends quarterly, declarations of future dividends are necessarily dependent upon future earnings, cash flow and fi-nancial requirements which the Com-pany cannot predict with certainty and which could be adversely affected by ratemaking uncertainties as more fully discussed below and in Note 10 of Notes to Consolidated Financial State-ments. Also, other factors, including re-strictions in governing instruments, may affect the declaration and payment of future dividends.

The holders of Common Stock are en-titled to one vote per share and may cumulate their votes for the election of Directors. Whenever dividends on Pre-ferred Stock are in default in an amount equivalent to four full quarterly divi-dends and thereafter 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 Preference Stock are in default in an amount equivalent to six full quar-terly 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 Directors. No dividends on Preferred Stock are now in arrears and no Preference Stock is now outstand-ing.

Size of holding Total Total shares (Shares) stockholders held 1 to 99 50,773 100 to 999 113,825 1,000 or more 9,904 174,502 1,618,039 28,415,426 97,107,529 127,140,994 Upon any dissolution, liquidation or winding up of the Company's business, the holders of Common Stock are enti-tled to receive pro rata all of the Com-pany's assets remaining and available for distribution after the full amounts to which holders of Preferred and Pref-erence Stock are entitled have been satisfied.

The indenture securing the Com-pany's mortgage debt provides that surplus shall be reserved and held un-available for the payment of dividends on Common Stock to the extent that expenditures for maintenance and re-pairs plus provisions for depreciation do not equal 2.25% of depreciable property as defined. Such provisions have never restricted the Company's surplus.

At year end, about 175,000 stockhold-ers owned common shares of Niagara Mohawk and about 7,900 held preferred stock. The chart below summarizes common stockholder ownership by size of holding:

RANGE ANOYEAREND MARKET PRICE OF COMMONSTOCK

$ IPk

$ 15Vi

$ 1711

$20Vi

$ 15Vi

$25Vi ATYEAR END v

$ 11Pi

$ 18Vi

$ 15Vi

$ 15Vi RANGE 1982 1983 1984 1985 1988

N I A G A R A M0 H A W K P 0 W E R C 0 R P 0 R A T I0 N A N D S U B S I D I A R Y C 0 M P <<4 N I'E $

Management's Discussion and Analysis ofFinancial Condition and Results ofOperations RESULTS OF OPERATIONS For 1986, earnings per share decreased 5.9% to $2.71 against

$2.88 for 1985.

The 1986 earnings represent decreases of 4.6% and 2.2o/o from 1984 and 1983 earnings per share, respectively. The average number of shares outstanding has increased approximately 30% over the three-year period.

The decrease in the Company's earn-ings per share for 1986 from 1985 re-sulted from a decrease in the Com-pany's authorized return on common equity. The Company achieved a 13.6%

rate of return on common equity in 1986 as compared with 15.0% in 1985 and 14.9% in 1984. The PSC-approved rate of return on equity, which is currently 13.5% as compared to 15.5% authorized at December 31, 1985 and 16% at De-cember 31, 1984, averaged 14.0% for 1986.

The following discussion and analysis highlights items having a significant ef-fect on operations during the three-year period ended December 31, 1986. It may not be indicative of future operations or earnings. It should be read in conjunc-tion with the Notes to Consolidated Fi-nancial Statements and other financial and statistical information appearing elsewhere in this report.

Electric revenues increased

$ 108.0 million or 5.3% over the three-year period. The increase is largely attribut-able to increased base rates and in-creased sales to ultimate consumers, offset somewhat by decreased revenues attributable to fuel and purchased power cost recoveries and the decrease in sales to other electric systems as in-dicated in the table below:

ELECTRIC SALES M1lfioo$of Kwrhro.

32 640 34 732 37,086 35 296 34 347 1982 1986 1983 1984 1985 14.7%

1 5.0'/o 14.9'/o EARNED RATE OF RETURN ON COMMON EQUITY 15.00/o Electric revenues Increase (decrease) from prioryear ln millfonsofdollars 1966 1985 1984 Total 13.6%

Increase in base rates

. $ 46.4 Fuel and purchased power cost revenues...

12.6 Sales to ultimate consumers...............

67.4 Sales to other electric systems.............

(100.3)

Miscellaneous operating revenues.........

9.3

$ 35.4

$ 65.9

$ 69.1

$181.4 (4.5)

(86.3)

(78.2) 11.9 56.1 135.4 (107.9) 68.7 (139.5)

(3.5) 3.1 8.9

$(38.1)

$ 110.7

$108.0 1982 1983 1984 1985 1986 Electric kilowatt-hour sales were 34.3 billion in 1986, a decrease of 2.7% from 1985 and 7.4% from 1984, reflecting the effects of increased competition which has reduced the Company's effectiveness in the resale market resulting in decreased sales to other electric systems (see Electric and Gas Statistics Electric Sales appearing on page 35). Details of the changes in electric revenues and kilowatt-hour sales by customer group are highlighted in the table below:

1966

% Increase (decrease) from prior year

'/o of Electric 1966 1985 1984 Class of service Revenues Revenues SaIes Revenues Safes Revenues Sales Residential...........

32.9/o 8.5o/o 4.3/o 6.6o/o 0.4%

4.1%

4.30/o Commercial..........

36.0 8.2 4.7 5.0 1.7 2.4 3.7 Industrial.............

21.1 2.6 (0.8)

(0.4)

(2.8)

(0.5) 3.1 Municipal service.....

1.9 4.6 (2.9) 3.7 (1.6) 3.8 (2.4)

Total to ultimate consumers.........

91.9 6.9 2.5 4.2 (0.4) 2.3 3.6 Other electric systems 4.5 (51.1)

(32.3)

(35.5)

(24.1) 29.2 23.1 Miscellaneous........

3.6 13.7

(5.0)

4.5 Total

.. 100.P/o 1.7Yo (2.7)%

(1.8)%

(4.8)%

5.5o/o 6.8o/o

5 I A G rIIII R A M 0 H A W K POWER CORPORATION A N D SUBSIDIARY C 0 M P A N I E S 13 Gas revenues decreased

$80.1 million or 13.2% over the three-year period. As shown by the table below, this decrease is attributable to lower costs for purchased gas coupled with reduced volume offset by higher base rates.

109.7 103.2 115.0 Millionsof dekatfrerrns 108.4

.00.8 Gas revenues Increase (decrease) from prior year ln millions ofdollars 1986 1985 1984 Total LLJ Cl Increase in base rates...........

3.0 8.2 8.7 19.9 Purchased gas adjustment clause (20.0)

(21.6)

(23.3)

(64.9)

Gas sales volume...............

(53.0)

(39.2) 57.1 (35.1)

$ (70.0)

$ (52.6)

$ 42.5

$ (80.1)

Gas sales were 95.9 million dekatherms in 1986, an 11.5% decrease from 1985 (see Electric and Gas Statistics-Gas Sales appearing on page 35). The decrease for 1986 reflects a 46.7% decrease in sales in the industrial class because of com-petition with oil and the ability of customers to purchase gas directly from produc-ers. The Company transported 4.9 million dekatherms for customers purchasing gas directly from producers and expects such transportation activities to increase with corresponding reductions in gas revenues. Revenues from the transportation of customer-owned gas are included in miscellaneous gas revenues. Changes in gas revenues and dekatherm sales by customer group are detailed in the table below:

1982 1983 1984 1985 1986 2.394 2.786 TOTALELECTRIC ANDGAS OPERATING REvENuEs Millionsof dollars 2,695 2,660 2,632 1986

% Increase (decrease) from prior year

%of Gas 1986 1985 1984 Class of service Revenues Revenues Sales Revenues SaIes Revenues Sales Residential...

Commercial...

Industrial.....

56.2Y0 0.6o/0 4.4%

(5 9)%

(4 4)%

3.1%

5.7o/0 27.0 (3.3) 0.8 (6.2)

(3.2) 1.0 3.6 13.0 (48.7)

(46.7)

(14.6)

(10.8) 21.1 27.3 Total to ultimate consumers.........

96.2 (11.8)

(10.9)

(8.1)

(6.0) 6.5 10.7 Other gas systems....

2.7 (23.5)

(23.6)

(5.2) 1.6 24.9 32.0 Miscellaneous.......

1.1 68.6

(11.5)

8.7 1982 1983 1984 1985 1986 Total

.. 100.0o/

(11.7)% (11.5)%

(8.1)%

(5.7)%

7.0o/

11.4%

On March 12, 1986, the PSC approved a 2.1% electric rate increase to provide the Company additional annual rev-enues of $39,974,000. The rates are based on a 13.5% return on common equity and provide for the current re-covery of finance charges accruing on

$680 million of Construction Work in Progress (CWIP) associated with the Nine Mile Point Nuclear Station Unit No.

2 (Unit). These new rates became effec-tive March 17, 1986 and represent 26%

of the revised rate relief requested by the Company. In March 1985, the PSC had approved rate increases providing additional annual revenues of

$49,312,000 (2.6%) for electric and

$8,826,000 (1.3%) for natural gas.

On August 23, 1986, in connection with a second-stage filing involving rates approved March 12, 1986, the PSC approved additional annual electric revenues of $7,475,000 for items which were not considered in the March 1986 decision. The new rates became effec-tive August 29, 1986.

Rate action, initiated in April 1986, presently seeks

$ 181.7 million (9.9%)

additional electric revenues based upon forecast operations for the rate year ending March 31, 1988. The application includes $133.1 million for the first year of a four-year phase-in of the Com-pany's 41% share of the Unit into rates.

In December 1986, PSC Administrative Law Judges recommended a rate in-crease of $ 130.8 million (7.1%). The Company is unable to predict what amount of rate relief will ultimately be granted. The PSC opinion is expected in March, 1987. No adjustment to gas rates is being requested at this time.

In 1986, electric fuel and purchased power costs decreased 11.4% to $672 million from $759 million in 1985 and

$853 million in 1984. This decrease is the result of a $121.9 milliondecrease in fuel and purchased power costs in-curred during the year, partially offset by a $35.0 million net increase in costs deferred and recovered through the op-eration of the fuel adjustment clause.

Fuel costs incurred at the Company's generating stations decreased

$81.8 million as a result of reduced demand and lower oil prices. The cost of pur-chased power decreased

$40.1 million as a result of a 3.5% decrease in kilowatt-hour purchases and a 7.5% de-crease in the average cost per kilowatt purchased (see Electric and Gas Statistics Electricity Generated and Purchased appearing on Page 35).

The total cost of gas purchased de-creased 17.8% in 1986 and 9.1% in 1985, after having increased 5% in 1984. The decrease for 1986 is the result of a 14.0% decrease in dekatherms pur-chased to meet customer demand,

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANI'E$

AVERAGECOST OF ATON OF COAL ANDA BARRELOF OILBURNED MAINTENANCEANDOTHER OPERATION EXPENSE Millionsof dollars TOTALTAXESINCLUDING INCOMETAXES Miliionsot dollars

$50.76

$29.67

$50.88

$30.67

$50.68

$49 16

$33.35

$31.16

$45.84

$18.00 ro CI os I

418.9 290.1 462.4 326.1 494.6 353.6 508.3 364.0 546.8 397.7 ro 8

os co ros 317 342 410 424

-482 llcr LLr 128.8 141,0 1443 149.1 1982 1983 1984 1985 1986 1982 1983 1984 1985 1986 1982 1983 1984 1985 1986 combined with lower rates charged by the Company's principal supplier and spot market purchases. The Company's net cost per dekatherm purchased de-creased to $3.52 in 1986 from $3.68 in 1985 and $3.96 in 1984.

Through the energy and purchased gas adjustment

clauses, costs of fuel, purchased power and gas purchased, above or below the levels allowed in ap-proved rate schedules, are billed or credited to customers. The Company's

~

fuel adjustment clause provides for par-tial pass-through of fuel and purchased power cost fluctuations from those forecast in rate proceedings, with the Company absorbing a specific portion of increases or retaining a portion of decreases to a maximum of $15 million per rate year.

Other operation and maintenance ex-penses increased 7.6% in 1986, 2.8% in 1985, and 7.0% in 1984, primarily as a result of increases in wages and as-sociated benefits and higher costs charged by suppliers. Effective June 1,

1984, the Company entered into a two-year labor agreement providing for wage increases of 5.25% in the first year and 5.50% in the second year. A new three-year contract providing for annual wage increases of 4.1%, 4.5% and 4.7%,

respectively, became effective June 1,

1986. The increase in other operation and maintenance expenses in 1984 and 1986 also includes scheduled mainte-nance costs relating to the refueling of Nine Mile Point Nuclear Station Unit No.

1 in those years. The next refueling out-age for this unit is scheduled for the Spring of 1988.

Depreciation and amortization ex-pense for 1986 increased 3.1% over 1985 and 10.0% over 1984, principally from normal plant growth and increases in depreciation rates applied to certain classes of assets.

Total Federal and foreign income taxes for 1986 rose 21.8% as net taxable income and the dollar amount ot items on which deterred taxes are provided increased.

The increase in taxes other than income taxes in the three-year period is due principally to higher prop-erty taxes resulting from property addi-tions.

The $21.5 million decrease in total Allowance for Funds Used During Con-struction (AFC) for 1986 results from lower AFC rates and an increase in the amount of CWIP included in rate base from $320 million to $680 million effec-tive April 1, 1986, despite increased overall levels of plant construction, principally the Unit.

