ML18038A247

Niagara Mohawk Power Corp,1986 Annual Rept. W/870331 Ltr

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

Text

ACCESSIONNBR-FACIL':50-410AUTH.NANEHAEHL>J.QDONLON>M.J.RECIP.MANEREQULINFORMATIONDISTRIBUTSTEN(RIDS)8704030486DOC.DATE:86/12/31NOTARIZED:NONineNilePointNucleavStationiUnit2iNiagaraalohaAUTHORAFFILIATIONNiagaraNohatokPowerCorp.Niagav'aMohawkPoMerCovp.RECIPIENTAFFILIATIONDOCKET05000410

SUBJECT:

"NiagavaNohaekPowerCorp'986AnnualRept."DISTRIBUTIONCODE:N004DCOPIESRECEIVED:LTRENCLSIZE:TITLE:50.71(b)AnnualFinancialReportNOTES:RECIPIENTIDCODE/NAf'1EB4lRPD3LAHAUQHEYiNCOPIESLTTRENCL0RECIPIENTIDCODE/MANEBMRPD3PDCOPIESLTTRMCL10INTERNALAEOD/PTBSPEXTERNAL:LPDREGFILENRCPDR0111TOTALNUl]BEROFCOPIESREQUIRED:LTTR8ENCL6

<":~LE))3ll'""",.~ci,"p"."-'l<"(G~~:"'~)3:le.'j'.Il)~F3T3"<"0"(lc:0i')"i;."f;.'Xfflh'>"Gi>'nN'z;,","i'.9(~,.",>i~~B:~."(..-~QO,<0l~~+i:c"~J,""fN".f<7J'"I*>~."'i.")t"f'IL">>'Y<t-1".hRGH>tJ;~.gI'03<~-VOk'rilil:illO(lb~C>'l>>~g'T~~'~'~:i'O'3;~!"~ff~~i'~i'c'..!>~"it'-"C"E>Aillc>hM-l,'~'l.'""-lH.,'iPhG;..a..3".9"'".<."~[L."'~'~',,v,.)-pl>Q.'3.(,cJH.PA"I~..~<,~AQJt,d<",.8'iÃii.9I')'3A>qeR.".<<l<n~.<<"-l:r<)v><>>r>'i>,<>>>,">.><-'p~x>>'r">3(>a(JP.I'>83lilJ.~'..'~i3;)3H3..~>.'1380~'v()[o.l(t~3D801"<tp~l.AYP.'"'2~.VOQBRi<~i1Acssfl'5L(iVIIf~~~P>>4i~.3ltisl'(~i3.""'i~~)""HVARi'3'3'3'<<IQ3p~,g)f~I'c~J~'~>"'I~F,'t~'.;=..",H~wf~j,~"<~3{lil33<JXl4~37)>'tl""i,(93=!<qBQ""g(i':ftI"~'~J<~'~":LIPID)RRRJ'i1"l'>tl8iffy'~i<pl'<J>)(fI" LmVNIAfahAUMOHAWKNIAGARAMOHAWKPOWERCORPORATION/301PLAINFIELDROAD,SYRACUSE,N.Y.13212/TELEPHONE(315)474-1511March31,1987(NMP2L1013)U.S.NuclearRegulatoryCommissionAttn:DocumentControlDeskWashington,D.C.20555Re:NineMilePointUnit2DocketNo.50-410NPF-54Gentlemen:InaccordancewithSection50.71(b)oftheCommission'sRegulations,enclosedareten(10)copiesofNiagaraMohawkPowerCorporation's1986AnnualReport.Verytrulyyours,NIAGARAMOHAWKPOWERCORPORATIONC.V.ManganSeniorVicePresidentPEF/pns2920GEnclosures'c:RegionalAdministrator,RegionIMr.W.A.Cook,ResidentInspectorMs.E.G.Adensam,ProjectDirector0~<

QIAGARAMOHAWKPOWERCORPORATIONANNUALREPORT1986'"TheMimeMxlleTwocoxxstxxxctxoxxescalsxxemtlybehhxdkus.Wexxomfacet}xefxxtUwevAthafxxxxxxesojlve,dledlxcatedltopvotecthxgaxxdlzehxfoxchxgthefxxljlfxxxaxxcxajlstvexxgt1hofouzcoxxxpaxxy..."8704030486Sb1231PDRADOCK05000410IPDR egServingupstateNewYorkQurCorporateMission~ELECTRIC~SERVICEAREAjeMees~eee\/YOsexese'Neee<~eeYes'EWYORKSTREEeeessseeStowelateeeeseseeFWeSeesesEeseeeeleRankedasonethemostprominentinvestor-ownedutilitiesintheUnitedStates,NiagaraMohawkPowerCorp.servesanareaencompassingmorethanhalfthelandmassofNewYorkState.OurelectricsystemextendsfromLakeErietoNewEngland'sborders,fromCanadatoPennsylvania,andmeetsthediversifiedneedsofmorethan1.4millioncustomers.Ournaturalgassystemserves445,000customersincentral,east-ernandnorthernNewYork,nearlyallwithinourelectricterritory.TwoCanadiancompanies,St.LawrencePowerCo.andCanadianNiagaraPowerCompany,Ltd.,ownedbyoursubsidiary,OpinacInvestments,Ltd.,provideenergytoportionsofOntario.OthersubsidiariesareHydra-CoEnter-prises,Inc.,NMUranium,Inc.,NiagaraMohawkFinance,N.V.andOpinacEnergy,Ltd.Ourcorporateheadquartersareat300ErieBoulevardWest,Syracuse,N.Y.13202.NiagaraMohawkisanenergycompanywithdiversifiedinterestsandresourcescommittedtomeetingcustomers'eedsthrougheconom-icalproductsandservicesofsuperiorquality.Wearededicatedtoprovidingafairandequitablereturntoshareholders.Inthisperiodofincreasingcompetitionandchang-ingregulation,wewillstrivetobethelow-costsupplierofreliableenergywhiledevelop-ingandmarketingnewproducts.Thededicated,well-trainedmenandwomenofNiagaraMohawkarethecompany'smostvaluableresource.Thecompany'ssuc-cessisdirectlydependentontheirefforts.Managementremainscommittedtoretainingandmotivatingthistalented,productive,ef-fectiveworkforcebyprovidingreasonablecompensation,incentivesandagoodworkingenvironment.NiagaraMohawkseekswaystoimprovetheeconomicclimateandwell-beingofcitizens,industryandbusinesswithinthecom-munitiesitserves,andadvocatesregulatoryandlegislativechangesthatbestservetheinterestsofcustomers,employeesandowners.Thecompanymaintainshighethicalstan-dardsandstrivesforopencommunicationswithallitsconstituencies.NiagaraMohawkisdedicatedtomaintain-ingandfurtherdevelopingdependableenergyresourcesanddeliverysystemsthataresafe,environmentallysoundandtechnologicallyadvanced.Managementwillactivelypursuestrategiesinsupportofobjectivestoaccomplishthismission.NATURALGASUSERVICEAREANEWYORKEEAEE tNIAGIARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESHighlightsof1986TotaloperatingrevenuesIncomeavailableforcommonstockholdersEarningspercommonshareDividendspercommonshareCommonsharesoutstanding(average)Utilityplant(gross)..19661985Change$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$2.061.012?,076,000122,215,0004.0$8,445,993,000$7,640,905,00010.5Constructionworkinprogress...$2,820,044,000$2,336,188,00020.7Grossadditionstoutilityplant..$774,062,000$771,120,0000.4Kilowatt-hoursales34,347,000,00035,296,000,000(2.7)Electriccustomersatendofyear.1,443,0001,424,0001.3Electricpeakload(kilowatts)5,724,0005,862,000(2.4)Naturalgastransported(dekatherms)Gascustomersatendofyear4,868,000445,000440,0001.1Naturalgassales(dekatherms)...95,947,000108,420,000(11.5)Contents2Toourstockholders4Theyearinreview11Marketpriceofcommonstockandrelatedstockholdermatters12Management'sdiscussionandanalysisoffinancialcondition17Consolidatedfinancialstatements21Notestoconsolidatedfinancialstatements33Reportofindependentaccountants33Reportofmanagement34Statistics36Directors,officers,corporateinformationMaximumdaygassendout(dekatherms)786,165774,0331.6EARNINGSANDDIVIDENDSPAIDPERCOMMONSHARERANGEANDYEARENDMARKETPRICEOFCOMMONSTOCK$1.76$2.64$2.77$1.98$2.84$2.06$2.88$2.08OMDENDS$2.71EARNINGS$1BS$15yi$15yi$1749$17%StSVi$25yiy$16%$1515ATYEARENDRANGE19821983198419851986198219831984198519861986REVENUEDOLLARResidentialcustomers38IICommercialcustomers34IIIndustrialcustomers19IIAllothers9IIANDWHEREITWENTFuelforthoproductionofelectricity25IIandelectricitypurchasedIncomeandothertaxesISIIGaspurchased13'ages,salaries,employeebenefits12'ividendstostockholders12II,Interestandothercosts-not1tttDepreciationSIIRetainedInbusiness NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIES>Toourstockholders:Earningswere$2.71pershareofcommonstockin1986,comparedwith$2.88persharein1985.Thisdecreaseresultedprimarilyfromareductionearlyin1986inearningsreturnoncommonequityallowedbytheN.Y.StatePublicServiceCommissionfromthe15.5percentpreviouslyauthorizedto13.5percent.Weareespeciallyconcernedaboutthiscontinuedloweringofauthorizedreturnandearlyin1987,asongoingrate-caseproceedingsnearedcompletion,wereinforcedourpetitionstothecommissiontograntusafairreturnonequity.Recommendationsbyotherpartiesintheratecasethusfarhavebeensignifi-cantlybelowtheaveragereturngrantedtoutilitiesinotherstates-leavingyou,ourshareholders,ataseveredisadvantage.MaintainingthedividendAttheyearend,wewerepleasedtopayour148thconsecutivedividendonourcommonstocksinceNiagaraMohawk'sconsolidationin1950.Everyeffortisbeingmadetomaintainthecurrentstockdividendlevel,despitependingregulatoryuncertaintiesandthemanychallengeswefaceinbringingNineMilePointNuclearUnitTwotooperationalreadiness.Ourdeterminationtoachieveauthorizedearningslevelsisevidencedbyanextensiveausterityprogram,initiatedin1986withadditionalmeasureslikelytofollowthisyear.Afreezeonmanagementsalariesandthesizeoftheworkforce,abolitionofvacantpositions,reducedovertime,redemptionofhigh-costdebtandothersecurities,andtighteningofexistingcostconstraints-theseandotherrestrictionsprevailthroughoutourbusiness.NineMileTwooperationdelayedbyfaultyvalvesWeweredisappointedinFebruarywhendifficultiesencounteredwithmainsteam-isolationvalvescom-pelledustopostponethecommercialoperationdateoftheNineMileTwoproject.Atthiswriting,everyavenueisbeingpursuedtorectifytheseproblems,enablingustoexpeditiouslyproceedtowardproduc-tionoffirstpowerforourcustomers.Atpresstime,theeffectofthesituationontheprojectschedulere-mainsundercontinuingassessment.Stockholderswillbekeptadvisedofdevelopments.WehaveeveryconfidencethatNineMileTwo,onceinservice,willearnrecognitionasaqualityadditiontoNewYorkState'senergypicture.Withtheunitonlineandinrates,NiagaraMohawk'sresidentialelec-tricrateswillcontinuetobethelowestamongthestate'smajorutilities,afactinwhichwecantakejustifiablepride.Asyouknow,NiagaraMohawk'sshareintheprojectis41percent.AsettlementagreementforNineMileTwo,pro-posedjointlybyNiagaraMohawkandtheunit'sco-tenants,wasapprovedinearlyOctoberbythePublicServiceCommission.Theagreement"caps"costsre-iNIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIEScoverablethroughcustomerratesat$4.16billion.NiagaraMohawk'sshareofcostsdisallowedwouldamounttoapproximately$1billion,beforereductionforfederalincometaxbenefits.Boththetimingandtheamountoflosstobewrittenoffbythecompanyarecontingentuponpendingregulatorydecisions,loancovenantsandfinalcompletioncost.RaterecognitionoftheNineMileTwoprojectandimplementationofthecostsettlementhavebeenin-tegralpartsofourpendingelectricratecase,beforethePSCsinceApril1986.WedonotexpectafinaldecisionfromthePSContheratecaseuntilMarch1987,butweshallcontinuetokeepstockholdersin-formedthroughperiodicreports.(Moredetaileddis-cussionsofNineMileTwoandrelatedfinancialandregulatoryaffairsarepresentedonpages4,13,29.)LeadingthewaywithinnovationOurfinancingactivitiesin1986werehighlightedbyinnovation,withimpressiveresults.A"reversedutchauction"tenderoffer(first-everbyautility)resultedinthecost-effectiveretirementof$153millionofhigh-couponbonds(someashighas15~/4percent).Cashproceedsfromthesale/leasebackofanewlycon-structedhigh-voltagetransmissionfacilitywerealsousedtoretirehigh-costlong-termdebtbyanother$114million,whilea$6-millionreductionwasachievedinpreferredstockdividendsthroughcallsandrefundingsduringtheyear.Creativeinnovations-ourpatentedPowerDonutŽsystemandourPCB-removalprocess,forinstance,discussedonpage6-aregeneratingpracticalbene-fitsforboththecompanyandothersintheenergyindustry.Inallplanning,weareintentonseekingnewandbetterconcepts,sometimesventuringtonewfrontiersoftechnology.Thetangibleresultsandpros-pectsarediscussedinthefollowingpages-achievementswhichhaveearnedNiagaraMohawknationalrecognitionasacompanyofinnovators.Inthesameboldspirit,wehaveembarkeduponnewmarketing,diversificationandcompetitiveventurestopositionourselvesfortomorrow'sopportunities.ConfidenceinourfutureOurconfidenceinchartingasteadycoursethroughtheseoftenfrustratingbutever-challengingtimesisrootedintheprovenresourcefulnessandresilienceofthemenandwomenofNiagaraMohawk.TheNineMileTwoconstructioneraisnearlybehindus.Wenowfacethefuturewithafirmresolve,dedicatedtoprotectingandreinforcingthefullfinancialstrengthofourcompanyandprovidingourcustomersthequalityenergyservicetheyexpect,atthelowestpos-sibleprice.Ourheartfeltthanksareextendedtoourstockhold-ersfortheirsupport,andtoourfellowemployeesfortheirsacrifices,hardworkandcontinuingloyalty.JoltnG.Haehl,Jr.ChairmanoftheBoardandChiefExecutiveOf/icer1VilliantJ.DonlonPresidentFebruary27,1987JohnG.Haehl,Jr.WilliamJ.Donlon 4NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPAcAIESyTheyearinreviewNineMileTwo-approachingitstimeAlong-awaitedmilestonetookplaceinOctober1986attheNineMilePointNuclearUnitTwoprojectwhentheU.S.NuclearRegulatoryCommissionissuedalow-powerlicenseandloadingoftheplant'suraniumfuelwascompletedin14days-oneweekaheadofschedule.However,recurringproblemswiththeunit'seightmainsteam-isolationvalvessubsequentlyrequireddelayinginitialstartupoperationsand,inlateFeb-ruary,extensivetestsofthevalveswerestillinprog-ress.Thetestswillhelpdeterminewhethertomodifythevalvesorreplacethemaltogether,anduntilthissituationisresolvedthedateoftheplant'scommer-cialserviceremainspending.Oncethisconditioniscorrected,theunitisscheduledto"gocritical"withinitialnuclearfissionachieved.Fiveweeksoftestingatlowpowerwillthenfollowand,afterissuanceofafull-powerlicensebytheNRC,itsoutputwillbebroughtupto150,000kilowatts.Thiswillgraduallybestepped-uptofullpowercapacityduringaseriesofpowerascensiontestsandinspections.WithNineMileTwoanoperatingnuclearstation(the104thtobelicensedintheUnitedStates),this1.08-millionkilowattadditiontoourpowersystemandtheNewYorkPowerPoolwillmarktheculmina-tionofalongandarduouscourse.Theprojectwillservenearlyfourmillioncustomersofitsfivepar-ticipatingutilites-thisdecadeandnext,andwellintothenextcenturyahead.NineMileTworepre-sentsmodernnucleartechnology,epitomizingthestateoftheart.InOctober,1986,anemergencyexercise,involvingNewYorkStateandOswegoCountyrepresentativesandobservedbytheNuclearRegulatoryCommission,wasconductedatNineMileTwo.Therealisticday-longdrill,inwhicharadiologicalaccidentattheplantwassimulated,wasarequirementforlicensingandreceivedapprovalfromtheNRC.Operationofthenewplantwillbetheresponsibil-ityofastaffofmorethan200highlytrainedspecialists,including36whoholdseniorreactoroperatorlicensesand24withreactorlicenses.MostoftheseprofessionalshaveextensivebackgroundsintheU.S.nuclearindustry.Lookingahead,thestationisscheduledfora10-weekshutdownformaintenanceandNRCinspectionsinlate1988.Itwillthenbebroughtbackonlineuntilitsfirstscheduledoutageforrefuelingin1989.Duringitslifetime,NineMileTwoisexpectedtogenerateelectricityequivalenttomorethan400mil-lionbarrelsofimportedoil,withbillionsofdollarsinfuelsavings.NiagaraMohawkisprincipalpartnerandmanag-ingagentoftheproject,owning41%ofNineMileTwo.LongIslandLightingCo.andNewYorkStateElectricandGasCorp.hold18%each;RochesterGasandElectricCorp.14%andCentralHudsonGasandElectricCorp.9%.FurtherinformationinmoredetailonNineMileTwo'scosts,financingandregulatorydevelopmentsarepresentedintheManagementDiscussionandAnalysisonpage13andinNote10tofinancialstate-mentsonpage29.NineMileOne-continuingnuclearleadershipOurNineMilePointUnitOnewascitedbytheUtilityDataInstitutein1986asthethirdlowest-costnuclearpowerproducerandfourthlowest-coststeam-electricplantinthenation.Duringtheyear,thispioneeringnucleardevelop-ment,designedandengineeredin-housebyNiagaraMohawk,andinservicesince1969,produced3.1bil-lionkilowatt-hoursofelectricity,representingasav-ingsof$72millionand$37millionrespectively,com-paredwithoilandcoal-firedpowergeneration.Earlyintheyear,UnitOne"coasteddown"to70percentofitsratedpowerbeforeshutdownandthestartofitsscheduledbiennialrefuelingandmainte-nance.While200ofits532uraniumfuelbundleswerereplacedwithfreshinserts,themostsignificantfacetoftheshutdownwasreplacementofmorethan246milesoftubingusedtocondensesteamfromtheunit'sturbine.Some13,000ofthese100-footlong,1i/4-inchtubeswerepartofUnitOne'soriginalequipmentinusesince1969.The15-weekoutagealsoenabledtheplantstafftocompletemanyotherroutinereplacementsandadditions.NineMileOneliveduptoitsreputationasade-pendablepowerperformerbyremainingavailableforgeneration90percentofthetimesinceitsreturntoserviceaftertherefuelingoutage.Thenextsuchout-ageisnotscheduleduntilspring1988.Alsoduring1986,ourNuclearDivisionmovedfromourcorporateheadquartersindowntownSyracusetonewleasedofficesinthesuburbanTownofSalina,justnorthofSyracuse,duetoaneedforadditionalofficespace.Cost-containmentcampaignstartedInautumn,thecompanyannounceditsmostsweep-ingcost-containmentprograminmorethanadecade,theresultofseriousfinancialproblemsimposedupon (NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESNiagaraMohawkbyrecentinadequaterate-caseawardsandthesettlementoftheNineMilePointNuclearUnitTwoprudencycase.Theausteritycampaignthusfarincludesafreezeonmanagementsalariesandanongoingreviewinalldepartmentstoconsolidateandreducethesizeoftheworkforce.Operationreviewteamsalsowereformedtoidentifyadditionalareasofpotentialimprove-mentsincostsandrevenues.Inaddition,aplanforunpaidpersonalleaves,part-timeworkarrange-ments,reductionofnon-emergencyovertimeworkandotherbelt-tighteningmeasureswereundertaken.TheprogramemphasizesthateveryeffortpossiblemustbemadesothatthecompanycancontinuetoprovidequalityservicetocustomersatthelowestpossiblecostandtoprotecttheinterestsofNiagaraMohawkstockholders.Life-extensionforfossil-fueledstationsThroughouttheyear,theFossilGenerationDepart-mentcontinuedalife-extensionprogramatourcoalandoil-firedgeneratingplants.Thelong-termobjec-tiveistolengthentheusefullifeofexistinggenerating'nitstodefertheneedfornewgenerationcapacity.StudiesbyNiagaraMohawk'sResearchandDe-velopmentDepartment,theEmpireStateElectricResearchCorp.andElectricPowerResearchInstitutehavedeterminedthatitcanbefarmorecost-effectivetorefurbishandmodernizeexistingplantsthantoinstallnewunits.Thelife-extensionentailsperformingdetailedin-spectionsofcriticalcomponentsofeachunit.Theirremainingyearsareassessed,andadollar/timescheduleisformulatedtoimplementtheimprove-mentsandrepairsneededtolengthentheiroperation.Latein1986,specialcomputersoftwarewentintoservicetohelpfossilstationoperatorsupgradetheon-lineefficiencyofeachgeneratingunitatcoal,oilorgas-firedpowerstations.Specificdata(temperatures,ELECTRICITYGENERATEDANDPURCHASEDBYTYPEOFFUEL,1966Hydro31%Varioussources25%Coal16'/oOil16/oNuclear11%Naturalgas1%pressures,fuel-consumptionrates,etc.)areautomati-callycollectedfromeachunitandcontinuouslytransmittedtoEnergyManagementSystemcompu-tersinSyracuse.Thisdataisprocessedandguidanceinformationinstantlytransmittedanddisplayedinthecontrolroomtohelpmakeproperadjustmentsand"fine-tuning"refinementsontheunitswhiletheycontinuetooperate.Ahigh-waterhydroyearAbnormallyhighrainfallenabledourhydroelectricstationstogenerate4.1billionkilowatt-hoursin1986,thehighestin10yearsandawelcomedevelopmentforconsumers.Theabundantwaterpowergenerationhelpedholdotherelectricpower-productioncostsdown,thusreducingfuel-adjustmentchargesoncus-tomers'ills.NiagaraMohawkoperates77hydrostationsonup-stateNewYorkwaterways,morethananyotherutil-ityinthefreeworld.Duringtheyear,wecontinuedtopursueplanstorenovateordevelopvarioushydroinstallationsforatotalof150,000kilowattsbythelate1990s.By1995wemustrelicense11hydrofacilitiesencompassing35individualpowerplants.Oneapplicationseekstore-developfiveseparatepowerinstallationsontheOswegoRiveralone.Atyearend,anew32,000-kilowatthydrofacilitywascompletedandbroughtonlineatGlenParkontheBlackRiver.ItwasthefirstprojectwhereNiagaraMohawksought"outside"proposalsfromprivateconcernsfortheindependentconstructionandlong-termoperationofapowerfacility,anarrangementthatoffersthecompanyavoidedcostsandeliminatesdevelopmentcosts.EnergyproducedatGlenParkissoldexclusivelybyaprivatedeveloperundercontracttoNiagaraMohawk.Asimilaragreementwithasec-ondprivatedeveloper,Synergics,Inc.ofMaryland,wasreachedin1986,involvingconstructionandop-erationofa2,600-kilowattplantslatedfor1987startupatUnionFallsontheSaranacRiver.Afisheries-keyedresearchventure,beingwatchednationwide,wasinitiatedontheSalmonRiverinOswegoCountyin1986byNiagaraMohawkwiththeU.S.FishandWildlifeService,N.Y.StateDepartmentofEnvironmentalConservationandEmpireStateElectricResearchCorp.Theprogramfocusesuponsalmonandtrouthabitat,whileexaminingstream-flowhydraulics,temperaturesandotherrivercharac-teristicswiththeobjectivesofmoreefficientandcost-effectivemethodsoffisheriesmanagementonhydrowaterways.Acomputermodelisapartofthiseffort,inwhichanumberofotherU.S.utilitiesin-6NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPA<NIESivolvedinthelicensingandoperationofhydroplantshaveexpressedinterest.EnergyresearchventuresAnotheryearofsolidresearchgainswasagainachievedbyNiagaraMohawkin1986.Workinginde-pendentlyon"in-house"projectsandjointlywithotherenergyinterests,includingthenationwideElec-tricPowerResearchInstituteandGasResearchInsti-tute,anumberofexploratoryprojectsprogressedtopracticalutilityapplications.Atthesametime,ac-tivitieswerebroadenedinvariousresearchareas.Oneprojectdemonstratingbothenvironmentalandeconomicpromisewasthesuccessfuldevelopmentofasolutiontotheproblemofprocessingpolychlori-natedbiphenyls(PCBs).InaprocedurepatentedbyNiagaraMohawkin1986,PCB-contaminatedoilusedinelectricaltransformerscannowberecoveredforre-usein"clean"form-awelcomebreakthroughintoxicwastetechnology.Thisnovelconcepthasbeendemonstratedandap-provedforcommercialusebyboththeU.S.Environ-mentalProtectionAgencyandN.Y.StateDepartmentofEnvironmentalConservation.Achemicalprocess,theprojectinvolvesamobiletreatmentunitthatcanbetransportedfromsite-to-sitetoremovePCBs.Pres-ently,NiagaraMohawkisnegotiatingwithseveralprominenthazardous-wastecontractingfirmstoselltherightsofthisnewtechnology,makingitsbenefitsavailabletootherutilitiesandindustry.Asimilarresearchventurewasinitiatedin1986toremovetoxicwastefromsoils.Withsupportfromseveralindustrygroups,NiagaraMohawkisevaluat-inganumberofinnovativetechniquesfortheon-siteremediationoftoxicwaste.Initialworkin1986lookedatoneapproachforbiologicaltreatment.Thisprocessfocusesonenhancingthenaturalbiodegrada-tionbygrowingharmlessorganismsandinjectingthemintothesoiltocauseunwantedchemicalstodecomposenaturally,butatahighlyacceleratedrate.Alsoduringtheyear,anexperimental"cleancoal"power-plantresearchprojectplannedjointlybyNiagaraMohawkwiththeN.Y.StateEnergyRe-searchandDevelopmentAuthorityandotherenergyinnovatorsatthecompany'sDunkirkSteamStationwasselectedforfundingsupportbytheU.S.Depart-mentofEnergy.Plannedisa5,000-kilowattdemon-strationunitatthewesternNewYorksite,amongninemajorconceptsnamedbythedepartmentasthemostpromisingchoicestoundergolarge-scaletest-ing.Thenewunitwilltestasimplifiedgas-from-coalconcepttogeneratepower,usingasteam-injectedturbine.Themostattractivefeatureistheproject'sabilitytofunctioneconomicallyandreliablywithvir-tuallynosulfuremissionsfromtheplant'sstack,aprimarygoalineffortstoreduceacidrainconcerns.Thedemonstrationisalsointendedtoreducethenumberofcomponentsnormallyusedtomakesuchaconceptworkable.Constructionoftheunitwillbegininlate1987,withoperationscheduledfor1990-91.NewpowercontrolcenterinwesternNewYorkFurtherevidenceofourdedicationtomeetingfutureenergyneedseconomicallyandefficientlywastheac-tivationinlateDecemberofanewRegionalPowerControlCenterinBuffalo,thelatestadditiontoNiag-araMohawk'sextensiveEnergyManagementSys-tems(EMS).ThecenterissimilartoourmainPowerControlCenterinSyracusebutisresponsiblesolelyforhigh-voltagetransmissionanddistributionfacilitiesinwesternNewYork.Thecenterisequippedwitha100-footwidedynamicmapboardandthemostmodernelectronicsandcomputerfacilitiesforanticipatinganddispatchingenergytonearlyone-halfmillioncustomersinwesternNewYork.Asimi-larcontrolcenterispresentlyunderconstructioninWatertownfortheNorthernRegionandanotherisplannedfortheCapitalRegioninAlbany.TheirdesignandfunctionwillfollowthoseofthewesternPowerControlCenter.Significantpowertransmissionprojectsduringtheyearincludedcompletionofa345,000-volttransmis-sionlinetocarrypowerfromthenewNineMilePointNuclearUnitTwofromourVolneystationsome65milessoutheasttoMarcynearUtica.Thisdoublecir-cuitlinksNineMileTwowithNiagaraMohawk'scross-stateenergysystemandtheNewYorkpowergrid.ThesaleandleasebackoftheVolney-Marcylinetoaprivatefirmfor$128millionwasconsummatedinNovember.Proceedsfromthistransactionwereappliedtoreducehigh-costdebt.InconjunctionwithtransmissiontechnologyandNiagaraMohawk'sdiversificationeffortstobroadenitsearningssources,thecompanyformeda50-50jointventurecorporationwithProductDevelopmentServices,Inc.ofFairfield,Conn.,tomarketaone-of-a-kindline-monitoringconceptinventedandpatentedthroughourresearchprogram.Thenewfirm,NITECH,Inc.willsell,installandprovidesup-portservicesforourPowerDonutŽsystem,atrademarkusedbyNiagaraMohawkforthisequip-ment.ThePowerDonutsensor-sonamedforitsshape-automaticallymeasuresvitalconditionsaf-fectingload-carryingcapacityoftransmissionlines, s&DIAG'ARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESvoltage,temperature,currentandenvironmentalconditionsinwhichthelinesfunction.Suchdataisrelayedfromthedevicetopowercontrolfacilities,allowingdispatcherstomoreeffectivelyutilizeexist-ingtransmissionfacilitiesandequipment.ThreeU.S.utilitieshaveinstalledthesePowerDonutsystemsandthreeothersplacedorderswithNITECHbytheyearend.AneventfulandpromisingyearfornaturalgasExpansionoftheArmy'sFortDruminnorthernNewYork-largest"stateside"militarybase-expansionhereintheU.S.inmorethan40years-resultedinconstructionofamajornewlinkinournaturalgassystemin1986,NiagaraMohawk'slargestgasprojectsincetheearly1960s.Thebaseisbeingenlargedtoaccommodatethere-located10thDivision(LightInfantry)withthepopu-lationinandaroundFortDrumexpectedtomorethandoubletosome30,000by1990.Tomeetantici-patedgasdemands,thecompanyhasinstalledmorethan20milesofpipeline,intheareaandfurtherplansareunderwaytoextendgasservicetocommunitieswestandnorthofthenearbyCityofWatertown.Alsoin1986,thecompanypurchasedapproxi-mately25percentofitsgassupplyinthe"spot"mar-ketforthefirsttimeastheresultoffederalchangesopeningpipelinesfortransportation.Thesepur-chases,combinedwithdecliningrates,haveloweredcoststoourmorethan445,000gascustomers.While"spot"purchaseshavebeenconductedonatempo-rarybasis,theylikelywillbecomeapermanentwayofacquiringaportionofgassuppliesforourcustom-ersintheyearsahead.WearealsoprogressingwithplansforanewGasEnergyManagementSystememployingthelatesttechniquesandtechnologiesforobtainingcost-effectivegassupplies.Scheduledforimplementationin1988,theconceptwillincludecomputerizedflowmodeling,remote-controlofselectgasfacilities,monitoringandcontrolofpeakloadperiods,main-replacementpriorities,computerizedpropertyrec-ords,records-informationdispatchandotherauto-matedfunctions.Servingasthehubforalltheseop-erationswillbeanewGasEnergyManagementCon-trolCenter,similartoandlocatednearourelectricEMSControlCenterinSyracuse.Targetedforopera-tionbythe1988heatingseason,thecenterwillover-seethe6,300milesofpipelinesandallregulatorsta-tionsintheNiagaraMohawkgassystem.In1986,NiagaraMohawkgasresearchersdevel-opedaunique"mechanicalmaintee."Thisplasticteeconnectorwillbeusedtoattachplasticgasservicelateralstogasmainsandshouldreduceinstallationcostsconsiderably.Thepatenteddevicewillbeintro-ducedfornationwidedistributioninMayf987.NewoilandgasventuresinwesternCanadaOuryoungCanadiansubsidiary,OpinacEnergy,Ltd.,postedanotherimpressiveyearaftersuccessfullydrilling17newoilwellsand36newnaturalgaswellsin1986.TheseandotherdrillingventureshavebeenpursuedjointlybyOpinacwithotherindustrypartnersworkinginthewesternprovinces.Opinacproducedmorethan$1million(U.S.)ofcrudeoilandnaturalgasduringtheyear,withplanscallingforanexpenditureof$11millionforcontinua-tionofthisexplorationanddevelopmentprograminthewesternCanadasedimentarybasininBritishCol-umbia,Alberta,SaskatchewanandManitobain1987.Sinceitsformationin1983,Opinac-basedinCal-gary,Alberta-hasdiscoveredanddevelopedmorethan50-billioncubicfeetofnaturalgasand1.2-millionbarrelsofprovencrude-oilreserveswithacombinedvalueofmorethan$21million.AswithallNiagaraMohawksubsidiaries,Opinacisfullyindependentandnotsubsidizedinanywaybythecustomersofitsparentcorporation.ThisjointexplorationcompanyandthreeotherCanadianfirmsaresubsidiariesofOpinacInvestments,Ltd.ofToronto,itselfawhollyownedNiagaraMohawksub-sidiary.TheothersareCanadianNiagaraPowerCompany,Ltd.,whichgeneratesanddistributespowertoaportionofOntario'sNiagaraPeninsula;St.LawrencePowerCompany,distributorofelectric-itytoCornwall,Ontario;andOpinacHoldings,Ltd.RewardingyearforHydra-CoAbanneryearwithincreasingnationalperspectivewasreportedbyourwhollyownedHydra-CoEnter-prises,Inc.,anindependentcogenerationsubsidiaryofNiagaraMohawk.In1986alone,some61,000kilowattsofhydroelectricproductionwerebroughtonlineinNewYorkStateanda5,000-kilowattgas-firedcogenerationplantwascompletedatLittleFallsbyHydra-Cowithvariousenergypartners.Otherprojectsareplannedacrossthenation.Amajorprojectannouncedin1986byHydra-Counderajointagreementwithth'eBabcock8zWilcoxCompanyistheproposedrehabilitationoftheformerAlliedChemicalCompany'spower-generatingplantinSolvay,nearSyracuse.Whencompletedin1988thecoal-firedfacilitywillhavean80,000-kilowattcapacity,itstotalcostestimatedat$87million.

8NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPAGNIESiInMaine,Hydra-Coisplanningdevelopmentofsome77,000-kilowattsinbothhydroandwood-fueledcogeneration.RegulatoryactionispendingonHydra-Copowerprojectstoyieldsome6,300kilowattsinVermontandNewYorkState,whilecogenerationagreementsarebeingnegotiatedinNewJerseyandOklahoma.OtherhydroplantsareenvisionedbythesubsidiaryinCalifornia,OregonandNewEngland.Hydra-Co,basedinSyracuse,wasformedin1981toparticipateinthedevelopment,ownershipandopera-tionofcogeneration,alternate-energyandsmallpower-productioninstallations.VitalityintheeconomySuccesswithaspecialeconomicdevelopmentrate(EDR)createdespeciallyforelectricindustrialandcommercialcustomersin1985ledtotheintroductionofasimilarrateforgascustomersin1986.Economicdevelopmentrateincentiveshavebeenwidelyacceptedbyareaindustryandinseveralinstanceshavebeenthekeytoencouragingfirmstoremaininourservicearearatherthanmovingelsewhere.TheelectricEDRhasalreadybeenutilizedby54separateaccountswith49companiesinour37-countyserviceterritory.Thishasproducedamore-than192.6-millionkilowatt-hourincreaseinsales-oraddedrevenuestotalingnearly$12millionyearly.Alsosignificant,alongwiththisenergysalesgrowth,istheresultinggrowthinemployment,withsome3,100newjobsresultinginupperNewYorkState.Duringtheyear,ourEconomicDevelopmentDe-partmenttookpartinanumberofpositivenewinno-vationstoretainbusinessesandattractnewfirmstoupstateNewYork.Amongthesearean"incubatorbusiness"initiativetoassistthosegettingofftoastart;acomputerizedinventoryofavailablebuildingsitesandindustrialparks;andaventure-capital"network"formatchingskillsandbusinessprospectswithentrepreneurialfirmsseekingprospectsintheregionsweserve.ThinkingcustomerStrongemphasiswasmaintainedthroughouttheyearonour"ThinkCustomer!"campaignaimedathelpingthemanypersonsandcommunitiesweserve.Tothisend,sevennewconsumer-orientedinitiativeswereunderwayorinfinalplanningin1986,asfollows:4Consumeradvocates-intheCapital,CentralandFrontierRegionswillworkwithcustomershavingdifficultypayingbillsbycounselingandreferringthemtoavailablehuman-serviceagencies.~Seniorombudsman-willdirectlyassistelderlycustomerswiththeirenergyproblemswiththecompany.4Energyconservationprogramsfornon-profitagencies-willprovidefundsandstaffsupporttocommunityfoundationstoassisttheminsecuringStateEnergyOfficefundsforenergyconservationprograms.4SeniorI.D.program-encouragescustomers60yearsandovertoregisterwiththecompanyforspecialprotection,relativetotheirenergyneeds.4Heat/ColdStressProgram-alocallyfocusedpro-gramconductedjointlywithcoalitionsofagenciestodisseminatehealthinformationonstressfromsummerandwinterweatherextremes.Large-printbillsforvisuallyimpaired-providesuponrequest,billswithabove-normalsizedtypeforcustomerswithvisualproblems.4EnergySavgo-Abingo-likegamewithenergy-savingtips,createdforwidespreadusebyseniorcitizengroupsandotherorganizations.Assistanceprogramsalreadyavailabletocustomersincreasedinpopularityduringtheyear.AmongtheseareourCommunityConservationGrant,EnergyCon-servationBank,HomeEnergyLevelPayment,ThirdPartyNotification,LifeSupportandExtendedPay-mentPlanprograms.These,nodoubt,contributedtoimprovedfavorabilityratingsaccordedthecompanyinaseriesofcustomerattitudesurveysinrecentyears.Oneofourmostpositiveandvisibleassistancepro-gramsistheCare&ShareEnergyFund.Itassiststheelderly,disabledorthoseexperiencingamedicalemergencybyhelpingthempayfortheiremergencyenergyneeds.InconjunctionwiththeAmericanRedCrosswhichadministersCare&Sharedirectly-thefundhashelpedsome2,770needyfamiliespayenergybillsandmakeessentialhomeenergyimprovements.Thisprogramissolelysupportedbycontributionsfromourstockholders,customersandemployees.UnderNiagaraMohawk'sSavingpowercampaign,some24,000customers-highestforanyyearandforanyotherutility-receivedhomeenergyconservationsurveysbythecompany'sspeciallytrainedtechni-ciansin1986.Manycustomersfollowedthroughbyobtainingfinancialassistanceandlow-interestloansfromlendinginstitutionstoimplementneededcon-servationimprovements.

,NIACsARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIES9MONTHLYRESIDENTIALELECTRICCOSTFOR500KILOWATT-HOURSNewYorCjtPlladelIaPNYStateAv.notlncludinNM*NewarkClevelandOHHalordCTBostonMAatlonalverae-LosAnelesCNlaaraohawkIncludesfuelandPASNYcreditadjustmentasapplicable.'NMRateDepartment1/87.-U.S.DepanmentofEnerpy10/88,Allothersuppliedbyutilitywhichservescity.withratesandfueleffective1/87.$65.0558.7555.4254.12475746.8045.7940.7539.4337.60Whereverpossible,ourcustomercommunicationsmakenoteofthefactthatNiagaraMohawk'sresiden-tialelectricratesremainthelowestamongNewYorkState'smajorutilities.PeopleinthemainstreamAfar-reachingself-evaluationandactionprocessin-volvingallemployeesisinprogressandhasbecomeaprincipalthemeinNiagaraMohawk'stotalfutureplanning.EvolvingintoourPeople-RelatedValuesProgram,thisistheoutgrowthofa1985surveyofmorethan8,000employeesrepresentingnearly76percentoftheworkforce-thefirstemployeesurveyeveratNiagaraMohawk.Theimmediateresponsetothesurvey'sfindingswasrevisionofourCorporateMissionStatementandStrategicPlantomoreaccuratelystresstheimpor-tanceofemployeecontributionstothecompany'ssuccess.Aspecialtaskforceonpeople-relatedvalueswasformed,with50employeesrecruitedfrombothunionandmanagementtoaddressemployeeconcernsandmakespecificrecommendationstomanagement.Teamswerealsoorganizedtopursuespecificprob-lemsandfindanswerstothem.Membersweredrawnfromacross-sectionofthecompany.Areasofconcernincludeddecision-making,employeecommunicationsandrecognition,teamworkanddevelopment.Pres-ently,wearecreatingamanagementmodelintendedtofosterimprovedcommunicationofNiagaraMohawk'smissionandpurposeatalllevels,step.upemployeecommitmentthroughmoredecisivedecision-makingandencourageahigherleadershipprofilewithinworkgroups.Asteeringcommitteewasappointedbyseniormanagementtotrackimplemen-tationandprogressofthisextensiveemployeerelationsandparticipationeffortthrough1987andthecomingyears.Attheendof1986,NiagaraMohawk'sworkforcetotaledapproximately11,400.About8,600or76per-centaremembersof12localunionsformingSystemCouncilU-11oftheInternationalBrotherhoodofElectricalWorkers(AFL-CIO).Managementchangesin1986includedtheelectionofGeraldD.Garcytovicepresident-powercon-tracts,andRichardE.A.Duffytovicepresident-publicaffairsandcorporatecommunications,suc-ceedingKermitE.Hill,whoretired.AttorneyGaryJ.Lavinewaselectedassistantgeneralcounsel.WeweredeeplysaddenedinNovemberoverthedeathofJamesF.Aldrich,vicepresident-regionaloperations.Strategyforcompetition-diversityCompetitionandregulatorychallengesarealteringthebusinessenvironmentforthenation'sutilitiesasneverbefore.NiagaraMohawkisrespondingtothisshiftingclimatewithpositiveanddynamicmeasuresforboththestockholderandtheconsumer.Thecompanyrecognizes,aboveall,theneedtore-maincompetitivebyprovidingcontinuinglow-costenergyserviceofthehighestquality.Butatthesametimeweareexploringthepossibilitiesofextendingour"corebusiness"tootherrelatedservices,marketsandventures.Recenttangibleresultsofexpansion/diversificationareourPowerDonutŽmonitoringsystemcurrentlybeingnationallyadvertisedandmarketedbyNITECH;thesaleoftechnologyrightsforourpatentedPCB-removalconcept;heatpump 10NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESresearch/development/promotion;andthecreationandgrowthofNiagaraMohawkenergysubsidiariesinboththeU.S.andCanada.OurguidingdocumentforthefutureisourCorpo-rateStrategicPlan,amendedtoemphasizecompeti-tiveopportunities.VariouslevelsofmanagementandalldepartmentstakepartinthecollectivestrategicplanningprocessbyevaluatingsituationsfacingNiagaraMohawkandadjustingtheplanforproperdirectiontobestemployourresources.DirectionissetforthinourCorporateMissionStatement(seeinsidefrontcover)andinpublishedcorporateobjectives.Alldepartmentsworkingtogetheronstrategicplanninghavehelpedtosolidifythespiritofteamwork-itselfasubstantialrewardfromourCorporateStrategicPlanasweviewthecenturyahead.Investorcommunications-atwo-wayexchangeAnincreasinglydiversemixofinstitutionalandin-dividualinvestorsownsNiagaraMohawkcommonstock.Tomeettheirgrowingneedsforinformationinthismediaage,ourInvestorRelationsDepartmenthasintensified"two-way"communicationswithstockholdersandtheinvestmentcommunity.Aprimeexamplewasthemarkedriseinthepopu-larityofourtoll-freetelephoneserviceavailabletoallshareholders.Thischannelprovidesdirectaccesstoaccountinformationandquickanswerstoquestionsonthecompany'soperationsandrelatedmatters.Inaddition,regionalstockholdersmeetings,rotatedyearlythroughoutourserviceterritory,continuetobeaneffectivemeansofcommunicationandpromoteaninformal,person-to-personexchangeofideasbetweenmanagementandshareholders.Further,thecompanyhasre-vampedits"IntheKnow"publicationspro-gram."IntheKnow"isspecificallytailoredtoindi-vidualinvestorsandsupplementsinformationroutinelyprovidedinourannualandquarterlyre-ports.Stockholdersinterestedinmorecomprehensiveinformationaboutthecompanycanjointhegrowingnumberof"IntheKnow"readersbycallingthetoll-freenumberlistedontheinsidebackcoverorbywrit-ingtheInvestorRelationsDepartmentinSyracuse.Aswecontinuetofacechallengingtimes,ourcom-municationeffortswiththeinvestmentcommunitycontinuetoreceivethesupportandendorsementofseniormanagement.Inadditiontodirect,personalcontactwithinstitutionalinvestors,anumberofbrokerandsecurityanalystmeetingswereheldthroughouttheU.S.in1986.Thesesessionsprovidedmembersoftheinvestmentcommunitytheopportu-nitytoobtainfirst-handfromcompanyleaderstheinformationneededtomakeinformed,factualrec-ommendationsaboutoursecurities.DividendReinvestmentPlanpopularin'86ParticipationinourDividendReinvestmentandCommonStockPurchasePlanisapopularmethodtoincreasestockownershipinNiagaraMohawk.Atyear-end1986,some66,600planparticipantsheldapproximately10.7millionsharesofthecompany'scommonstock,representing8.4percentoftheout-standingcommonshares.OneofthefeaturesoftheplanallowscustomersofNiagaraMohawktobuystockthroughthecompanyandbecomeplanpartici-pants.SincethismodificationinApril1985,some7,700customershavepurchasedabout600,000com-monshares.Despiterecentchangestofederaltaxlegislation,thisallowsshareholdersaunique,cost-effectivesavingsmethod.Inthefirstquarterof1986,inresponsetochangingcapitalneeds,thecompanymadeanumberofchangesintheplan.However,theplanremainsineffectandallholdersofNiagaraMohawkcommonorpreferredstockareeligibleandinvitedtoparticipate.Inthepast,stockaddedtoeachparticipant'sdivi-dendreinvestmentplanaccountwasnewly-issuedsharespurchaseddirectlyfromthecompany.Effec-tiveMarch1,1986,NiagaraMohawkappointedanagenttopurchasesharesofstockontheopenmarketforparticipants'ccounts.Thepurchasepriceofthestockallocatedtoplanparticipantsistheaveragepricepaidbytheagentontheopenmarket.Inaddi-tiontothereinvestmentofdividends,theplanallowsoptionalcashpaymentsupto$5,000percalendarquartertobeappliedtowardthepurchaseofaddi-tionalcommonstock.Allbrokeragefeesandcommis-sionsassociatedwiththepurchaseofsharesintheopenmarketcontinuetobepaidbythecompany.Acopyofthenewplanprospectus,whichdiscussesthechangesingreaterdetail,wasmailedtoplanpar-ticipantsinFebruary1986.Ifyouhaveanyquestionsabouttheplanorwishtoobtainacopyoftheprospec-tus,pleasecallourShareholderServicesDepartmentattheappropriatetoll-freenumberforyourarea.

NI'AGJIIIRAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESMarketPriceofCommonStockandRelatedStockholderMatters19661stQuarter2ndQuarter3rdQuarter4thQuarterDividendpaidPricerangepershareHighLow-$.52$247/8$195/8.5225'/2193/4.52247/819'/4.5219'/815'/2$2.081stQuarter2ndQuarter3rdQuarter4thQuarter$.50$18$163/8.522fRfI175/8.52217/817'/2.5221175/8$2.06TheCompany'scommonstockandcer-tainofitspreferredseriesarelistedontheNewYorkStockExchange.ThecommonstockisalsotradedontheBoston,Cin-cinnati,Midwest,PacificandPhiladelphiastockexchanges.Thetickersymbolis"NMK".PreferredandcommonstockdividendswerepaidonMarch31,June30,Sep-tember30andDecember31.TheCom-panypresentlyestimatesthatnoneofthe1986commonorpreferredstockdiv-idendswillconstituteareturnofcapitalandthereforetheyaresubjecttoFederalincometaxasordinaryincome.ThetablebelowshowsdividendspersharefortheCompany'scommonstockandquotedmarketprices:WhiletheCompanyintendstocon-tinuethepracticeofpayingcashdiv-idendsquarterly,declarationsoffuturedividendsarenecessarilydependentuponfutureearnings,cashflowandfi-nancialrequirementswhichtheCom-panycannotpredictwithcertaintyandwhichcouldbeadverselyaffectedbyratemakinguncertaintiesasmorefullydiscussedbelowandinNote10ofNotestoConsolidatedFinancialState-ments.Also,otherfactors,includingre-strictionsingoverninginstruments,mayaffectthedeclarationandpaymentoffuturedividends.TheholdersofCommonStockareen-titledtoonevotepershareandmaycumulatetheirvotesfortheelectionofDirectors.WheneverdividendsonPre-ferredStockareindefaultinanamountequivalenttofourfullquarterlydivi-dendsandthereafteruntilalldividendsthereonarepaidordeclaredandsetasideforpayment,theholdersofsuchstockcanelectamajorityoftheBoardofDirectors.WheneverdividendsonanyPreferenceStockareindefaultinanamountequivalenttosixfullquar-terlydividendsandthereafteruntilalldividendsthereonarepaidordeclaredandsetapartforpayment,theholdersofsuchstockcanelecttwomembersoftheBoardofDirectors.NodividendsonPreferredStockarenowinarrearsandnoPreferenceStockisnowoutstand-ing.SizeofholdingTotalTotalshares(Shares)stockholdersheld1to9950,773100to999113,8251,000ormore9,904174,5021,618,03928,415,42697,107,529127,140,994Uponanydissolution,liquidationorwindingupoftheCompany'sbusiness,theholdersofCommonStockareenti-tledtoreceiveprorataalloftheCom-pany'sassetsremainingandavailablefordistributionafterthefullamountstowhichholdersofPreferredandPref-erenceStockareentitledhavebeensatisfied.TheindenturesecuringtheCom-pany'smortgagedebtprovidesthatsurplusshallbereservedandheldun-availableforthepaymentofdividendsonCommonStocktotheextentthatexpendituresformaintenanceandre-pairsplusprovisionsfordepreciationdonotequal2.25%ofdepreciablepropertyasdefined.SuchprovisionshaveneverrestrictedtheCompany'ssurplus.Atyearend,about175,000stockhold-ersownedcommonsharesofNiagaraMohawkandabout7,900heldpreferredstock.Thechartbelowsummarizescommonstockholderownershipbysizeofholding:RANGEANOYEARENDMARKETPRICEOFCOMMONSTOCK$IPk$15Vi$1711$20Vi$15Vi$25ViATYEARENDv$11Pi$18Vi$15Vi$15ViRANGE19821983198419851988 NIAGARAM0HAWKP0WERC0RP0RATI0NANDSUBSIDIARYC0MP<<4NI'E$Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperationsRESULTSOFOPERATIONSFor1986,earningspersharedecreased5.9%to$2.71against$2.88for1985.The1986earningsrepresentdecreasesof4.6%and2.2o/ofrom1984and1983earningspershare,respectively.Theaveragenumberofsharesoutstandinghasincreasedapproximately30%overthethree-yearperiod.ThedecreaseintheCompany'searn-ingspersharefor1986from1985re-sultedfromadecreaseintheCom-pany'sauthorizedreturnoncommonequity.TheCompanyachieveda13.6%rateofreturnoncommonequityin1986ascomparedwith15.0%in1985and14.9%in1984.ThePSC-approvedrateofreturnonequity,whichiscurrently13.5%ascomparedto15.5%authorizedatDecember31,1985and16%atDe-cember31,1984,averaged14.0%for1986.Thefollowingdiscussionandanalysishighlightsitemshavingasignificantef-fectonoperationsduringthethree-yearperiodendedDecember31,1986.Itmaynotbeindicativeoffutureoperationsorearnings.Itshouldbereadinconjunc-tionwiththeNotestoConsolidatedFi-nancialStatementsandotherfinancialandstatisticalinformationappearingelsewhereinthisreport.Electricrevenuesincreased$108.0millionor5.3%overthethree-yearperiod.Theincreaseislargelyattribut-abletoincreasedbaseratesandin-creasedsalestoultimateconsumers,offsetsomewhatbydecreasedrevenuesattributabletofuelandpurchasedpowercostrecoveriesandthedecreaseinsalestootherelectricsystemsasin-dicatedinthetablebelow:ELECTRICSALESM1lfioo$ofKwrhro.326403473237,08635296343471982198619831984198514.7%15.0'/o14.9'/oEARNEDRATEOFRETURNONCOMMONEQUITY15.00/oElectricrevenuesIncrease(decrease)fromprioryearlnmillfonsofdollars196619851984Total13.6%Increaseinbaserates..$46.4Fuelandpurchasedpowercostrevenues...12.6Salestoultimateconsumers...............67.4Salestootherelectricsystems.............(100.3)Miscellaneousoperatingrevenues.........9.3$35.4$65.9$69.1$181.4(4.5)(86.3)(78.2)11.956.1135.4(107.9)68.7(139.5)(3.5)3.18.9$(38.1)$110.7$108.019821983198419851986Electrickilowatt-hoursaleswere34.3billionin1986,adecreaseof2.7%from1985and7.4%from1984,reflectingtheeffectsofincreasedcompetitionwhichhasreducedtheCompany'seffectivenessintheresalemarketresultingindecreasedsalestootherelectricsystems(seeElectricandGasStatistics-ElectricSalesappearingonpage35).Detailsofthechangesinelectricrevenuesandkilowatt-hoursalesbycustomergrouparehighlightedinthetablebelow:1966%Increase(decrease)fromprioryear'/oofElectric196619851984ClassofserviceRevenuesRevenuesSaIesRevenuesSafesRevenuesSalesResidential...........32.9/o8.5o/o4.3/o6.6o/o0.4%4.1%4.30/oCommercial..........36.08.24.75.01.72.43.7Industrial.............21.12.6(0.8)(0.4)(2.8)(0.5)3.1Municipalservice.....1.94.6(2.9)3.7(1.6)3.8(2.4)Totaltoultimateconsumers.........91.96.92.54.2(0.4)2.33.6Otherelectricsystems.4.5(51.1)(32.3)(35.5)(24.1)29.223.1Miscellaneous........3.613.7-(5.0)-4.5Total..100.P/o1.7Yo(2.7)%(1.8)%(4.8)%5.5o/o6.8o/o 5IAGrIIIIRAM0HAWKPOWERCORPORATIONANDSUBSIDIARYC0MPANIES13Gasrevenuesdecreased$80.1millionor13.2%overthethree-yearperiod.Asshownbythetablebelow,thisdecreaseisattributabletolowercostsforpurchasedgascoupledwithreducedvolumeoffsetbyhigherbaserates.109.7103.2115.0Millionsofdekatfrerrns108.4$.00.8GasrevenuesIncrease(decrease)fromprioryearlnmillionsofdollars198619851984TotalLLJClIncreaseinbaserates...........$3.0$8.2$8.7$19.9Purchasedgasadjustmentclause(20.0)(21.6)(23.3)(64.9)Gassalesvolume...............(53.0)(39.2)57.1(35.1)$(70.0)$(52.6)$42.5$(80.1)Gassaleswere95.9milliondekathermsin1986,an11.5%decreasefrom1985(seeElectricandGasStatistics-GasSalesappearingonpage35).Thedecreasefor1986reflectsa46.7%decreaseinsalesintheindustrialclassbecauseofcom-petitionwithoilandtheabilityofcustomerstopurchasegasdirectlyfromproduc-ers.TheCompanytransported4.9milliondekathermsforcustomerspurchasinggasdirectlyfromproducersandexpectssuchtransportationactivitiestoincreasewithcorrespondingreductionsingasrevenues.Revenuesfromthetransportationofcustomer-ownedgasareincludedinmiscellaneousgasrevenues.Changesingasrevenuesanddekathermsalesbycustomergrouparedetailedinthetablebelow:198219831984198519862.3942.786TOTALELECTRICANDGASOPERATINGREvENuEsMillionsofdollars2,6952,6602,6321986%Increase(decrease)fromprioryear%ofGas198619851984ClassofserviceRevenuesRevenuesSalesRevenuesSaIesRevenuesSalesResidential...Commercial...Industrial.....56.2Y00.6o/04.4%(59)%(44)%3.1%5.7o/027.0(3.3)0.8(6.2)(3.2)1.03.613.0(48.7)(46.7)(14.6)(10.8)21.127.3Totaltoultimateconsumers.........96.2(11.8)(10.9)(8.1)(6.0)6.510.7Othergassystems....2.7(23.5)(23.6)(5.2)1.624.932.0Miscellaneous.......1.168.6-(11.5)-8.719821983198419851986Total..100.0o/(11.7)%(11.5)%(8.1)%(5.7)%7.0o/11.4%OnMarch12,1986,thePSCapproveda2.1%electricrateincreasetoprovidetheCompanyadditionalannualrev-enuesof$39,974,000.Theratesarebasedona13.5%returnoncommonequityandprovideforthecurrentre-coveryoffinancechargesaccruingon$680millionofConstructionWorkinProgress(CWIP)associatedwiththeNineMilePointNuclearStationUnitNo.2(Unit).Thesenewratesbecameeffec-tiveMarch17,1986andrepresent26%oftherevisedratereliefrequestedbytheCompany.InMarch1985,thePSChadapprovedrateincreasesprovidingadditionalannualrevenuesof$49,312,000(2.6%)forelectricand$8,826,000(1.3%)fornaturalgas.OnAugust23,1986,inconnectionwithasecond-stagefilinginvolvingratesapprovedMarch12,1986,thePSCapprovedadditionalannualelectricrevenuesof$7,475,000foritemswhichwerenotconsideredintheMarch1986decision.Thenewratesbecameeffec-tiveAugust29,1986.Rateaction,initiatedinApril1986,presentlyseeks$181.7million(9.9%)additionalelectricrevenuesbaseduponforecastoperationsfortherateyearendingMarch31,1988.Theapplicationincludes$133.1millionforthefirstyearofafour-yearphase-inoftheCom-pany's41%shareoftheUnitintorates.InDecember1986,PSCAdministrativeLawJudgesrecommendedaratein-creaseof$130.8million(7.1%).TheCompanyisunabletopredictwhatamountofratereliefwillultimatelybegranted.ThePSCopinionisexpectedinMarch,1987.Noadjustmenttogasratesisbeingrequestedatthistime.In1986,electricfuelandpurchasedpowercostsdecreased11.4%to$672millionfrom$759millionin1985and$853millionin1984.Thisdecreaseistheresultofa$121.9milliondecreaseinfuelandpurchasedpowercostsin-curredduringtheyear,partiallyoffsetbya$35.0millionnetincreaseincostsdeferredandrecoveredthroughtheop-erationofthefueladjustmentclause.FuelcostsincurredattheCompany'sgeneratingstationsdecreased$81.8millionasaresultofreduceddemandandloweroilprices.Thecostofpur-chasedpowerdecreased$40.1millionasaresultofa3.5%decreaseinkilowatt-hourpurchasesanda7.5%de-creaseintheaveragecostperkilowattpurchased(seeElectricandGasStatistics-ElectricityGeneratedandPurchasedappearingonPage35).Thetotalcostofgaspurchasedde-creased17.8%in1986and9.1%in1985,afterhavingincreased5%in1984.Thedecreasefor1986istheresultofa14.0%decreaseindekathermspur-chasedtomeetcustomerdemand, NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANI'E$AVERAGECOSTOFATONOFCOALANDABARRELOFOILBURNEDMAINTENANCEANDOTHEROPERATIONEXPENSEMillionsofdollarsTOTALTAXESINCLUDINGINCOMETAXESMiliionsotdollars$50.76$29.67$50.88$30.67$50.68$4916$33.35$31.16$45.84$18.00roCIosI418.9290.1462.4326.1494.6353.6508.3364.0546.8397.7ro8oscoros317342410424-482llcrLLr128.8141,01443149.1198219831984198519861982198319841985198619821983198419851986combinedwithlowerrateschargedbytheCompany'sprincipalsupplierandspotmarketpurchases.TheCompany'snetcostperdekathermpurchasedde-creasedto$3.52in1986from$3.68in1985and$3.96in1984.Throughtheenergyandpurchasedgasadjustmentclauses,costsoffuel,purchasedpowerandgaspurchased,aboveorbelowthelevelsallowedinap-provedrateschedules,arebilledorcreditedtocustomers.TheCompany's~fueladjustmentclauseprovidesforpar-tialpass-throughoffuelandpurchasedpowercostfluctuationsfromthoseforecastinrateproceedings,withtheCompanyabsorbingaspecificportionofincreasesorretainingaportionofdecreasestoamaximumof$15millionperrateyear.Otheroperationandmaintenanceex-pensesincreased7.6%in1986,2.8%in1985,and7.0%in1984,primarilyasaresultofincreasesinwagesandas-sociatedbenefitsandhighercostschargedbysuppliers.EffectiveJune1,1984,theCompanyenteredintoatwo-yearlaboragreementprovidingforwageincreasesof5.25%inthefirstyearand5.50%inthesecondyear.Anewthree-yearcontractprovidingforannualwageincreasesof4.1%,4.5%and4.7%,respectively,becameeffectiveJune1,1986.Theincreaseinotheroperationandmaintenanceexpensesin1984and1986alsoincludesscheduledmainte-nancecostsrelatingtotherefuelingofNineMilePointNuclearStationUnitNo.1inthoseyears.Thenextrefuelingout-ageforthisunitisscheduledfortheSpringof1988.Depreciationandamortizationex-pensefor1986increased3.1%over1985and10.0%over1984,principallyfromnormalplantgrowthandincreasesindepreciationratesappliedtocertainclassesofassets.TotalFederalandforeignincometaxesfor1986rose21.8%asnettaxableincomeandthedollaramountotitemsonwhichdeterredtaxesareprovidedincreased.Theincreaseintaxesotherthanincometaxesinthethree-yearperiodisdueprincipallytohigherprop-ertytaxesresultingfrompropertyaddi-tions.The$21.5milliondecreaseintotalAllowanceforFundsUsedDuringCon-struction(AFC)for1986resultsfromlowerAFCratesandanincreaseintheamountofCWIPincludedinratebasefrom$320millionto$680millioneffec-tiveApril1,1986,despiteincreasedoveralllevelsofplantconstruction,principallytheUnit.Thedecreaseinotherincomeanddeductions-otheritems(net)isprimar-ilytheresultofthereductioninthein-terestearnedontheadvancesmadeforLILCO(seeNote11ofNotestoConsoli-datedFinancialStatements).InterestexpenseandpreferredstockdividendrequirementsincreasedslightlyasaresultofnewissuancestoraisethecapitalnecessarytofundtheCompany'sconstructionprogramotfsetbyareductioninhighcouponse-curities.Theweightedaveragelong-termdebtinterestrateandpreferreddividendratepaidin1986decreasedfrom10.30%and8.85%in1985,respec-tively,to9.82/oand8.20%,respectively,asaresultoftheCompany'srefinancingefforts.EffectsofChangingPrices.Therateofinflationcontinuedtobemoderatein1986.TheCompanyisespeciallysensi-tivetoinflationbecauseofthelargeamountofcapitalitmustraisetofi-nanceitsconstructionprogramandbe-causeitspricesareregulatedusingaratebasethatreflectsthehistoricalcostofutilityplant.TheCompany'sconsolidatedfinan-cialstatementsarebasedonhistoricaleventsandtransactionswhenthepur-chasingpowerofthedollarwassub-stantiallyditferentfromthepresent.Theeffectsofinflationonmostutilities,in-cludingNiagaraMohawk,aremostsig-nificantintheareasofdepreciationandutilityplant.TheCompanycouldnotre-placeitsutilityplantandequipmentforthehistoricalcostvalueatwhichtheyarerecordedonthebooks.Inaddition,theCompanywouldprobablynotre-placetheseassetswithidenticalonesduetotechnologicaladvancesandreg-ulatorychangeswhichhaveoccurred.Inlightoftheseconsiderations,thede-preciationchargesinoperatingex-pensesdonotreflectthecurrentcostofprovidingservice.TheCompany,how-ever,willseekadditionalrevenuetocoverthecostsofmaintainingserviceasassetsarereplaced.Duringaperiodofinflation,holdersofmonetaryassetssufferalossofgen-eralpurchasingpowerwhileholdersofmonetaryliabilitiesexperienceagain.Thegainfromthedeclineinpurchasingpowerofnetamountsowedisprimarilyattributabletothesubstantialamountofdebtwhichhasbeenusedtofinanceutilityplant.Sincethedepreciationonthisplantislimitedtotherecoveryofhistoricalcosts,theCompanydoesnothavetheopportunitytorealizeahold-inggainondebtandislimitedtorecov-eryonlyoftheembeddedcostofdebtcapital.Thetableonthefollowingpagepresentsselectedfinancialdatare-statedfortheeffectsofchangingpricesinaverage1986dollars:

