ML18041A064

Forwards 1997 Annual Financial Repts of NMP & co-tenant Companies of Rg&E,Nyseg,Chge & Lilco,Per 10CFR50.71(b).Amend 2 to Form 10-K/A,encl.W/o NMP & Lilco Annual Repts

ML18041A064
Person / Time
Site:	Nine Mile Point
Issue date:	06/30/1998
From:	CONWAY J T NIAGARA MOHAWK POWER CORP.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
Shared Package
ML17059C114	List: ML17059C113 ML17059C115 ML17059C116 ML18041A064
References
NMP1L-1336, NUDOCS 9807070338
Download: ML18041A064 (241)

Text

CATEGORY1REGULARLYINFO!RMATIONDISTRIBUTIOSYSTEM(RIDS)kACCESSIONNBR:9807070338DOC.DATE:98/06/30NOTARIZED:NODOCKET¹FACIL:50-220NineMilePointNuclearStation,Unit1,NiagaraPowe0500022050-410NineMilePointNuclearStation,Unit2,NiagaraMoha05000410AUTH.NAMEAUTHORAFFILIATIONCONWAY,J.T.NiagaraMohawkPowerCorp.RECIP.NAMERECIPIENT,AFFILIATIONRecordsManagementBranch(DocumentControlDesk)

SUBJECT:

Forwards1997annualfinancialreptsofNMP&,co-tenantcompaniesofRG&E,NYSEG,CHGE&LILCO,per10CFR50.71(b).Amend2toForm10-K/A,encl.W/oNMP&LXLCOannualrepts.DISTRIBUTIONCODE:MPP4DCOPIESRECEIVED:LTR1ENCL)SIZE:TITLE:50.71(b)AnnualFinancialReportNOTES:C(AE.RECIPIENTIDCODE/NAMEPD1-1LAHOOD,DINTERNA.83KCZRNRR/DRPM/PGEB1'11NRR/DRPMCOPXESRECIPIENTLTTRENCLIDCODE/NAME11PD1-1PD11'OPIESLTTRENCL1111G;0RYIEXTERNAL:NRCPDR11CIUM'NOTETOALL"RIDS"RECIPIENTS:PLEASEHELPUSTOREDUCEWASTE.TOHAVEYOURNAMEORORGANIZATIONREMOVEDFROMDISTRIBUTIONLISTSORREDUCETHENUMBEROFCOPIESRECEIVEDBYYOUORYOURORGANIZATION,CONTACTTHEDOCUMENTCONTROLDESKtDCD)ONEXTENSION415-2083TOTALNUMBEROFCOPIESREQUIRED:LTTR7ENCL7 A~rtL

'NiajaraMohawkT.ConwayresidentearGenerationOffice:(315)3494213Fax:(315)349-26(5June30,1998NHPlL1336U.S.NuclearRegulatoryCommissionAttn:DocumentControlDeskWashington,DC20555RE:NineMilePointUnit1DocketNo.50-220NineMilePointUnit2DocketNo.50-410

Subject:

1997Annual$7nancialReportsofNiagaraMohatvkandtheCo-TenantCompaniesofNineMilePointUnit2Gentlemen:PursuanttoSection50.71(b)oftheregulationsoftheNuclearRegulatoryCommission(10CFR)50.71(b)),enclosedisacopyofthe1997AnnualFinancialReportofNiagaraMohawkPowerCorporation(NMPC),togetherwithanamended(AmendmentNo.2)1997AnnualFinancialReportforNMPC.AlsoenclosedarecopiesoftheAnnualFinancialReportsofNineMilePointUnit2Co-Tenantcompanies:RochesterGasandElectric,NewYorkStateElectric&Gas,CentralHudsonGas&Electric,andLongIslandLightingCompany.Verytrulyyours,J.T.ConwayVicePresident-NuclearGenerationJTC/LMC/scEnclosuresexc:w/oenclosuresMr.H.J.Miller,RegionalAdministrator,RegionIMr.S.S.Bajwa,Director,ProjectDirectorateI-l,NRRMr.D.S.Hood,SeniorProjectManager,NRRMr.B.S.Norris,SeniorResidentInspectorRecordsManagementNineMilePointNuclearStation,P.O.Box63.Lvco1n-N>>~Yci;-<~",<34tf807070338,980b3020PDR~ADOCK,05000220www.nimo.cornif tr0~Cl.

SECURITIESANDEXCHANGECOMMISSIONWashington,D.C.20549FORM10-KxANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthefiscalyearendedDecember31,1997ORTRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934Forthetransitionperiodfrom.....................to...................Commissionfilenumber1-2987NIAGARAMOHAWKPOWERCORPORATION(Exactnameofregistrantasspecifiedinitscharter)StateofNewYork154265555(Stateorotherjurisdictionofincorporationororganization)(I.R.S.EmployeridentificationNo.)300ErieBoulevardWestSyracuse,NewYork13202(Addressofprincipalexecutiveoffices)(Zipcode)(315)474-1511(Registrant'stelephonenumber.Indudingareacode)SecuritiesregisteredpursuanttoSection12(b)oftheAct:(EachclassisregisteredontheNewYorkStockExchange)TitleofeachclassCommonStock1arvaluePreferredStock100arvalue-cumulative3.40%Series4.10%Series6.10%Series3.60%Series4.85%Series7.72%Series3.90%Series5.25%SeriesPreferredStock25arvalue-cumulative950%SeriesAdjustableRateSeriesAaSeriesCSecuritiesregisteredpursuanttoSection12(g)oftheAct:NoneIndicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesIx]No[]IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestoftheregistrant'sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.[x]Statetheaggregatemarketvalueofthevotingstockheldbynon-affiliatesoftheregistrant.Approximately$1,800,000,000atMarch26,1998.Indicatethenumberofsharesoutstandingofeachoftheregistrant'sclassesofcommonstock,asofthelatestpracticabledate.Commonstock,$1parvalue,outstandingatMarch26,1998:144,419,351sharos.~..9807070338

NIAGARAMOHAWKPOWERCORPORATIONINFORMATIONREQUIREDINFORM10-KPartIItemNumberGlossaryofTermsItem1.Business.Item2.Properties.Item3.LegalProceedings.Item4.SubmissionofMatterstoaVoteofSecurityHolders.ExecutiveOfficersoftheRegistrantPacae3516182223PartIIZtem5.Item6.Item7.Item8.'tem9.MarketfortheRegistrant'sCommonEquityandRelatedStockholderMatters.SelectedConsolidatedFinancialData.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations.FinancialStatementsandSupplementaryData.ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure.2426275190Item10.Ztem11.Item12.Item13.PartIIIDirectorsandExecutiveOfficersoftheRegistrant.ExecutiveCompensation.SecurityOwnershipofCertainBeneficialOwnersandManagement.CertainRelationshipsandRelatedTransactions.9093105107PartIVItem14.Exhibits,FinancialStatementSchedules,andReportsonForm8-K.Signatures108126 NIAGARAMOHAWKPOWERCORPORATIONGLOSSARYOFTERMSTERMAFCCleanAirActCOPSCTCCWIP'-'DECDthEBZTDAEPAFACFASBFERCGRTZPPIPPPartyZSOMERITMGPMRAregulatoryasset,NORDEFINITIONAllowanceforFundsUsedDuringConstructionBritishThermalUnitsCleanAirActAmendmentsof1990CNGTransmissionCorporationCanadianNiagaraPowerCompany,LimitedCompetitiveOpportunitiesProceedingCompetitiveTransitionChargesConstructionWorkinProgressNewYorkStateDepartmentofEnvironmentalConservationU.S.DepartmentofEnergyDekatherm:onethousandcubicfeetofgaswithaheatcontentof1,000BritishThermalUnitspercubicfootEarningsbeforeInterestCharges,InterestIncome,IncomeTaxes,DeprecxationandAmortization(anon-GAAPmeasureofcashflow)U.S.EnvironmentalProtectionAgencyFuelAdjustmentClause:aclauseinarateschedulethatprovidesforanadjustmenttothecustomer'sbillifthecostoffuelvariesfromaspecifiedunitcostFinancialAccountingStandardsBoardFederalEnergyRegulatoryCommissionGenerallyAcceptedAccountingPrinciplesGrossReceiptsTaxGigawatt-hour:onegigawatt-hourequalsonebillionwatt-hoursIndependentPowerProducer:anypersonthatownsoroperates,inwholeorinpart,oneormoreIndependentPowerFacilitxesIndependentPowerProducersthatareapartytotheMRAIndependentSystemOperatorKilowatt:onethousandwattsKilowatt-hour:aunitofelectricalenergyequaltoonekilowattofFowersuppliedortakenfromanelectriccircuitsteadilyforoneourMeasuredEquityReturnIncentiveTermManufacturedGasPlantMasterRestructuringAgreement-anagreementtoterminate,restateoramendZPPPartypowerpurchaseagreementsRecoverablecoststoterminate,restateoramendZPPPartycontracts,whicharedeferredandamortizedunderPowerChoiceMegawatt:onemillionwattsMegawatt-hour:onethousandkilowatt-hoursNitrogenOxide:gasesformedingreatpartfromatmosphericnitrogenandoxygenwhencombustiontakesplaceunderconditionsofhightemperatureandhighpressure;consideredamajorairpollutant0-3" NPLFederalNationalPrioritiesListforUncontrolledHazardousWasteSitesNYPPNYPPMemberSystemsNYSERDAPowerChoiceagreementPPAPRPPSCPURPAQFROE'FASNo.71SFASNo.101SFASNo.106SFASNo.109SFASNo.121SFASNo.130SFASNo.131SFASNo.132SO,strandedcostsUnit1Unit.2SupremeCourtoftheStateofNewYdrk,AlbanyCountyU.S.NuclearRegulatoryCommissionNewYorkPowerAuthorityNewYorkPowerPoolEightMemberSystemsare:thesevenNewYorkStateinvestor-ownedelectricutilitiesandNYPANewYorkStateEnergyResearchandDevelopmentAuthorityCompany'sfive-yearelectricrateagreement,whichincorporatestheMRA,approvedinFebruary1998PowerPurchaseAgreement:long-termcontractsunderwhichautilityisobligatedtopurchaseelectricityfromanIPPatspecifiedratesPotentiallyResponsiblePartyNewYorkStatePublicServiceCommissionPublicUtilityRewxlatoryPoliciesActof1978,asamended.OneoffivebillssignedintolawonNovember8,1978,astheNationalEnergyAct.Itsetsforthproceduresandrequirementsapplicabletostateutilitycommissions,electricandnaturalgasutxlitiesandcertainfederalregulatoryagencies.Amajoraspectofthislawisthemandatorypurchaseob1igationfromqualifyingfacilities.QualifyingFacility:anindividual'(orcorporation)thatownsand/oroperatesageneratingfacilitybutisnotprimarilyengagedinthegenerationorsaleofelectricpower.QFsarecatherpowerproductionorcogenerationfacilitiesthatqualifyunderSection201ofPURPA.ReturnonCommonStockEquityStatementofFinancialAccountingStandardsNo.71"AccountingfortheEffectsofCertainTypesofRegulation"StatementofFinancialAccountingStandardsNo.101"RegulatedEnterprises-AccountingfortheDiscontinuanceofApplicationofFASBStatementNo.71"StatementofFinancialAccountingStandardsNo.106"Employers'ccountingforPostretirementBenefitsOtherThanPensions"StatementofFinancialAccountingStandardsNo.109"AccountingforIncomeTaxes"StatementofFinancialAccountingStandardsNo.121"AccountingfortheImpairmentofLong-LivedAssetsandforLong-LivedAssetstoBeDisposedOf"StatementofFinancialAccountingStandardsNo.130"ReportingComprehensiveIncome"StatementofFinancialAccountingStandardsNo.131"DisclosuresaboutSegmentsofanEnterpriseandRelatedInformation"StatementofFinancialAccountingStandardsNo.132"Employers'isclosureaboutPensionsandOtherPostretirementBenefits"SulfurDioxide:acolorlessgasofcompoundsofsulfurandoxygenwhichisproducedprimarilybythecombustionoffossilfuelUtilitycoststhatmaybecomeunrecoverableduetoachangeintheregulatoryenvironmentNineMilePointNuclearStationUnitNo.1NineMilePoint,NuclearStationUnitNo.24-N1AGARAMOHAWKPOWERCORPORATZONPARTXItem1.Business.NiagaraMohawkPowerCorporation(the"Company"),organizedin1937underthelawsofNewYorkState,isengagedprincipallyinthebusinessofgeneration,purchase,transmission,distributionandsaleofelectricityandthepurchase,distribution,saleandtransportationofgasinNewYorkState.SeePartZZ,Item8.FinancialStatementsandSupplementaryData-"Note12.InformationRegardingtheElectricandGasBusinesses."GENERALUntilrecentyears,theelectricandgasutilityindustryoperatedinarelativelystablebusinessenvironment,subjecttotraditionalcost-of-serviceregulation.Theinvestmentcommunity,bothshareholdersandcreditors,consideredutilitysecuritiestobeoflowriskandhighquality.Regulatorsupheldtheutility'sexclusiverighttoprovideservice'initsfranchiseareasinexchangefortheutilitycompany'sobligationtoprovideuniversalservicetocustomersinitsserviceterritory,subjecttocost-of-serviceregulation.Suchregulationoftenencouragedregulatorsandothergovernmentalbodiestouseutilitiesasvehiclestoadvancesocialprogramsandcollecttaxes.Ingeneral,priceswereestablishedbasedoncost-of-service,includingafairrateofreturnandutilitieswereallowedtofullyrecoverallprudentlyincurredcosts.Cashflowswererelativelypredictable,aswastheindustry'sabilitytosustaindividendpayoutandinterestcoverageratios.Consequently,theCompany'scurrentelectricityandgaspricesreflecttraditionalutilityregulation.Assuch,theCompany'selectricitypriceshaveincludedstate-mandatedpurchasedpowercostsfromIPPs,atcostsfarexceedingtheCompany'sactualavoidedcosts,aswellasthecostsofhightaxesintheStateofNewYork.AvoidedcostsarethecoststheCompanywouldotherwiseincurtogeneratepowerifitdidnotpurchaseelectricityfromanothersource.WhiletheCompanywasexperiencingrisingcosts,rapidtechnologicaladvanceshavesignificantlyreducedthepriceofnewgenerationandsignificantlyimprovedtheperformanceofsmallerscalegeneratingunits'naddition,thecurrentexcesssupplyofgeneratingcapacityhasdrivendownthepricesacompetitivemarketwouldsupport.Actionstakenbyotherutilitiesthroughoutthecountrytolowertheirprices,includingthoseinareaswithalreadyrelativelylowprices,increasethethreatofindustrialrelocationandtheneedtoofferdiscountstoindustrialcustomers.Zn1997,theCompanyenteredintotworelatedagreementsthatitbelieveswillsignificantlyimproveitsfinancialoutlook.PursuanttotheCompany'sPowerChoiceagreement,enteredintowiththePSC,whichregulatesutilitiesintheStateofNewYork,theCompanyhasagreedtoafiveyearrateplan.andhasagreedtodivestitsfossilandhydrogeneratingassets,representing4,217MWofcapacityandapproximately$1,100millionofnetbookvalue.PursuanttotheMRA,theCompanyand15IPPshaveagreedtoterminate,restateoramend28PPAsinexchangeforcash,sharesofCompanycommonstockandcertainfinancialcontracts.Foradiscussionofeventsthatoccurredduring1997inthecompetitiveenvironment,federalandstateregulatoryinitiativesandtheCompany'seffortstoaddressitscompetitivedisadvantagesanddeterioratingfinancialcondition,seePartII,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations.Thefollowingtopicsarediscussedunderthegeneralheadingof"Business."Whereapplicable,thediscussionsmakereferencetothevariousotheritemsofthisForm10-K.-5-

~To1cpacaeRegulationandRatesZPPsNewYorkPowerAuthorityOtherPurchasedPowerFuelforElectricGenerationGasDeliveryGasSupplyFinancialZnformationAboutIndustEnvironmentalMattersResearchandDevelopmentNuclearOperationsConstructionProgramElectricSupplyPlanningElectricDeliveryPlanningInsuranceEmployeeRelationsSeasonalityrySegmentsInaddition,foradiscussionoftheCompany'sProperties-"ElectricService"and"GasService".Company'streatmentofworkingcapitalitems,seePartDiscussionandAnalysisofFinancialConditionand"FinancialPosition,LiquidityandCapitalResources"677779910101515151515161616properties,seeItem2.ForadiscussionoftheII,Item7~Management'sResultsofOperationsREGULATION.ANDRATESSeveralcriticalinitiativeshavebeenundertakenbyvariousregulatorybodiesandtheCompanythathavehad,and'relikelytocontinuetohave,asignificantimpactonthereshapingoftheCompanyandtheutilityindustry.SeePartZI,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"PSCCompetitiveOpportunitiesProceeding-Electric,""FERCRulemakingonOpenAccessandStrandedCostRecovery,"and"OtherFederalandStateRegulatoryInitiatives-PSCProposalofNewZPPOperatingandPPAManagementProcedures,""-GenericGasRateProceeding"and"-NRCandNuclearOperatingMatters"foradiscussionoftheseotherinitiatives.PowerChoiceAgreementandtheMRA.ForadiscussionofthePowerChoiceagreementandtheMRA,seePartIZ,Ztem7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations'"MasterRestructuringAgreementandthePowerChoiceAgreement".Multi.-YearGasRateSettlementAgreementandGenericGasRateProceeding.Foradiscussionofthethree-yeargasratesettlementagreementthatwasconditionallyapprovedbythePSCinDecember1996,seePartII,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-OtherFederalandStateRegulatoryInitiatives-"Multi-YearGasRateSettlementAgreement"and"-'enericGasRateProceeding."PriceDi.scounts.Foradiscussionofpricediscountsofferedtocustomersandthetermsofdiscountagreements,seePartZZ,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"OtherCompanyEffortstoAddressCompetitiveChallenges-CustomerDiscounts."PSCAudi.t.ZnSeptember1996,asaresultoftheCompany'sinvestigationofacontractwithascrapdealer,JosephBarsuk,Inc.