The decrease in other income and deductions other items (net) is primar-ily the result of the reduction in the in-terest earned on the advances made for LILCO (see Note 11 of Notes to Consoli-dated Financial Statements).

Interest expense and preferred stock dividend requirements increased slightly as a result of new issuances to raise the capital necessary to fund the Company's construction program otfset by a reduction in high coupon se-curities. The weighted average long-term debt interest rate and preferred dividend rate paid in 1986 decreased from 10.30% and 8.85% in 1985, respec-tively, to 9.82/o and 8.20%, respectively, as a result of the Company's refinancing efforts.

Effects of Changing Prices. The rate of inflation continued to be moderate in 1986. The Company is especially sensi-tive to inflation because of the large amount of capital it must raise to fi-nance its construction program and be-cause its prices are regulated using a rate base that reflects the historical cost of utility plant.

The Company's consolidated finan-cial statements are based on historical events and transactions when the pur-chasing power of the dollar was sub-stantially ditferent from the present. The effects of inflation on most utilities, in-cluding Niagara Mohawk, are most sig-nificant in the areas of depreciation and utilityplant. The Company could not re-place its utilityplant and equipment for the historical cost value at which they are recorded on the books. In addition, the Company would probably not re-place these assets with identical ones due to technological advances and reg-ulatory changes which have occurred.

In light of these considerations, the de-preciation charges in operating ex-penses do not reflect the current cost of providing service. The Company, how-ever, will seek additional revenue to cover the costs of maintaining service as assets are replaced.

During a period of inflation, holders of monetary assets suffer a loss of gen-eral 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 utility plant. Since the depreciation on this plant is limited to the recovery of historical costs, the Company does not have the opportunity to realize a hold-ing gain on debt and is limited to recov-ery only of the embedded cost of debt capital. The table on the following page presents selected financial data re-stated for the effects of changing prices in average 1986 dollars:

QIAGArRA MOHAWK POWER CORPORATION AND S U'BSI DIARY COMPANIES 1986 1985 1984 Operating Revenues ($000's)....

Gain from decline in purchasing power on net

'mounts owed ($000's).......

Per Common Share:

Cash dividends declared......

Market price at year end......

Average Consumer Price Index..

FINANCIALPOSITION, LIQUIDITYA Financial Position. During recent years internal funds from operations have been insufficient to meet the Com-pany's capital requirements and there-fore, large amounts of new capital from external sources have been necessary.

The Company's overall requirements consist of amounts for the Company's construction program, working capital

needs, maturing debt issues and sink-ing fund provisions on outstanding debt and preferred stock and are affected by its refinancing efforts. Sources and uses of funds to meet these require-ments during the past three years are reported in the Consolidated Statement of Changes in Financial Position on page 20.

The Company's key financial indi-cators remained constant in 1986. Capi-tal structure at year-end was 47.0%

tong-term debt, 10.5% preferred stock and 42.5% common equity. This posi-tion is indicative of the Company's cor-porate goal of maintaining a strong equity-based capitalization of 40-45%

common equity. However, the strength of the Company's capitalization struc-ture and earnings will be adversely im-pacted upon the adoption of new ac-counting rules, which will require an immediate write-off of Unit disallowed costs, and the recognition of the Set-tlement Agreement in rates (see Note 10 of Notes to Consolidated Financial Statements).

Coverage of fixed charges decreased slightlyto 2.98 at year-end, but remained at approximately the 3x level forthe fifth consecutive year and close to the corpo-rate goal of maintaining at least a 3.25 coverage ratio. The coverage ratio excluding AFC improved slightly to 2.42 as financing costs not currently reco-vered in rates decreased, primarilyas the result of $680 million of CWIP in rate base. AFC for 1986 amounted to 48.2% of the balance available for common stock as compared with 53.2% in 1985 and 52.4% ln 1984.

$2l660,319

$2,746,798

$2,940,448 36,418 108,788 115,867 2.08 2.10 2.09 16.75 20.89 18.34 328.4 322.2 311.1 ND CAPITALRESOURCES During the year, the market price for the Company's common stock fell below the book value after having shown substantial improvement in 1985. In addition, credit ratings for first mortgage bonds, pollution control bonds and preferred stock were low-ered by rating agencies because of the delays and related cost increases ex-perienced at the Unit.

Continued delays in the Unit's com-pletion, and the related increases in costs coupled with a prospective write-off of disallowed Unit costs of ap-proximately $ 1 billion ($626 million net of tax at a 46% rate), recent reductions in the authorized rate of return on common equity experienced by the Company and other New York State utilities and uncertainty regarding the ratemaking treatment relative to the im-plementation of the Settlement Agree-ment, are expected to have a negative impact on the financial condition and results of operations of the Company and, in turn, could jeopardize the maintenance of the current common stock dividend level.

Construction and Other Capital Re-quirements.

Annual expenditures for the years 1984-1986 for construction and nuclear fuel, including related AFC and overheads capitalized, were $769.8 million, $771.1 million and $774.1 mil-lion, respectively. The principal project presently under construction is the Unit (see Note 10 of Notes to Consolidated Financial Statements).

The Company is a 41% owner and had invested about

$2.4 billion, including AFC and over-heads capitalized, in the Unit and Unit related projects through December 31, 1986. Expenditures for construction of the Unit have averaged approximately 51% of total construction requirements during the period 1984 to 1986.

Total capital requirements in 1986 in-creased due to refinancing efforts and, in 1984 and 1985, as the Company made 11 5%

41'/o 4.

o 12.6%

42,1oo 4,5o 11 5%

2.0/o 11.5%

42.7/o 47,0'o 10.5 CC I,cb~

Z co O~

~O CI CC LIJ CC CL 1982 1983 1984 1985 1986 advances for construction of the Unit on behalf of LILCO. As described in Note 11 of Notes to Consolidated Financial Statements,

however, LILCO repaid such obligations in December 1986.

The 1987 estimate for construction additions and nuclear fuel, including AFC and overheads capitalized, is ap-proximateiy $550 million and approxi-mately 28% of this estimate is for the Unit. Debt and preferred stock retire-ments, the amount due under the Co-tenant Agreement and other require-.

ments are expected to add approxi-mately another

$468 million to the Company's capital requirements for a total of $1.018 billion.

Complete estimates of the Company's capital requirements and resources for the years 1987 through 1991 are being reviewed by the Company to take into consideration, among other things, the impact of the Settlement Agreement, the $ 171 million to be paid by the Com-pany to the cotenant companies upon commercial operation of the. Unit pur-suant to the Cotenant Agreement, the impact of the Tax Reform Act of 1986 (Tax Act), the Financial Accounting Standards Board's ("FASB") Exposure Draft concerning proposed changes in accounting for income taxes and the January 1987 cost estimate of the Unit.

The FASB Exposure Draft would re-quire, among other things, adjustment of net deferred tax liabilities or assets for the net change in the tax rates paid by the Company. However, the Tax Act

~

prohibits rapid reduction of excess de-ferred taxes relating to accelerated de-preciation occasioned by the reduction of the corporate tax rate. The Tax Act contains numerous other provisions likely to affect the Company. The most significant changes relate to a reduc-tion in the marginal corporate income tax rate, increased minimum tax provi-CAPITALIZATIONRATIOS

16 NIAGARA MOHAWK POWER CORPORATION AND S U B S I D I A R Y C 0 M P1A N I'E 5 sions and the elimination of the invest-ment tax credit. The Tax Act when ini-tially considered in the rate setting pro-

cess, is likely to create a reduction in internal generation of cash.

However, reductions in the Company's cash gen-eration and coverage ratios would also likely be addressed in the rate setting process. To the extent any such nega-tive impacts are not adequately consid-ered in rates, a corresponding loss of cash flow, if experienced, could be ex-pected to increase the Company's ex-ternal financing requirements and pos-sibly lower credit ratings and may im-pact the common stock dividend rate.

Liquidity and Resources.

During 1986, the Company raised approximately

$780,500,000 through external sources, consisting of

$598,900,000

debt,

$75,000,000 of preferred

stock,

$4,600,000 of common stock from the issuance of 212,654 shares, and net in-creases of $9,000,000 under inter-mediate term bank revolving credit ob-ligations and $93,000,000 in short-term debt. The Company also completed ap-proximately $22,000,000 of capital lease financing, received

$225,000,000 from the sale and redemptions of the LILCO General and Refunding Bonds it held and

$ 128,000,000 from a sale and leaseback of a transmission facility. In addition to sinking fund and scheduled retirements, during 1986 the Company retired prior to maturity $381 million of high-coupon long-term debt and $47 million of preferred stock. A portion of the funds needed to complete these re-demptions were obtained from the sale by the Company of LILCO General and Refunding Bonds and the transmission facility. These early retirements of high coupon securities contributed to a re-duction in the estimated year-end aver-age cost of capital. Using the maximum rates payable on variable rate securities the year-end average cost of long-term debt decreased from 10.57% to 9.76%

and the preferred dividend rate de-creased from 9.79% to 9.43%.

During 1986, funds needed to pay for the Company's overall construction re-quirements amounted to $774,100,000, including AFC, and were provided 29%

from internal sources and 71% from ex-ternal financing.

External financing for 1987 is ex-pected to approximate $687 million, in-cluding funds needed to complete the construction of the Unit, pay amounts due under the Cotenant Agreement and ANNUALEXTERNAL FINANCINGBYTYPE Millionsol dollars 780.5 700.9 583.1 1,8 614.3 374.7 584.1 323.8 os I

ds CI Od CZ:

oo C)

ED 424.9 259.7 120.0 50.0 189.

1982 1983 1984 75.0 185.3 1985 75.0 1986 refund debt and preferred stock ex-pected to be retired prior to maturity.

The Company expects to secure the majority of its capital needs from tradi-tional financing sources.

However, it will continue to explore and utilize, as appropriate, other methods of financ-ing. Recent adoption by the FASB of amendments with respect to financial accounting recognition of disallowed Unit costs, together with the anticipated charge against earnings based on the Settlement, may prohibit or severely re-strict the Company's ability to borrow under revolving credit agreements, and for a period of approximately twelve months, issue Preferred Stock or First Mortgage Bonds under its Indenture on the basis of additional property. There are currently no tests or restrictions on the Company's ability to issue Prefer-ence Stock. In addition, the 1986 reduc-tion of the credit ratings on the Com-pany's First Mortgage Bonds and Pre-ferred Stock, with the possible adverse effect on the rates of interest and div-idend rates that may be required on fu-ture issues ot such securities, may also reduce the Company's financing flexi-bility and adversely aftect its capital structure and financial position. Not-withstanding these possible limitations on its financing capacity and flexibility, the Company believes that available sources ot financing, including as of December 31, 1986, approximately $566 million principal amount of First Mortgage Bonds issuable on the basis of retired bonds (to the extent not re-quired for other purposes) and $ 100 million aggregate par value of Preter-ence Stock, will be sutficient to satisfy the Company's external financing needs for 1987.

Ordinarily, construction related short-term borrowings are refunded with permanent securities on a continu-ing basis.

Bank credit arrangements, which total $673 million (including $450 millionof revolving credit and term loan agreements,

$ 123 million in lines of credit and a $100 million Bankers Ac-ceptance Facility Agreement), are used by the Company to enhance flexibility as to the type and timing of its perma-nent security sales. Further increases in the costs of the Unit, implementation of the Settlement and recent changes in financial accounting standards could affect the Company's ability to access certain of its bank credit arrangements.

Certain of these agreements, as well as other agreements of the Company, con-tain representations and covenants which, if not met or re-negotiated, re-quire the Company to provide security in the form of First Mortgage Bonds or prevent the Company from making new borrowings under such agreements (see Notes 4 and 11 of Notes to Consoli-dated Financial Statements).

Any se-curity provided in the form of First Mortgage Bonds may diminish the amount of First Mortgage Bonds availa-ble for issuance on the basis of retired bonds. The unsecured debt limitation imposed by the Company's Charter is

$700 million declining to 10% of capitalization plus $50 million after 1988. This limitation on unsecured debt together with certain restrictions on secured financing may limit the Com-pany's ability to complete certain types ot financing.

In general, the Company has had a strong capital structure, adequate short and intermediate term bank borrowing capability and has been able to access the permanent capital markets with flex-ibility. Earnings coverage of interest charges may remain in excess of mortgage indenture restrictions for the issuance of First Mortgage Bonds and over $1.3 billion of property is available to support the issuance of First Mortgage Bonds.

However, continua-tion of this degree ot financial strength is dependent on a number of factors, including the ultimate cost of the Nine Mile Point Nuclear Station Unit No. 2, the rate phase-in plan for the Unit, the methodology adopted by the PSC in implementing the Settlement Agree-ment, the adoption of Statement of Fi-nancial Accounting Standards No. 90 (see Note 10 of Notes to Consolidated Financial Statements) and adequate rate relief.

VI'AGfiRA MOHAWK POWER CORPORATION AN D SUBSIDIARY COMPANIES Consolidated Statement of Income and Retained Earnings Operating revenues:

Electric Gas For the year ended December 31

~

1986

$2>131,833 528,486 2,660,319 fn thousands ofdollars 1985

$2,096,404 598,536 2,694,940 1984

$2,134>470 651,076 2,785,546 Operating expenses:

Operation:

Fuel for electric generation Electricity purchased Gas purchased..

Other operation expenses Maintenance Depreciation and amortization Federal and foreign income taxes Othertaxes Operating Income.

Other income and deductions:

Allowance for other funds used during construction Federal income taxes Other items (net) (Note 11)

Income before Interest charges Interest charges:

Interest on long-term debt Other interest Allowance for borrowed funds used during construction Net income Dividends on preferred stock Balance available forcommon stock Dividends on common stock Retained earnings forthe year Retained earnings at beginning of year Retained earnings at end of year 319,834 352,126 338,634 397,714 149,124 155,311 211,237 295,165 2,219,145 441,174 121,932 32,293 37,539 191,764 632,938 264,054 14,880 (43,861) 235,073 397,865 53>817 344,048 264,312 79>736 842,115 921,851 391,382 367,406 411,801 364,010 144,312 150,627 173,471 280,643 2,283,652 411,288 141,320 26,708 53,110 221,138 632,426 260,271 6,721 (45,996) 220,996 411,430 59,559 351,871 252,218 99,653 742,462 S

842,115 476,040 377,052 452,960 353,660 140,987 141,150 181,767 269,204 2,392,820 392,726 122,354 33,460 8,591 164,405 557,131 224,099 12,440 (39,142) 197,397 359,734 51,460 308,274 216,493 91,781 650,681 S

742,462 Average number of shares of common stock outstanding (in thousands)

Balance available per average share of common stock..

Dividends per share of common stock.................

127,076 2.71 2.08 122,215 6

2.88 5

2.06 108,734 2.84 1.98

() Denotes deduction

18 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIA/

Consolidated Balance Sheets AtDecember 31 ~

1986 ln thousands ofdollars ASSETS Utilityplant, at original cost (Note 1):

Electric plant Nuclearfuel(Nofe3)

Gas plant Common plant Construction work in progress(Note10),.

Total utilityplant.

Less accumulated depreciation and amortization Net utilityplant Other property and Investments Advances onbehalf of Nine Mile Point Nuclear Unit No.2 cotenant, Including deferred supplemental pay ments (Note 11)

Current assets:

Cash, including time deposits of $78,389 and $7,521, respectively.....

Accounts receivable (less allowance fordoubtful accounts of $3,600)..

Materials and supplies, at average cost:

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

Unamortized debt expense Deferred finance charges (Note 1)

Deferred recoverable energy costs.

Extraordinary property losses Other

$4,559,389 392)662 544,447 129,451 2,820,044 8,445,993 1,763,443 6,682,550 76,504 175,979 289,350 43,504 73,015 21,109 602,957 118,209 831951 9,935 37,097 249,192

$7,611,203

$4,302,280 369,126 517,995 115,316 2,336,188 7,640,905 1,629,437 6,011,468 146,487 232,847 44,933 283,962 64,454 65,450 20,931 479,730 64,260 25,055 32,520 1,709 19,761 143,305

$7,013,837

NEAGAr RA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 19 CAPITALIZATIONAND LIABILITIES AtDecember 31 ~

1966 ln thousands ofdollars Capitalization (Note 7):

Common stockholders'quity:

Common stock, issued 127,140,994 and 126,928,340 shares, respectively Capital stock premium and expense Retained earnings Non-redeemable preferred stock Redeemable preferred stock Long-term debt Total capitalization Current liabilities:

Short-term debt (Note 4)

Long-term debt due within one year Redemption and sinking fund requirements on redeemable preferred stock (Note 7)

Accounts payable Payable on outstanding bank checks Customers'eposits Accrued taxes Accrued interest Accrued vacation pay Gas supplier refunds payable to customers Cotenant prepayments to Nine MilePoint Nuclear Unit No. 2 project fund(Note11)

Due to cotenants under Cotenant Agreement (Note 10)......

Other Deferred credits:

Accumulated deferred Federal income taxes Mandated refunds to customers (Note 11).

Deferred finance charges(Note 1)

Other Commitments and contingencies (Notes 3, 10 and 11) 127,141 1,522,499 921,851 2,571i491 290,000 347,470 2,799,605 6I008,566 1001212 93,914 60,380 141,338 59,512 8,645 10,232 68,759 28,234 2,846 1,096 171,100 24,231 770,499 6485641 63,229 83,951 36,317 832,138

$7,611,203 126,928 1,519,577 842,115 2,488,620 290,000 379,850 2,643,094 5,801,564 7,195 65,465 13,050 186,887 63,340 7,829 7,560 76,157 25,945 11,381 84,904 25,937 575,650 515,554 80,000 25,055 16,014 636,623

$7,013,837

20 NIAGARA MOHAWK POWER CORPORATION AN D SUBSIDIARY COMPA) N IES Consolidated Statement of Changes in Financial Position For the year ended December 31, FINANCIALRESOURCES WERE PROVIDED BY:

Operations:

Net income Charges (credits) to income not requiring (not providing) working capital Depreciation and amortization..................

Allowance tor funds used during construction....

Amortization of nuclear fuel Provision for deferred Federal income taxes (net)

Other..............

Outside financing:

Sale of common stock Sale of preferred stock Sale of mortgage bonds.

Issuance of other long-term debt Net borrowings under revolving credit facilities Increase (decrease) in short-term debt.........

Other sources:

Deferred recoverable energy costs Mandated refunds to customers(Note

11).............

Sale of LILCOGeneral and Refunding Bonds(Note 11)

Repayment of construction advances(Note

11)........

Sale/leaseback of transrqission facility................

Other investments Unamortized debt expense (Increase) decrease in working capital other than short-term debt (see below)..............

Miscellaneous (net)

Total resources provided FINANCIALRESOURCES WERE USED FOR:

Construction additions, including capital leases Nuclear fuel.

Allowance for funds used during construction...

Net additions.

Amounts accrued under Cotenant Agreement(Note 10)..

Advances on behalf of Nine MilePoint Nuclear Unit No.2cotenant(Note11)

Reduction of long-term debt Reduction of preferred and preference stock...........

Dividends.

Total resources used (Increase) decrease in working capital other than short-term debt:

Cash Accounts receivable Coal and oil for production of electricity...............

Other materials and supplies Long-term debt due within one year...................

Redemption and sinking fund requirements on redeemable preferred stock Accounts payable Payable on outstanding bank checks..................

Accrued taxes and interest Gas supplier refunds due customers..................

Cotenant prepayments to Nine Mile Point Nuclear Unit No. 2 project fund Due to cotenants under Cotenant Agreement(Note 10)

Other (net) 1986 397,865 155,311 (165I793) 18,257 133,743 539,383 4,603 75,000 500,000 98,900 8,959 93,017 780,479 22,585 (16,771) 140,000 92,847 128I000 72,596 (53,949)

(21,395)

(11,133) 352,780

$1,672,642 750,526 23,536 (165,793) 6081269 1711100 467,764 1071380 318,129

$1,672,642

$ (131)046)

(5,388) 20,950 (7,565) 28,449 47,330 (45,549)

(3,828)

(4,726)

(8,535)

(83,808) 1711100 1,221 (21,395) fn thousands ofdollars 1985 411,430 150,627 (187,316) 25,448 141,206 (4,707) 536,688 185,270 75,000 175,000 225,000 (29,880)

(46,321) 584,069 (16,267)

(10,191) 38,481 (32,775)

(11,602) 92,084 (9,331) 50,399

$1,171,156 718,903 52,217 (187,316) 583,804 135,808 126,717 13,050 311,777

$1,171

~156 (12,294)

(1,730) 32,020 (3,432) 1,628 (6,551) 3,848 3,988 (5,990) 5,137 84,594 (9,134) 92,084 359,734 141,150 (161,496) 17,612 116,265 (10,821) 462,444 189,626 50,000 319,250 81,618 5,060 (31,247) 614,307 9,480 (9,273)

(27,495)

(8,128) 38,964 3,643 7,191

$1,083,942 746,910 22,936 (161,496) 608,350 120,060 67,005 20,574 267,953

$1,083,942 (1,440)

(8,156)

(564)

(5,764) 33,685 7,651 (2,213)

(17,119) 27,440 (8,989)

(2,507) 16,940 38,964

N I'AGORA MOHAWK POWER

'CORPORATION AND SUBSIDIARY COMPANIES 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 Regulatory 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.

In December 1986, Statement of Financial Accounting Stan-dards No. 90, "Regulated Enterprises Accounting for Aban-donments and Disallowance of Plant Costs" was issued by the Financial Accounting Standards Board (FASB) and is required to be adopted not later than 1989. (See Note 10-Nine Mile Point Nuclear Station Unit No. 2 for a detailed discussion of the effects of this pronouncement).

Principles of Consolidation:

The consolidated financial statements include the Company and its wholly-owned sub-sidiaries. All significant intercompany balances and transac-tions have been eliminated. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenue and expense accounts are translated at the average exchange rate in effect during the year. Currency translation adjustments are recorded as a component of equity and do not have a significant impact on financial condition.

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.

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 de-termined in accordance with FERC and PSC regulations. The Company computes AFC at a rate which is reduced to reflect the income tax effect of the borrowed funds component of AFC for all additions to electric utilityplant. The AFC rates in effect December 31, 1986 were 11.02% and, net of tax at the current statutory rate of 46%, 8.90%. AFC is segregated into its two components, borrowed funds and other funds, and is reflected in the Interest Charges section and the Other Income and Deductions section, respectively, of the Consolidated State-ment of Income.

Effective April 1985, pursuant to a PSC authorization, the Company discontinued accruing AFC on $320 million of con-struction work in progress (CWIP) for which a cash return is being allowed through inclusion in rate base of that portion of the investment in the Nine Mile Point Nuclear Station Unit No. 2 (Unit).This amount was increased to $680 million in April 1986.

Amounts equal to the AFC which is no longer accrued on the CWIP included in rate base are being accumulated in deferred debit and credit accounts and, at the time the Unit commences commercial operation and is placed in rate base, the balance in the deferred credit account could be available to reduce future revenue requirements over a period potentially shorter than the life of the Unit. It is currently expected that the balance in the deferred debit account will be amortized and recovered in rates over the life of the Unit.

Depreciation, Amortization and Nuclear Generating Plant De-commissioning Costs: For accounting purposes, depreciation is computed on the straight-line basis using the average or remaining service lives by classes of depreciable property. In addition, certain costs associated with the discontinued Ster-ling Nuclear Station (See Note 2) were amortized over shorter periods as approved by the PSC. For Federal income tax pur-poses, the Company computes depreciation using accelerated methods and shorter allowable depreciable lives.

Estimated decommissioning costs (costs to remove the plant from service in the future) of the Company's Nine Mile Point Nuclear Station Unit No. 1 are being recovered in rates through an annual allowance and charged to operations through de-preciation charges.

Based on a study completed in 1986, the cost of decommissioning Nine Mile Point Nuclear Station Unit No. 1, which is expected to begin in the year 2005, is estimated to be approximately $442,000,000 at that time ($211,700,000 in 1986 dollars). Through December 31, 1986, the Company has recovered $23,200,000 of decommissioning costs in rates. The Company's 41% share of costs to decommission Nine Mile Point Nuclear Station Unit No. 2 which is expected to begin in the year 2027, is estimated to be approximately $565,000,000

($ 108,100,000 in 1986 dollars). The annual allowances for re-covery, based upon currently estimated decommissioning costs over the life of these units, are under consideration in the Company's current rate proceeding. The Company continues to review the estimated requirements for decommissioning and plans to seek rate adjustments when appropriate. There is no assurance that the decommissioning allowance will ulti-mately aggregate a sufficient amount to decommission the units. The Company believes that decommissioning costs, if higher than currently estimated, willultimately be recovered in the rate process, although no such assurance can be given.

Amortization of Nuclear Fuel: Amortization of the cost of nu-clear fuel is determined on the basis of the quantity of heat produced for the generation of electric energy. The cost of disposal of nuclear fuel, which presently is $.001 per kilowatt-hour of net generation, is based upon a contract with the U.S.

Department of Energy. These costs, which are associated with generation at Nine Mile Point Unit Nuclear Station No. 1, are charged to operating expense and recovered from customers through base rates or through the fuel adjustment clause.

Revenues:

Revenues are based on cycle billings rendered to certain customers monthly and others bi-monthly. The Com-pany does not accrue revenues for energy consumed and not billed at the end of any fiscal period. The Company's tariffs include electric and gas adjustment clauses under which energy and purchased gas costs, 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 recovery. The PSC has periodically authorized the Company to make changes in the level of al-lowed energy and purchased gas costs included in approved rate schedules. As a result of such periodic changes, a portion

22 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPAGNIE~

of energy costs deferred at the, time of change would not be recovered under the normal operation of the electric adjust-ment clause.

However, the Company has been permitted to amortize and billsuch portions to customers, through the elec-tric adjustment clause, over 36 months from the effective date of each change.

The Company's electric fuel adjustment clause provides for partial pass-through of fuel cost fluctua-tions from those forecast in rate proceedings with the Com-pany absorbing a specific portion of increases or retaining a portion of decreases to a maximum of $15 million per rate year.

Federal Income Taxes: In accordance with PSC requirements, the tax eftect of book and tax timing differences is flowed through unless authorized by the PSC to be deferred. The Company provides deferred taxes on certain benefits realized from depreciation, on deferred energy and purchased gas costs, on nuclear fuel disposal costs accrued prior to April 7, 1983, on nuclear generating plant decommissioning costs, on certain construction overheads and on certain other items (see Note 9). In conformity with ratemaking practices of the PSC, the Company has not provided deferred taxes on approxi-mately $1.6 billion of other tax deductions which include cer-tain depreciation differences and various construction over-heads deductible currently for tax purposes and capitalized for accounting and ratemaking purposes.