QIAGArRAMOHAWKPOWERCORPORATIONANDSU'BSIDIARYCOMPANIES198619851984OperatingRevenues($000's)....Gainfromdeclineinpurchasingpoweronnet'mountsowed($000's).......PerCommonShare:Cashdividendsdeclared......Marketpriceatyearend......AverageConsumerPriceIndex..FINANCIALPOSITION,LIQUIDITYAFinancialPosition.DuringrecentyearsinternalfundsfromoperationshavebeeninsufficienttomeettheCom-pany'scapitalrequirementsandthere-fore,largeamountsofnewcapitalfromexternalsourceshavebeennecessary.TheCompany'soverallrequirementsconsistofamountsfortheCompany'sconstructionprogram,workingcapitalneeds,maturingdebtissuesandsink-ingfundprovisionsonoutstandingdebtandpreferredstockandareaffectedbyitsrefinancingefforts.Sourcesandusesoffundstomeettheserequire-mentsduringthepastthreeyearsarereportedintheConsolidatedStatementofChangesinFinancialPositiononpage20.TheCompany'skeyfinancialindi-catorsremainedconstantin1986.Capi-talstructureatyear-endwas47.0%tong-termdebt,10.5%preferredstockand42.5%commonequity.Thisposi-tionisindicativeoftheCompany'scor-porategoalofmaintainingastrongequity-basedcapitalizationof40-45%commonequity.However,thestrengthoftheCompany'scapitalizationstruc-tureandearningswillbeadverselyim-pactedupontheadoptionofnewac-countingrules,whichwillrequireanimmediatewrite-offofUnitdisallowedcosts,andtherecognitionoftheSet-tlementAgreementinrates(seeNote10ofNotestoConsolidatedFinancialStatements).Coverageoffixedchargesdecreasedslightlyto2.98atyear-end,butremainedatapproximatelythe3xlevelforthefifthconsecutiveyearandclosetothecorpo-rategoalofmaintainingatleasta3.25coverageratio.ThecoverageratioexcludingAFCimprovedslightlyto2.42asfinancingcostsnotcurrentlyreco-veredinratesdecreased,primarilyastheresultof$680millionofCWIPinratebase.AFCfor1986amountedto48.2%ofthebalanceavailableforcommonstockascomparedwith53.2%in1985and52.4%ln1984.$2l660,319$2,746,798$2,940,448$36,418$108,788$115,867$2.08$2.10$2.09$16.75$20.89$18.34328.4322.2311.1NDCAPITALRESOURCESDuringtheyear,themarketpricefortheCompany'scommonstockfellbelowthebookvalueafterhavingshownsubstantialimprovementin1985.Inaddition,creditratingsforfirstmortgagebonds,pollutioncontrolbondsandpreferredstockwerelow-eredbyratingagenciesbecauseofthedelaysandrelatedcostincreasesex-periencedattheUnit.ContinueddelaysintheUnit'scom-pletion,andtherelatedincreasesincostscoupledwithaprospectivewrite-offofdisallowedUnitcostsofap-proximately$1billion($626millionnetoftaxata46%rate),recentreductionsintheauthorizedrateofreturnoncommonequityexperiencedbytheCompanyandotherNewYorkStateutilitiesanduncertaintyregardingtheratemakingtreatmentrelativetotheim-plementationoftheSettlementAgree-ment,areexpectedtohaveanegativeimpactonthefinancialconditionandresultsofoperationsoftheCompanyand,inturn,couldjeopardizethemaintenanceofthecurrentcommonstockdividendlevel.ConstructionandOtherCapitalRe-quirements.Annualexpendituresfortheyears1984-1986forconstructionandnuclearfuel,includingrelatedAFCandoverheadscapitalized,were$769.8million,$771.1millionand$774.1mil-lion,respectively.TheprincipalprojectpresentlyunderconstructionistheUnit(seeNote10ofNotestoConsolidatedFinancialStatements).TheCompanyisa41%ownerandhadinvestedabout$2.4billion,includingAFCandover-headscapitalized,intheUnitandUnitrelatedprojectsthroughDecember31,1986.ExpendituresforconstructionoftheUnithaveaveragedapproximately51%oftotalconstructionrequirementsduringtheperiod1984to1986.Totalcapitalrequirementsin1986in-creasedduetorefinancingeffortsand,in1984and1985,astheCompanymade115%41'/o4.o12.6%42,1oo4,5o115%2.0/o11.5%42.7/o47,0'o10.5CCI,cb~ZcoO~~OCICCLIJCCCL19821983198419851986advancesforconstructionoftheUnitonbehalfofLILCO.AsdescribedinNote11ofNotestoConsolidatedFinancialStatements,however,LILCOrepaidsuchobligationsinDecember1986.The1987estimateforconstructionadditionsandnuclearfuel,includingAFCandoverheadscapitalized,isap-proximateiy$550millionandapproxi-mately28%ofthisestimateisfortheUnit.Debtandpreferredstockretire-ments,theamountdueundertheCo-tenantAgreementandotherrequire-.mentsareexpectedtoaddapproxi-matelyanother$468milliontotheCompany'scapitalrequirementsforatotalof$1.018billion.CompleteestimatesoftheCompany'scapitalrequirementsandresourcesfortheyears1987through1991arebeingreviewedbytheCompanytotakeintoconsideration,amongotherthings,theimpactoftheSettlementAgreement,the$171milliontobepaidbytheCom-panytothecotenantcompaniesuponcommercialoperationofthe.Unitpur-suanttotheCotenantAgreement,theimpactoftheTaxReformActof1986(TaxAct),theFinancialAccountingStandardsBoard's("FASB")ExposureDraftconcerningproposedchangesinaccountingforincometaxesandtheJanuary1987costestimateoftheUnit.TheFASBExposureDraftwouldre-quire,amongotherthings,adjustmentofnetdeferredtaxliabilitiesorassetsforthenetchangeinthetaxratespaidbytheCompany.However,theTaxAct~prohibitsrapidreductionofexcessde-ferredtaxesrelatingtoacceleratedde-preciationoccasionedbythereductionofthecorporatetaxrate.TheTaxActcontainsnumerousotherprovisionslikelytoaffecttheCompany.Themostsignificantchangesrelatetoareduc-tioninthemarginalcorporateincometaxrate,increasedminimumtaxprovi-CAPITALIZATIONRATIOS 16NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYC0MP1ANI'E5sionsandtheeliminationoftheinvest-menttaxcredit.TheTaxActwhenini-tiallyconsideredintheratesettingpro-cess,islikelytocreateareductionininternalgenerationofcash.However,reductionsintheCompany'scashgen-erationandcoverageratioswouldalsolikelybeaddressedintheratesettingprocess.Totheextentanysuchnega-tiveimpactsarenotadequatelyconsid-eredinrates,acorrespondinglossofcashflow,ifexperienced,couldbeex-pectedtoincreasetheCompany'sex-ternalfinancingrequirementsandpos-siblylowercreditratingsandmayim-pactthecommonstockdividendrate.LiquidityandResources.During1986,theCompanyraisedapproximately$780,500,000throughexternalsources,consistingof$598,900,000debt,$75,000,000ofpreferredstock,$4,600,000ofcommonstockfromtheissuanceof212,654shares,andnetin-creasesof$9,000,000underinter-mediatetermbankrevolvingcreditob-ligationsand$93,000,000inshort-termdebt.TheCompanyalsocompletedap-proximately$22,000,000ofcapitalleasefinancing,received$225,000,000fromthesaleandredemptionsoftheLILCOGeneralandRefundingBondsitheldand$128,000,000fromasaleandleasebackofatransmissionfacility.Inadditiontosinkingfundandscheduledretirements,during1986theCompanyretiredpriortomaturity$381millionofhigh-couponlong-termdebtand$47millionofpreferredstock.Aportionofthefundsneededtocompletethesere-demptionswereobtainedfromthesalebytheCompanyofLILCOGeneralandRefundingBondsandthetransmissionfacility.Theseearlyretirementsofhighcouponsecuritiescontributedtoare-ductionintheestimatedyear-endaver-agecostofcapital.Usingthemaximumratespayableonvariableratesecuritiestheyear-endaveragecostoflong-termdebtdecreasedfrom10.57%to9.76%andthepreferreddividendratede-creasedfrom9.79%to9.43%.During1986,fundsneededtopayfortheCompany'soverallconstructionre-quirementsamountedto$774,100,000,includingAFC,andwereprovided29%frominternalsourcesand71%fromex-ternalfinancing.Externalfinancingfor1987isex-pectedtoapproximate$687million,in-cludingfundsneededtocompletetheconstructionoftheUnit,payamountsdueundertheCotenantAgreementandANNUALEXTERNALFINANCINGBYTYPEMillionsoldollars780.5700.9583.11,8614.3374.7584.1323.8osIdsCIOdCZ:ooC)ED424.9259.7120.050.0189.19821983198475.0185.3198575.01986refunddebtandpreferredstockex-pectedtoberetiredpriortomaturity.TheCompanyexpectstosecurethemajorityofitscapitalneedsfromtradi-tionalfinancingsources.However,itwillcontinuetoexploreandutilize,asappropriate,othermethodsoffinanc-ing.RecentadoptionbytheFASBofamendmentswithrespecttofinancialaccountingrecognitionofdisallowedUnitcosts,togetherwiththeanticipatedchargeagainstearningsbasedontheSettlement,mayprohibitorseverelyre-stricttheCompany'sabilitytoborrowunderrevolvingcreditagreements,andforaperiodofapproximatelytwelvemonths,issuePreferredStockorFirstMortgageBondsunderitsIndentureonthebasisofadditionalproperty.TherearecurrentlynotestsorrestrictionsontheCompany'sabilitytoissuePrefer-enceStock.Inaddition,the1986reduc-tionofthecreditratingsontheCom-pany'sFirstMortgageBondsandPre-ferredStock,withthepossibleadverseeffectontheratesofinterestanddiv-idendratesthatmayberequiredonfu-tureissuesotsuchsecurities,mayalsoreducetheCompany'sfinancingflexi-bilityandadverselyaftectitscapitalstructureandfinancialposition.Not-withstandingthesepossiblelimitationsonitsfinancingcapacityandflexibility,theCompanybelievesthatavailablesourcesotfinancing,includingasofDecember31,1986,approximately$566millionprincipalamountofFirstMortgageBondsissuableonthebasisofretiredbonds(totheextentnotre-quiredforotherpurposes)and$100millionaggregateparvalueofPreter-enceStock,willbesutficienttosatisfytheCompany'sexternalfinancingneedsfor1987.Ordinarily,constructionrelatedshort-termborrowingsarerefundedwithpermanentsecuritiesonacontinu-ingbasis.Bankcreditarrangements,whichtotal$673million(including$450millionofrevolvingcreditandtermloanagreements,$123millioninlinesofcreditanda$100millionBankersAc-ceptanceFacilityAgreement),areusedbytheCompanytoenhanceflexibilityastothetypeandtimingofitsperma-nentsecuritysales.FurtherincreasesinthecostsoftheUnit,implementationoftheSettlementandrecentchangesinfinancialaccountingstandardscouldaffecttheCompany'sabilitytoaccesscertainofitsbankcreditarrangements.Certainoftheseagreements,aswellasotheragreementsoftheCompany,con-tainrepresentationsandcovenantswhich,ifnotmetorre-negotiated,re-quiretheCompanytoprovidesecurityintheformofFirstMortgageBondsorpreventtheCompanyfrommakingnewborrowingsundersuchagreements(seeNotes4and11ofNotestoConsoli-datedFinancialStatements).Anyse-curityprovidedintheformofFirstMortgageBondsmaydiminishtheamountofFirstMortgageBondsavaila-bleforissuanceonthebasisofretiredbonds.TheunsecureddebtlimitationimposedbytheCompany'sCharteris$700milliondecliningto10%ofcapitalizationplus$50millionafter1988.ThislimitationonunsecureddebttogetherwithcertainrestrictionsonsecuredfinancingmaylimittheCom-pany'sabilitytocompletecertaintypesotfinancing.Ingeneral,theCompanyhashadastrongcapitalstructure,adequateshortandintermediatetermbankborrowingcapabilityandhasbeenabletoaccessthepermanentcapitalmarketswithflex-ibility.EarningscoverageofinterestchargesmayremaininexcessofmortgageindenturerestrictionsfortheissuanceofFirstMortgageBondsandover$1.3billionofpropertyisavailabletosupporttheissuanceofFirstMortgageBonds.However,continua-tionofthisdegreeotfinancialstrengthisdependentonanumberoffactors,includingtheultimatecostoftheNineMilePointNuclearStationUnitNo.2,theratephase-inplanfortheUnit,themethodologyadoptedbythePSCinimplementingtheSettlementAgree-ment,theadoptionofStatementofFi-nancialAccountingStandardsNo.90(seeNote10ofNotestoConsolidatedFinancialStatements)andadequateraterelief.