("Barsuk"),thePSCdirecteditsstafftoinvestigatetheprudenceofseverallongtermcontractsinvolvingscrapmetalandthecircumstancessurroundingthelettingandadministrationofthosecontracts.InFebruary1997,thePSCconcludedthatamorecomprehensiveinvestigationwasrequiredtoensurethattheCompany'sethi'csandinternalcontrolproceduresarebeingeffectivelyimplemented.ThefinalreportontheprudencereviewwasissuedonJanuary21,1998andcontainedvariousrecommendationstostrengthentheCompany'sscraphandlingprocedures,itsethicsprogramanditsinternalcontrolprocesses.Actionsarecurrently-6-underwaytoaddressrecommendationsinthereport.Further,theCompanywillrefundtocustomersbetween$2.9millionand$3.7millionrelatedtolossesfromactionsbyascrapmetaldealertodefraudtheCompanybetween1970and1990andhasalsocommittedtocontinuetostrengthenitsethicsprogramandinternalcontrols.TheCompanyisengagedinlitigationagainstBarsukandaformer,insidedirectoroftheCompanywhoretiredin1988torecoverdamagesfromsuchdealings,butisunabletodeterminetheoutcomeofthismatter.IPPsZn1997,theCompanypurchased13,520,000MWhorabout33%ofitstotalpowersupplyfromIPPs.ForadiscussionofCompanyeffortstoreduceitsIPPcosts,seeItem3.LegalProceedings,PartIZ,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"MasterRestructuringAgreementandthePowerChoiceAgreement"and"OtherFederalandStateRegulatoryInitiatives-PSCProposalofNewZPPOperatingandPPAManagementProcedures"andPartZZ,Item8.Financial'StatementsandSupplementaryData-"Note9.CommitmentsandContingencies-Long-TermContractsforthePurchaseofElectricPower."NEWYORKPOWERAUTHORITYTheCompanypresentlyhascontractualrightstopurchaseelectricityfromanumberofgeneratingfacilitiesownedbytheNYPA.Zn1997,thesepurchasesamountedto7,578,000MWh,orabout19%oftheCompany'stotalpowersupplyrequirements.TheCompanycreditstoitsresidentialcustomers,pursuanttothetermsoftheagreementswithNYPA,aportionof.thelowcostpowerpurchasedfromNYPAhydropowersources.RefertoPartZI,Item8.FinancialStatementsandSupplementaryData-"Note9.CommitmentsandContingencies-Long-TermContractsforthePurchaseofElectricPower"foratablethatsummarizestheNYPAgeneratingsource,amountsofpower,andthecontractexpirationdatesforNYPAelectricitywhichtheCompanywasentitledtopurchaseasofJanuary1,1998'nMay23,1997,theCompanysignedanagreementwithNYPAandthePSCthat~allowsNYPA'scurrentindustrialcustomerstocontinuetoreceivetheirpowerallocationsfromNYPA'sJamesA.FitzPatricknuclearplant.TheagreementalsoprotectstheCompany'remainingcustomersbygenerallyrequi:ringthereimbursementbyNYPAofstrandedcostswhichmayresultfromanyNYPAsalesabovecurrentlevels.TheagreementenablestheStateofNewYorktocontinuetouse,.NYPA'selectricitytokeepandcreatejobsandinvestmentinNewYorkStatewhileprotectingthefinancialinterestsoftheCompany.ThisagreementterminatedlitigationpendingbeforethePSCandtheFERCregardingNYPA'spowersalestoindustrialcustomers.OTHERPURCHASEDPOWERPowerpurchasedin1997fromsourcesotherthanZPPsandNYPAamountedto1,844,000MWh,representingapproximately4%oftheCompany'stotalpowersupplyrequirements.TheCompanypurchaseselectricityfromtheNYPPandotherneighboringutilitiesasneededforeconomicoperation.Thepricepaidforthatpowerisdeterminedbyspecificcontractualterms,basedonmarketprices.Physicallimitationsofexistingtransmissionfacilities,aswell.ascompetitionwithotherutilitiesandavailabilityofenergy,impacttheamountofpowertheCompanyisabletopurchaseorsellandthepricetheCompanypaysorreceivesforthatpower.FUELFORELECTRICGENERATIONThePowerChoiceagreementwilleliminatetheCompany'sFAC,whichprovidedforpartialpass-throughtocustomersoffuelandpurchasedpowercostfluctuationsfromamountsforecast.Also,theCompanywillauctionitsfossilandhydrogeneratingassetsinaccordancewiththerestructuringunderPowerChoice.(SeePartII,Item7.Management'sDiscussionandAnalysisofFinancial-7-ConditionandResultsofOperations-"MasterRestructuringAgreementandthePowerChoiceAgreement.")Coal.TheC.R.HuntleyandDunkirkSteamStations,theCompany'sonlycoalfiredgeneratingstations,areexpectedtoburnabout,1.8millionand1.4milliontonsofcoal,respectively,in1998.TheCompanypurchasedits1997coalrequirementsundershort-termcontractsandanticipatesobtainingitstotal1998coalrequirementsundershort-termcontractsaswell.Theaveragelevelofcoalsupplywas25days,whichismanagedforsupplyrisk.Theannualaveragecostofcoalburnedin1995,1996and1997was$1.42,$1.39,and$1.41respectively,permillionBTU,or$36.81,$36.00and$36.68,respectively,perton.See"EnvironmentalMatters-Air."NaturalGas.TheAlbanySteamStationhasthecapabilitytousenaturalgas,aswellasresidualoil,asafuelforelectricgeneration.Thisdual-fuelcapabilitypermitstheuseofthelowercostfueldependingonfuelmarketconditions.During1995,1996and1997,naturalgaswasthepredominantfuelused.However,generationatthisstationwascurtailedsignificantlyduringthisperiodbecauseoftherequirementtopurchaseIPPpowerandexcess,capacityintheregion.Inearly1995,modificationswerecompletedattheOswegoSteamStationthatprovidedalimitedcapabilityforusingnaturalgasforelectricgeneration.TheOswegoSteamStation'sprimaryfuelisresidualoil~TheCompanycurrentlypurchasesallnaturalgasfortheAlbanyandOswegoSteamStationsfromthespotmarket.Thisgasispurchasedasaninterruptiblesupply;andtherefoie,colderthannormalweatherandincreaseddemandforcapacityoninterstatepipelinesbyotherfirm(non-interruptible)gascustomerscouldrestricttheamountofgassuppliedtothestations.TheCompanyhasa25%ownershipinterestinRosetonSteamStationUnitsNo.1and2(the"RosetonUnits").BothRosetonUnitshavedualfuelcapabilitywithresidualoilastheprimaryfuelandnaturalgasasthealternatefuel.CentralHudsonGasandElectricCorporation,aco-ownerandtheoperatoroftheRosetonSteamStation,hasonecontractforthesupplyofuptoapproximately100,000DthsperdayofnaturalgasforuseattheRosetonUnits.The'naturalgassupplyisusedprimarilyduringoffpeakmonths(AprilthroughOctoberofeachyear),minimizingtheexposuretointerruption.In1997,approximately0.7millionDth(theCompany'sshare)ofgaswereusedattheRosetonUnits.TheannualaveragecostofnaturalgasburnedbytheCompany,includingtheRosetonSteamStation,from1995through1997was$1.65,$1.96,and$2.50respectively,permillionBTU,or$1.65,$1.96and$2.50,respectively,perDth.Res9.dual09.1.TheCompany'stotalrequirementsforresidualoilin1998foritsAlbanyandOswegoSteamStationsareestimatedatapproximately1.0millionbarrels.FuelsulfurcontentstandardsinstitutedbyNewYorkStaterequire1.5%sulfurcontentfueloiltobeburnedattheAlbanySteamStation.OswegoUnitNo.6requireslowsulfurfueloil(0.7%).OswegoUnitNo.5,whichburns1.5%sulfurfueloil,wasplacedonlongtermcoldstandbyeffectiveMarch1994.Alloilrequirementsaremetonth'espotmarket.AtDecember31,1997,therewereapproximately386,000barrelsofoil,ormore.thana16-daysupply,attheOswegoSteamStationandapproximately350,000barrelsofoil,ora30-daysupply,attheAlbanySteamStation,basedonrecentburnprojections.TheaveragepriceofOswegoUnitNo.6oilatJanuary1,1998wasapproximately$22.00perbarrelfor0.7%sulfuroil.For1.5%sulfuroil,theaveragepricewasapproximately$17.50perbarrelattheAlbanySteamStation.Thefueloilpricesquotedincludethe$2'5perbarrelpetroleumbusinesstaximposedbyNewYorkState.ThesupplyofresidualoilfortheRosetonUnitshasbeenarrangedbyCentralHudsonGasandElectricCorporation.Arequirementscontractiscurrentlyinplacewithoptionstoextendthecontractperiod.-8-TheannualaveragecostofresidualoilburnedattheAlbany,OswegoandRosetonSteamStationsfrom1995through1997was$3.41,$3.81and$4.05,respectively,permillionBTU,or$21.66,$24.15and$25F58,respectively,perbarrel.Nuclear.ThesupplyoffuelfortheCompany'sNineMilePointnucleargeneratingplantsinvolves:(1)theprocurementofuraniumconcentrates,(2)theconversionofuraniumconcentratestouraniumhexafluoride,(3)~theenrichmentoftheuraniumhexafluoride,(4)thefabricationoffuelassembliesand(5)thedisposalofspentfuelandradioactivewastes.AgreementsfornuclearfuelmaterialsandservicesforUnit1andUnit2(inwhichtheCompanyhasa41%interest)havebeenmadethroughthefollowingyears:UnitNo.1UnitNo.2UraniumConcentratesConversionEnrichmentFabrication20022002200320072002200220032006Arrangementshavebeenmadeforprocuringaportionoftheuranium,conversionandenrichmentrequirementsthroughtheyearslistedabove,leavingtheremainingportionoftherequirementsuncommitted.EnrichmentservicesareundercontractwiththeU.S.EnrichmentCorporationforupto100%oftherequirementsthroughtheyear2003.Uptoapproximately95%and90%oftheuraniumandconversionrequirementsareundercontractthroughtheyear2002forUnit1andUnit2,respectively.Theuncommittedrequirementsfornuclearfuelmaterialsandservicesareexpectedtobeobtainedthroughlong-termcontractsorsecondarymarketpurchases.ThecostoffuelutilizedatUnit1for1995,1996and1997was$0.61,$0.60and$0.'54permillionBTU,respectively.ThecostoffuelutilizedatUnit2for1995through1997was$0'1,$0.50'and$0.49permillionBTU,respectively.Foradiscussionofnuclearfueldisposalcostsandthedisposalofnuclearwastes,therecoveryofnuclearfuelcoststhroughratesandforfurtherinformationconcerningcostsrelatingtodecommissioningoftheCompany'snucleargeneratingplants,seeItem8-FinancialStatementsandSupplementaryData-"Note1.SummaryofSignificantAccountingPolicies-Depreciation,AmortizationandNuclearGeneratingPlantDecommissioningCosts"and"Note3~NuclearOperations."ForadiscussionoftheCompany'splanstoformaNewYorkNuclearOperatingCompany,seeItem7-Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-'"MasterRestructuringAgreementandthePowerChoiceAgreement."GASDELZVERY3TheCompanysells,distributesandtransportsnaturalgastoageographicterritorythatgenerallyextendsfromSyracusetoAlbany.ThenorthernreachesofthesystemextendtoWatertownandGlensFalls.NotalloftheCompany'sdistributionareasarephysicallyinterconnectedwithoneanotherbyCompany-ownedfacilities.Presently,nineseparatedistributionareasareconnecteddirectlywithCNG,,aninterstatenaturalgaspipelineregulatedbytheFERC,viaseventeendeliverystations.TheCompanyalsohasonedirectconnectionwithIroquoisGasTransmissionandonewithEmpireStatePipeline.GASSUPPLYThemajorityoftheCompany'sgassalesareforresidentialandcommercialspaceandwaterheating.Consequently,thedemandfornaturalgasbytheCompany'scustomersisprimarilyseasonalandinfluencedbyweatherfactors.Th~Companypurchasesitsnaturalgasforsaletoitscustomersunderfirmandshort~termspotcontracts,whichistransportedonbothfirmandinterruptible-9-transportationcontracts.During1997,about92%and8%oftheCompany'snaturalgassupplywaspurchasedunderfirmcontractsandshort-termspotcontracts,respectively(generallylongerthan30days)(SeePartZI.Item8-FinancialStatementsandSupplementaryData-"Note9.CommitmentsandContingencies-GasSupply,StorageandPipelineCommitments").Inaddition,theCompanyhasacommitmentwithCNGtoprovidegasstoragecapabilityuntilMarch2002.ForadiscussionofthePSCstaff'spzoposalthatnaturalgasutilitiesexitthebusinessofpurchasingnaturalgasforcustomersoverthenextfiveyears,SeePartZI.Item7-Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"GenericGasRateProceeding."FINANCIALINFORMATIONABOUTINDUSTRYSEGMENTSSeePartZZ,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperationsandItem8.FinancialStatementsandSupplementaryData-"Note12.InformationRegardingtheElectricandGasBusinesses."ENVIRONMENTALMATTERSGeneral.TheCompany'soperationsandfacilitiesaresubjecttonumerousfederal,stateandlocallawsandregulations-relatingtotheenvironmentincluding,amongotherthings,requirementsconcerningairemissions,waterdischarges,siteremediation,hazardousmaterialshandling,wastedisposalandemployeehealthandsafety.WhiletheCompanydevotesconsiderableresourcestoenvironmentalcomplianceandpromotingemployeehealthandsafety,theimpactoffutureenvironmentalhealthandsafetylawsandregulationsontheCompanycannotbepredictedwithcertainty.Incompliancewithenvironmentalstatutesandconsistentwithitsstrategicphilosophy,theCompanyperformsenvironmentalinvestigationsandanalysesandinstalls,asrequired,pollutioncontrolequipment,including,amongotherthings,effluentmonitoringinstrumentationandmaterialsstorage/handlingfacilitiesdesignedtopreventorminimizereleasesofpotentiallyharmfulsubstances.Expendituresforenvironmentalmattersfor1997totaledapproximately$37.1million,ofwhichapproximately$5.6millionwascapitalizedaspollutioncontrolequipmentorplantenvironmentalsurveillanceandapproximately$31.5millionwaschargedtooperatingexpenseforremediation,operationofenvironmentalmonitoringandwastedisposalprograms.Expendituresfor1998areestimatedtototal$41.6million,ofwhich$9.0millionisexpectedtobecapitalizedand$32.6millionchargedtooperatingexpense.Anticipatedexpendituresfor1999areestimatedtototal$42.5million,ofwhich$5.1millionisexpectedtobecapitalizedand$37.4millionchargedtooperatingexpense.Theexpendituresfor1998and1999includetheestimatedcostsfortheCompany'sexpectedproportionateshareofthecostsforsiteinvestigationandremediationofwastesitesdiscussedunder"Solid/HazardousWaste"below.Costsforsiteinvestigationandremediationareincludedinoperatingexpensetotheextentactualcostsdonotexceedtheamountprovidedforinrates,inwhichcase,theexcesscostsaredeferredforfuturerecoverythroughcost-of-servicebasedrates.ZSO14001.During1997,theCompanyhadallofitsfossilandnucleargenerating.assets(theOswego,Albany,HuntleyandDunkirkSteamStationsandNineMilePoint)certifiedtotheISO14001environmentalmanagementsystemstandard.TheregistrationauditsofthesefacilitieswasconductedbyAdvancedWasteManagementSystems.TheCompany'spositionhasbeenandcontinuestobethataneffectiveenvironmentalmanagementsystemisnecessarytoprudentlymanageenvironmentalissuesandminimizeenvironmentalliabilities.TheCompanybelievesthatitisprobablethatcostsassociatedwithenvironmentalcompliancewillcontinuetoberecoveredthroughtheratemakingprocess.ForadiscussionofthecircumstancesregardingtheCompany'scontinuedabilitytorecoverthesetypesofexpendituresinrates,seePartII,Item8.FinancialStatementsandSupplementaryData-"Note2.RatesandRegulatoryIssuesandContingencies."-10-IAir.TheCompanyisrequiredtocomplywithapplicablefederalandstateairqualityrequirementspertainingtoemissionsintotheatmospherefromitsfossil-fuelgeneratingstationsandotherairemissionsources.TheCompany'sfourfossil-firedgeneratingstations(theAlbany,Huntley,OswegoandDunkirkSteamStations)haveCertificatestoOperateissued'bytheDEC.TheprovisionsoftheCleanAirActaddressattainmentandmaintenanceofambientairqualitystandards,mobilesourcesofairpollution,hazardousairpollutants,ac'idrain,permits,enforcement,cleanairresearchandotheritems.TheCleanAirActwillcontinuetohaveasubstantialandincreasingimpactupontheoperationoffossil-firedelectricpowerplantsinfutureyears.TheacidrainprovisionsoftheCleanAirAct(TitleZV)requirethatS4emissionsfromutilitiesandcertainothersourcesbereducednationwideby10milliontonsfromtheir1980levelsandthatNO,emissionsbereducedbytwomilliontonsfrom1980levels.Emissionreductionsweretobeachievedintwophases-Phase.IwastobecompletedbyJanuary1,1995andPhaseZIwillbecompletedbyJanuary1,2000.TheCompanyhastwounits(Dunkirk3and4)affectedinPhase.Z.Beginningin1995,theCompanywasrequiredtoreduceSO<emissionsbyapproximately10,00015,000tonsperyearandtheCompanyiscomplyingwiththeserequirementsbysubstitutingnon-PhaseIunitsandrelyingonreducedutilizationoftheseunitstosatisfyitsemissionreductionrequirementsatDunkirk3and4.WithrespecttoNOTitleIVoftheCleanAirActrequiresemissionreductionsatDunkirk3and4.LowNO,burnertechnologyhasbeeninstalledtomeetthenewemissionlimitations.Inaddition,TitleIoftheCleanAirAct(ProvisionsfortheAttainmentandMaintenanceofNationalAmbientAirQualityStandards)requiredtheinstallationofreasonablyavailablecontroltechnology("RACT")onalloftheCompany'scoal,oilandgas-firedunitsbyMay31,1995.CompliancewithTitleZRACTrequirementsattheCompany'sunitswasachievedbyinstallinglowNOburnersorothercombustioncontroltechnology.PhaseZIrequirementsassociatedwithTitleZVoftheCleanAirAct(targetedfortheyear2000andbeyond)willrequiretheCompany,tofurtherreduceitsSO>emissionsatallofitsfossilgeneratingunits.PossibleoptionsforPhaseZZSQcompliancebeyondthoseconsideredforPhaseIcomplianceincludefuelswitching,installationoffluegasdesulfurizationorcleancoaltechnologies,repoweringandtheuseofemissionallowancescreatedundertheCleanAirAct.rZnSeptember,1994,thestatescomprisingtheNortheastOzoneTransportCommission(NewYorkStateincluded)signedaMemorandumofUnderstandingthatcallsforeachmemberstatetodevelopregulationsfortwoadditionalphasesofNO,reductionbeyondRACT(referredtoasPhaseZZandPhaseIZZNO,reductions).InPhaseZZ,airemissionsourceslocatedinupstateNewYork(whichincludesalloftheCompany'sairemissionsources)willhavetoreduceNO,emissionsbyMay,1999by55percentrelativeto1990levels.ZnPhaseIZI,theseairemissionsourceswillhavetoreduceNO,emissionsinMay2003by75percent.relativeto1990levels.TheMemorandumofUnderstandingprovidesthatthespecifiedreductionsinPhaseIZZmaybemodifiedifevidenceshowsthatalternativeNOreductions,togetherwithotheremissionreductions,willsatisfytheairqualitystandardacrosstheregion.TheDECwillbedevelopingitsPhaseZZNOregulationsin1998.TheneedforandextentofanyfurtherreductionsneededinPhaseZIIwillnotbedetermineduntil1999orlater.UntildetailsareavailableonhowthePhaseIIandPhaseZZZNO,reductionswillbeimplemented,definitivecomplianceplansfortheCompany'sfossilgeneratingstationsandreliablecompliancecostestimatescannotbedeveloped,althoughsuchcostscouldbesignificant.PotentialairregulatorydevelopmentsmayimpacttheCompanyinthefutureincluding:(1)aproposed"longrangeozonetransport"rulemakingforutilitiesandotherNO,sourcesintheNortheastandMidwesttosubstantiallyreducetheirNO,emissions;and(2)arevisedNationalAmbientAirQualityStandardfoParticulateMatterthatincludesfineparticulates.