The Company has claimed 10 percent investment tax credit and deferred the ben-efits of such credits as realized in accordance with PSC direc-tives. For purposes of computing capital cost recovery deduc-tions and normalization, the asset basis is partly reduced by the credit claimed. The imputed tax benefit of the borrowed funds component of AFC and the tax etfect of LILCO General and Refunding Bond interest and supplemental payments are recorded in Other Income and Deductions (see Note 11).

Amortization of Debt Issue Costs: The premium or discount and debt expenses on long-term debt issues and on certain debt retirements prioi to maturity, are amortized ratably over the lives of the related issues and included in interest on long-term debt (see Note 7).

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 (see Note 8).

In December 1985, Statement of Financial Accounting Stan-dards No. 87 "Employers'ccounting for Pensions" was is-sued by the FASB and is effective for fiscal years beginning after December 15, 1986. The adoption of the requirements of this statement is not currently anticipated to have a significant impact on the results of operations or financial position of the Company as shown in the Consolidated Financial Statements.

NOTE 2. Depreciation and Amortization The total provision for depreciation and amortization, includ-ing amounts charged to clearing accounts, was $156,494,000 for 1986, $151,817,000 for 1985 and $142,500,000 for 1984. The provisions include approximately $2,800,000, $9,500,000 and

$10,200,000, respectively, resulting from the PSC allowed re-covery of the amortization of costs associated with the discon-tinued Sterling Nuclear Station. The percentage relationship between the total provision for depreciation and average de-preciable property was 3.0% in 1986 and 1985 and 2.9% in 1984. The Company makes depreciation studies on a continu-ing basis and, upon approval by the PSC, periodically adjusts the rates of its various classes of depreciable property.

NOTE 3. N M Uranium, Inc.

During 1976, through a wholly-owned subsidiary, N M Uranium, Inc. (NMU), the Company purchased a 50 percent undivided interest in uranium deposits and associated mining equipment to be held by a jointly-owned mining venture. Ac-quisition of this interest was made primarily to provide a more assured future supply of nuclear fuel. The investment in the subsidiary, which includes costs incurred since acquisition and AFC accrued through March 31, 1981, has been reduced by the proceeds from the sale of uranium, net of tax, and trans-fers to the Company and is included in the consolidated finan-cial statements as part of the nuclear fuel component of utility plant. Such investment totaled $82,200,000 at December 31, 1986 and $73,800,000 at December 31, 1985.

In connection with the Company's rate decisions in March 1984 and March 1986 the PSC has allowed, as the cost of ap-proximately 790,000 lbs. of NMU uranium utilized in the 1984 and 1986 reloads of the Company's Nine Mile Point Nuclear Unit No. 1 and approximately 107,000 lbs. utilized for a portion of the initial core at Nine Mile Point Nuclear Unit No. 2, a price which represents the average United States delivery price for the year, as reported by the U.S. Department of Energy (DOE).

The total allowed value of these transfers using DOE prices is approximately $30.5 million while the Company's cost is ap-proximately $39.4 million. The differential between the Com-pany's cost of this NMU uranium and that amount allowed to be recovered in rates charged to customers has been deferred subject to the PSC approval of the comparison of cost to mar-ket on an aggregate basis over the life of the project. The Com-pany anticipates that, based upon present DOE forecasts of average delivery prices, substantially all of its investment will be recovered, although no such assurance can be provided.

NOTE 4. Bank Credit Arrangements At December 31, 1986, the Company had $673 million of bank credit arrangements, including the Oswego Facilities Trust, with 34 banks. These credit arrangements consisted of

$450 million in commitments under Revolving Credit and Term Loan Agreements,

$ 10 million in short-term commitments under Credit Agreements,

$113 million in lines of credit and

$100 million under a Bankers Acceptance Facility Agreement.

The Revolving Credit and Term Loan Agreements extend through 1990 although the revolving credit periods under the agreements for $135 million of the $450 million expire in 1987.

At the option of the Company, the interest rate applicable to borrowings under these agreements is based on the prime rate or at specified increments over the rates applicable to certifi-cates of deposit or, in certain agreements, eurodollar deposits.

Allof the other bank credit arrangements are subject to review on an ongoing basis with interest rates negotiated at the time of use. The Company also issues commercial paper. Unused bank credit facilities are held available to support the amount of commercial paper outstanding, including amounts currently issued in connection with Interest Rate Exchange Agreements (see Note 7). $215 million of the Revolving Credit and Term Loan Agreements contain representations and covenants which, ifnot met or re-negotiated, would prevent the Company

YI'AGORA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 23 AtDecember 31:

In thousands oldollars 1986 1985 from making new borrowings under such agreements and re-quire the Company to begin scheduled repayment over three years of amounts outstanding.

The Company pays fees for substantially all of its bank credit arrangements.

The Bankers Acceptance Facility Agreement, which is used to finance the fuel inventory for the Company,'s generating stations, provides for the payment of fees only at the time of issuance of each acceptance.

Amounts outstanding under Interest Rate Exchange Agree-ments and Revolving Credit and Term Loan Agreements to-taled $100 million at December 31, 1986 and are recorded as long-term debt.

Additional bank credit arrangements in connection with the Company's guarantee of certain obligations of LILCO are dis-cussed in Note 11.

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

Operating revenues:

Electric.......;....

Gas In thousands oldollars 1986 1985 1984

$2,131,833

$2,096,404

$2,134,470 528,486 598,536 651,076 NOTE 6. Information Regarding the Electric and Gas Businesses The Company is engaged in the electric and natural gas util-ity businesses.

Certain information regarding these segments is set forth in the following table. General corporate expenses, property common to both segments and depreciation of such common property have been allocated to the segments in ac-cordance with practice established for regulatory purposes.

Identifiable assets include net utility plant, materials and supplies, deferred finance charges and deferred recoverable energy costs. Corporate assets consist of other property and investments, cash, accounts receivable, prepayments, unamor-tized debt expense and other deferred debits.

Short-term debt:

Commercial paper....

Notes payabie Bankers acce tances Weighted average Interest rate(a)..

For earendedDecember31:

$100,212 8.33%

S 7,195 7.93%

..S 72,000 212 2,195 28,000 5.000 Total

$2,660,319

$2,694,940

$2,785,546 Operating Income before taxes:

Electric...................

S 596,864 S

529,659 511,842 Gas......................

55,547 55,100 62,651 S

652,411 584,759 574,493 Total Dailyaverage outstanding......

Dailyweighted average interest rate(a)

Maximum amount outstandin (a) Excluding fees.

.. $1971557 6.60%

.. 8396,115

$ 45,607 8.31%

$ 182,818 Total...................

818,204 Income taxes................

211,237 Other income and deductions.

69,832 Interest char es.............

278,934 772,075 173,471 79,818 266,992 735,989 181,767 42,051 236,539 Pretax operating Income, Including AFC:

Electric...................

762,362 716,719 672,964 Gas 55,842 55,356 63,025 NOTE 5. Jointly-Owned Generating Facilities The following table reflects the Company's share of jointly-owned generating facilities at December 31, 1986. The Com-pany is required to provide financing for the unit in process of construction and for any additions to the units in service. The Company's share of expenses associated with the Roseton units and Oswego Steam Station Unit No. 6 is included in the appropriate operating expenses in the Consolidated Statement of Income.

In thousands oldollars Percentage Construction owner-Utility AccumuIated work in ship plant depreciation progress Net income S

397,865 411,430 S

359,734 Depreciation:

Electric.....

Gas Total 141,663 137,630 128,521 13,648 12.997 12,629 S

155,311 150,627 141,150 Construction expenditures (including nuclear fuel):

Electric...................

S 734,348 S

749,912 S

734.706 Gas 39,714 21,208 35.140 S

774,062 S

771,120 769.846 Total Roseton Steam Station Units No.1 and 2(a)...

25

$ 83,199

$27,513 738 Oswego Steam Station Unit No. 6(b)..........

76

$260,099

$47,961 S

631 Nine Mile Point Nuclear Station UnitNo. 2(c)(d).

41

$2,263,700 (a) The remaining ownership interests are Central Hudson Gas and Electric Corporation, the operator of the plant (35%) and Consoli-dated Edison Company of New York, Inc. (40%).

fb) The Company is the operator. The remaining ownership interest is Rochester Gas and Electric Corporation (24%).

(c) The remaining ownership interests are Long Island Lighting Com-pany (18%), New York State Electric and Gas Corporation (18%),

Rochester Gas and Electric Corporation (14%), and Central Hud-son Gas and Electric Corporation (9%) (see Note 10).

(d) Excludes amounts spent for nuclear fuel ~ unshared internal Com-pany charges, certain costs associated with non-generating facilities being constructed in connection with the Unit and ac-crued amounts due under the Cotenant Agreement.

Identifiable assets:

Electric...........

Gas Total........

Corporate assets Total assets

$6,424,656

$5,756,586

$5,155,372 468,299 444,070 432,113 6,892,955 6,200,656 5,587,485 718,248 813,181 645,916

$7,611,203

$7,013.837

$6,233,401

24 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES NOTE 7. Capitalization CAPITAL STOCK The following table summarizes the shares of capital stock authorized, issued and outstanding:

At December 31, 1986 1985 1984 Common stock, $1 par value:

Authorized Issued &outstandin Preferred stock, $100 par value:

Authorized Issued &outstandin 150,000I000 127,140,994 3,400)000 3,260,000 150,000,000 150,000,000 126,928.340 116,848,974 3,400,000 3,400,000 3,318.000 3,342.510 Preferred stock, $25 par value:

Authorized

" Issued &outstandin 19,600,000 14,874,000 19,600,000 14,044,000 19,600,000 11,210,000 Preference stock, $25 par value:

'uthorized Issued &outstandin 4,000,000 0

4,000,000 4,000,000 0

520,000 The table below summarizes changes in capital accounts for 1984, 1985 and 1986:

Common Stock

($ 1 par value)

Preferred and Preference Stock

$ 100 par value

$25 par value on-on-Redeem-Redeem-Redeem-able*

able'hares able*

Capital Stock Premium Redeem-Expense able*

(Net)'alance January 1, 1984 Salesin1984.............

Issued to stock purchase plans in 1984............

Redemptions.............

Foreign currency translation ad ustment...

104,010,003 $ 104,010 3,370,240

$210,000 6,534,400 6,534 6,304,571 6,305 (27,730)

$127,024(e) 10,136,000 2,000,000 (2,773)

(406,000)

(10,150) 87,117 555 (2,126)

$30,000

$223,400(a)

$ 1,174,382 50,000 87,878 Balance December 31,1984 Salesin1985.............

Issued to stock purchase plans in1985............

Redemptions.............

Foreign currency translation adjustment...

116,848,974 116,849 3,342,510 210,000 4,465,600 4,465 5,613,766 5,614 (24,510) 124,251(e) 11,730,000 30,000 3,000,000 50,000 (2,451)

(686,000)

(17,150) 99,535 442 (2,422) 263,250(a) 1,347,806 25,000 74,216 Balance December 31,1985 Sales in 1986.............

Issued to stock purchase plansin1986............

Redemptions.............

Foreign currency translation ad ustment....

126,928,340 126,928 3,318,000 60,354 61 152,300 152 (58,000) 210,000 121,800(e) 14,044,000 3,000,000 (5,800)

(2,170,000)

(54,250) 2,821 437 603 80,000 271,100(a) 1,519,577 75,000 (939)

Balance December 31,1986 127,140,994 $ 127,141 3,260,000

$210.000

$ 116,000(e) 14,874,000

$80,000

$291.850(a)

$1,522.499 In thousands of dollars.

(a) Includes sinking fund requir'ements due withinone year.

NI'AGORA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 25 NON-REDEEMABLE PREFERRED STOCK (Optionally Redeemable)

The Company has certain issues of preferred stock which provide for optional redemption as follows:

Redemption price per share (Before adding accumulated dividends)

In thousands of dollars Eventual 1986 1985 1984 December 31, 1986 minimum At December 31, Preferred $100 par value:

3.40% Series; 200,000 shares..

3.60% Series; 350,000 shares..

3.90% Series; 240,000 shares..

4.10% Series; 210,000 shares..

4.85% Series; 250,000 shares..

5.25% Series; 200,000 shares..

6.10% Series; 250,000 shares..

7.72% Series; 400,000 shares..

Preferred $25 par value:

Adjustable Rate Series A; 1,200,000 shares...........

Adjustable Rate Series C; 2,000,000 shares...........

$ 20,000 35,000 24,000 21,000 25,000 20,000 25,000 40,000 30,000 50,000

$ 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 30,000 30,000 50,000

$103.50 104.85 106.00 102.00 102.00 102.00 101.00 105.44 (a)

(b)

$103.50 104.85 106.00 102.00 102.00 102.00 101.00 102.36 25.00 25.00 (a) Not redeemable until 1988.

(b) Not redeemable until 1990.