VI'AGfiRAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESConsolidatedStatementofIncomeandRetainedEarningsOperatingrevenues:ElectricGas.FortheyearendedDecember31~1986$2>131,833528,4862,660,319fnthousandsofdollars1985$2,096,404598,5362,694,9401984$2,134>470651,0762,785,546Operatingexpenses:Operation:Fuelforelectricgeneration.Electricitypurchased.Gaspurchased..OtheroperationexpensesMaintenanceDepreciationandamortization.FederalandforeignincometaxesOthertaxesOperatingIncome.Otherincomeanddeductions:AllowanceforotherfundsusedduringconstructionFederalincometaxesOtheritems(net)(Note11)IncomebeforeInterestchargesInterestcharges:Interestonlong-termdebtOtherinterestAllowanceforborrowedfundsusedduringconstruction.NetincomeDividendsonpreferredstockBalanceavailableforcommonstockDividendsoncommonstock.RetainedearningsfortheyearRetainedearningsatbeginningofyearRetainedearningsatendofyear319,834352,126338,634397,714149,124155,311211,237295,1652,219,145441,174121,93232,29337,539191,764632,938264,05414,880(43,861)235,073397,86553>817344,048264,31279>736842,115921,851391,382367,406411,801364,010144,312150,627173,471280,6432,283,652411,288141,32026,70853,110221,138632,426260,2716,721(45,996)220,996411,43059,559351,871252,21899,653742,462S842,115476,040377,052452,960353,660140,987141,150181,767269,2042,392,820392,726122,35433,4608,591164,405557,131224,09912,440(39,142)197,397359,73451,460308,274216,49391,781650,681S742,462Averagenumberofsharesofcommonstockoutstanding(inthousands).Balanceavailableperaverageshareofcommonstock..Dividendspershareofcommonstock.................127,0762.712.08122,21562.8852.06108,734$2.84$1.98()Denotesdeduction 18NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIA/ConsolidatedBalanceSheetsAtDecember31~1986lnthousandsofdollarsASSETSUtilityplant,atoriginalcost(Note1):ElectricplantNuclearfuel(Nofe3).GasplantCommonplantConstructionworkinprogress(Note10),.Totalutilityplant.LessaccumulateddepreciationandamortizationNetutilityplantOtherpropertyandInvestmentsAdvancesonbehalfofNineMilePointNuclearUnitNo.2cotenant,Includingdeferredsupplementalpayments(Note11)Currentassets:Cash,includingtimedepositsof$78,389and$7,521,respectively.....Accountsreceivable(lessallowancefordoubtfulaccountsof$3,600)..Materialsandsupplies,ataveragecost:CoalandoilforproductionofelectricityOther.PrepaymentsDeferreddebits:Unamortizeddebtexpense.Deferredfinancecharges(Note1).Deferredrecoverableenergycosts.ExtraordinarypropertylossesOther$4,559,389392)662544,447129,4512,820,0448,445,9931,763,4436,682,55076,504175,979289,35043,50473,01521,109602,957118,2098319519,93537,097249,192$7,611,203$4,302,280369,126517,995115,3162,336,1887,640,9051,629,4376,011,468146,487232,84744,933283,96264,45465,45020,931479,73064,26025,05532,5201,70919,761143,305$7,013,837 NEAGArRAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIES19CAPITALIZATIONANDLIABILITIESAtDecember31~1966lnthousandsofdollarsCapitalization(Note7):Commonstockholders'quity:Commonstock,issued127,140,994and126,928,340shares,respectivelyCapitalstockpremiumandexpenseRetainedearningsNon-redeemablepreferredstockRedeemablepreferredstock.Long-termdebt.TotalcapitalizationCurrentliabilities:Short-termdebt(Note4)Long-termdebtduewithinoneyearRedemptionandsinkingfundrequirementsonredeemablepreferredstock(Note7)AccountspayablePayableonoutstandingbankchecksCustomers'epositsAccruedtaxesAccruedinterest.AccruedvacationpayGassupplierrefundspayabletocustomersCotenantprepaymentstoNineMilePointNuclearUnitNo.2projectfund(Note11)DuetocotenantsunderCotenantAgreement(Note10)......OtherDeferredcredits:AccumulateddeferredFederalincometaxes.Mandatedrefundstocustomers(Note11).Deferredfinancecharges(Note1).OtherCommitmentsandcontingencies(Notes3,10and11)$127,1411,522,499921,8512,571i491290,000347,4702,799,6056I008,566100121293,91460,380141,33859,5128,64510,23268,75928,2342,8461,096171,10024,231770,499648564163,22983,95136,317832,138$7,611,203$126,9281,519,577842,1152,488,620290,000379,8502,643,0945,801,5647,19565,46513,050186,88763,3407,8297,56076,15725,94511,38184,90425,937575,650515,55480,00025,05516,014636,623$7,013,837 20NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPA)NIESConsolidatedStatementofChangesinFinancialPositionFortheyearendedDecember31,FINANCIALRESOURCESWEREPROVIDEDBY:Operations:Netincome.Charges(credits)toincomenotrequiring(notproviding)workingcapital-Depreciationandamortization..................Allowancetorfundsusedduringconstruction....AmortizationofnuclearfuelProvisionfordeferredFederalincometaxes(net).Other..............Outsidefinancing:Saleofcommonstock.SaleofpreferredstockSaleofmortgagebonds.Issuanceofotherlong-termdebtNetborrowingsunderrevolvingcreditfacilities.Increase(decrease)inshort-termdebt.........Othersources:DeferredrecoverableenergycostsMandatedrefundstocustomers(Note11).............SaleofLILCOGeneralandRefundingBonds(Note11).Repaymentofconstructionadvances(Note11)........Sale/leasebackoftransrqissionfacility................OtherinvestmentsUnamortizeddebtexpense(Increase)decreaseinworkingcapitalotherthanshort-termdebt(seebelow)..............Miscellaneous(net)TotalresourcesprovidedFINANCIALRESOURCESWEREUSEDFOR:Constructionadditions,includingcapitalleases.Nuclearfuel.Allowanceforfundsusedduringconstruction...Netadditions.AmountsaccruedunderCotenantAgreement(Note10)..AdvancesonbehalfofNineMilePointNuclearUnitNo.2cotenant(Note11)Reductionoflong-termdebtReductionofpreferredandpreferencestock...........Dividends.Totalresourcesused.(Increase)decreaseinworkingcapitalotherthanshort-termdebt:CashAccountsreceivableCoalandoilforproductionofelectricity...............OthermaterialsandsuppliesLong-termdebtduewithinoneyear...................RedemptionandsinkingfundrequirementsonredeemablepreferredstockAccountspayablePayableonoutstandingbankchecks..................AccruedtaxesandinterestGassupplierrefundsduecustomers..................CotenantprepaymentstoNineMilePointNuclearUnitNo.2projectfundDuetocotenantsunderCotenantAgreement(Note10).Other(net).1986397,865155,311(165I793)18,257133,743539,3834,60375,000500,00098,9008,95993,017780,47922,585(16,771)140,00092,847128I00072,596(53,949)(21,395)(11,133)352,780$1,672,642$750,52623,536(165,793)60812691711100467,7641071380318,129$1,672,642$(131)046)(5,388)20,950(7,565)28,44947,330(45,549)(3,828)(4,726)(8,535)(83,808)17111001,221(21,395)fnthousandsofdollars1985411,430150,627(187,316)25,448141,206(4,707)536,688185,27075,000175,000225,000(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$718,90352,217(187,316)583,804135,808126,71713,050311,777$1,171~156(12,294)(1,730)32,020(3,432)1,628(6,551)3,8483,988(5,990)5,13784,594(9,134)92,084359,734141,150(161,496)17,612116,265(10,821)462,444189,62650,000319,25081,6185,060(31,247)614,3079,480(9,273)(27,495)(8,128)38,9643,6437,191$1,083,942$746,91022,936(161,496)608,350120,06067,00520,574267,953$1,083,942(1,440)(8,156)(564)(5,764)33,6857,651(2,213)(17,119)27,440(8,989)(2,507)16,94038,964 NI'AGORAMOHAWKPOWER'CORPORATIONANDSUBSIDIARYCOMPANIES21NotestoConsolidatedFinancialStatementsNOTE1.SummaryofSignificantAccountingPoliciesTheCompanyissubjecttoregulationbytheNewYorkStatePublicServiceCommission(PSC)andtheFederalEnergyRegulatoryCommission(FERC)withrespecttoitsratesforserviceandthemaintenanceofitsaccountingrecords.TheCompany'saccountingpoliciesconformtogenerallyacceptedaccountingprinciples,asappliedtoregulatedpublicutilities,andareinaccordancewiththeaccountingrequirementsandratemakingpracticesoftheregulatoryauthorities.InDecember1986,StatementofFinancialAccountingStan-dardsNo.90,"RegulatedEnterprises-AccountingforAban-donmentsandDisallowanceofPlantCosts"wasissuedbytheFinancialAccountingStandardsBoard(FASB)andisrequiredtobeadoptednotlaterthan1989.(SeeNote10-NineMilePointNuclearStationUnitNo.2foradetaileddiscussionoftheeffectsofthispronouncement).PrinciplesofConsolidation:TheconsolidatedfinancialstatementsincludetheCompanyanditswholly-ownedsub-sidiaries.Allsignificantintercompanybalancesandtransac-tionshavebeeneliminated.AssetsandliabilitiesofforeignsubsidiariesaretranslatedintoU.S.dollarsattheexchangerateineffectatthebalancesheetdate.Revenueandexpenseaccountsaretranslatedattheaverageexchangerateineffectduringtheyear.Currencytranslationadjustmentsarerecordedasacomponentofequityanddonothaveasignificantimpactonfinancialcondition.UtilityPlant:Thecostofadditionstoutilityplantandofre-placementsofretirementunitsofpropertyiscapitalized.Costincludesdirectmaterial,labor,overheadandanallowanceforfundsusedduringconstruction(AFC).Thecostofcurrentre-pairsandmaintenanceischargedtoexpense.Wheneverutilityplantisretired,itsoriginalcost,togetherwiththecostofre-moval,lesssalvage,ischargedtoaccumulateddepreciation.AllowanceforFundsUsedDuringConstruction:TheCom-panycapitalizesAFCinamountsequivalenttothecostoffundsdevotedtoplantunderconstruction.AFCratesarede-terminedinaccordancewithFERCandPSCregulations.TheCompanycomputesAFCataratewhichisreducedtoreflecttheincometaxeffectoftheborrowedfundscomponentofAFCforalladditionstoelectricutilityplant.TheAFCratesineffectDecember31,1986were11.02%and,netoftaxatthecurrentstatutoryrateof46%,8.90%.AFCissegregatedintoitstwocomponents,borrowedfundsandotherfunds,andisreflectedintheInterestChargessectionandtheOtherIncomeandDeductionssection,respectively,oftheConsolidatedState-mentofIncome.EffectiveApril1985,pursuanttoaPSCauthorization,theCompanydiscontinuedaccruingAFCon$320millionofcon-structionworkinprogress(CWIP)forwhichacashreturnisbeingallowedthroughinclusioninratebaseofthatportionoftheinvestmentintheNineMilePointNuclearStationUnitNo.2(Unit).Thisamountwasincreasedto$680millioninApril1986.AmountsequaltotheAFCwhichisnolongeraccruedontheCWIPincludedinratebasearebeingaccumulatedindeferreddebitandcreditaccountsand,atthetimetheUnitcommencescommercialoperationandisplacedinratebase,thebalanceinthedeferredcreditaccountcouldbeavailabletoreducefuturerevenuerequirementsoveraperiodpotentiallyshorterthanthelifeoftheUnit.ItiscurrentlyexpectedthatthebalanceinthedeferreddebitaccountwillbeamortizedandrecoveredinratesoverthelifeoftheUnit.Depreciation,AmortizationandNuclearGeneratingPlantDe-commissioningCosts:Foraccountingpurposes,depreciationiscomputedonthestraight-linebasisusingtheaverageorremainingservicelivesbyclassesofdepreciableproperty.Inaddition,certaincostsassociatedwiththediscontinuedSter-lingNuclearStation(SeeNote2)wereamortizedovershorterperiodsasapprovedbythePSC.ForFederalincometaxpur-poses,theCompanycomputesdepreciationusingacceleratedmethodsandshorterallowabledepreciablelives.Estimateddecommissioningcosts(coststoremovetheplantfromserviceinthefuture)oftheCompany'sNineMilePointNuclearStationUnitNo.1arebeingrecoveredinratesthroughanannualallowanceandchargedtooperationsthroughde-preciationcharges.Basedonastudycompletedin1986,thecostofdecommissioningNineMilePointNuclearStationUnitNo.1,whichisexpectedtobeginintheyear2005,isestimatedtobeapproximately$442,000,000atthattime($211,700,000in1986dollars).ThroughDecember31,1986,theCompanyhasrecovered$23,200,000ofdecommissioningcostsinrates.TheCompany's41%shareofcoststodecommissionNineMilePointNuclearStationUnitNo.2whichisexpectedtobeginintheyear2027,isestimatedtobeapproximately$565,000,000($108,100,000in1986dollars).Theannualallowancesforre-covery,baseduponcurrentlyestimateddecommissioningcostsoverthelifeoftheseunits,areunderconsiderationintheCompany'scurrentrateproceeding.TheCompanycontinuestoreviewtheestimatedrequirementsfordecommissioningandplanstoseekrateadjustmentswhenappropriate.Thereisnoassurancethatthedecommissioningallowancewillulti-matelyaggregateasufficientamounttodecommissiontheunits.TheCompanybelievesthatdecommissioningcosts,ifhigherthancurrentlyestimated,willultimatelyberecoveredintherateprocess,althoughnosuchassurancecanbegiven.AmortizationofNuclearFuel:Amortizationofthecostofnu-clearfuelisdeterminedonthebasisofthequantityofheatproducedforthegenerationofelectricenergy.Thecostofdisposalofnuclearfuel,whichpresentlyis$.001perkilowatt-hourofnetgeneration,isbaseduponacontractwiththeU.S.DepartmentofEnergy.Thesecosts,whichareassociatedwithgenerationatNineMilePointUnitNuclearStationNo.1,arechargedtooperatingexpenseandrecoveredfromcustomersthroughbaseratesorthroughthefueladjustmentclause.Revenues:Revenuesarebasedoncyclebillingsrenderedtocertaincustomersmonthlyandothersbi-monthly.TheCom-panydoesnotaccruerevenuesforenergyconsumedandnotbilledattheendofanyfiscalperiod.TheCompany'stariffsincludeelectricandgasadjustmentclausesunderwhichenergyandpurchasedgascosts,respectively,aboveorbelowthelevelsallowedinapprovedrateschedules,arebilledorcreditedtocustomers.TheCompany,asauthorizedbythePSC,chargesoperationsforenergyandpurchasedgascostincreasesintheperiodofrecovery.ThePSChasperiodicallyauthorizedtheCompanytomakechangesinthelevelofal-lowedenergyandpurchasedgascostsincludedinapprovedrateschedules.Asaresultofsuchperiodicchanges,aportion 22NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPAGNIE~ofenergycostsdeferredatthe,timeofchangewouldnotberecoveredunderthenormaloperationoftheelectricadjust-mentclause.However,theCompanyhasbeenpermittedtoamortizeandbillsuchportionstocustomers,throughtheelec-tricadjustmentclause,over36monthsfromtheeffectivedateofeachchange.TheCompany'selectricfueladjustmentclauseprovidesforpartialpass-throughoffuelcostfluctua-tionsfromthoseforecastinrateproceedingswiththeCom-panyabsorbingaspecificportionofincreasesorretainingaportionofdecreasestoamaximumof$15millionperrateyear.FederalIncomeTaxes:InaccordancewithPSCrequirements,thetaxeftectofbookandtaxtimingdifferencesisflowedthroughunlessauthorizedbythePSCtobedeferred.TheCompanyprovidesdeferredtaxesoncertainbenefitsrealizedfromdepreciation,ondeferredenergyandpurchasedgascosts,onnuclearfueldisposalcostsaccruedpriortoApril7,1983,onnucleargeneratingplantdecommissioningcosts,oncertainconstructionoverheadsandoncertainotheritems(seeNote9).InconformitywithratemakingpracticesofthePSC,theCompanyhasnotprovideddeferredtaxesonapproxi-mately$1.6billionofothertaxdeductionswhichincludecer-taindepreciationdifferencesandvariousconstructionover-headsdeductiblecurrentlyfortaxpurposesandcapitalizedforaccountingandratemakingpurposes.TheCompanyhasclaimed10percentinvestmenttaxcreditanddeferredtheben-efitsofsuchcreditsasrealizedinaccordancewithPSCdirec-tives.Forpurposesofcomputingcapitalcostrecoverydeduc-tionsandnormalization,theassetbasisispartlyreducedbythecreditclaimed.TheimputedtaxbenefitoftheborrowedfundscomponentofAFCandthetaxetfectofLILCOGeneralandRefundingBondinterestandsupplementalpaymentsarerecordedinOtherIncomeandDeductions(seeNote11).AmortizationofDebtIssueCosts:Thepremiumordiscountanddebtexpensesonlong-termdebtissuesandoncertaindebtretirementsprioitomaturity,areamortizedratablyoverthelivesoftherelatedissuesandincludedininterestonlong-termdebt(seeNote7).PensionPlans:Thecostofpensionplansisbaseduponcur-rentcosts,amortizationofunfundedpastservicebenefitsoverperiodsrangingfrom15to40yearsandamortizationover15yearsofunfundedpastservicebenefitsarisingfromplanamendments.TheCompany'spolicyistofundpensioncostsaccrued(seeNote8).InDecember1985,StatementofFinancialAccountingStan-dardsNo.87"Employers'ccountingforPensions"wasis-suedbytheFASBandiseffectiveforfiscalyearsbeginningafterDecember15,1986.TheadoptionoftherequirementsofthisstatementisnotcurrentlyanticipatedtohaveasignificantimpactontheresultsofoperationsorfinancialpositionoftheCompanyasshownintheConsolidatedFinancialStatements.NOTE2.DepreciationandAmortizationThetotalprovisionfordepreciationandamortization,includ-ingamountschargedtoclearingaccounts,was$156,494,000for1986,$151,817,000for1985and$142,500,000for1984.Theprovisionsincludeapproximately$2,800,000,$9,500,000and$10,200,000,respectively,resultingfromthePSCallowedre-coveryoftheamortizationofcostsassociatedwiththediscon-tinuedSterlingNuclearStation.Thepercentagerelationshipbetweenthetotalprovisionfordepreciationandaveragede-preciablepropertywas3.0%in1986and1985and2.9%in1984.TheCompanymakesdepreciationstudiesonacontinu-ingbasisand,uponapprovalbythePSC,periodicallyadjuststheratesofitsvariousclassesofdepreciableproperty.NOTE3.NMUranium,Inc.During1976,throughawholly-ownedsubsidiary,NMUranium,Inc.(NMU),theCompanypurchaseda50percentundividedinterestinuraniumdepositsandassociatedminingequipmenttobeheldbyajointly-ownedminingventure.Ac-quisitionofthisinterestwasmadeprimarilytoprovideamoreassuredfuturesupplyofnuclearfuel.Theinvestmentinthesubsidiary,whichincludescostsincurredsinceacquisitionandAFCaccruedthroughMarch31,1981,hasbeenreducedbytheproceedsfromthesaleofuranium,netoftax,andtrans-ferstotheCompanyandisincludedintheconsolidatedfinan-cialstatementsaspartofthenuclearfuelcomponentofutilityplant.Suchinvestmenttotaled$82,200,000atDecember31,1986and$73,800,000atDecember31,1985.InconnectionwiththeCompany'sratedecisionsinMarch1984andMarch1986thePSChasallowed,asthecostofap-proximately790,000lbs.ofNMUuraniumutilizedinthe1984and1986reloadsoftheCompany'sNineMilePointNuclearUnitNo.1andapproximately107,000lbs.utilizedforaportionoftheinitialcoreatNineMilePointNuclearUnitNo.2,apricewhichrepresentstheaverageUnitedStatesdeliverypricefortheyear,asreportedbytheU.S.DepartmentofEnergy(DOE).ThetotalallowedvalueofthesetransfersusingDOEpricesisapproximately$30.5millionwhiletheCompany'scostisap-proximately$39.4million.ThedifferentialbetweentheCom-pany'scostofthisNMUuraniumandthatamountallowedtoberecoveredinrateschargedtocustomershasbeendeferredsubjecttothePSCapprovalofthecomparisonofcosttomar-ketonanaggregatebasisoverthelifeoftheproject.TheCom-panyanticipatesthat,baseduponpresentDOEforecastsofaveragedeliveryprices,substantiallyallofitsinvestmentwillberecovered,althoughnosuchassurancecanbeprovided.NOTE4.BankCreditArrangementsAtDecember31,1986,theCompanyhad$673millionofbankcreditarrangements,includingtheOswegoFacilitiesTrust,with34banks.Thesecreditarrangementsconsistedof$450millionincommitmentsunderRevolvingCreditandTermLoanAgreements,$10millioninshort-termcommitmentsunderCreditAgreements,$113millioninlinesofcreditand$100millionunderaBankersAcceptanceFacilityAgreement.TheRevolvingCreditandTermLoanAgreementsextendthrough1990althoughtherevolvingcreditperiodsundertheagreementsfor$135millionofthe$450millionexpirein1987.AttheoptionoftheCompany,theinterestrateapplicabletoborrowingsundertheseagreementsisbasedontheprimerateoratspecifiedincrementsovertheratesapplicabletocertifi-catesofdepositor,incertainagreements,eurodollardeposits.Alloftheotherbankcreditarrangementsaresubjecttoreviewonanongoingbasiswithinterestratesnegotiatedatthetimeofuse.TheCompanyalsoissuescommercialpaper.Unusedbankcreditfacilitiesareheldavailabletosupporttheamountofcommercialpaperoutstanding,includingamountscurrentlyissuedinconnectionwithInterestRateExchangeAgreements(seeNote7).$215millionoftheRevolvingCreditandTermLoanAgreementscontainrepresentationsandcovenantswhich,ifnotmetorre-negotiated,wouldpreventtheCompany YI'AGORAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIES23AtDecember31:Inthousandsoldollars19861985frommakingnewborrowingsundersuchagreementsandre-quiretheCompanytobeginscheduledrepaymentoverthreeyearsofamountsoutstanding.TheCompanypaysfeesforsubstantiallyallofitsbankcreditarrangements.TheBankersAcceptanceFacilityAgreement,whichisusedtofinancethefuelinventoryfortheCompany,'sgeneratingstations,providesforthepaymentoffeesonlyatthetimeofissuanceofeachacceptance.AmountsoutstandingunderInterestRateExchangeAgree-mentsandRevolvingCreditandTermLoanAgreementsto-taled$100millionatDecember31,1986andarerecordedaslong-termdebt.AdditionalbankcreditarrangementsinconnectionwiththeCompany'sguaranteeofcertainobligationsofLILCOaredis-cussedinNote11.Thefollowingtablesummarizesadditionalinformationapplicabletoshort-termdebt:Operatingrevenues:Electric.......;....GasInthousandsoldollars198619851984$2,131,833$2,096,404$2,134,470528,486598,536651,076NOTE6.InformationRegardingtheElectricandGasBusinessesTheCompanyisengagedintheelectricandnaturalgasutil-itybusinesses.Certaininformationregardingthesesegmentsissetforthinthefollowingtable.Generalcorporateexpenses,propertycommontobothsegmentsanddepreciationofsuchcommonpropertyhavebeenallocatedtothesegmentsinac-cordancewithpracticeestablishedforregulatorypurposes.Identifiableassetsincludenetutilityplant,materialsandsupplies,deferredfinancechargesanddeferredrecoverableenergycosts.Corporateassetsconsistofotherpropertyandinvestments,cash,accountsreceivable,prepayments,unamor-tizeddebtexpenseandotherdeferreddebits.Short-termdebt:Commercialpaper....NotespayabieBankersaccetances.WeightedaverageInterestrate(a)..ForearendedDecember31:$100,2128.33%S7,1957.93%..S72,000$2122,19528,0005.000Total$2,660,319$2,694,940$2,785,546OperatingIncomebeforetaxes:Electric...................S596,864S529,659$511,842Gas......................55,54755,10062,651S652,411$584,759$574,493TotalDailyaverageoutstanding......Dailyweightedaverageinterestrate(a).Maximumamountoutstandin(a)Excludingfees...$19715576.60%..8396,115$45,6078.31%$182,818Total...................818,204Incometaxes................211,237Otherincomeanddeductions.69,832Interestchares.............278,934772,075173,47179,818266,992735,989181,76742,051236,539PretaxoperatingIncome,IncludingAFC:Electric...................$762,362$716,719$672,964Gas55,84255,35663,025NOTE5.Jointly-OwnedGeneratingFacilitiesThefollowingtablereflectstheCompany'sshareofjointly-ownedgeneratingfacilitiesatDecember31,1986.TheCom-panyisrequiredtoprovidefinancingfortheunitinprocessofconstructionandforanyadditionstotheunitsinservice.TheCompany'sshareofexpensesassociatedwiththeRosetonunitsandOswegoSteamStationUnitNo.6isincludedintheappropriateoperatingexpensesintheConsolidatedStatementofIncome.InthousandsoldollarsPercentageConstructionowner-UtilityAccumuIatedworkinshipplantdepreciationprogressNetincomeS397,865$411,430S359,734Depreciation:Electric.....GasTotal$141,663$137,630$128,52113,64812.99712,629S155,311$150,627$141,150Constructionexpenditures(includingnuclearfuel):Electric...................S734,348S749,912S734.706Gas39,71421,20835.140S774,062S771,120$769.846TotalRosetonSteamStationUnitsNo.1and2(a)...25$83,199$27,513$738OswegoSteamStationUnitNo.6(b)..........76$260,099$47,961S631NineMilePointNuclearStationUnitNo.2(c)(d).41--$2,263,700(a)TheremainingownershipinterestsareCentralHudsonGasandElectricCorporation,theoperatoroftheplant(35%)andConsoli-datedEdisonCompanyofNewYork,Inc.(40%).fb)TheCompanyistheoperator.TheremainingownershipinterestisRochesterGasandElectricCorporation(24%).(c)TheremainingownershipinterestsareLongIslandLightingCom-pany(18%),NewYorkStateElectricandGasCorporation(18%),RochesterGasandElectricCorporation(14%),andCentralHud-sonGasandElectricCorporation(9%)(seeNote10).(d)Excludesamountsspentfornuclearfuel~unsharedinternalCom-panycharges,certaincostsassociatedwithnon-generatingfacilitiesbeingconstructedinconnectionwiththeUnitandac-cruedamountsdueundertheCotenantAgreement.Identifiableassets:Electric...........Gas.Total........Corporateassets.Totalassets$6,424,656$5,756,586$5,155,372468,299444,070432,1136,892,9556,200,6565,587,485718,248813,181645,916$7,611,203$7,013.837$6,233,401 24NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESNOTE7.CapitalizationCAPITALSTOCKThefollowingtablesummarizesthesharesofcapitalstockauthorized,issuedandoutstanding:AtDecember31,198619851984Commonstock,$1parvalue:Authorized.Issued&outstandinPreferredstock,$100parvalue:Authorized.Issued&outstandin150,000I000127,140,9943,400)0003,260,000150,000,000150,000,000126,928.340116,848,9743,400,0003,400,0003,318.0003,342.510Preferredstock,$25parvalue:Authorized."Issued&outstandin19,600,00014,874,00019,600,00014,044,00019,600,00011,210,000Preferencestock,$25parvalue:'uthorizedIssued&outstandin4,000,00004,000,0004,000,0000520,000Thetablebelowsummarizeschangesincapitalaccountsfor1984,1985and1986:CommonStock($1parvalue)PreferredandPreferenceStock$100parvalue$25parvalueon-on-Redeem-Redeem-Redeem-able*able'haresable*CapitalStockPremiumRedeem-Expenseable*(Net)'alanceJanuary1,1984Salesin1984.............Issuedtostockpurchaseplansin1984............Redemptions.............Foreigncurrencytranslationadustment...104,010,003$104,0103,370,240$210,0006,534,4006,5346,304,5716,305(27,730)$127,024(e)10,136,0002,000,000(2,773)(406,000)(10,150)87,117555(2,126)$30,000$223,400(a)$1,174,38250,00087,878BalanceDecember31,1984Salesin1985.............Issuedtostockpurchaseplansin1985............Redemptions.............Foreigncurrencytranslationadjustment...116,848,974116,8493,342,510210,0004,465,6004,4655,613,7665,614(24,510)124,251(e)11,730,00030,0003,000,00050,000(2,451)(686,000)(17,150)99,535442(2,422)263,250(a)1,347,80625,00074,216BalanceDecember31,1985Salesin1986.............Issuedtostockpurchaseplansin1986............Redemptions.............Foreigncurrencytranslationadustment....126,928,340126,9283,318,00060,35461152,300152(58,000)210,000121,800(e)14,044,0003,000,000(5,800)(2,170,000)(54,250)2,82143760380,000271,100(a)1,519,57775,000(939)BalanceDecember31,1986127,140,994$127,1413,260,000$210.000$116,000(e)14,874,000$80,000$291.850(a)$1,522.499Inthousandsofdollars.(a)Includessinkingfundrequir'ementsduewithinoneyear.