-11-TheCompanyspentapproximately$5million,$0.1million,and$0.1millionincapitalexpendituresin1995,1996and1997,,respectively,onprojectsatthefossilgenerationplantsassociatedwithPhaseIcompliance.TheCompanyhasincluded$1.0millioninits1998through2000constructionforecastforPhaseIIcompliancewhichwillbecomeeffectiveJanuary1,2000'oradiscussionontheCompany'splanstosellitsfossilandhydroassets,seePartII,Item7~Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"MasterRestructuringAgreementandthePowerChoiceAgreement."ForadiscussionoftheCompany'snegotiationswithDECofaConsentDecreeaddressingpastopacityexcursionsandfutureopacitycomplianceissues,seeItem3.LegalProceedings.Water.TheCompanyisrequiredto.complywithapplicableFederalandStatewaterqualityrequirements,includingtheCleanWaterAct,inconnectionwiththedischargeofcondensercoolingwaterandotherwastewatersfromitssteam-electricgeneratingstationsand.otherfacilities.WastewaterdischargepermitshavebeenissuedbyDECforeachofits'team-electricgeneratingstations.Thesepermitsmustberenewedeveryfiveyears.Inaddition,hydroelectricfacilitiesarerequiredtoobtainCleanWaterActcertificationsaspartoftheFERClicensing/relicensingprocess.SuchcertificationshavebeenissuedorarependingforasubstantialportionoftheCompany'shydroelectricfacilities.Conditionsofthepermitstypicallyrequirethatstudiesbe.performedtodeterminetheeffectsofstationoperationontheaquaticenvironmentinthestationvicinityandtoevaluatevarioustechnologiesformitigatinglossesofaquaticlife.LowLevelRadioactiveWaste.SeePartII,Item8.FinancialStatementsandSupplementaryData-"Note3.NuclearOperations-LowLevelRadioactiveWaste."SOlid/HaZardOuSWaSte.Thepublicutilityindustrytypicallyutilizesand/orgeneratesinitsoperationsabroadrangeofhazardousandpotentiallyhazardouswastesandby-products.TheCompanybelievesitishandlingidentifiedwastesandby-productsinamannerconsistentwithfederal,stateandlocalrequirementsandhasimplementedanenvironmentalauditprogramtoidentifypotentialareasofconcernandaidincompliancewithsuchrequirements.Environmentallawscanimposeliabilityfortheentirecostofsiteremediationuponeachofthepartiesthathavesentwastetoacontaminatedsiteregardlessoffaultorthelawfulnessoftheoriginaldisposalactivity.TheCompanyisalsocurrentlyinvestigatingandremediating,asnecessarytomeetcurrentenvironmentalstandards,certainpropertiesassociatedwithitsformergasmanufacturingoperationsandotherpropertieswhichtheCompanyhaslearnedmaybeimpactedbyindustrialwaste,aswellasinvestigatingidentifiedindustrialwastesiteswhereCompanywastematerialsmayhavebeensent.TheCompanyhasalsobeenadvisedthatvariousfederal,stateorlocalagenciesbelievecertainpropertiesrequireinvestigationandhasprioritizedthesitesbasedonavailableinformationinordertoenhancethemanagementofinvestigationandremediation,ifnecessary.TheCompanyiscurrentlyawareof124suchsiteswithwhichithasbeenormaybeassociated,including76whichareCompany-owned.TheCompany-ownedsitesinclude21formerMGPsites,10industrialwastesitesand45operatingpropertysiteswherecorrectiveactionsmaybedeemednecessarytoprevent,containand/orremediateimpactstosoiland/orwaterinthevicinity.OftheseCompany-ownedsites,SaratogaSpringsisontheNPLpublishedbytheEPA.ThenumberofownedsiteshasincreasedastheCompanyhasestablishedaprogramtoactivelyidentifyandmanagepotentialareasofconcernatitselectricsubstations.Thiseffortresultedinidentifyinganadditional32sitesin1997.The48non-ownedsiteswithwhichtheCompanyhasbeenormaybeassociatedaregenerallyindustrialdisposalwastesiteswheresomeofthedisposedwastematerialsareallegedtohaveoriginatedfromtheCompany'soperations.Pendingtheresultsofinvestigationsatthenon-ownedsites,theCompanymayberequiredtofundsomeshareoftheremedialcosts.Althoughonepartycan,asamatteroflaw,beheldliableforalloftheremedialcostsatasite,regardlessoffault,inpracticecostsareusuallyallocatedamongPRPs.InvestigationsateachoftheCompany-ownedsitesaredesignedto(1)determineifenvironmentalcontaminationproblemsexist,(2)ifnecessary,determinetheappropriateremedialactionsand(3)whereappropriate,identify Iotherpartieswhoshouldbearsomeorallofthecostofremediation.Legalactionagainstsuchotherpartieswillbeinitiatedwhereappropriate.Aftersiteinvestigationsarecompleted,theCompanyexpectstodeterminesite-specificremedialactions.andtoestimatetheattendantcostsforrestoration.However,sinceinvestigationsareongoingatmostsites,theestimatedcostofanyremedialactionissubjecttochange.EstimatesoftheCompany'spotentialliabilityforCompany-ownedsitesarebaseduponavarietyoffactors,includingidentifiedorpotentialcontaminants,location,sizeanduseofthesite,proximitytosensitiveresources,statusofregulatoryinvestigationandknowledgeofactivitiesandcostsatsimilarlysituatedsites.Additionally,asfurtherdescribedbelow,theCompany'sestimatingapproachnowincludesaprocessforcertainsiteswherethesefactorsaredevelopedandreviewedusingdirectinputandsupportobtainedfromtheDEC.ActualCompanyexpendituresaredependentuponthetotalcostofinvestigationandremediationandtheultimatedeterminationoftheCompany'sshareofresponsibilityforsuchcosts,aswellasthe.financialviabilityofotheridentifiedresponsiblepartiessinceclean-upobligationsarejoint.andseveral.TheCompanyhasdeniedanyresponsibilityatcertainofthesesiteswhereotherPRPsareidentifiedandiscontestingliabilityaccordingly.Asaconsequenceofsitecharacterizationsandassessmentscompletedtodate,theCompanyhasaccruedaliabilityof$155millionfortheseownedsites,representingitsbestcurrentestimateforitsshareofthecostsforinvestigationandremediation.Thehighendoftherangeispresentlyestimatedatapproximately$365million.TheamountaccruedatDecember31,1997,incorporatestheadditionalelectricsubstations,previouslymentioned,andachangeinthemethodusedtoestimatetheliabilityfor27ofitslargestsites,torelyuponadecisionanalysisapproach.Thismethodincludesdevelopingseveralremediationapproachesforeachofthe27sites,usingthefactorspreviouslydescribed,andthenassigningaprobabilitytoeachapproach.TheprobabilityrepresentstheCompany'sbestestimateofthelikelihoodoftheapproachoccurringusinginputreceiveddirectlyfromtheDEC.Theprobablecostsforeachapproacharethencalculatedtoarriveatanexpectedvalue.Whilethisapproachcalculatesarangeofoutcomes,theCompanyhasaccruedthesumoftheexpectedvaluesforthesesites.TheamountaccruedfortheCompany'sremainingownedsitesrepresentseithercostsresultingfromfeasibilitystudieorengineeringestimates,theCompany'sshareofaPRPallocationor,wherenobetterestimateisavailable,thelowendofarangeofpossibleoutcomes.ThemajorityofcostestimatesforcurrentlyownedpropertiesrelatetotheMGPsites,particularlytheHarborPointsite(Utica,NewYork),whichincludesfivesurroundingnon-ownedsites.InOctober1997,theCompanysubmittedadraftfeasibilitystudytotheDECfortheHarborPointandsurroundingsites.Thestudyindicatesarangeofviableremedialapproaches.However,afinaldeterminationhasnotbeenmadeconcerningtheremedialapproachtobetaken.Thisrangeconsistsofalowendof$22millionandahighendof$230millionwithanexpectedvaluecalculationof$51million,whichisincludedinthetotalamountsaccruedatDecember31,1997.TherangerepresentsthetotalcoststoremediateHarborPointandthesurroundingsitesanddoesnotconsidercontributionsfromotherPRPs.TheCompanyanticipatesreceivingcommentsfromtheDEConthedraftfeasibilitystudybythespringof1999.Atthistime,theCompanycannotdefinitivelypredictthe.natureoftheDECproposedremedialactionplanortherangeofremediationcostsitwillrequire.WhiletheCompanydoesnotexpecttoberesponsiblefortheentirecosttoremediatetheseproperties,itisnotpossibleatthistimetodetermineitsshareofthecostofremediation.InMay1995,theCompanyfiledacomplaint,pursuanttoapplicableFederalandNewYorkStatelaw,intheU.S.DistrictCourtfortheNorthernDistrictofNewYorkagainstseveraldefendantsseekingrecoveryofpastandfuturecostsassociatedwiththeinvestigationandremediationoftheHarborPointandsurroundingsites'namotioncurrentlypendingbeforetheCourt,theNewYorkStateAttorneyGeneralhasmovedtodismisstheCompany'sclaimsagainsttheStateofNewYork,theNewYorkStateDepartmentofTransportation,theThruwayAuthorityandCanalCorporation.TheCompanyhasopposedthismotion.ThecasemanagementorderpresentlycallsforthecloseofdiscoveryonDecember31,1998.Asaresult,theCompanycannotpredicttheoutcomeofthependinglitigationagainstotherPRPsortheallocationoftheCompany'sshareofthcoststoremediatetheHarborPointandsurroundingsites.-13-WithrespecttositesnotownedbytheCompany,but,forwhichtheCompanyhasbeenormaybeassociatedasaPRP,theCompanyhasrecordedaliabilityof$65million,representingitsbestcurrentestimateofitsshareofthetotalcosttoinvestigateandremediatethesesites.Totalcoststoinvestigateandremediateallnon-ownedsitesisestimatedtobeapproximately$285millionintheunlikelyeventtheCompanyisrequiredtoassume100%oftheresponsibilityforthesesites.TheCompanyhasdeniedanyresponsibilityforcertainofthesePRPsitesandiscontestingliabilityaccordingly.EightofthePRPsitesareincludedontheNPL.TheCompanyestimatesitsshareoftheliabilityfortheseeightsitesisnotmaterialandhasincludedtheamountinthedeterminationoftheamountsaccrued.EstimatesoftheCompany'spotentialliabilityforsitesnotownedbytheCompany,butforwhichtheCompanyhasbeenidentifiedasanallegedPRP,havebeenderivedbyestimatingthetotalcostofsiteclean-upandthenapplyingaCompanycontributionfactortothatestimatewhereappropriate.Estimatesofthetotalclean-upcostsaredeterminedbyusingallavailableinformationfrominvestigationsconductedbytheCompanyandotherparties,negotiationswithotherPRPsand,wherenootherbasisisavailableatthetimeofestimate,theEPAfigureforaveragecosttoremediateasitelistedontheNPLasdisclosedintheFederalRegisterofJune23,1993(58Fed.Reg.119).Acontributionfactoriscalculated,whenthereisareasonablebasisforit,thatuseseitheraproratasharebaseduponthetotalnumberofPRPsnamedorotherwiseidentified,orthepercentageagreeduponwithotherPRPsthroughsteeringcommitteenegotiationsorbyothermeans.Insomeinstances,theCompanyhasbeenunabletodetermineacontributionfactorandhasincludedintheamountaccruedthetotalestimatedcoststoremediatethe.sites.ActualCompanyexpendituresforthesesitesaredependentuponthetotalcostofinvestigationandremediationandtheultimatedeterminationoftheCompany'shareofresponsibilityforsuchcostsaswellasthefinancialviabilityofotherPRPssinceclean-upobligationsarejointandseveral.WhiletheCompanyhasaccruedanobligationof$220millionforitsownedandnon-ownedsites,thehighendoftherangeofremedialobligationsiscurrentlyestimatedtobeapproximately$650million.InMay1997,theDECexecutedanOrderonConsent(the"1997Order")whichservestokeeptheannualcashrequirementforcertainsiteinvestigationandremediation("SZR")level(atapproximately$15millionperyear),aswellasprovideforanannualsiteprioritizationmechanism.Asexecuted,the1997Orderexpandsthescopeoftheoriginal1992Order,whichcovered21formerMGPsites,toencompass52siteswithwhichtheCompanyhasbeenassociated.Theagreementissupportedbythedecisionanalysisapproach,whichtheCompanyandtheDECwillcontinuetoreviseonanannualbasistoaddressSIRprogressandsiteprioritiesrelativetoestablishingtheannualcostcap,aswellasdeterminingtheCompany'sliabilityforthesesites.TheSaratogaSpringsandHarborPointMGPsitesarebeinginvestigatedandremediatedpursuanttoseparateregulatoryConsentOrderswiththeEPAandtheDEC,respectively.However,theannualcostsassociatedwiththeremediationofthesesitesareincludedinthecashrequirementsundertheamended1997Order.PowerChoiceandtheCompany'sgassettlementprovidefortherecoveryofSZRcostsoverthesettlementperiods.TheCompanybelievesfuturecosts,beyondthesettlementperiods,willcontinuetoberecoveredinrates.Baseduponthisassessment,aregulatoryassethasbeenrecordedintheamountof$220million,representingthefuturerecoveryofremediationobligationsaccruedtodate.Asaresult,theCompanydoesnotbelieveSIRcostswillhaveamaterialadverseeffectonitsresultsofoperationsorfinancialcondition.SeealsoPartIZ,Item8.FinancialStatementsandSupplementaryData-"Note2~RateandRegulatoryIssuesandContingencies."Whereappropriate,theCompanyhasprovidednoticesofinsuranceclaimstocarrierswithrespecttotheinvestigationandremediationcostsforMGP,industrialwastesitesandsitesforwhichtheCompanyhasbeenidentifiedasaPRP.Todate,theCompanyhasreachedsettlementswithanumberofinsurancecarriers,resultinginpaymentstotheCompanyofapproximately$36million,netofcostsincurredinpursuingrecoveries.TheCompanyhasagreed,initsPowerChoicesettlement,toamortizetheportionallocatedtotheelectricbusiness,orapproximately$32million,overaten-yearperiod.Theremaining-14-portionrelatestothegasbusinessandisbeingamortizedoverthethree-yearsettlementperiod.Foradiscussionofadditionalenvironmentallegalproceedings,seeItem3.LegalProceedings.RESEARCHANDDEVELOPMENTTheCompanymaintainsaresearchanddevelopment(>>RQ)>>)programaimedatimprovingthedeliveryanduseofenergyproductsandfindingpracticalapplicationsfornewandexistingtechnologiesintheenergybusiness.Theseeffortsinclude(1)improvingefficiency;(2)minimizing'environmentalimpacts;(3)improvingfacilityavailability;(4)minimizingmaintenancecosts;(5)promotingeconomicdevelopmentand(6)improvingthequalityoflifeforourcustomerswithnewelectrictechnologies.RaDexpendituresin1995through1997werenotmaterialtotheCompany'sresultsofoperationsorfinancialcondition.NUCLEAROPERATIONSSeePartZZ,Item7~Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"OtherFederalandStateRegulatoryInitiatives-NRCandNuclearOperatingMatters>>andPartZZ,Item8.FinancialStatementsandSupplementaryData-"Note3.NuclearOperations."CONSTRUCTIONPROGRAMSeePartII,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"FinancialPosition,LiquidityandCapitalResources-Constructionand'therCapitalRequirements"andPartZI,Item8.FinancialStatementsandSupplementaryData-"Note9.CommitmentsandContingencies-ConstructionProgram."'IELECTRICSUPPLYPLANNINGUnderthePowerChoiceagreement,theCompanyhasagreedtoputallofitsfossilandhydrogenerationassetsupforauction.Winningbidswouldbeselectedwithin11months'fPSCapprovaloftheauctionplan,whichwasfiledwiththePSConDecember1,1997separatelyfromthePowerChoiceagreement.*IftheCompanydoesnotreceiveanacceptablepositivebidforanasset,theCompanyagreedtoformasubsidiarytoholdanysuchassetsandthentolegallyseparatethissubsidiaryfromtheCompanythrougha"spin-'off'toshareholdersorotherwise.Aftertheforegoingprocessiscomplete,theCompanyagreednottoownanynon-nucleargeneratingassetsintheStateofNewYork,subjecttocertainlimitedexceptionsprovidedinthePowerChoiceagreement.ELECTRICDELIVERYPLANNING(SeePartZZ~Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations->>FERCRulemakingonOpenAccessandStrandedCostRecovery.")AsofJanuary1,1998,theCompanyhadapproximately130,000milesoftransmissionanddistributionlinesforelectricdelivery.EvaluationofthesefacilitiesrelativetoNYPPandNortheastPowerCoordinatingCouncilplanningcriteriaandanticipatedCompanyinternalandexternaldemandsisanongoingprocessintendedtominimizethecapitalrequirementsforexpansionofthesefacilities.