$290,000

$290,000

$240,000 MANDATORILYREDEEMABLE PREFERRED STOCK The Company has certain issues of preferred and preference stock which provide for mandatory and optional redemption as follows:

Redemption price per share (Before adding accumulated dividends)

In thousands of dollars At December 31, 1986 1985 1984 December 31, 1986 minimum Preferred $100 par value:

7.45% Series; 420,000, 438,000, and 456,000 shares...

10.13'/o Series; 250,000 shares 10.60% Series; 240,000, 280,000 and 286,510 shares 12.75% Series; 250,000 shares.

Preferred $25 par value:

8.375% Series; 1,200,000, 1,300,000 and 1,400,000 shares 8.75% Series; 3,000,000 shares 9.75%Series; 738,000, 804,000 and 870,000shares 9.75% Series (second); 816,000 and 1,020,000 shares 10.13'/o Series; 1,000,000 shares 10.75% Series; 1,600,000 shares 12.25% Series; 700,000 shares 12.50/o Series; 620,000 shares.

12.75% Series; none and 1,000,000 shares.............

15.00/o Series; none and 800,000 shares..............

Adjustable Rate Series 8; 2,000,000 shares.............

Preference $25 par value:

7.75% Series; none and 520,000shares..............

30>000 75>000 18,450 20,400 25>000 40,000 17,500 15,500 50,000 32,500 20,100 25,500 25,000 40,000 17,500 15,500 25,000 20,000 50,000

$ 42,000

$ 43,800 25,000 25,000 24,000 28,000 25,000'5,000

$ 45,600 25,000 28,651 25,000 35,000 21,750 25,500 25,000 40,000 17,500 15,500 20,000 50,000 13,000

$104.33 (a) 107.95 26.21 (b) 26.1625 26.22 (a)

(a)

(c)

(c)

(d)

$ 100.00 100.00 102.65 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 Lessslnkin fundandredem tionre uirements..

407,850 60,380 392,900 13,050 387,501 19,601 (a) Not redeemable until 1988.

(b) Not redeemable until 1992.

(c) Not redeemable until 1991.

(d) Not redeemable until 1989.

'Series called for redemption January 19, 1987.

$347,470

$379.850

$367.900

26 N I A G A R A M0 H A W K POWER CORPORATION AN D SUBSIDIARY C 0 M P ft N I'E S These series require mandatory sinking funds for annual redemption and provide optional sinking funds through which the Company may redeem, at par, a like amount of additional shares (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 for preferred stock are as follows:

No. of shares Commencing In thousands ofdollars 1987 1988 1989 1990 1991 Preferred $100 par value:

7.45% Series..........

10.13% Series....

~

~

~

~

~

~

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

Preferred $25 par value:

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

8.75% Series...........

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

10.13/o Series...........

10.75% Series.........

~.

12.25% Series.......

~

~

~

~

12.50% Series........

~

~

~

Ad ustable Rate Series B 18,000 25,000 20,000 100,000 600,000 66,000 100,000 320,000 43,060 38,139 50,000 6/30/77 12/31/87 3/31/80 4/1/83 12/31/92 10/1/80 12/31/87 6/30/89 3/31/87 3/31/87 9/30/93

$ 1,800 2,500 2,000 2,500 1,650 2,500 1,077 953

$ 1,800 2,500 2,000 2,500 1,650 2,500 1,077 953

$ 1,800 1,875 2,000 2,500 1,650 1,875 8,000 1,077 953

$ 1,800 2,500 2,000 2,500 1,650 2,500 8,000 1,077 953

$ 1,800 2,500 2,000 2,500 1,650 2,500 8,000 1,077 953

$14,980

$14,980

$21,730

$22,980

$22,980 LONG-TERM DEBT Long-term debt and long-term debt due within one year consisted of the following:

In thousands ofdollars At December 31, 1986 1985 In thousands ofdollars At December 31, 1986 1985 First mortgage bonds:

3s/e% Series due May 1, 1986.........

4r/e% Series due September 1, 1987...

3r/s%Seriesdue June1,1988........

14r/e% Series due August 11, 1988.....

12%

Series due March 1, 1989.......

• 9Ve%SeriesdueOctober 1,1989.....

4V4% Series due April 1, 1990.........

15%

Series due March 1, 1991.......

14e/4% Series due May 1 ~ 1991.........

4Ve% Series due November 1, 1991 12.73/o Series due February 1, 1992....

13.06% Series due February 1, 1992....

12.73% Series due February 20, 1992..

12.68% Series due February 28, 1992..

15Ve% Series due March 1, 1992.......

1574% Series due June 1 ~ 1992........

11%

Series due May1,1993.........

12Ve% Series due March 1,1994.......

8r/s% Series due August 1, 1994......

4Vs% Series due December 1, 1994...

9Vs% Series due October 1, 1996.....

5r/s% Series due November 1, 1996...

6V4% Series due August 1, 1997......

6Ve% Series due August 1, 1998......

12e/s% Series due March 1 ~ 1999.......

9Vs% Series due December 1, 1999...

12.95% Series due October 1, 2000....

7s/s% Series due February 1, 2001.....

7Vs% Series due February 1, 2002.....

7s/4% Series due August 1, 2002......

8V4% Series due December 1, 2003...

9Ve% Series due December 1,2003...

9.95% Series due September 1, 2004..

10.20% Series due March 1, 2005......

8.35% Series due August 1, 2007.....

8Vs% Series due December 1, 2007...

'13Ve% Series due April1, 2012.........

16'/s Series due August 1, 2012........

50,000 50,000 34,000 20,000 13,000 50,000 40,000 201000 50,000 10,000 20,000 251045 23,346 50,000 150,000 40,000 100,000 45,000 40,000 60,000 75,000 69,334 65,000 80,000 80>000 80,000 50,000 90,000 35,000 711050 42,000 25,760 3i016

$ 30,000 50,000 50,000 50,000 20,000 13,000 50,000 38,650 90,000 40,000 20,000 50,000 10,000 20,000 50,000 58,500 50,000 13,000 40,000 45,000 40,000 60,000 17,000 75,000 80,000 65,000 80,000 80,000 80,000 50,000 95,000 35,000 71,050 44,000 25,800 3,046 12r/e% Series due November 1, 2012 12r/s% Series due March 1,2013.....

12Ve%Seriesdue June15,2013.....

11V4%Seriesdue July1

~ 2014.......

'11Vs% Series due October 1, 2014...

10/o Series due June1

~ 2016........

10/o Series due November 1,2016...

8~/s%SeriesdueNovember1,2025 Total First Mortgage Bonds.........

Promissory notes:

8% Series Adue June 1, 2004.......

Adjustable Rate Series due July 1, 2015 December 1, 2025 December 1,2026 Notes payable:

17% Eurodollar Guaranteed Notes due September15,1989.................

Adjustable London Interbank Offered Rate due September 15, 1989.....

Intermediate Notes, Various rates, due 1989-1992 Swiss Franc Bonds due December 15, 1995..

15.02/o Unsecured Notes due 1990.........

Notes, Interest Rate Exchange Agreement...

Revolving credit and loan agreements Revolving credit agreement, Oswego Facilities Trust.................

Other Unamortized remlum discount TOTALLONG-TERM DEBT.............

Less long-term debt due within one ear Tax-exempt pollution control related issues 79,355 69,530 75,690 40,015 150,000 100,000 75,000 100,000 100,000 50,000 75,690 40,015 75,000 100,000 100,000 75,000 75,000 50,000 48,900 50,000 50,000 50,000 46,705 9,000 50,000 50,000 50,000 25,000 25,000 34,039 117,906 67) 25,080 99,875 1,548 2,893,519 2,708,559 93,914 65,465

$2,799,605 $2,643,094 2,246,141 2,129,751 46,600 46,600

NI/(CA+A MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 27 Several series of First Mortgage Bonds and Notes were issued to secure a like amount of tax-exempt revenue bonds and notes issued by the New York State Energy Research and De-velopment Authority (NYSERDA). $225,000,000 bear interest at a daily adjustable interest rate (with a Company option to con-vert to a fixed interest rate) which averaged 4.38% for 1986 and are supported by bank direct pay letters of credit. Pursuant to agreements between NYSERDA and the Company, trust funds have been established with the proceeds from the bond and note issues. Such proceeds are to be used for the purpose of constructing certain pollution control facilities at the Com-pany's generating facilities. Unexpended proceeds in the trust funds amounted to $2,238,000 at December 31, 1986 and are recorded in Other Property and Investments.

Notes Payable include a ten-year Swiss Franc Bond issue equivalent to $50,000,000 in U.S. funds. Simultaneously with the sale of these bonds, the Company entered into a currency exchange agreement to fullyhedge against currency exchange rate fluctuations.

The Company has Interest Rate Exchange Agreements ex-tending into 1991 for $75,000,000, including $25,000,000 for Oswego Facilities Trust (Trust). The agreements require the Company to make fixed rate payments which, calculated on a semi-annual bond basis, are equivalent to 7.53%, and, in ex-change, receive a LIBOR-based floating rate payment from a bank. The Company generally uses its own commercial paper notes as the source of funding for $50,000,000 and Trust notes for $25,000,000. The related interest expense is recorded on a net basis.

The arrangements with the Trust provide financing for the construction of a new energy management system. The Trust has a $50,000,000 Direct Pay Letter of Credit Facility and Re-volving Credit Agreement, $25,000,000 of which is subject to an Interest Rate Exchange Agreement and is used to support its commercial paper obligations. All such obligations are se-cured by certain assets held by the Trust. The Company is required to purchase, or otherwise arrange for, the disposition of the Trust assets upon the termination of the Trust. The Letter of Credit Facility and Revolving Credit Agreement of the Trust require payment of fees which are based upon the amount of commercial paper outstanding.

Other long-term debt in 1986 consists of obligations under capital leases of $56,180,000 and a liabilityto the U.S. Depart-ment of Energy for nuclear fuel disposal of $61,726,000.

Certain of the Company's debt securities provide for a mandatory sinking fund forannual redemption. The Company's five-year mandatory sinking fund redemption requirements are as follows:

Principal amount Commencing ln thousands ofdollars 1987 1988 1989 1990 1991 First Mortgage Bonds:

10.20% Seriesdue March1,2005......

8.35% Series due August 1, 2007.....

85/8% Series due December 1, 2007...

9.95% Series due September 1, 2004 14r/e% Series due August 11, 1988.....

12.95% Series due October 1, 2000....

9'%eries due December1,2003...

PromIssory Notes:

8%SeriesAdue June1

~ 2004........

$ 1,500 750 2,000 5,000 17,000 5,333 2,941 500 3/1/78 8/1/82 12/1/83 9/1/85 8/11/86 10/1/86 12/1/87 6/1/90

$ 1,500 550(a) 2,000 5,000 17,000 5,333 2,941

$ 1,500 750 2,000 5,000 17,000 5,333 2,941

$ 1,500 750 2,000 5,000 5,333 2,941

$ 1,500 750 2,000 5,000 5,333 2,941 500

$ 1,500 750 2,000 5,000 5,333 2,941 500 (a) A portion of the requirements have been met by advance purchases.

$34,324

$34.524

$ 17,524

$18.024

$ 18,024 Additionally, certain other series of mortgage bonds provide for a debt retirement fund whereby payment requirements may be met, in lieu of cash, by the certification of additional property, the waiver of the issuance of additional bonds or the retirement of outstanding bonds. The 1986 requirements for these series were satisfied by the certification of additional property. The Com-pany anticipates that the 1987 requirements for these series will be satisfied by other than payment in cash. Total annual debt retirement fund requirements for these series, based upon mortgage bonds outstanding December 31, 1986, are $7,050,000.

NOTE 8. Pension and Other Retirement Plans.

The Company and its subsidiaries have non-contributory pension plans covering substantially all their employees. The total pension cost was $44,300,000 for 1986 and $42,100,000 for 1985 and 1984 (of which $15,600,000 for 1986, $13,400,000 for 1985 and $11,400,000 for 1984 was related to construction labor and accordingly, was charged to construction projects).

Studies indicate that the accumulated plan benefits, as de-termined by consulting actuaries, and plan net assets for the Company's plans at December 31, 1986 and 1985 are as fol-lows:

Total Net assets available for plan benefits...

$501,000

$433,000

$677,000

$583,000 The weighted average assumed rate of return used in deter-mining the actuarial present value of accumulated plan ben-efits was 7t!~% in 1986 and 8% in 1985.

fn thousands ofdollars 1986 1985 Actuarial present value of accumulated benefits:

Vested

$471,000

$409,000 Non-vested 30,000 24,000

28 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMHANIES The table on page 27 summarizes accumulated plan benefits attributable to employee wage levels and service rendered through December 31, 1986 and 1985. These amounts do not take into consideration expected future service, wage in-creases and associated actuarial assumptions.

These addi-tional factors and assumptions are considered in determining the funding requirements of the Company's ongoing pension plans, based upon an approved actuarial cost method, and are in conformity with generally accepted actuarial principles and practices.

In addition to providing pension benefits, the Company and its subsidiaries provide certain health care and life insurance benefits for retired employees.

Substantially all of the Com-pany's employees may become eligible for these benefits if they reach retirement age while working for the Company.

These benefits are provided through an insurance company whose premiums are based on the benefits paid during the year. The cost (insurance premiums) of providing these ben-efits amounted to approximately

$7,900,000 for 1986,

$7,500,000 for 1985 and $6,000,000 for 1984.