NI'AGORAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIES25NON-REDEEMABLEPREFERREDSTOCK(OptionallyRedeemable)TheCompanyhascertainissuesofpreferredstockwhichprovideforoptionalredemptionasfollows:Redemptionpricepershare(Beforeaddingaccumulateddividends)InthousandsofdollarsEventual198619851984December31,1986minimumAtDecember31,Preferred$100parvalue:3.40%Series;200,000shares..3.60%Series;350,000shares..3.90%Series;240,000shares..4.10%Series;210,000shares..4.85%Series;250,000shares..5.25%Series;200,000shares..6.10%Series;250,000shares..7.72%Series;400,000shares..Preferred$25parvalue:AdjustableRateSeriesA;1,200,000shares...........AdjustableRateSeriesC;2,000,000shares...........$20,00035,00024,00021,00025,00020,00025,00040,00030,00050,000$20,00035,00024,00021,00025,00020,00025,00040,000$20,00035,00024,00021,00025,00020,00025,00040,00030,00030,00050,000$103.50104.85106.00102.00102.00102.00101.00105.44(a)(b)$103.50104.85106.00102.00102.00102.00101.00102.3625.0025.00(a)Notredeemableuntil1988.(b)Notredeemableuntil1990.$290,000$290,000$240,000MANDATORILYREDEEMABLEPREFERREDSTOCKTheCompanyhascertainissuesofpreferredandpreferencestockwhichprovideformandatoryandoptionalredemptionasfollows:Redemptionpricepershare(Beforeaddingaccumulateddividends)InthousandsofdollarsAtDecember31,198619851984December31,1986minimumPreferred$100parvalue:7.45%Series;420,000,438,000,and456,000shares...10.13'/oSeries;250,000shares.10.60%Series;240,000,280,000and286,510shares..12.75%Series;250,000shares.Preferred$25parvalue:8.375%Series;1,200,000,1,300,000and1,400,000shares.8.75%Series;3,000,000shares9.75%Series;738,000,804,000and870,000shares..9.75%Series(second);816,000and1,020,000shares.10.13'/oSeries;1,000,000shares10.75%Series;1,600,000shares12.25%Series;700,000shares.12.50/oSeries;620,000shares.12.75%Series;noneand1,000,000shares.............15.00/oSeries;noneand800,000shares..............AdjustableRateSeries8;2,000,000shares.............Preference$25parvalue:7.75%Series;noneand520,000shares..............30>00075>00018,45020,40025>00040,00017,50015,50050,00032,50020,10025,50025,00040,00017,50015,50025,00020,00050,000$42,000$43,80025,00025,00024,00028,00025,000'5,000$45,60025,00028,65125,00035,00021,75025,50025,00040,00017,50015,50020,00050,00013,000$104.33(a)107.9526.21(b)26.162526.22(a)(a)(c)(c)(d)$100.00100.00102.6525.0025.0025.0025.0025.0025.0025.0025.0025.00Lessslnkinfundandredemtionreuirements..407,85060,380392,90013,050387,50119,601(a)Notredeemableuntil1988.(b)Notredeemableuntil1992.(c)Notredeemableuntil1991.(d)Notredeemableuntil1989.'SeriescalledforredemptionJanuary19,1987.$347,470$379.850$367.900 26NIAGARAM0HAWKPOWERCORPORATIONANDSUBSIDIARYC0MPftNI'ESTheseseriesrequiremandatorysinkingfundsforannualredemptionandprovideoptionalsinkingfundsthroughwhichtheCompanymayredeem,atpar,alikeamountofadditionalshares(limitedto120,000sharesofthe7.45%seriesand300,000sharesofthe9.75%series).Theoptiontoredeemadditionalamountsisnotcumulative.TheCompany'sfive-yearmandatorysinkingfundredemptionrequirementsforpreferredstockareasfollows:No.ofsharesCommencingInthousandsofdollars19871988198919901991Preferred$100parvalue:7.45%Series..........10.13%Series....~~~~~~10.60%Series..........Preferred$25parvalue:8.375%Series..........8.75%Series...........9.75%Series...........10.13/oSeries...........10.75%Series.........~.12.25%Series.......~~~~12.50%Series........~~~AdustableRateSeriesB.18,00025,00020,000100,000600,00066,000100,000320,00043,06038,13950,0006/30/7712/31/873/31/804/1/8312/31/9210/1/8012/31/876/30/893/31/873/31/879/30/93$1,8002,5002,0002,5001,6502,5001,077953$1,8002,5002,0002,5001,6502,5001,077953$1,8001,8752,0002,5001,6501,8758,0001,077953$1,8002,5002,0002,5001,6502,5008,0001,077953$1,8002,5002,0002,5001,6502,5008,0001,077953$14,980$14,980$21,730$22,980$22,980LONG-TERMDEBTLong-termdebtandlong-termdebtduewithinoneyearconsistedofthefollowing:InthousandsofdollarsAtDecember31,19861985InthousandsofdollarsAtDecember31,19861985Firstmortgagebonds:3s/e%SeriesdueMay1,1986.........4r/e%SeriesdueSeptember1,1987...3r/s%SeriesdueJune1,1988........14r/e%SeriesdueAugust11,1988.....12%SeriesdueMarch1,1989.......*9Ve%SeriesdueOctober1,1989.....4V4%SeriesdueApril1,1990.........15%SeriesdueMarch1,1991.......14e/4%SeriesdueMay1~1991.........4Ve%SeriesdueNovember1,199112.73/oSeriesdueFebruary1,1992....13.06%SeriesdueFebruary1,1992....12.73%SeriesdueFebruary20,1992..12.68%SeriesdueFebruary28,1992..15Ve%SeriesdueMarch1,1992.......1574%SeriesdueJune1~1992........11%SeriesdueMay1,1993.........12Ve%SeriesdueMarch1,1994.......8r/s%SeriesdueAugust1,1994......4Vs%SeriesdueDecember1,1994...9Vs%SeriesdueOctober1,1996.....5r/s%SeriesdueNovember1,1996...6V4%SeriesdueAugust1,1997......6Ve%SeriesdueAugust1,1998......12e/s%SeriesdueMarch1~1999.......9Vs%SeriesdueDecember1,1999...12.95%SeriesdueOctober1,2000....7s/s%SeriesdueFebruary1,2001.....7Vs%SeriesdueFebruary1,2002.....7s/4%SeriesdueAugust1,2002......8V4%SeriesdueDecember1,2003...9Ve%SeriesdueDecember1,2003...9.95%SeriesdueSeptember1,2004..10.20%SeriesdueMarch1,2005......8.35%SeriesdueAugust1,2007.....8Vs%SeriesdueDecember1,2007...'13Ve%SeriesdueApril1,2012.........16'/sSeriesdueAugust1,2012........$50,00050,00034,00020,00013,00050,00040,00020100050,00010,00020,00025104523,34650,000150,00040,000100,00045,00040,00060,00075,00069,33465,00080,00080>00080,00050,00090,00035,00071105042,00025,7603i016$30,00050,00050,00050,00020,00013,00050,00038,65090,00040,00020,00050,00010,00020,00050,00058,50050,00013,00040,00045,00040,00060,00017,00075,00080,00065,00080,00080,00080,00050,00095,00035,00071,05044,00025,8003,04612r/e%SeriesdueNovember1,2012.12r/s%SeriesdueMarch1,2013.....12Ve%SeriesdueJune15,2013.....11V4%SeriesdueJuly1~2014.......'11Vs%SeriesdueOctober1,2014...10/oSeriesdueJune1~2016........10/oSeriesdueNovember1,2016...8~/s%SeriesdueNovember1,2025.TotalFirstMortgageBonds.........Promissorynotes:8%SeriesAdueJune1,2004.......AdjustableRateSeriesdueJuly1,2015December1,2025.December1,2026.Notespayable:17%EurodollarGuaranteedNotesdueSeptember15,1989.................AdjustableLondonInterbankOfferedRatedueSeptember15,1989.....IntermediateNotes,Variousrates,due1989-1992SwissFrancBondsdueDecember15,1995..15.02/oUnsecuredNotesdue1990.........Notes,InterestRateExchangeAgreement...RevolvingcreditandloanagreementsRevolvingcreditagreement,OswegoFacilitiesTrust.................OtherUnamortizedremlumdiscountTOTALLONG-TERMDEBT.............Lesslong-termdebtduewithinoneear.Tax-exemptpollutioncontrolrelatedissues79,35569,53075,69040,015150,000100,00075,000100,000100,00050,00075,69040,01575,000100,000100,00075,00075,00050,00048,90050,00050,00050,00046,7059,00050,00050,00050,00025,00025,00034,039117,90667)25,08099,8751,5482,893,5192,708,55993,91465,465$2,799,605$2,643,0942,246,1412,129,75146,60046,600 NI/(CA+AMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIES27SeveralseriesofFirstMortgageBondsandNoteswereissuedtosecurealikeamountoftax-exemptrevenuebondsandnotesissuedbytheNewYorkStateEnergyResearchandDe-velopmentAuthority(NYSERDA).$225,000,000bearinterestatadailyadjustableinterestrate(withaCompanyoptiontocon-verttoafixedinterestrate)whichaveraged4.38%for1986andaresupportedbybankdirectpaylettersofcredit.PursuanttoagreementsbetweenNYSERDAandtheCompany,trustfundshavebeenestablishedwiththeproceedsfromthebondandnoteissues.SuchproceedsaretobeusedforthepurposeofconstructingcertainpollutioncontrolfacilitiesattheCom-pany'sgeneratingfacilities.Unexpendedproceedsinthetrustfundsamountedto$2,238,000atDecember31,1986andarerecordedinOtherPropertyandInvestments.NotesPayableincludeaten-yearSwissFrancBondissueequivalentto$50,000,000inU.S.funds.Simultaneouslywiththesaleofthesebonds,theCompanyenteredintoacurrencyexchangeagreementtofullyhedgeagainstcurrencyexchangeratefluctuations.TheCompanyhasInterestRateExchangeAgreementsex-tendinginto1991for$75,000,000,including$25,000,000forOswegoFacilitiesTrust(Trust).TheagreementsrequiretheCompanytomakefixedratepaymentswhich,calculatedonasemi-annualbondbasis,areequivalentto7.53%,and,inex-change,receiveaLIBOR-basedfloatingratepaymentfromabank.TheCompanygenerallyusesitsowncommercialpapernotesasthesourceoffundingfor$50,000,000andTrustnotesfor$25,000,000.Therelatedinterestexpenseisrecordedonanetbasis.ThearrangementswiththeTrustprovidefinancingfortheconstructionofanewenergymanagementsystem.TheTrusthasa$50,000,000DirectPayLetterofCreditFacilityandRe-volvingCreditAgreement,$25,000,000ofwhichissubjecttoanInterestRateExchangeAgreementandisusedtosupportitscommercialpaperobligations.Allsuchobligationsarese-curedbycertainassetsheldbytheTrust.TheCompanyisrequiredtopurchase,orotherwisearrangefor,thedispositionoftheTrustassetsupontheterminationoftheTrust.TheLetterofCreditFacilityandRevolvingCreditAgreementoftheTrustrequirepaymentoffeeswhicharebasedupontheamountofcommercialpaperoutstanding.Otherlong-termdebtin1986consistsofobligationsundercapitalleasesof$56,180,000andaliabilitytotheU.S.Depart-mentofEnergyfornuclearfueldisposalof$61,726,000.CertainoftheCompany'sdebtsecuritiesprovideforamandatorysinkingfundforannualredemption.TheCompany'sfive-yearmandatorysinkingfundredemptionrequirementsareasfollows:PrincipalamountCommencinglnthousandsofdollars19871988198919901991FirstMortgageBonds:10.20%SeriesdueMarch1,2005......8.35%SeriesdueAugust1,2007.....85/8%SeriesdueDecember1,2007...9.95%SeriesdueSeptember1,2004.14r/e%SeriesdueAugust11,1988.....12.95%SeriesdueOctober1,2000....9'%eriesdueDecember1,2003...PromIssoryNotes:8%SeriesAdueJune1~2004........$1,5007502,0005,00017,0005,3332,9415003/1/788/1/8212/1/839/1/858/11/8610/1/8612/1/876/1/90$1,500550(a)2,0005,00017,0005,3332,941$1,5007502,0005,00017,0005,3332,941$1,5007502,0005,0005,3332,941$1,5007502,0005,0005,3332,941500$1,5007502,0005,0005,3332,941500(a)Aportionoftherequirementshavebeenmetbyadvancepurchases.$34,324$34.524$17,524$18.024$18,024Additionally,certainotherseriesofmortgagebondsprovideforadebtretirementfundwherebypaymentrequirementsmaybemet,inlieuofcash,bythecertificationofadditionalproperty,thewaiveroftheissuanceofadditionalbondsortheretirementofoutstandingbonds.The1986requirementsfortheseseriesweresatisfiedbythecertificationofadditionalproperty.TheCom-panyanticipatesthatthe1987requirementsfortheseserieswillbesatisfiedbyotherthanpaymentincash.Totalannualdebtretirementfundrequirementsfortheseseries,baseduponmortgagebondsoutstandingDecember31,1986,are$7,050,000.NOTE8.PensionandOtherRetirementPlans.TheCompanyanditssubsidiarieshavenon-contributorypensionplanscoveringsubstantiallyalltheiremployees.Thetotalpensioncostwas$44,300,000for1986and$42,100,000for1985and1984(ofwhich$15,600,000for1986,$13,400,000for1985and$11,400,000for1984wasrelatedtoconstructionlaborandaccordingly,waschargedtoconstructionprojects).Studiesindicatethattheaccumulatedplanbenefits,asde-terminedbyconsultingactuaries,andplannetassetsfortheCompany'splansatDecember31,1986and1985areasfol-lows:TotalNetassetsavailableforplanbenefits...$501,000$433,000$677,000$583,000Theweightedaverageassumedrateofreturnusedindeter-miningtheactuarialpresentvalueofaccumulatedplanben-efitswas7t!~%in1986and8%in1985.fnthousandsofdollars19861985Actuarialpresentvalueofaccumulatedbenefits:Vested$471,000$409,000Non-vested30,00024,000 28NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMHANIESThetableonpage27summarizesaccumulatedplanbenefitsattributabletoemployeewagelevelsandservicerenderedthroughDecember31,1986and1985.Theseamountsdonottakeintoconsiderationexpectedfutureservice,wagein-creasesandassociatedactuarialassumptions.Theseaddi-tionalfactorsandassumptionsareconsideredindeterminingthefundingrequirementsoftheCompany'songoingpensionplans,baseduponanapprovedactuarialcostmethod,andareinconformitywithgenerallyacceptedactuarialprinciplesandpractices.Inadditiontoprovidingpensionbenefits,theCompanyanditssubsidiariesprovidecertainhealthcareandlifeinsurancebenefitsforretiredemployees.SubstantiallyalloftheCom-pany'semployeesmaybecomeeligibleforthesebenefitsiftheyreachretirementagewhileworkingfortheCompany.Thesebenefitsareprovidedthroughaninsurancecompanywhosepremiumsarebasedonthebenefitspaidduringtheyear.Thecost(insurancepremiums)ofprovidingtheseben-efitsamountedtoapproximately$7,900,000for1986,$7,500,000for1985and$6,000,000for1984.NOTE9.FederalandForeignIncomeTaxesincomeTaxReform:InOctober1986,theTaxReformActof1986(Act)wassignedintolaw.OneoftheprovisionsoftheActloweredthestatutorycorporateFederalincometaxratefrom46%to34%effectiveJuly1,1987.ThedeferredFederalincometaxesbelowrelatingtobook/taxtimingdifferenceshavebeenprovidedatthecurrentstatutoryrateof46%.ComponentsofUnitedStatesandforeignincomebeforein-lnthousandsofdollars198619851984UnitedStates..............ForeignConsoiidatineliminations.$570,11314,3117,61$551,907$499,28517,51618,32611,2309,570Incomebeforeincometaxes.$576,809$558,193$508,041FollowingisasummaryofthecomponentsofFederalandforeignincometaxandareconcilationbetweentheamountofFederalincometaxexpensereportedintheConsolidatedStatementofIncomeandthecomputedamountatthestatu-torytaxrate:SummaryAnalysis:lnthousandsofdollars198619851984ComponentsofFederalandforeignincometaxes:Currenttaxexpense:FederalForeinDeferredFederalincometaxexpense...IncometaxesincludedinOperatingExpenses.FederalincometaxexpenseincludedinOtherIncomeandDeductions.FederalincometaxcreditsincludedinOtherIncomeandDeductions...Total$24>9596,76731>726179,511211>23713>47545,768$178,944$(21,329)7,746(13,583)187,054173,47119,14045,848$146,763$17,7138,49826,211155,556181,7675,83139,291)$148,307ComponentsofdeferredFederalIncometaxes(Note1):Depreciation.InvestmenttaxcreditConstructionoverheads..............................Recoverableenergyandpurchasedgascosts.GainondispositionofpropertyNuclearfueldisposalcost............................Reacquisitionotbonds.Sterlingabandonment.OtherDeferredFederaiincometaxesnet$50,39948,25226,111(9,309)(15,374)15,700(1,243)19,207$133,743$38,82236,50717,9736,47241,1484,601(3,769)548)$141,206$52,13054,9006,756(2,458)3,1001,477(1,566)1,926$116,265ReconciliationbetweenFederalandforeignIncometaxesandthetaxcomputedatprevailingU.S.statutoryrateonIncomebeforeincometaxes:Computedtax.Reductionattributabletoflow-throughofcertaintaxadjustments:Depreciation.Allowanceforfundsusedduringconstruction.Taxes,pensionsandemployeebenefitscapitalizedforaccountingpurposes..Realestatetaxesonanassessmentdatebasis.DeferredtaxesprovidedatotherthanthestatutoryrateOtherFederalandforeinincometaxes$265,332(18>235)76,2661>6454,0747>21015,42886,388$178,944$256,769(16,274)86,1665,1136,06213,85515,084110,006$146,763$233,699(14,926)74,28811,896(406)12,1432,39785,392$148,307 NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIES29NOTE10.NineMilePointNuclearStationUnitNo.2NineMilePointNuclearStationUnitNo.2(Unit),anuclearpowerplantbeingconstructedandtobeoperatedbytheCompanyandsharedwithotherutilities,istheonlymajorgeneratingfacilitycurrentlyunderconstructionbytheCom-pany.OwnershipissharedbytheCompany(41%),LongIslandLightingCompany(LILCO)(18%),NewYorkStateElectric8GasCorporation(18%),RochesterGasandElectricCorpora-tion(14%),andCentralHudsonGas8ElectricCorporation(9%).OutputoftheUnit,whichwillhaveaprojectedcapabilityof1,084,000kw.,istobesharedinthesameproportionsasthecotenants'espectiveownershipinterests.TherecoveryofcostsassociatedwiththeUnitisbeingaf-fectedbytheCostSettlementAgreementandtheimplementa-tionofsuchAgreementforratemakingpurposesasdiscussedbelow.Also,recentchangesingenerallyacceptedaccountingprincipleswillrequiretherecognitionofthelossassociatedwithdisallowedplantcostsbytheyear1989.UnderthetermsoftheCostSettlementAgreement,thelosstotheCompanywouldapproximate$626million,netofFederalincometaxesata46%rate,andcouldincreaseasdescribedmorefullyunder"RatemakingandFinancialAccountingRecognition"below.ConstructionStatus-CostandSchedule:OnOctober31,1986,theCompanyobtainedalowpowerlicensefromtheNuclearRegulatoryCommission(NRC),whichincludedascheduleexemptiontopermittheloadingoffueltotakeplace.Thefuelloadingprocesshasbeensuccessfullycompleted.TheCom-panyispresentlyawaitingtheapprovalbytheNRCofcertainengineeringanalysesrelatedtorepairsmadetotheUnit'seightmainstreamisolationvalves(MSIV's)thatverifytheircon-tinuedsuitabilityforoperation.TheCompanyanticipatestheNRQwillapprovetheCompany'sfindingsandrecommenda-tionsandallowthepowerascensionprogramtoproceed,al-thoughnosuchassurancecanbeprovided.Onceapprovalisobtained,Unitstart-upwillbeinitiatedleadingtoplannedcommercialoperationinSeptember1987.AsaresultoftheMSIVengineeringanalysisandrepair,coupledwiththeNRCreviewandaconsequentchangeintheestimatedcommercialoperationdatetoSeptember1987,thecompletioncostoftheUnitiscurrentlyestimatedtobe$5.878billion(comprisedofconstructioncostsof$4.059billionandAFCof$1.819billion),representinganincreaseof$91millionascomparedtotheNovember1986costestimatewhichas-sumedaJuly1987commercialoperationdate.Inadditiontoincorporatingthecurrenttimetableforpowerascensionandcommercialoperation,thiscostestimateconsiderseachco-tenantscurrentestimateforfinancingcostratesandtheinclu-sionofconstructionworkinprogress(CWIP)includedinratebaseforthreeofthecotenants.TheincreaseinthecostoftheUnitisprimarilyattributabletodelaysoccasionedbytheen-gineeringanalysesandrepairstotheMSIV'scoupledwiththerequiredNRCapproval.TheCompany's41%shareofthetotalestimateisapproximately$2.417billion,exlusiveofthe$171millionofpayments(describedbelow)tobemadebytheCom-panytothecotenantsand,asofDecember31,1986,theCom-panyhasinvestedapproximately$2.3billionintheUnit,includ-ingAFCandoverheadscapitalized.Asdiscussedbelow,theCompanywillberequiredtowriteoffaportionofthisinvest-ment,whichincludesAFCcurrentlyreflectedinincomeandAFCwhichwillaccruetoincometotheextentpermittedbyapplicablegenerallyacceptedaccountingprinciples.