(ForadiscussionofmajorrestorationoftheCompany'selectricdeliveryfacilitiesinnorthernNewYorkasaresultofanicestorminJanuary1998,seePartII,Item8.FinancialStatementsandSupplementaryData-"Note13.SubsequentEvent)."-15-TheCompanyhasreviewedtheadequacyofitselectricdeliveryfacilitiesandhasdeterminedthatcapitalrequirementstosupportnewloadgrowthwillbebelowpreviousyears'xpenditures.Transmissionplanningstudiesarepresentlyinprogresstoinvestigatethesystemimpactoftwoproposedgenerationprojects,U.S.GeneratingCompany's1080MWplantlocatedinAthens,NewYorkandtheCompany's723MWrepoweringoftheAlbanySteamStationinBethlehem,NewYork.(SeeItem2.Properties-"ElectricService").BothoftheseprojectsarefilingforArticleXcertificationwithaprojectedinservicedateof2001.INSURANCEAsofJanuary31,1998,theCompany'sdirectorsandofficersliabilityinsurancewasrenewed.ThiscoverageincludesnuclearoperationsandinsurestheCompanyagainstobligationsincurredasaresultofitsindemnificationofdirectorsandofficers.ThecoveragealsoinsuresthedirectorsandofficersagainstliabilitiesforwhichtheymaynotbeindemnifiedbytheCompany,exceptforadishonestactorbreachoftrust.Inaddition,foradiscussionofnuclearinsurance,seePartIZ,Item8.FinancialStatementsandSupplementaryData-"Note3.NuclearOperations-NuclearLiabilityInsurance"and-"NuclearPropertyInsurance."EMPLOYEERELATIONSTheCompany'sworkforceatDecember31,1997numberedapproximately8,500ofwhomapproximately71%wereunionmembers.Ztisestimatedthatapproximately78%oftheCompany'stotallaborcostsareapplicabletooperationandmaintenanceandapproximately22%areapplicabletoconstructionandotheraccounts.AlloftheCompany'snon-supervisoryproductionandclericalworkerssubjecttocollectivebargainingarerepresentedbytheInternationalBrotherhoodofElectricalWorkers("ZBEW").ZnApril1996,theCompanyandtheIBEWagreedonafive-year,threemonthlaboragreement,whichprovidesforwageincreasesfapproximately2%to3%ineachofthesubsequentfouryears.SEASONALITYSeeItem2.Properties-"ElectricService"andPartZZ,Item8.FinancialStatementsandSupplementaryData-"Note14.QuarterlyFinancialData(Unaudited)."Item2.Property.es.ELECTRICSERVICEAsofJanuary1,1998,theCompanyownedandoperatedfourfossilfuelsteamplants(aswellashavinga25%interestintheRosetonSteamStationanditsoutput),twonuclearfuelsteamplants,variousdieselgeneratingunitsand72hydroelectricplants,andhadamajorityinterestinBeebeeIslandandFeederDamhydroplantsandtheiroutput.TheCompanyalsopurchasessubstantiallyalloftheoutputof93otherhydroelectricfacilities.TheCompany'swholly-ownedsubsidiary;OpinacNorthAmerica,Znc.,ownsOpinacEnergyCorporationandPlumStreetEnterprises,Inc.OpinacEnergyCorporationhasa50percentinterestinCNP(ownerandoperatorofthe76.8MWRankinehydroelectricplant)whichdistributeselectricpowerwithintheProvinceofOntarioandownsawindmillgeneratorintheProvinceofAlberta.Znaddition,theCompanyhascontractstopurchaseelectricenergyfromNYPAandothersources.SeeItem1.Business-"IPPs,"-"NewYorkPowerAuthority"and-"OtherPurchasedPower"andPartZZ,Item8.FinancialStatementsandSupplementaryData-"Note9.CommitmentsandContingencies-Long-termContractsforthePurchaseofElectricPower"and"ElectricandGasStatistics."TheCompanyholdstheFERClicensefor65hydroelectricplants.Asignificantnumberoftheselicensesaresubjecttorenewaloverthenext4years.'sofDecember31,1997,theCompanyhasrenewed2hydrolicensesandhas7licenserenewalspending.ZntheeventtheCompanyisunabletorenewahydrolicense,itisentitledtocompensationforthe-16-facility.(SeePartII,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations,-"MasterRestructuringAgreementandthePowerChoiceAgreement-PowerchoiceAgreement"foradiscussionoftheCompany'splanstosellitsfossilandhydroassets).ThefollowingisalistoftheCompany'smajoroperatinggeneratingstationsatFebruary1,1998:Station,LocationandPercentOwnershipHuntley,NiagaraRiver(100%)Dunkirk,LakeErie(100%)Albany,HudsonRiver(100%)Oswego,LakeOntario(76%)(Unit6)Roseton,HudsonRiver(25%)EnergySourceCoalCoalOil/NaturalGasOil/NaturalGasOil/NaturalGasCompany'sShareof~NominalNetCapabilityinMW760600400646300NineMilePoint,LakeOntario(100%)(Unit1)Nuclear613NineMilePoint,LakeOntario(41%)(Unit2)Nuclear469In1994,OswegoUnitNo.5(anoil-firedunitwithanetbookvalue-of$160millionandacapabilityof850MW)wasputintolong-termcoldstandby,butcanbereturnedtoserviceinthreemonths.TheCompanyispursuingthenecessarypermitstoinstallstate-of-the-artechnologyattheAlbanySteamStationtoredevelopthefacilitytoincreasethecapacityfromthecurrent.400MWto723MWandrenamethestationtheBethlehemEnergyCenter.Thenewfacilitywouldusenaturalgasfueledcombinedcycleunitswhichwouldreduceairemissionsandsignificantlyimprovethefacility'soperatingefficiency.Thelicensingeffortandpermittingprocessisexpectedtotakeupto18monthsandbetransferabletoanewownerofthefacilityunderthefossilandhydrogeneratingfacilityauction.TheelectricsystemoftheCompanyandCNPisdirectlyinterconnectedwithotherelectricutilitysystemsinOntario,Quebec,NewYork,Massachusetts,VermontandPennsylvania,andindirectlyinterconnectedwithmostoftheelectricutilitysystemsthroughtheEasternInterconnectionoftheUnitedStates.AsofDecember31,1997,theCompany'selectrictransmissionanddistributionsystemswerecomposedof952substationswitharatedtransformercapacityofapproximately28,500,000kilovoltamperes,approximately8,000circuitmilesofoverheadtransmissionlines,approximately1,100cablemilesofundergroundtransmissionlines,approximately113,100conductormilesofoverheaddistributionlinesandabout5,800cablemilesofundergrounddistributioncables,onlyapartofsuchtransmissionanddistributionlinesb'einglocatedonpropertyownedbytheCompany.Thereisseasonalvariationinelectriccustomerload.In1997,theCompany'maximumhourlydemandoccurredinthesummer.Historically,theCompany'smaximumhourlydemandoccurredinthewinter.Themaximumsimultaneoushourlydemand(excludingeconomyandemergencysalestootherutilities)ontheelectricsystemoftheCompanyforthetwelvemonthsendedDecember31,1997occurredonJuly15,1997andwas6,348,000KWh.ForasummaryoftheCompany'selectricsupplycapabilityatDecember31,1997,seePartII,Item8.FinancialtStatementsandSupplementaryData-"ElectricandGasStatistics."-17-TheCompanyownsandoperatesseveralelectrictransmissionlinescrossingtheSenecaNationCattaraugusandAlleganyReservationswhichrangefrom230kilovoltsto34.5kilovolts.In1991,the.SenecaNationchallengedthevalidityoftheright-of-wayagreementsforthesetransmissionlines.WhilediscussionsbetweentheNationandtheCompanyweresuspendedinmid-1992,theNationhasrecentlyaskedtheCompanytoreopenthediscussions.TheCompanyisunabletoestimateanypotentialcostsassociatedwiththisissue,ifany.NEWYORKPOWERPOOLTheCompany,sixotherNewYorkutilitiesandNYPAconstitutetheNYPP,throughwhichtheycoordinatetheplanningandoperationoftheirinterconnectedelectricproductionandtransmissionfacilitiesinordertoimprovereliabilityofserviceandefficiencyforthebenefitofcustomersoftheirrespectiveelectricsystems.ForadiscussiononpotentialchangestoNYPP,seePartZI,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"MasterRestructuringAgreementandthePowerChoiceAgreement"and.