NOTE 9. Federal and Foreign Income Taxes income Tax Reform: In October 1986, the Tax Reform Act of 1986 (Act) was signed into law. One of the provisions of the Act lowered the statutory corporate Federal income tax rate from 46% to 34% effective July 1, 1987. The deferred Federal income taxes below relating to book/tax timing differences have been provided at the current statutory rate of 46%.

Components of United States and foreign income beforein-ln thousands ofdollars 1986 1985 1984 United States..............

Foreign Consoiidatin eliminations

$570,113 14,311 7,61

$551,907

$499,285 17,516 18,326 11,230 9,570 Income before income taxes

$576,809

$558,193

$508,041 Following is a summary of the components of Federal and foreign income tax and a reconcilation between the amount of Federal income tax expense reported in the Consolidated Statement of Income and the computed amount at the statu-tory tax rate:

Summary Analysis:

ln thousands ofdollars 1986 1985 1984 Components of Federal and foreign income taxes:

Current tax expense: Federal Forei n

Deferred Federal income tax expense...

Income taxes included in Operating Expenses Federal income tax expense included in Other Income and Deductions Federal income tax credits included in Other Income and Deductions...

Total

$ 24>959 6,767 31>726 179,511 211>237 13>475 45,768

$178,944

$ (21,329) 7,746 (13,583) 187,054 173,471 19,140 45,848

$146,763

$ 17,713 8,498 26,211 155,556 181,767 5,831 39,291)

$148,307 Components of deferred Federal Income taxes(Note 1):

Depreciation.

Investment tax credit Construction overheads..............................

Recoverable energy and purchased gas costs Gain on disposition of property Nuclear fuel disposal cost............................

Reacquisition ot bonds Sterling abandonment Other Deferred Federai income taxes net

$ 50,399 48,252 26,111 (9,309)

(15,374) 15,700 (1,243) 19,207

$133,743

$ 38,822 36,507 17,973 6,472 41,148 4,601 (3,769) 548)

$141,206

$ 52,130 54,900 6,756 (2,458) 3,100 1,477 (1,566) 1,926

$116,265 Reconciliation between Federal and foreign Income taxes and the tax computed at prevailing U.S. statutory rate on Income before income taxes:

Computed tax Reduction attributable to flow-through of certain tax adjustments:

Depreciation.

Allowance forfunds used during construction Taxes, pensions and employee benefits capitalized foraccounting purposes..

Real estate taxes on an assessment date basis Deferred taxes provided at other than the statutory rate Other Federal and forei n income taxes

$265,332 (18>235) 76,266 1>645 4,074 7>210 15,428 86,388

$178,944

$256,769 (16,274) 86,166 5,113 6,062 13,855 15,084 110,006

$ 146,763

$233,699 (14,926) 74,288 11,896 (406) 12,143 2,397 85,392

$ 148,307

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 29 NOTE 10. Nine Mile Point Nuclear Station Unit No. 2 Nine Mile Point Nuclear Station Unit No. 2 (Unit), a nuclear power plant being constructed and to be operated by the Company and shared with other utilities, is the only major generating facility currently under construction by the Com-pany. Ownership is shared by the Company (41%), Long Island Lighting Company (LILCO) (18%), New York State Electric 8 Gas Corporation (18%), Rochester Gas and Electric Corpora-tion (14%), and Central Hudson Gas 8 Electric Corporation (9%). Output of the Unit, which will have a projected capability of 1,084,000 kw., is to be shared in the same proportions as the cotenants'espective ownership interests.

The recovery of costs associated with the Unit is being af-fected by the Cost Settlement Agreement and the implementa-tion of such Agreement for ratemaking purposes as discussed below. Also, recent changes in generally accepted accounting principles will require the recognition of the loss associated with disallowed plant costs by the year 1989. Under the terms of the Cost Settlement Agreement, the loss to the Company would approximate $626 million, net of Federal income taxes at a 46% rate, and could increase as described more fullyunder "Ratemaking and Financial Accounting Recognition" below.

Construction Status-Cost and Schedule: On October 31, 1986, the Company obtained a low power license from the Nuclear Regulatory Commission (NRC), which included a schedule exemption to permit the loading of fuel to take place. The fuel loading process has been successfully completed. The Com-pany is presently awaiting the approval by the NRC of certain engineering analyses related to repairs made to the Unit's eight main stream isolation valves (MSIV's) that verify their con-tinued suitability for operation. The Company anticipates the NRQ will approve the Company's findings and recommenda-tions and allow the power ascension program to proceed, al-though no such assurance can be provided. Once approval is obtained, Unit start-up will be initiated leading to planned commercial operation in September 1987.

As a result of the MSIV engineering analysis and repair, coupled with the NRC review and a consequent change in the estimated commercial operation date to September 1987, the completion cost of the Unit is currently estimated to be $5.878 billion (comprised of construction costs of $4.059 billion and AFC of $ 1.819 billion), representing an increase of $91 million as compared to the November 1986 cost estimate which as-sumed a July 1987 commercial operation date. In addition to incorporating the current timetable for power ascension and commercial operation, this cost estimate considers each co-tenants current estimate for financing cost rates and the inclu-sion of construction work in progress (CWIP) included in rate base for three of the cotenants. The increase in the cost of the Unit is primarily attributable to delays occasioned by the en-gineering analyses and repairs to the MSIV's coupled with the required NRC approval. The Company's 41% share of the total estimate is approximately $2.417 billion, exlusive of the $ 171 million of payments (described below) to be made by the Com-pany to the cotenants and, as of December 31, 1986, the Com-pany has invested approximately $2.3 billion in the Unit, includ-ing AFC and overheads capitalized. As discussed below, the Company will be required to write off a portion of this invest-ment, which includes AFC currently reflected in income and AFC which will accrue to income to the extent permitted by applicable generally accepted accounting principles. (See Ratemaking and Financial Accounting Recognition regarding changes in financial accounting recognition adopted by the Financial Accounting Standards Board (FASB) in December 1986.)

During 1987, the primary activity at the Unitwillbe the power ascension program leading to commercial operation. However as delays have previously occurred with respect to the Unit, the Company can provide no assurance as to the precise date commercial operation will be accomplished.

Any delay in achieving the September 1987 commercial operation date is estimated to add a minimum of approximately $60 millioneach month to the total cost of the Unit (approximately $25 million with respect to the Company's 41% share).

Under the Cost Settlement discussed below, the Company does not expect the additional costs arising under the current estimate, or addi-tional costs arising as a result of further delays, if any, to be recoverable through rates.

Cost Settlement:

ln connection with an extensive 1982 PSC proceeding, which concluded that completion of the Unit is warranted, the PSC stated that it would apply a strict standard of prudence for all costs incurred in completing the Unit. On July 3, 1985, the PSC ordered the establishment of a proceed-ing (Case No. 29124) to investigate the prudence of costs in-curred for the construction of the Unit.

On September 18, 1985, the Company and the other coten-ants, together with the Staff of the PSC, filed a joint motion with the PSC seeking approval of an agreement entitled "Specifications of Terms and Conditions of Offer of Settle-ment" (Settlement) that, if approved by the PSC, would consti-tute a complete disposition of Case No. 29124 and establish, among other things, an allowed cost for the Unit of $4.450 billion.

On June 26, 1986, the PSC decided not to accept the Settle-ment as proposed and ordered the cotenants to inform the PSC whether they would agree to a settlement of the proceed-ing using a $4.160 billion cost allowance. On July 15, 1986, the cotenant companies notified the PSC that they would accept a Settlement modified only for a change in the allowable cost to

$4.160 billion from that amount originally proposed of $4.450 billion. In addition, in order to induce settlement among the cotenants, the Company entered into an agreement with the other cotenant companies (Cotenant Agreement) whereby it will reimburse the cotenant companies, upon commercial op-eration of the Unit, for $ 171 million representing their respec-tive ownership shares of the $290 million incremental disallow-ance. This obligation willnot cause a reallocation of ownership interests in the Unit.

On September 10, 1986, the PSC approved the Settlement which contained the following key terms and conditions:

The maximum amount of the Unit's expenditures to be included in the cotenants'ate bases would be $4.160 billion, and disallowed expenditures would not be less than $ 1.190 billion with amounts, if any, above the January 1985 completion cost estimate of $5.350 billion being forthe account of the cotenants, except in the case of an "extraordinary event" as discussed below. The al-lowed cost of $4.160 billionwillbe reduced by the financ-ing costs "prepaid" by ratepayers as a result of rate base inclusion of a portion of the Unit's cost prior to comple-tion.

The cotenants may request from the PSC an upward adjustment of the $4.160 billion cap based only on the occurrence of an "extraordinary event" as contemplated

30 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPAGNIE/

in prior PSC orders concerning the Unit. At the time the agreement was entered into, the cotenants stipulated that they were not then aware of any basis for such a claim.

The rate phase-in of each cotenant's share of allowed Unit costs is to be included in rate base over a reasonable period, together with accumulated deferred carrying costs on the portion of allowed Unit cost that has not yet been included in rate base.

Appropriate income tax deductions and credits appli-cable to the Unit's completion cost will be allocated to the disallowed costs and reserved for shareholders.

The provisions of the Settlement would be in full satis-faction of the penalty and incentive provisions of the PSC's prior Incentive Rate of Return (IROR) and "cap" orders relating to the Unit.

The cotenants agree not to challenge the legal validity of either the IROR or "cap" orders previously issued by the PSC. In addition, each cotenant would waive any and all claims it may have against any other cotenant con-cerning the design, engineering or construction of the Unit.

Based upon the proposal adopted by the PSC, the January 1987 cost estimate of $5.878 billion,which reflects the benefits of approximately $273 million of prepaid financing costs, re-sults in the disallowance of $ 1.991 billion of the total Unit cost.

The Company's share of the disallowed amount (including the impact of the Company's 41% share of the $290 million de-crease in the allowed cost amounting the $119 million,and the

$ 171 million payment to the cotenants under the Cotenant Agreement) would be approximately $ 1 billion. The disallow-ance to the Company would increase by its proportionate share of the cost of any further delays in the commercial opera-tion of the Unit and might be further increased dependent on the ultimate PSC decision as to the costs covered by the Set-tlement. Also, the magnitude of the loss to the Company would be affected by the implementation requirements that may ulti-mately be ordered by the PSC. (See "Ratemaking and Financial Accounting Recognition.")

Several intervening parties petitioned for rehearing of the Settlement. Such petitions were denied and these intervenors have indicated that they will take legal action to overturn the PSC's approval and require the PSC to resume the proceeding investigating the prudence of costs incurred for construction of the Unit. The Company is unable to predict whether such legal action will be taken, or if taken, the results thereof.

Ratemaklng and Financial Accounting Recognition: In connec-tion with the Company's pending rate filing, the Staff of the PSC on August 22, 1986, proposed adjustments to the Com-pany's original rate case filing to incorporate the terms of the Settlement.

The Staff's implementation requirements, which include among other things an expansion of costs covered by the Settlement, if ultimately sustained, would result in a greater level of disallowed Unit costs to be considered in the rate set-ting process.

Also, the Staff has proposed the adoption of ratemaking methodologies which the Company believes are contrary to the terms and intent of the Settlement. These in-clude the recognition of tax benefits at a 34% rate rather than a 46% rate, the discounting of tax benefits, exclusion from rate base of unrealized tax benefits and a departure from prevailing ratemaking methodologies used in developing capital struc-ture. These proposals, if adopted, would have a further detri-mental impact on the financial condition and results of opera-tions of the Company. A decision on the Company's pending rate filing, which will include Settlement implementation re-quirements, is expected in March 1987. The Company willcon-tinue to oppose the Staff's proposals and cannot predict whether such proposals will ultimately be adopted and sustained.

In December 1986, the FASB issued Statement of Financial Accounting Standards No. 90 "Regulated Enterprises-Accounting for Abandonments and Disallowances of Plant Costs", an amendment of FASB Statement No. 71 (SFAS No.

90). Among other things, this statement requires that when it becomes probable that part of the cost of a generating facility will be disallowed for ratemaking purposes and a reasonable estimate of the amount of the disallowance can be made, the estimated amount of the probable disallowance shall be de-ducted from the reported cost of the plant and recognized as a loss. Also, once adopted the statement would prohibit the capitalization of an allowance for funds used during construc-tion (AFC) unless it is probable that such AFC will be includa-ble as an allowable cost for ratemaking purposes. The FASB is continuing to review the financial accounting recognition for rate phase-in plans. In the case of the Company, the applica-tion of this statement is generally required no later than 1988.

However, the effective date of SFAS No. 90 may be delayed until 1989 if its adoption would cause a violation or probable future violation of a restrictive clause in an existing loan inden-ture or other agreement and relief from such restrictive clause is being actively pursued (see Note 4).

Based upon the Company's interpretation of the terms and conditions of the Settlement discussed above, the Company would be required to write-off approximately $ 1 billion, re-duced to approximately $626 million, net of Federal income taxes at a 46% rate. The amount of this write-offcould increase by approximately $200 million, net of Federal income taxes, should the PSC adopt all of the PSC Staff's positions previ-ously described. These amounts do not take into consideration any delay in commercial operation beyond September 1987.

The accounting period to which a write-offwould be charged is dependent upon the Company's decision with respect to the timing of adoption of SFAS No. 90. If SFAS No. 90 had been in effect in 1986 and 1985, the net of tax loss would have been allocated to each of those years. Therefore, reported 1986 and 1985 balance available for common stock would have been, on a pro-forma basis, approximately $61 million and $65 million, respectively, and pro-forma earnings per share would have been $.48 per share and $.53 per share, respectively.