(SeeRatemakingandFinancialAccountingRecognitionregardingchangesinfinancialaccountingrecognitionadoptedbytheFinancialAccountingStandardsBoard(FASB)inDecember1986.)During1987,theprimaryactivityattheUnitwillbethepowerascensionprogramleadingtocommercialoperation.HoweverasdelayshavepreviouslyoccurredwithrespecttotheUnit,theCompanycanprovidenoassuranceastotheprecisedatecommercialoperationwillbeaccomplished.AnydelayinachievingtheSeptember1987commercialoperationdateisestimatedtoaddaminimumofapproximately$60millioneachmonthtothetotalcostoftheUnit(approximately$25millionwithrespecttotheCompany's41%share).UndertheCostSettlementdiscussedbelow,theCompanydoesnotexpecttheadditionalcostsarisingunderthecurrentestimate,oraddi-tionalcostsarisingasaresultoffurtherdelays,ifany,toberecoverablethroughrates.CostSettlement:lnconnectionwithanextensive1982PSCproceeding,whichconcludedthatcompletionoftheUnitiswarranted,thePSCstatedthatitwouldapplyastrictstandardofprudenceforallcostsincurredincompletingtheUnit.OnJuly3,1985,thePSCorderedtheestablishmentofaproceed-ing(CaseNo.29124)toinvestigatetheprudenceofcostsin-curredfortheconstructionoftheUnit.OnSeptember18,1985,theCompanyandtheothercoten-ants,togetherwiththeStaffofthePSC,filedajointmotionwiththePSCseekingapprovalofanagreemententitled"SpecificationsofTermsandConditionsofOfferofSettle-ment"(Settlement)that,ifapprovedbythePSC,wouldconsti-tuteacompletedispositionofCaseNo.29124andestablish,amongotherthings,anallowedcostfortheUnitof$4.450billion.OnJune26,1986,thePSCdecidednottoaccepttheSettle-mentasproposedandorderedthecotenantstoinformthePSCwhethertheywouldagreetoasettlementoftheproceed-ingusinga$4.160billioncostallowance.OnJuly15,1986,thecotenantcompaniesnotifiedthePSCthattheywouldacceptaSettlementmodifiedonlyforachangeintheallowablecostto$4.160billionfromthatamountoriginallyproposedof$4.450billion.Inaddition,inordertoinducesettlementamongthecotenants,theCompanyenteredintoanagreementwiththeothercotenantcompanies(CotenantAgreement)wherebyitwillreimbursethecotenantcompanies,uponcommercialop-erationoftheUnit,for$171millionrepresentingtheirrespec-tiveownershipsharesofthe$290millionincrementaldisallow-ance.ThisobligationwillnotcauseareallocationofownershipinterestsintheUnit.OnSeptember10,1986,thePSCapprovedtheSettlementwhichcontainedthefollowingkeytermsandconditions:ThemaximumamountoftheUnit'sexpenditurestobeincludedinthecotenants'atebaseswouldbe$4.160billion,anddisallowedexpenditureswouldnotbelessthan$1.190billionwithamounts,ifany,abovetheJanuary1985completioncostestimateof$5.350billionbeingfortheaccountofthecotenants,exceptinthecaseofan"extraordinaryevent"asdiscussedbelow.Theal-lowedcostof$4.160billionwillbereducedbythefinanc-ingcosts"prepaid"byratepayersasaresultofratebaseinclusionofaportionoftheUnit'scostpriortocomple-tion.ThecotenantsmayrequestfromthePSCanupwardadjustmentofthe$4.160billioncapbasedonlyontheoccurrenceofan"extraordinaryevent"ascontemplated 30NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPAGNIE/inpriorPSCordersconcerningtheUnit.Atthetimetheagreementwasenteredinto,thecotenantsstipulatedthattheywerenotthenawareofanybasisforsuchaclaim.Theratephase-inofeachcotenant'sshareofallowedUnitcostsistobeincludedinratebaseoverareasonableperiod,togetherwithaccumulateddeferredcarryingcostsontheportionofallowedUnitcostthathasnotyetbeenincludedinratebase.Appropriateincometaxdeductionsandcreditsappli-cabletotheUnit'scompletioncostwillbeallocatedtothedisallowedcostsandreservedforshareholders.TheprovisionsoftheSettlementwouldbeinfullsatis-factionofthepenaltyandincentiveprovisionsofthePSC'spriorIncentiveRateofReturn(IROR)and"cap"ordersrelatingtotheUnit.ThecotenantsagreenottochallengethelegalvalidityofeithertheIRORor"cap"orderspreviouslyissuedbythePSC.Inaddition,eachcotenantwouldwaiveanyandallclaimsitmayhaveagainstanyothercotenantcon-cerningthedesign,engineeringorconstructionoftheUnit.BasedupontheproposaladoptedbythePSC,theJanuary1987costestimateof$5.878billion,whichreflectsthebenefitsofapproximately$273millionofprepaidfinancingcosts,re-sultsinthedisallowanceof$1.991billionofthetotalUnitcost.TheCompany'sshareofthedisallowedamount(includingtheimpactoftheCompany's41%shareofthe$290millionde-creaseintheallowedcostamountingthe$119million,andthe$171millionpaymenttothecotenantsundertheCotenantAgreement)wouldbeapproximately$1billion.Thedisallow-ancetotheCompanywouldincreasebyitsproportionateshareofthecostofanyfurtherdelaysinthecommercialopera-tionoftheUnitandmightbefurtherincreaseddependentontheultimatePSCdecisionastothecostscoveredbytheSet-tlement.Also,themagnitudeofthelosstotheCompanywouldbeaffectedbytheimplementationrequirementsthatmayulti-matelybeorderedbythePSC.(See"RatemakingandFinancialAccountingRecognition.")SeveralinterveningpartiespetitionedforrehearingoftheSettlement.SuchpetitionsweredeniedandtheseintervenorshaveindicatedthattheywilltakelegalactiontooverturnthePSC'sapprovalandrequirethePSCtoresumetheproceedinginvestigatingtheprudenceofcostsincurredforconstructionoftheUnit.TheCompanyisunabletopredictwhethersuchlegalactionwillbetaken,oriftaken,theresultsthereof.RatemaklngandFinancialAccountingRecognition:Inconnec-tionwiththeCompany'spendingratefiling,theStaffofthePSConAugust22,1986,proposedadjustmentstotheCom-pany'soriginalratecasefilingtoincorporatethetermsoftheSettlement.TheStaff'simplementationrequirements,whichincludeamongotherthingsanexpansionofcostscoveredbytheSettlement,ifultimatelysustained,wouldresultinagreaterlevelofdisallowedUnitcoststobeconsideredintherateset-tingprocess.Also,theStaffhasproposedtheadoptionofratemakingmethodologieswhichtheCompanybelievesarecontrarytothetermsandintentoftheSettlement.Thesein-cludetherecognitionoftaxbenefitsata34%rateratherthana46%rate,thediscountingoftaxbenefits,exclusionfromratebaseofunrealizedtaxbenefitsandadeparturefromprevailingratemakingmethodologiesusedindevelopingcapitalstruc-ture.Theseproposals,ifadopted,wouldhaveafurtherdetri-mentalimpactonthefinancialconditionandresultsofopera-tionsoftheCompany.AdecisionontheCompany'spendingratefiling,whichwillincludeSettlementimplementationre-quirements,isexpectedinMarch1987.TheCompanywillcon-tinuetoopposetheStaff'sproposalsandcannotpredictwhethersuchproposalswillultimatelybeadoptedandsustained.InDecember1986,theFASBissuedStatementofFinancialAccountingStandardsNo.90"RegulatedEnterprises-AccountingforAbandonmentsandDisallowancesofPlantCosts",anamendmentofFASBStatementNo.71(SFASNo.90).Amongotherthings,thisstatementrequiresthatwhenitbecomesprobablethatpartofthecostofageneratingfacilitywillbedisallowedforratemakingpurposesandareasonableestimateoftheamountofthedisallowancecanbemade,theestimatedamountoftheprobabledisallowanceshallbede-ductedfromthereportedcostoftheplantandrecognizedasaloss.Also,onceadoptedthestatementwouldprohibitthecapitalizationofanallowanceforfundsusedduringconstruc-tion(AFC)unlessitisprobablethatsuchAFCwillbeincluda-bleasanallowablecostforratemakingpurposes.TheFASBiscontinuingtoreviewthefinancialaccountingrecognitionforratephase-inplans.InthecaseoftheCompany,theapplica-tionofthisstatementisgenerallyrequirednolaterthan1988.However,theeffectivedateofSFASNo.90maybedelayeduntil1989ifitsadoptionwouldcauseaviolationorprobablefutureviolationofarestrictiveclauseinanexistingloaninden-tureorotheragreementandrelieffromsuchrestrictiveclauseisbeingactivelypursued(seeNote4).BasedupontheCompany'sinterpretationofthetermsandconditionsoftheSettlementdiscussedabove,theCompanywouldberequiredtowrite-offapproximately$1billion,re-ducedtoapproximately$626million,netofFederalincometaxesata46%rate.Theamountofthiswrite-offcouldincreasebyapproximately$200million,netofFederalincometaxes,shouldthePSCadoptallofthePSCStaff'spositionsprevi-ouslydescribed.TheseamountsdonottakeintoconsiderationanydelayincommercialoperationbeyondSeptember1987.Theaccountingperiodtowhichawrite-offwouldbechargedisdependentupontheCompany'sdecisionwithrespecttothetimingofadoptionofSFASNo.90.IfSFASNo.90hadbeenineffectin1986and1985,thenetoftaxlosswouldhavebeenallocatedtoeachofthoseyears.Therefore,reported1986and1985balanceavailableforcommonstockwouldhavebeen,onapro-formabasis,approximately$61millionand$65million,respectively,andpro-formaearningspersharewouldhavebeen$.48pershareand$.53pershare,respectively.Baseduponthecurrenthighcostoflarge,base-loadgeneratingfacilities,legislators,regulatorycommissionsandutilitycompaniesnationwidehaveorderedorareconsideringthephase-inofthesecostsoveraperiodofyears.Inaccor-dancewithcurrentgenerallyacceptedaccountingprinciples,Unitoperatingandfinancingcostsmaybedeferrableunderaphase-inplanforrecoveryinthefuture.TheStaffofthePSCandtheCompanyareinagreementonthemethodologytobeutilizedinrateimplementationofaphase-inplan,includingrecoveryofdeferredcostsandcarryingchargesovertheoperatinglifeoftheUnit.ThePSChasadoptedthephase-inmethodologyproposedbytheCompanyandStaff.ThePSCalsoadoptedaphase-inperiodfortheUnitofsevenyears,notingthatafive-yearphase-inperiodwouldbereasonableintheeventofadisallow-anceofcostinthemagnitudecontemplatedbytheSettlementdiscussedabove.InconnectionwiththeCompany'scurrently QIggAsRAMOHAWKPOWERCORPORA7IONANDSU'BSIDIARYCOMPANIES31pendingrateproceeding,theStaffhasproposedafive-yearphase-inofallowedUnitcosts.TheCompanyisunabletopre-dictatthistimeoverwhatperiodoftimethephase-inwillultimatelybeorderedorwhenitwillcommence.AportionoftheUnit'scost($680million)ispresentlybeingreflectedasCWIPinratebase.Also,inApril1982,thePSCadoptedanincentive,rateofreturn(IROR)programinconnectionwiththeremainingcon-structioncostsoftheUnitwhichwouldbeimplementedaspartoftherateproceedingforeachcotenantthatconsidersraterecognitionoftheUnit'scompletioncost.InJuly1984,thePSCissuedanopinionandorderwhichamendedtheIRORpro-gramtoalsoincludea$5.4billionceilingontheUnit'sfinalallowablecost.UndertheamendedIRORprogram,costsin-curredinexcessof$4.6billion,butlessthan$5.4billion,arerequiredtobebornebycotenantshareholderstotheextentof20%ofthevariationofrevenuerequirements,withcostsinexcessof$5.4billiontobeborneintotalbythecotenantshareholders.Asindicatedaboveunder"CostSettlement,"theapprovaloftheSettlementbythePSCandtheabilityofthePSC'sadoptionoftheSettlementtosustainjudicialchallengewouldrendertheIRORand"cap"ordersinoperative.NuclearRegulatoryCommission-AuditsandLicensing:InMay1986,theStaffoftheNuclearRegulatoryCommission(NRC)concludedanassessmentoftheUnit'soverallconstructionprogram.TheassessmentcoveredthetwelvemonthsendedJanuary1986andconcludedthatmanagementoftheprojectwassatisfactoryinallareas,althoughincreasedmanagementattentiontocertainitemswasrecommended.TheCompanyaddressedtheNRCrecommendationsinaresponsesubmittedtotheNRConJune30,1S86.Mostoftheactionsrecom-mended,asdescribedintheCompany'sresponse,wereal-readyinitiatedand,insomecases,completedpriortoreceiptofthereportfromtheNRC.TheCompanydoesnotexpectthattheimplementationoftheremainingrecommendationswillmateriallyaffecteithercostorscheduledcompletionoftheUnit.AnumberofnuclearpowerplantconstructionprojectsintheUnitedStateshaveencounteredsubstantialdelays,licensingdifficultiesandcostescalationduetoavarietyoffactors.Also,theissuanceofafullpoweroperatinglicenseandachievementofcommercialoperationcouldbeadverselyaffectedbyawidevarietyofindustryandplantspecificconstruction,operating,regulatory,legislative,economicandotherfactors,includingrecentinternationalevents.Althoughtheoutcomeofthere-mainingregulatorylicensingproceedingsrelatingtoreceiptofafullpowerlicensecannotbepredictedwithcertainty,theCompanybelievesafullpoweroperatinglicensewillbeissuedsincetheUnitisdesignedandconstructedtomeetapplicableregulatoryrequirements.Long-termContractsforthePurchaseofElectricPower:AtJanuary1,1987,theCompanyhadlong-termcontractstopurchaseelectricpowerfromthefollowinggeneratingfacilitiesownedbytheNewYorkPowerAuthority(NYPA):FacilityNiagara-hydroelectricproject..Blenheim-Gilboa-pumpedstoragegeneratingstation.....FitzPatrick-nuclearplant.........ExpirationPurchasedEstimateddateofcapacityannualcontractinkw.capacitycost19901,111,332$13,336,0002002year-to-earbasis270,0006,156,000153,000(a)14,686,0001,534,332$34,178,000LeaseCommitments:TheCompanyleasescertainpropertyandequipmentwhichmeettheaccountingcriteriaforcapitali-zation.Suchleases,havinganetbookvalueof$56.2millionand$41.9millionatDecember31,1986and1985,respectively,areincludedinUtilityPlantintheaccompanyingConsolidatedBalanceSheets.Sincecurrentratemakingpracticetreatsallleasesasoperatingleases,thecapitalizationoftheseleaseshasnoimpactoftheCompany'sConsolidatedStatementofIncome.TheCompanyrecognizesasachargeagainstincomeanamountequaltotherentalexpenseallowedforratepur-poses.TheCompany'sfutureminimumrentalcommitmentsunderthesecapitalleasesandnon-cancellableoperatingleasesaggregateapproximately$634million,asubstantialpor-tionofwhichrelatestoa41-yearoperatingleaseofatransmis-sionlinefacility.Annualfutureminimumrentalcommitmentsfortheperiod1987-1991rangebetween$23millionand$32million.MandatedRefundstoCustomers:AspartoftheCompany'sMarch1984ratedecision,thePSCorderedtherefundofap-proximately$96millionofpreviouslycollectednuclearfueldisposalcostsoverafive-yearperiod.TheCompanyhadcol-lectedinratesapproximately$146millionforthedisposalofnuclearfuelirradiatedpriorto1983.TherefundrepresentstheamountbywhichthesepreviouslycollectedcostsareinexcessoftheCompany'sliabilityasofMarch31,1984totheU.S.DepartmentofEnergyfornuclearfueldisposalundertheNu-clearWastePolicyAct.AtDecember31,1986,$63.2millionremainstoberefundedandisrecordedinDeferredCredits.(a)61,000kwforsummerof1987;59,000kwforwinterof1987-88.Thepurchasecapacitiesshownabovearebasedonthecon-tractscurrentlyineffect.Theestimatedannualcapacitycostsaresubjecttopriceescalationandareexclusiveofapplicableenergycharges.NOTE11.CommitmentsandContingenciesConstructionProgram:AtDecember31,1986,substantialcon-structioncommitmentsexisted,includingthosefortheCom-pany'sshareofUnitNo.2attheNineMilePointNuclearSta-tion.TheCompanypresentlyestimatesthattheconstructionprogramfortheyears1987through1991willrequireapproxi-mately$1.572billion,excludingAFC,nuclearfuelandcertainoverheadscapitalized.Byyearstheestimatesare$330million,$317million,$296million,$315millionand$314million,respectively.Litigation:In1983,thePSCinstitutedaproceedingtoinvesti-gatetheCompany'soperatingpracticesandcertainothermat-tersthatitwasallegedmayhaveresulted,amongotherthings,inexcessivefueladjustmentchargesduringtheyears1977to1982,andfurther,todeterminewhetherandtowhatextentremedialactionwithrespecttoanysuchmattersisproperunderthePSC'sregulationsorotherwise.In1985,thePSCorderedtheCompanytorefundapproximately$31.9millionoverthetwelvemonthsendingApril30,1S86.TheCompanyappealedthisdecisiontotheSupremeCourt,AppellateDivi-sion,ThirdDepartmentwhich,inMarch1986,heldthatthe 32NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPtANjtESPSCcouldnotorderrefundsarisingfromrateschargedpriortoJune21,1981,whencertainpublicservicelawswereadopted.ThePSCwasdirectedtorecalculatetheamountoftherefundandtakeactiontocorrectforadditionalamountsrefundedbytheCompany.UnderthisdecisionasubstantialportionoftheamountsrefundedbytheCompanywouldberecoveredfromratepayers.ThePSChasappealedthisdeci-siontotheCourtofAppealsandadecisionisexpectedin1987.TheCompanyisunabletopredicttheoutcomeofthismatter.AdvancesonBehalfofNineMilePointNuclearUnitNo.2Co-tenant:InAugust1984,theCompanyandLongIslandLightingCompany(LILCO)enteredintoanagreementprovidingfortheissuancebyLILCOofupto$250millioninGeneralandRefund-ingBonds(LILCOBonds)and$150millioninunsecurednotestoevidenceandsecureLILCO'srepaymentobligationforfundsadvancedbytheCompanyonbehalfofLILCOforits18%ownershipintheUnit.TheLILCOBondswerefullyissuedbyNovember1985andunderthetermsofasecondagreement(CapitalFundsAgree-ment),theCompanyprovideditsguaranteeforaperiodofapproximatelythreeyearsthroughMarch31,1989,ofupto$165millionofLILCO'sreimbursementobligationsinconnec-tionwith$150millionprincipalamountoftax-exemptpollutioncontrolbondsissuedbyLILCOonDecember31,1985.TheguaranteeoftheCompanycontainscertainrepresentationswhich,shouldtheCompanybeunabletomeet,requireittoprovidesecurityintheformofFirstMortgageBonds.TheCompanyexpectsLILCOtohonoritsobligationsinconnectionwiththeLILCOtax-exemptbondsthroughouttheperiodwhiletheguaranteeisineffect.TheCompanyhasarrangedforfour-yeartermloanstofunditsguaranteeobligation,ifneeded.TheCompanyhasaninterestof$85millioninLILCO'sthirdmortgage,whichservesaspartialsecurityintheeventitsguaranteeisrequiredtobehonored.LILCOisrequiredtopayfeestotheCompanyinconnectionwiththeguarantee.In'1985,theCompanyreceived$146.7millionofthepro-ceedsfromthesaleoftheLILCOtax-exemptbondsandapplied$25millionagainsttheLILCOBonds,$36.7millionagainstunsecurednotesand$85milliontoLILCO'sshareofcashconstructioncostsfortheUnitcommencingNovember18,1985.Afterbeingreducedby$13.6millionforadvancesplusinterestthroughDecember31,1985,theproceedspro-videdtheCompanywith$71.4millionatDecember31,1985.ThisbalancewasappliedagainstsubsequentLILCOcashcon-structionobligationsuntilfullyexpendedinSeptember1986,atwhichtimeLILCOresumedmakingcashpaymentsforitsportionofcashconstructioncosts.TheCompanyagreedtowaiveinterestandsupplementalpaymentsonaprincipalamountofLILCOBondsequaltothedailyunusedportionofsuch$71.4million.InMay1986,theCompanysold$140millionoftheLILCOBondstoasingle-purposetrust,whichtrustis-suedcertificatestoalimitednumberofinstitutionalinvestors.OnDecember30,1986,theLILCOBondsheldbytheCompanyandrelatedunsecurednotes,togetherwiththeLILCOBondsheldbythesingle-purposetrustwererepaidandatDecember31,1986,LILCO'sobligationstotheCompanyhavebeenfullysatisfied.However,theCompany'sguaranteeobligationundertheCapitalFundsAgreementremainsineffect.InterestandsupplementalpaymentsontheLILCOBondsandunsecurednotesamountedto$27.1millionfor1986,$40.8millionfor1985and$10.9millionfor1984andareincludedinotherincomeanddeductions-otheritemsintheConsolidatedStatementofIncome.Dec.31,1986$637,8961985661,2371984675,089$104>63384,79181,185$84,698$.5791,724.6159,708.39Sept.30,1986$554,5461985554,7791984606,437$92,64073,09586,421$74,909$.4979,503.5284,636.66June30,1986$636,8591985637,7241984696,325S97>585100,036101,319$85,535$.5696,758.6794,197.77March31,1986$831,0181985841,2001984807,695$146,316153,366123,801$152,723$1.08143,4451.11121,1931.04NOTE12.QuarterlyFinancialData(Unaudited)Operatingrevenues,operatingincome,netincomeandearn-ingspercommonsharebyquartersfor1986,1985and1984areshowninthefollowingtable.TheCompany,initsopinion,hasincludedalladjustmentsnecessaryforafairpresentationoftheresultsofoperationsforthequarters.Duetotheseasonalnatureoftheutilitybusiness,theannualamountsarenotgen-eratedevenlybyquarterduringtheyear.InthousandsofdollarsOperatingOperatingNetEarningsperrevenuesincomeincomecommonshareQuarterended NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIES33ReportofIndependentAccountantsPriceVaterhnuseTotheStockholdersandtheBoardofDirectorsofNiagaraMohawkPowerCorporationWehaveexaminedtheconsolidatedbalancesheetsofNiagaraMohawkPowerCorporationanditssubsidiariesasofDecember31,1986and1985,andtherelatedconsoli-datedstatementsofincomeandretainedearningsandofchangesinfinancialpositionforeachofthethreeyearsintheperiodendedDecember31,1986.Ourexaminationsweremadeinaccordancewithgenerallyacceptedauditingstandardsandaccordinglyincludedsuchtestsoftheac-countingrecordsandsuchotherauditingproceduresasweconsiderednecessaryinthecircumstances.AsdescribedinNote10,theFinancialAccountingStan-dardsBoardissuedStatementofFinancialAccountingStandardsNo.90"RegulatedEnterprises-AccountingforAbandonmentsandDisallowancesofPlantCosts"whichprovides,amongotherthingsthatthecostofageneratingfacilitydisallowedforratemakingpurposes,berecognizedasaloss.ApplicationofthisStatementisrequirednotlaterthan1989.TheCompanyisa41%participantintheconstructionofNineMilePointNuclearStationNo.2(Unit).AsaresultofcontinuinguncertaintiesdiscussedinNote10,managementisunabletopredictwhetherfurtherregulatoryactionsbytheNewYorkStatePublicServiceCommissionwithrespecttoitsinvestmentintheUnitwillhave,intheaggregate,amaterialeffectonitsfinancialpositionorresultsofopera-tions.Inouropinion,subjecttotheeffectsonthe1986,1985and1984financialstatementsofsuchadjustments,ifany,thatmighthavebeenrequiredhadtheoutcomeoftheun-certaintiesdiscussedintheprecedingparagraphbeenknown,theconsolidatedfinancialstatementsexaminedbyuspresentfairlythefinancialpositionofNiagaraMohawkPowerCorporationanditssubsidiariesasofDecember31,1986and1985andtheresultsoftheiroperationsandchangesintheirfinancialpositionforeachofthethreeyearsintheperiodendedDecember31,1986inconformitywithgenerallyacceptedaccountingprinciplesconsistentlyapplied.ReportofManagementTheconsolidatedfinancialstatementsofNiagaraMohawkPowerCorporationanditssubsidiarieswerepreparedbyandaretheresponsibilityofmanagement.FinancialinformationcontainedelsewhereinthisAnnualReportisconsistentwiththatinthefinancialstatements.Tomeetitsresponsibilitieswithrespecttofinancialinforma-tion,managementmaintainsandenforcesasystemofinternalaccountingcontrols,whichisdesignedtoprovidereasonableassurance,onacosteffectivebasis,astotheintegrity,objec-tivityandreliabilityofthefinancialrecordsandprotectionofassets.Thissystemincludescommunicationthroughwrittenpoliciesandprocedures,anorganizationalstructurethatpro-videsforappropriatedivisionofresponsibilityandthetrainingofpersonnel.Thissystemisalsotestedbyacomprehensiveinternalauditprogram.Inaddition,theCompanyhasaCodeofConductwhichrequiresallemployeestomaintainthehighestlevelofethicalstandardsandrequireskeymanagementemployeestoformallyaffirmtheircompliancewiththeCode.ThefinancialstatementshavebeenexaminedbyPriceWaterhouse,theCompany'sindependentaccountants,inac-cordancewithgenerallyacceptedauditingstandards.Aspartoftheirexamination,theymadeastudyandevaluationoftheCompany'ssystemofinternalaccountingcontrol.Thepurposeofsuchstudywastoestablishabasisforreliancethereonindeterminingthenature,timingandextentofotherauditingproceduresthatwerenecessaryforexpressinganopinionastowhetherthefinancialstatementsarepresentedfairly.Theirexaminationresultedintheexpressionoftheiropinionwhichappearsonthispage.Theindependentaccountants'xamina-tiondoesnotlimitinanywaymanagement'sresponsibilityforthefairpresentationofthefinancialstatementsandallotherinformation,whetherauditedorunaudited,inthisAnnualRe-port.TheAuditCommitteeoftheBoardofDirectors,consistingof'hreedirectorswhoarenotemployees,meetsregularlywithmanagement,internalauditorsandPriceWaterhousetore-viewanddiscussinternalaccountingcontrols,auditexamina-tionsandfinancialreportingmatters.PriceWaterhouseandtheCompany'sinternalauditorshavefreeaccesstomeetindi-viduallywiththeAuditCommitteeatanytime,withoutman-agementpresent.Syracuse,NewYorkJanuary28,1987 34NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPiAN)ESSelectedFinancialDataAsdiscussedinManagement'sDiscussionandAnalysisofFinancialConditionandResultsofOperationsandNotestoConsolidatedFinancialStatements,certainofthefollowingselectedfinancialdatamaynotbeindicativeoftheCompany'sfuturefinancialconditionorresultsofoperations.19861985196419831982Operations:(000's)Operatingrevenues.Netincome$2,660,319$2,694,940$2,785,546$2,632,315$2,393,771397,865411,430359,734312,409268,534Commonstockdata:Bookvaluepershareatyearend.MarketpriceatyearendRatioofmarketpricetobookvalueatyearend..Dividendyieldatyearend.Earningsperaveragecommonshare...........Rateofreturnoncommonequity.Dividendspaidpercommonshare.............Dividendpayoutratio.$20.23167482.8o/o12.4%S2.7113.P/oS2.0876.PYo$19.6120'/2104.5%10.1%$2.8815.(P/o$2.0671.P/o$18.8917%92.(P/o11.P/o$2.8414.P/o$1.9869.7/o$18.55153/484.F/o12.PYo$2.7715.(P/o$1.8968.2Yo$17.9115%87.2/o11.P/o$2.6414.7o/o$1.7666.7'/oCapitalization:(000's)CommonequityNon-redeemablepreferredstock..RedeemablepreferredstockLong-termdebt.$2,571,491$2,488,620$2,207,117$1,929,073$1,680,650290,000290,000240,000240,000210,000347,470379,850367,900338,474262,7922,799,6052,643,0942,395,4712,048,5481,881,441Total.Firstmortgagebondsmaturingwithinoneyear6,008,5665,801,5645,210,48850,00030,00047,4504,556,0954,034,88325,00065,000Total$6,058,566$5,831,564$5,257,938$4,581,095$4,099,883Capitalizationratios:(includingfirstmortgagebondsmaturingwithinoneyear)CommonstockequityPreferredstockLong-termdebt42.P/o10.547.042.7Yo11.545.842.(P/o11.546.542.1%41.(P/o12.6"11.545.347.5Financialratios:Ratioofearningstofixedcharges.RatioofearningstofixedchargeswithoutAFC.......RatioofAFCtobalanceavailableforcommonstock..Ratioofearningstofixedchargesandpreferredstockdividends.Otherratios-%ofoperatingrevenues:Fuel,purchasedpowerandpurchasedgas........MaintenanceanddepreciationTotaltaxes.OperatingincomeBalanceavailableforcommonstock..............2.982.4248.2/o2.3538.0/o11.418.116.612.93.072.3753.2Yo2.3643.4%10.915.715.313.13.112.4352.4%2.3946.F/o10.114.714.111.12.982.4043.P/o2.3550.0o/o10.013.013.510.32.952.4241.0'/o2.3249.PYo10.513.213.29.6Miscellaneous:(000's)Grossadditionstoutilityplant.Totalutilityplant.AccumulateddepreciationandamortizationTotalassets.S774,062$771,120$769,846$691,464$594,4698,445,9937,640,9056,903,1846,165,7115,516,5321,763,4431,629,4371,501,2821,486,1961,389,1127,611,2037,013,8376,233,4015,357,5724,781,767 N[Afi/BAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIES35ElectricandGasStatisticsELECTRICCAPABILITYAtJanuary1,1987%19861985ELECTRICSTATISTICS198619851984Thermal:CoalfuelHuntley,NiagaraRiver..Dunkirk,LakeErie.....715105558715715555555Totalcoalfuel...ResidualoilfuelAlbany,HudsonRiver-.Oswego,LakeOntario..Roseton,HudsonRiver.Middledistillateoilfuel20Combustionturbineanddieselunits........TotaloilfuelNuclearfuelNineMilePoint,LakeOntario.Purchased-firmcontractPowerAuthority-FltzPatrick,LakeOntario...Totalnuclearfuel..Totalthermalsources..1,270181,2701,27040064004001,563231,7361,736299430030023733103102,499362,7462,74661096106101532167138763117777484,532654,7934,76410695695161,1111,1181152704262455055020963Hydro:Ownedandleasedhydrostations(77).684Purchased-firmcontractsPowerAuthority-NiagaraRiver....1,111PowerAuthority-St.LawrenceRiver..............PowerAuthority-Blenheim-GilboaPumpedStoragePlant...........Other.Electricsales(Millionsofkw-hrs.)Residential................Commercial...............Industrial..................Municipalservice..........Otherelectricsstems......9,35910,37410,8012343,5798,9769,90710,8862415,2868,9449,73911,1942456,96435,296$647,507708,517437,29239,238196,10467,74637,086$607,527674,929438,92037,846303,96871,280$2)131I833$2,096,404$2,134,470Electriccustomers(Average)Residential................Commercial...............Industrial..................Other.....................Residential(Average)Annualkw-hr.usepercustomer............Costtocustomerperkw-hr..Annualrevenuepercustomer............1,291,111136,3042,4813,2821,433,1787,2497.504$543.961,273,969134,7872,4903,3151,414,5617,0467.21'508.261,259,077133,2342,5223,2791,398,1127,1046.79tt$482.5234,347Electricrevenues(Thousandsofdollars)Residential................$702,309Commercial...............766,815Industrial..................448,855Municipalservice..........41,031Otherelectricsystems......95,809Miscellaneous.............77,014Totalhdrosources...Otherurchases...Totalcapability',327342,5652,5418014454006,9391007,8037,705Electriceakloaddurlnear19865,724198519845,8625,526Availablecapabilitycanbeincreasedduringheavyloadperiodsbypurchasesfromneighboringinterconnectedsystems.HydrostationcapabilityisbasedonaverageDecemberstream-flowconditions.-Hascapabilitytoburnnaturalgas(aswellasoil)asafuel.GASSTATISTICS1986Totalsales..........Transportationofcustomer-ownedas..95,9474,868Gassales(Thousandsofdekatherms)Residential................49,430Commercial...............27,218Industrial..................15,575Otherassstems..........3,724198547,32827,00629,2134,873108,420198449,51927,89232,7554,794114,960ELECTRICITYGENERATEDANDPURCHASEDMillionsofkw-hrs.1986%1985%1984Thermal:GeneratedCoal...........Oil.............Nuclear........Naturalgas.....Purchased-NuclearfromPowerAuthorit.TotalthermalHydro:Generated........PurchasedfromPowerAuthorit.6,140167,409197,863205,811162,86673,75493,14784,932133,635917711,62442,10351,28438252878216,5594417,6564518,233454,140113,49693,80397,683207,815208,31221Totalgeneratedandurchased37,63910039,21310040,588100Totalhdro..........11,8233111,3112912,11530Otherpurchasedpower-varloussources......9,2572510,2462610,24025108,420114,960$295,060147,751133,44618,6913,588$313,536157,469156,30719,7084,056$528,486$598,536$651,076Gascustomers(Average)Residential..............Commercial.............Industrial................Other...................407,54633,2484652441,261404,11632,6034852437,206400,87832,1065022433,488Residential(Average)Annualdekathermusepercustomer........Costtocustomerperdekatherm.......Annualrevenuepercustomer........Maximumdaygassendoutdekalherms.121.3117.1123.5$6.01$6.23$6.33$728.39$730.14$782.12786,165774,033772,604Totalgasdelivered.....100,815Gasrevenues(Thousandsoldollars)Residential................$296,853Commercial...............142,807Industrial..................68,476Othergassystems..........14,300Miscellaneous.............6,050 36NIAGARAMOHAWKPOWERCORPORATIONDirectorsJamesBartlettFormerExecutiveVicepresident,SyracuseEdmundM.Davis(A,B,E)Partner,Hiscock&Barclay,attorneys-at-law,SyracuseWilliamJ.DonlonPresident,SyracuseEdwardW.Duffy(A,B,C)FormerChairmanoftheBoardandChiefExecutiveOfficer,MarineMidlandBanks,Inc.,abankholdingcompany,BuffaloJohnG.Haehl,Jr.(A)ChairmanoftheBoardandChiefExccutivcOfficer,SyracuseLaumanMartinConsultant(formerlySeniorVicePresidentandGeneralCounsel),SyracuseBaldwinMaull(A,B)CorporateDirector,NewYorkMarthaHancockNorthrup(D)Homemaker,formerPresident,Crouse-IrvingMemorialHospitalBoard,SyracuseFrankP.Piskor(A,C,D)PresidentEmeritus,St.LawrenceUniversity,CantonDonaldB.RieflerI)Chairman,SourcesandUsesofFundsCommittee,MorganGuarantyTrustCompanyofNewYork,NcwYorkLewisA.Swyer(B,C,D)Chairman,L.A.SwycrCo.,Inc.,buildersandconstructionmanagers,AlbanyJohnG.Wick(D,E)Partner,Falk&Siemer,attorneys-at-law,BuffaloA.MemberofthcExecutiveCommittccB.MemberofthcCompensationCommitteeC.MemberoftheAuditCommittceD.MemberoftheCommittcconCorporatePublicPolicyE.MemberoftheFinanceCommitteeOfficersJohnG.Haehl,Jr.ChairmanoftheBoardandChiefExecutiveOHicerWilliamJ.DonlonPresidentJohnM.EndriesSeniorVicePresidentJohnM.HaynesSeniorVicePresidentJohnP.HennesseySeniorVicePtesidentCharlesV.ManganSeniorVicePnsidentJamesJ.MillerSeniorVicePresident(RetiredJanuary31,1987)JohnH.TerrySeniorVicePresident,GeneralCounselandSecretaryRichardF.TorreySeniorVicePresidentJamesF.AldrichVicePresident-RegionalOperationsNeceasedNovetnber14,1986)AnthonyJ.Baratta,Jr.VicePtesidentMntmllerMichaelJ.CahillVicePresident-RegionalOperationsRobertM.ClearyVicePresident-RegionalOperationsGeraldJ.CurrierVicePresident~nsumerServicesRichardEA..DuffyVicePresident-PublicAffairsandCorporateCommunications(Effectivehfovember1,1986)GeraldD.GarcyVicePresident-PowerContractsQffectiveMay6,1986)KermitE.HillVicepiesident-PublicAffairsandCorporateCommunicationsNetiredOctober31,1986)EdwardF.HoffmanVicePresident-FossilGenerationThomasE.LempgesVicePresident-NuclearOperationsSamuelF.MannoVicePtesident-PurchasingandMaterialsManagementEugeneJ.MorelVicePresident-RiskManagementJamesF.MorrellVicePresident-CorporatePlanningJamesA.PerryVicePresident-QualityAssuranceJohnW.PowersVicePresident-TreasurerMichaelP.RanalliVicePresident-Engineering(Non-nuclear)KennethA.TramutolaVicePresident-GasChristopherD.TurnerVicePresident-CorporateDevelopmentPerryB.Woods,Jr.VicePresident-EmployeeRelationsGaryJ.LavineAssistantGeneralCounsel(EffectiveAugust1,1986)HermanB.NollAssistantGeneralCounselNicholasL.Prioletti,Jr.AssistantControllerAdamF.ShafferAssistantControllerHenryB.Wightman,Jr.AssistantControllerHaroldJ.BoganAssistantSecretaryJosephF.ClearyAssistantSecretaryFrederickC.McCall,Jr.AssistantSecretaryArthurW.RoosAssistantTreasurerRichardN.WescottAssistantTreasurer CorporateInformationInvestorIntiuMesShanCtolderinquiries:ShareholderSer'vicesDepartment,(315)474-1151,Ext.4150(Syracuse);1-800-962-3236(NewYorkState);1-800-448-5450(elsewhereincontinentalU.S.)Analystinquiries:InvestorRelationsDepartment,(315)428-3134DividendReinvestmentPlanShareholdersdesiringinformationonenrollingintheDividendReinvestmentandCommonStockPtutchasePlanshouldcallorwriteourShareholderServicesDepartmentatP.O.Box7058,Syracuse,N.Y.13261.AnnualMeetingTheannualmeetingofshareholderswillbeheldintheauditoriumoftheCompany'smainofficeinSyracuse,N.Y.onTuesday,May5,1987.Anoticeofthemeeting,proxystatementandformofproxywillbesenttoholdersofcommonstockinearlyApril.Form10-KReportAcopyoftheCompany'sForm10-KreportfiledannuallywiththeSecuritiesandExchangeCommissionisavailableafterMarch31,1987,bywritingtheInvestorRelationsDepartmentat300Erie,BoulevardWest,Syracuse,N.Y.13202.DisbursingAgent'refemdandCommonStocks:NiagaraMohawkPowerCorporation300ErieBoulevardWest,Syracuse,N.Y.13202TransferAgentsandRegistrarsPreferredStock:(throughJulyI,1986)MarineMidlandBank,NA,.,140Broadway,NewYork,N.Y.10015.PreferredandCommonStock:MorganShareholderServicesTrustCompanyofNewYork,,30WestBroadway,NewYork,N.Y.10015StockExchanges'ommonstockandCertainPreferredSeries:ListedandtradedontheNewYorkStockExhange.CommonStock:AlsotradedontheBoston,Cincinnati,Midwest,PacificandPhiladelphiastockexchanges.Bonds:TradedontheNewYorkandLuxembourgstockexchanges.TradingSymbol:NMK'fheinformationinthisreporttsnotgiveninconnectionwithIhesateot.orottertobuy,anysecurity.printedInU.SA.

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