Based upon the current high cost of large, base-load generating facilities, legislators, regulatory commissions and utilitycompanies nationwide have ordered or are considering the phase-in of these costs over a period of years. In accor-dance with current generally accepted accounting principles, Unit operating and financing costs may be deferrable under a phase-in plan for recovery in the future. The Staff of the PSC and the Company are in agreement on the methodology to be utilized in rate implementation of a phase-in plan, including recovery of deferred costs and carrying charges over the operating life of the Unit.

The PSC has adopted the phase-in methodology proposed by the Company and Staff. The PSC also adopted a phase-in period for the Unit of seven years, noting that a five-year phase-in period would be reasonable in the event of a disallow-ance of cost in the magnitude contemplated by the Settlement discussed above. In connection with the Company's currently

QIggAsRA MOHAWK POWER CORPORA7ION AND SU'BSI DIARY COMPANIES 31 pending rate proceeding, the Staff has proposed a five-year phase-in of allowed Unit costs. The Company is unable to pre-dict at this time over what period of time the phase-in will ultimately be ordered or when it will commence. A portion of the Unit's cost ($680 million) is presently being reflected as CWIP in rate base.

Also, in April 1982, the PSC adopted an incentive, rate of return (IROR) program in connection with the remaining con-struction costs of the Unitwhich would be implemented as part of the rate proceeding for each cotenant that considers rate recognition of the Unit's completion cost. In July1984, the PSC issued an opinion and order which amended the IROR pro-gram to also include a $5.4 billion ceiling on the Unit's final allowable cost. Under the amended IROR program, costs in-curred in excess of $4.6 billion, but less than $5.4 billion, are required to be borne by cotenant shareholders to the extent of 20% of the variation of revenue requirements, with costs in excess of $5.4 billion to be borne in total by the cotenant shareholders. As indicated above under "Cost Settlement," the approval of the Settlement by the PSC and the ability of the PSC's adoption of the Settlement to sustain judicial challenge would render the IROR and "cap" orders inoperative.

Nuclear Regulatory Commission-Audits and Licensing: In May 1986, the Staff of the Nuclear Regulatory Commission (NRC) concluded an assessment of the Unit's overall construction program. The assessment covered the twelve months ended January 1986 and concluded that management of the project was satisfactory in all areas, although increased management attention to certain items was recommended.

The Company addressed the NRC recommendations in a response submitted to the NRC on June 30, 1S86. Most of the actions recom-

mended, as described in the Company's

response, were al-ready initiated and, in some cases, completed prior to receipt of the report from the NRC. The Company does not expect that the implementation of the remaining recommendations will materially affect either cost or scheduled completion of the Unit.

A number of nuclear power plant construction projects in the United States have encountered substantial delays, licensing difficulties and cost escalation due to a variety of factors. Also, the issuance of a full power operating license and achievement of commercial operation could be adversely affected by a wide variety of industry and plant specific construction, operating, regulatory, legislative, economic and other factors, including recent international events. Although the outcome of the re-maining regulatory licensing proceedings relating to receipt of a full power license cannot be predicted with certainty, the Company believes a full power operating license willbe issued since the Unit is designed and constructed to meet applicable regulatory requirements.

Long-term Contracts for the Purchase of Electric Power: At January 1, 1987, the Company had long-term contracts to purchase electric power from the following generating facilities owned by the New York Power Authority (NYPA):

Facility Niagara hydroelectric project..

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

FitzPatrick nuclear plant.........

Expiration Purchased Estimated date of capacity annual contract in kw.

capacity cost 1990 1,111,332

$ 13,336,000 2002 year-to-earbasis 270,000 6,156,000 153,000 (a) 14,686,000 1,534,332

$34,178,000 Lease Commitments:

The Company leases certain property and equipment which meet the accounting criteria for capitali-zation. Such leases, having a net book value of $56.2 million and $41.9 million at December 31, 1986 and 1985, respectively, are included in UtilityPlant in the accompanying Consolidated Balance Sheets.

Since current ratemaking practice treats all leases as operating leases, the capitalization of these leases has no impact of the Company's Consolidated Statement of Income. The Company recognizes as a charge against income an amount equal to the rental expense allowed for rate pur-poses. The Company's future minimum rental commitments under these capital leases and non-cancellable operating leases aggregate approximately $634 million,a substantial por-tion of which relates to a 41-year operating lease of a transmis-sion line facility. Annual future minimum rental commitments for the period 1987-1991 range between

$23 million and $32 million.

Mandated Refunds to Customers:

As part of the Company's March 1984 rate decision, the PSC ordered the refund of ap-proximately $96 million of previously collected nuclear fuel disposal costs over a five-year period. The Company had col-lected in rates approximately $146 million for the disposal of nuclear fuel irradiated prior to 1983. The refund represents the amount by which these previously collected costs are in excess of the Company's liability as of March 31, 1984 to the U.S.

Department of Energy for nuclear fuel disposal under the Nu-clear Waste Policy Act. At December 31, 1986, $63.2 million remains to be refunded and is recorded in Deferred Credits.

(a) 61,000 kw for summer of 1987; 59,000 kw for winter of 1987-88.

The purchase 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.

NOTE 11. Commitments and Contingencies Construction Program: At December 31, 1986, substantial con-struction commitments existed, including those for the Com-pany's share of Unit No. 2 at the Nine Mile Point Nuclear Sta-tion. The Company presently estimates that the construction program for the years 1987 through 1991 will require approxi-mately $1.572 billion, excluding AFC, nuclear fuel and certain overheads capitalized. By years the estimates are $330 million,

$317 million, $296 million, $315 million and $314 million, respectively.

Litigation: In 1983, the PSC instituted a proceeding to investi-gate the Company's operating practices and certain other mat-ters that it was alleged may have resulted, among other things, in excessive fuel adjustment charges during the years 1977 to 1982, and further, to determine whether and to what extent remedial action with respect to any such matters is proper under the PSC's regulations or otherwise.

In 1985, the PSC ordered the Company to refund approximately $31.9 million over the twelve months ending April 30, 1S86. The Company appealed this decision to the Supreme Court, Appellate Divi-sion, Third Department which, in March 1986, held that the

32 NIAGARA MOHAWK POWER CORPORATION AN D SUBSIDIARY COMPtAN jtES PSC could not order refunds arising from rates charged prior to June 21, 1981, when certain public service laws were adopted. The PSC was directed to recalculate the amount of the refund and take action to correct for additional amounts refunded by the Company. Under this decision a substantial portion of the amounts refunded by the Company would be recovered from ratepayers.

The PSC has appealed this deci-sion to the Court of Appeals and a decision is expected in 1987.

The Company is unable to predict the outcome of this matter.

Advances on Behalf of Nine Mile Point Nuclear Unit No. 2 Co-tenant: In August 1984, the Company and Long Island Lighting Company (LILCO)entered into an agreement providing for the issuance by LILCOof up to $250 million in General and Refund-ing Bonds (LILCOBonds) and $150 million in unsecured notes to evidence and secure LILCO's repayment obligation for funds advanced by the Company on behalf of LILCOfor its 18%

ownership in the Unit.

The LILCO Bonds were fully issued by November 1985 and under the terms of a second agreement (Capital Funds Agree-ment), the Company provided its guarantee for a period of approximately three years through March 31, 1989, of up to

$165 million of LILCO's reimbursement obligations in connec-tion with $150 million principal amount of tax-exempt pollution control bonds issued by LILCO on December 31, 1985. The guarantee of the Company contains certain representations which, should the Company be unable to meet, require it to provide security in the form of First Mortgage Bonds. The Company expects LILCOto honor its obligations in connection with the LILCO tax-exempt bonds throughout the period while the guarantee is in effect. The Company has arranged for four-year term loans to fund its guarantee obligation, if needed. The Company has an interest of $85 millionin LILCO's third mortgage, which serves as partial security in the event its guarantee is required to be honored. LILCO is required to pay fees to the Company in connection with the guarantee.

In '1985, the Company received $146.7 million of the pro-ceeds from the sale of the LILCO tax-exempt bonds and applied $25 million against the LILCO Bonds, $36.7 million against unsecured notes and $85 million to LILCO's share of cash construction costs for the Unit commencing November 18, 1985. After being reduced by $ 13.6 million for advances plus interest through December 31, 1985, the proceeds pro-vided the Company with $71.4 million at December 31, 1985.

This balance was applied against subsequent LILCOcash con-struction obligations until fully expended in September

1986, at which time LILCO resumed making cash payments for its portion of cash construction costs. The Company agreed to waive interest and supplemental payments on a principal amount of LILCO Bonds equal to the daily unused portion of such $71.4 million.In May 1986, the Company sold $140 million of the LILCO Bonds to a single-purpose trust, which trust is-sued certificates to a limited number of institutional investors.

On December 30, 1986, the LILCO Bonds held by the Company and related unsecured notes, together with the LILCO Bonds held by the single-purpose trust were repaid and at December 31, 1986, LILCO's obligations to the Company have been fully satisfied. However, the Company's guarantee obligation under the Capital Funds Agreement remains in effect. Interest and supplemental payments on the LILCO Bonds and unsecured notes amounted to $27.1 millionfor 1986, $40.8 millionfor 1985 and $10.9 million for 1984 and are included in other income and deductions other items in the Consolidated Statement of Income.

Dec. 31, 1986

$637,896 1985 661,237 1984 675,089

$104>633 84,791 81,185

$84,698

$.57 91,724

.61 59,708

.39 Sept. 30, 1986

$554,546 1985 554,779 1984 606,437

$92,640 73,095 86,421

$74,909

$.49 79,503

.52 84,636

.66 June 30, 1986

$ 636,859 1985 637,724 1984 696,325 S 97>585 100,036 101,319

$85,535

$.56 96,758

.67 94,197

.77 March 31,1986

$831,018 1985 841,200 1984 807,695

$146,316 153,366 123,801

$152,723

$1.08 143,445 1.11 121,193 1.04 NOTE 12. Quarterly Financial Data (Unaudited)

Operating revenues, operating income, net income and earn-ings per common share by quarters for 1986, 1985 and 1984 are shown in the following table. The Company, in its opinion, has included all adjustments necessary for a fair presentation of the results of operations for the quarters. Due to the seasonal nature of the utilitybusiness, the annual amounts are not gen-erated evenly by quarter during the year.

In thousands ofdollars Operating Operating Net Earnings per revenues income income common share Quarterended

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 33 Report ofIndependent Accountants Price Vaterhnuse To the Stockholders and the Board of Directors of Niagara Mohawk Power Corporation We have examined the consolidated balance sheets of Niagara Mohawk Power Corporation and its subsidiaries as of December 31, 1986 and 1985, and the related consoli-dated statements of income and retained earnings and of changes in financial position for each of the three years in the period ended December 31, 1986. Our examinations were made in accordance with generally accepted auditing standards and accordingly included such tests of the ac-counting records and such other auditing procedures as we considered necessary in the circumstances.

As described in Note 10, the Financial Accounting Stan-dards Board issued Statement of Financial Accounting Standards No. 90 "Regulated Enterprises Accounting for Abandonments and Disallowances of Plant Costs" which provides, among other things that the cost of a generating facility disallowed for ratemaking purposes, be recognized as a loss. Application of this Statement is required not later than 1989.

The Company is a 41% participant in the construction of Nine Mile Point Nuclear Station No. 2 (Unit). As a result of continuing uncertainties discussed in Note 10, management is unable to predict whether further regulatory actions by the New York State Public Service Commission with respect to its investment in the Unit will have, in the aggregate, a

material effect on its financial position or results of opera-tions.

In our opinion, subject to the effects on the 1986, 1985 and 1984 financial statements of such adjustments, if any, that might have been required had the outcome of the un-certainties discussed in the preceding paragraph been known, the consolidated financial statements examined by us present fairly the financial position of Niagara Mohawk Power Corporation and its subsidiaries as of December 31, 1986 and 1985 and the results of their operations and changes in their financial position for each of the three years in the period ended December 31, 1986 in conformity with generally accepted accounting principles consistently applied.

Report of Management The consolidated financial statements of Niagara Mohawk Power Corporation and its subsidiaries were prepared by and are the responsibility of management.

Financial information contained elsewhere in this Annual Report is consistent with that in the financial statements.

To meet its responsibilities with respect to financial informa-tion, management maintains and enforces a system of internal accounting controls, which is designed to provide reasonable assurance, on a cost effective basis, as to the integrity, objec-tivity and reliability of the financial records and protection of assets.

This system includes communication through written policies and procedures, an organizational structure that pro-vides for appropriate division of responsibility and 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 requires key management employees to formally affirm their compliance with the Code.

The financial statements have been examined by Price Waterhouse, the Company's independent accountants, in ac-cordance with generally accepted auditing standards. As part of their examination, they made a study and evaluation of the Company's system of internal accounting 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 appears on this page. The independent accountants'xamina-tion does not limit in any way management's responsibility for the fair presentation of the financial statements and all other information, whether audited or unaudited, in this Annual Re-port.

The Audit Committee of the Board of Directors, consisting of'hree directors who are not employees, meets regularly with management, internal auditors and Price Waterhouse to re-view and discuss internal accounting controls, audit examina-tions and financial reporting matters. Price Waterhouse and the Company's internal auditors have free access to meet indi-vidually with the Audit Committee at any time, without man-agement present.

Syracuse, New York January 28, 1987

34 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPiAN)ES Selected Financial Data As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements, certain of the following selected financial data may not be indicative of the Company's future financial condition or results of operations.

1986 1985 1964 1983 1982 Operations: (000's)

Operating revenues.

Net income

$2,660,319

$2,694,940

$2,785,546

$2,632,315

$2,393,771 397,865 411,430 359,734 312,409 268,534 Common stock data:

Book value per share at year end Market price at year end Ratio of market price to book value at year end..

Dividend yield at year end Earnings per average common share...........

Rate of return on common equity Dividends paid per common share.............

Dividend payout ratio

$20.23 1674 82.8o/o 12.4%

S 2.71 13.P/o S 2.08 76.PYo

$19.61 20'/2 104.5%

10.1%

$ 2.88 15.(P/o

$ 2.06 71.P/o

$18.89 17%

92.(P/o 11.P/o

$ 2.84 14.P/o

$ 1.98 69.7/o

$18.55 153/4 84.F/o 12.PYo

$ 2.77 15.(P/o

$ 1.89 68.2Yo

$ 17.91 15%

87.2/o 11.P/o

$ 2.64 14.7o/o

$ 1.76 66.7'/o Capitalization: (000's)

Common equity Non-redeemable preferred stock..

Redeemable preferred stock Long-term debt

$2,571,491

$2,488,620

$2,207,117

$1,929,073

$1,680,650 290,000 290,000 240,000 240,000 210,000 347,470 379,850 367,900 338,474 262,792 2,799,605 2,643,094 2,395,471 2,048,548 1,881,441 Total First mortgage bonds maturing within one year 6,008,566 5,801,564 5,210,488 50,000 30,000 47,450 4,556,095 4,034,883 25,000 65,000 Total

$6,058,566

$5,831,564

$5,257,938

$4,581,095

$4,099,883 Capitalization ratios: (including first mortgage bonds maturing within one year)

Common stock equity Preferred stock Long-term debt 42.P/o 10.5 47.0 42.7Yo 11.5 45.8 42.(P/o 11.5 46.5 42.1%

41.(P/o 12.6

" 11.5 45.3 47.5 Financial ratios:

Ratio of earnings to fixed charges Ratio of earnings to fixed charges without AFC.......

Ratio of AFC to balance available for common stock..

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

Fuel, purchased power and purchased gas........

Maintenance and depreciation Total taxes Operating income Balance available for common stock..............

2.98 2.42 48.2/o 2.35 38.0/o 11.4 18.1 16.6 12.9 3.07 2.37 53.2Yo 2.36 43.4%

10.9 15.7 15.3 13.1 3.11 2.43 52.4%

2.39 46.F/o 10.1 14.7 14.1 11.1 2.98 2.40 43.P/o 2.35 50.0o/o 10.0 13.0 13.5 10.3 2.95 2.42 41.0'/o 2.32 49.PYo 10.5 13.2 13.2

9.6 Miscellaneous

(000's)

Gross additions to utilityplant Total utilityplant Accumulated depreciation and amortization Total assets S

774,062 771,120 769,846 691,464 594,469 8,445,993 7,640,905 6,903,184 6,165,711 5,516,532 1,763,443 1,629,437 1,501,282 1,486,196 1,389,112 7,611,203 7,013,837 6,233,401 5,357,572 4,781,767

N[Afi/BA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 35 Electric and Gas Statistics ELECTRIC CAPABILITY AtJanuary 1, 1987 1986 1985 ELECTRIC STATISTICS 1986 1985 1984 Thermal:

Coal fuel Huntley, Niagara River..

Dunkirk, Lake Erie.....

715 10 555 8

715 715 555 555 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 Nuclear fuel Nine Mile Point, Lake Ontario Purchased-firm contract Power Authority-FltzPatrick, Lake Ontario...

Total nuclear fuel..

Total thermal sources..

1,270 18 1,270 1,270 400 6

400 400 1,563 23 1,736 1,736 299 4

300 300 237 3

310 310 2,499 36 2,746 2,746 610 9

610 610 153 2

167 138 763 11 777 748 4,532 65 4,793 4,764 10 695 695 16 1,111 1,118 115 270 4

262 4

550 550 209 63 Hydro:

Owned and leased hydro stations (77).

684 Purchased firmcontracts Power Authority-Niagara River....

1,111 Power Authority-St. Lawrence River..............

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

Other Electric sales(Millions ofkw-hrs.)

Residential................

Commercial...............

Industrial..................

Municipal service..........

Otherelectrics stems......

9,359 10,374 10,801 234 3,579 8,976 9,907 10,886 241 5,286 8,944 9,739 11,194 245 6,964 35,296 647,507 708,517 437,292 39,238 196,104 67,746 37,086 607,527 674,929 438,920 37,846 303,968 71,280

$2)131I833

$2,096,404

$2,134,470 Electric customers(Average)

Residential................

Commercial...............

Industrial..................

Other.....................

Residential(Average)

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

Cost to customer per kw-hr..

Annual revenue per customer............

1,291,111 136,304 2,481 3,282 1,433,178 7,249 7.504

$543.96 1,273,969 134,787 2,490 3,315 1,414,561 7,046 7.21'508.26 1,259,077 133,234 2,522 3,279 1,398,112 7,104 6.79tt

$482.52 34,347 Electric revenues(Thousands ofdollars)

Residential................

702,309 Commercial...............

766,815 Industrial..................

448,855 Municipal service..........

41,031 Other electric systems......

95,809 Miscellaneous.............

77,014 Total h dro sources...

Other urchases...

Totalcapability',327 34 2,565 2,541 80 1

445 400 6,939 100 7,803 7,705 Electric eak load durln ear 1986 5,724 1985 1984 5,862 5,526 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.

-Has capability to burn natural gas (as well as oil) as a fuel.

GAS STATISTICS 1986 Totalsales..........

Transportation of customer-owned as..

95,947 4,868 Gas sales(Thousands ofdekatherms)

Residential................

49,430 Commercial...............

27,218 Industrial..................

15,575 Other ass stems..........

3,724 1985 47,328 27,006 29,213 4,873 108,420 1984 49,519 27,892 32,755 4,794 114,960 ELECTRICITYGENERATED AND PURCHASED Millionsofkw-hrs.

1986 1985 1984 Thermal:

Generated Coal...........

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

Nuclear........

Natural gas.....

Purchased-Nuclear from Power Authorit Total thermal Hydro:

Generated........

Purchased from Power Authorit 6,140 16 7,409 19 7,863 20 5,811 16 2,866 7

3,754 9

3,147 8

4,932 13 3,635 9

177 1

1,624 4

2,103 5

1,284 3

825 2

878 2

16,559 44 17,656 45 18,233 45 4,140 11 3,496 9

3,803 9

7,683 20 7,815 20 8,312 21 Total generated and urchased 37,639 100 39,213 100 40,588 100 Total h dro..........

11,823 31 11,311 29 12,115 30 Other purchased power-varlous sources......

9,257 25 10,246 26 10,240 25 108,420 114,960

$295,060 147,751 133,446 18,691 3,588

$313,536 157,469 156,307 19,708 4,056

$528,486

$598,536

$651,076 Gas customers(Average)

Residential..............

Commercial.............

Industrial................

Other...................

407,546 33,248 465 2

441,261 404,116 32,603 485 2

437,206 400,878 32,106 502 2

433,488 Residential(Average)

Annual dekatherm use per customer........

Cost to customer per dekatherm.......

Annual revenue percustomer........

Maximum day gas sendout dekalherms 121.3 117.1 123.5

$6.01

$6.23

$6.33

$728.39

$730.14

$782.12 786,165 774,033 772,604 Total gas delivered.....

100,815 Gas revenues(Thousands oldollars)

Residential................

$296,853 Commercial...............

142,807 Industrial..................

68,476 Other gas systems..........

14,300 Miscellaneous.............

6,050

36 NIAGARA MOHAWK POWER CORPORATION Directors James Bartlett Former Executive Vice president, Syracuse Edmund M. Davis (A, B, E)

Partner, Hiscock &Barclay, attorneys-at-law, Syracuse WilliamJ. Donlon President, Syracuse Edward W. Duffy(A, B, C)

Former Chairman ofthe Board and Chief Executive Officer, Marine Midland Banks, Inc., a bank holding company, Buffalo John G. Haehl, Jr. (A)

Chairman ofthe Board and Chief Exccutivc Officer, Syracuse Lauman Martin Consultant (formerly Senior Vice President and General Counsel), Syracuse Baldwin Maull (A, B)

Corporate Director, New York Martha Hancock Northrup (D)

Homemaker, former President, Crouse-Irving Memorial Hospital Board, Syracuse Frank P. Piskor (A, C, D)

President Emeritus, St. Lawrence University, Canton Donald B. RieflerI)

Chairman, Sources and Uses ofFunds Committee, Morgan Guaranty Trust Company ofNew York,Ncw York Lewis A. Swyer(B,C,D)

Chairman, L.A.Swycr Co., Inc., builders and construction managers, Albany John G.Wick(D,E)

Partner, Falk &Siemer, attorneys-at-law, Buffalo A. Memberof thc Executive Committcc B. Member ofthc Compensation Commit tee C. MemberoftheAuditCommittce D. Member ofthe Committcc on Corporate Public Policy E. Memberof the Finance Committee Officers John G. Haehl, Jr.

Chairman ofthe Board and ChiefExecutive OHicer WilliamJ. Donlon President John M. Endries Senior Vice President John M. Haynes Senior Vice President John P. Hennessey Senior Vice Ptesident Charles V. Mangan Senior Vice Pnsident James J. Miller Senior Vice President (Retired January 31, 1987)

John H. Terry Senior Vice President, General Counsel and Secretary Richard F. Torrey Senior Vice President James F. Aldrich Vice President-Regional Operations NeceasedNovetnber14, 1986)

Anthony J. Baratta, Jr.

Vice PtesidentMntmller Michael J. Cahill Vice President-Regional Operations Robert M. Cleary Vice President-Regional Operations Gerald J. Currier Vice President~nsumer Services Richard EA.. Duffy Vice President-Public Affairs and Corporate Communications (Effectivehfovember 1, 1986)

Gerald D. Garcy Vice President-Power Contracts QffectiveMay 6, 1986)

Kermit E. Hill Vice piesident-Public Affairs and Corporate Communications Netired October 31, 1986)

Edward F. Hoffman Vice President-Fossil Generation Thomas E. Lempges Vice President-Nuclear Operations Samuel F. Manno Vice Ptesident-Purchasing and Materials Management Eugene J. Morel Vice President-Risk Management James F. Morrell Vice President-Corporate Planning James A. Perry Vice President-Quality Assurance John W. Powers Vice President-Treasurer Michael P. Ranalli Vice President-Engineering (Non-nuclear)

Kenneth A.Tramutola Vice President-Gas Christopher D. Turner Vice President-Corporate Development Perry B. Woods, Jr.

Vice President-Employee Relations Gary J. Lavine Assistant General Counsel (Effective August 1, 1986)

Herman B. Noll Assistant General Counsel Nicholas L. Prioletti, 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 ArthurW. Roos Assistant Treasurer Richard N. Wescott Assistant Treasurer

Corporate Information Investor IntiuMes ShanCtolder inquiries:

Shareholder Ser'vices Department, (315) 474-1151, Ext. 4150 (Syracuse); 1-800-962-3236 (New YorkState); 1-800-448-5450 (elsewhere in continental U.S.)

Analyst inquiries:

Investor Relations Department, (315) 428-3134 Dividend Reinvestment Plan Shareholders desiring information on enrolling in the Dividend Reinvestment and Common Stock Ptutchase Plan should call or writeour Shareholder Services Department at P.O. Box 7058, Syracuse, N.Y. 13261.

Annual Meeting The annual meeting ofshareholders willbe held in the auditorium ofthe Company's main office in Syracuse, N.Y. on Tuesday, May 5, 1987. Anotice ofthe meeting, proxy statement and form ofproxy willbe sent to holders ofcommon stock in early April.

Form 10-K Report Acopy ofthe Company's Form 10-K report filed annually with the Securities and Exchange Commission is available after March 31, 1987, by writingthe Investor Relations Department at 300 Erie

, Boulevard West, Syracuse, N.Y. 13202.

Disbursing Agent

'refemd and Common Stocks:

Niagara Mohawk Power Corporation 300 Erie Boulevard West, Syracuse, N.Y. 13202 Transfer Agents and Registrars Preferred Stock: (through July I, 1986)

Marine Midland Bank, NA,., 140 Broadway, New York, N.Y. 10015

. Preferred and Common Stock:

Morgan Shareholder Services Trust Company ofNew York,

, 30 West Broadway, New York, N.Y. 10015 Stock Exchanges

'ommon stock and Certain Preferred Series:

Listed and traded on the New YorkStock Exhange.

Common Stock: Also traded on the Boston, Cincinnati, Midwest, Pacific and Philadelphia stock exchanges.

Bonds: Traded on the New Yorkand Luxembourg stock exchanges.

Trading Symbol: NMK

'fhe information in this report ts not given in connection with Ihe sate ot. or otter to buy, any security.

printed InU.SA.

300 Erie Blvd. West Syracuse, NY 13202