-"FERCRulemakingonOpenAccessandStrandedCostRecovery."GASSERVICETheCompanydistributesgaspurchasedfromsuppliersandtransportsgasownedbyothers.AsofDecember31,1997,theCompany'snaturalgassystemwascomprisedofapproximately8,000milesofpipelinesandmains,onlyapartofwhichislocatedonpropertyownedbytheCompany.SUBSIDIARIESOneoftheCompany'swholly-ownedsubsidiaries,OpinacNorthAmerica,Znc.ownsOpinacEnergyCorporation(aCanadiancorporation)andPlumStreetEnterprises,Inc.OpinacEnergyCorporationhasa50percentinterestinanelectriccompany,CNP,whichhasoperationsintheProvinceofOntario,Canada.CNPgenerateselectricityatitsRankinehydroplantforthewholesalemarketandforitsdistributionsysteminFortErie,Ontario.CNPownsa99.99%interestinCanadianNiagaraWindPowerCompany,Znc.andCowleyRidgePartnership,respectively,whichtogetheroperateawindpowerjointventureintheProvinceofAlberta,Canada.PlumStreet,Enterprises,Inc.,incorporatedintheStateofDelaware,isanunregulatedcompanythatoffersenergyrelatedservices.Awholly-ownedTexassubsidiaryoftheCompany,NMUranium,Inc.hasaninterestinauraniumminingoperationinLiveOakCounty,Texaswhichisnowintheprocessofreclamationandrestoration.Anotherwholly-ownedNewYorkStatesubsidiaryoftheCompany,NMHoldings,Znc.,engagesinrealestatedevelopmentofpropertyformerlyownedbytheutilitycompany.-Znaddition,theCompanyhasestablishedasingle-purposewholly-ownedsubsidiary,NMReceivablesCorporation,tofacilitateitssaleofanundividedinterestinadesignatedpoolofcustomerreceivables,includingaccruedunbilledrevenues.TheCompanyalsoownsa66.67percentand82.84percentinterestinMoreauManufacturingCorporationandBeebeeIslandCorporation,respectively,whichareNewYorkStatesubsidiariesthatownandoperatehydro-electricgeneratingstations.MORTGAGELIENSSubstantiallyalloftheCompany'soperatingpropertiesaresubjecttoamortgageliensecuringitsmortgagedebt.(SeePartII,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"MasterRestructuringAgreementandtheRevisedPowerChoiceAgreement").Item3.LegalProceedings.Foradetaileddiscussionofadditionallegalproceedings,seePartIZ,Item8.FinancialStatementsandSupplementaryData-"Note9~CommitmentsandContingencies-TaxAssessments"and-"EnvironmentalContingencies."SeealsoItem1.Business-"EnvironmentalMatters-Solid/HazardousWaste,"andPartII,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResults-18-ofOperations-"MasterRestructuringAgreementandthePowerChoiceAgreement."TheCompanyisunabletopredicttheultimatedispositionofthemattersreferredtobelowin{1),{2),{3),{4)and{5).However,theCompanyhaspreviouslybeenallowedtorecoverthesetypesofexpendituresinrates.Znaddition,consistentwithPowerChoice,theCompanybelievesthatitisprobablethat,theCompanywill-continuetorecoverthesetypesofexpendituresin-cost-of-servicebasedrates.~SeealsoPartZI,Item8.FinancialStatementsandSupplementaryData-"Note~2.RateandRegulatoryIssuesandContingencies."1.OnJune22,1993,theCompanyandtwentyotherindustrialentities,aswellastheowner/operatorofthePfohlBrothersLandfillnearBuffalo,NewYork,weresuedinNYSSupremeCourt,ErieCounty,byagroupofresidentslivingintheareasurroundingthelandfill.Theplaintiffsseekcompensationforallegedeconomiclossandpropertydamageclaimedtohaveresultedfromexposuretocontaminationassociatedwiththelandfill.Znaddition,sinceJanuary18,1995,theCompanyhasbeennamedasadefendantorthird-partydefendantinaseriesoftoxictortactionsfiledinfederalorstatecourtsintheBuffaloarea.Theseactionsallegeexposureonthepartofplaintiffsorplaintiffs'ecedentstotoxicchemicalsemanatedfromthelandfill,resultingintheallegedcausationofcancer.Theplaintiffsseekcompensatoryandpunitivedamagessofartotallingapproximately$60million.TheCompanyhasfiledanswersrespondingtotheclaimsputforthinthesesuits,denyingliabilityastoanyoftheclaimedconditionsordamages,andintendstocontinuetovigorouslydefendagainsteachclaim.2.TheCompanyisunabletopredictatthistimetheprobableoutcomeoftheseproceedings,whichatpresentremaininthediscoverystage.TheCompany,throughmembershipinthePfohlBrotherslandfillSiteCommittee,isparticipatinginthedesignandimplementationofaremedialprogramforthelandfill.ZnthecontextofliabilityallocationproceduresconductedonbehalfoftheCommittee,ithasbeendeterminedthattheCompany'scontributionofindustrialwastestothelandfillwasminor.Further,itistheCompany'spositionthatmaterialspresentatthelandfillattributabletotheCompanyarenotcausallyrelatedtoanyconditionallegedbyplaintiffsinthevarioulawsuitsassociatedwiththelandfill.TheCompanydoesnotbelievthattheoutcomeoftheseproceedingswillhaveamaterialadverseeffectonitsresultsofoperationsorfinancialcondition.OnOctober23,1992,theCompanypetitionedthePSCtoorderIPPsto.postlettersofcreditorotherfirmsecuritytoprotectratepayers'nterestsinadvancepaymentsmadeinprior.yearstothesegenerators.ThePSCdismissedtheoriginalpetitionwithoutprejudice.InDecember1995,theCompanyfiledapetitionwiththePSCsimilartotheonethattheCompanyfiledinOctober1992.'heCompanycannotpredicttheoutcomeofthisaction.However,inAugust1996,thePSCproposedtoexaminethecircumstancesunderwhichautility,includingtheCompany,shouldbeallowedtodemandsecurityfromZPPstoensuretherepaymentofadvancepaymentsmadeundertheirpurchasedpowercontracts.SeePartII,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"OtherFederalandStateRegulatoryInitiatives-PSCProposalofNewIPPOperatingandPPAManagementProcedures."OnFebruary4,1994,theCompanynotifiedtheownersofnineprojectswithcontractsthatprovideforfront-endloadedpaymentsoftheCompany'sdemandforadequateassurancethattheownerswillperformalloftheirfuturerepaymentobligations,includingtheobligationtodeliverelectricityinthefutureatpricesbelowtheCompany'savoidedcostasrequiredbyagreementsandtherepaymentofanyadvancepaymentwhichremainsoutstandingattheendofthecontract.Theprojectsatissuetotal426MW.TheCompany'sdemandisbasedonitsassessmentoftheamountofadvancepaymenttobeaccumulatedunderthetermsofthecontracts,futureavoidedcostsandfutureoperatingcostsfortheprojects.Litigationensuedwithsixoftheprojectsasaresultthesenotifications,asfollows:-19" OnMarch4,1994,EncogenFourPartners,LEP.("Encogen")filedacomplaintintheUnitedStatesDistrictCourtfortheSouthernDistrictofNewYork(the"U.S.DistrictCourt")allegingbreachofcontractandprimafacietortbytheCompany.Encogenseekscompensatorydamagesofapproximately$1millionandunspecifiedpunitivedamages.Inaddition,EncogenseeksadeclaratoryjudgmentthattheCompanyisnotentitledtoassuranceoffutureperformancefromEncogen.OnApril4,1994,theCompanyfileditsanswerandcounterclaimfordeclaratoryjudgmentrelating'otheCompany'exercise.ofitsrighttodemandadequateassurance.Encogenhasamendeditscomplaint,rescindeditsprimafacietortclaim,andfiledamotionofjudgmentonthepleadings.OnFebruary6,1996,theU.S.DistrictCourtgrantedEncogen'smotionforjudgmentonthepleadingsandruledthatunderNewYorklaw,theCompanydidnothavetherighttodemandadequateassurancesoffutureperformance.Inaddition,theU.S.DistrictCourtdidnotawardanydamages.TheCompanyhasappealedthisdecision.AmotiontostayfurtherproceedingshasbeenmadesincethiscontractisincludedintheMRA.OnMarch4,1994,SterlingPowerPartners,L.P.("Sterling"),SenecaPowerPartners,L.P.,PowerCityPartners,L.P.andAG-Energy,L.P.filedacomplaintintheNYSSupremeCourtseekingadeclaratoryjudgmentthat:(a)theCompanydoesnothaveanylegalrighttodemandassuranceofplaintiffs'utureperformance;(b)evenifsucharightexisted,theCompanylacksreasonableinsecurityastoplaintiffs'utureperformance;(c)thespecificformsofassurancessoughtbytheCompanyareunreasonableand(d)iftheCompanyisentitledtoanyformofassurances,plaintiffshaveprovidedadequateassurances.OnApri3,4,1994,theCompanyfileditsanswerandcounterclaimfordeclaratoryjudgmentrelatingtotheCompany'sexerciseofitsrighttodemandadequateassurance.OnOctober5,1994,SterlingmovedforsummaryjudgmentandtheCompanyopposedandcrossmovedforsummaryjudgment.OnFebruary16,1996,Sterlingsupplementeditsmotion,claimingthattheFebruary6,1996rulingintheEncogencaseisdispositive.OnFebruary29,1996,theNYSSupremeCourtgrantedSterling'smotionforsummaryjudgmentandruledthatunderNewYorklaw,theCompanydidnot.havetherighttodemandadequateassurancesoffutureperformance.TheCompanyhasappealedthisdecision.AmotiontostayfurtherproceedingshasbeenmadesincethiscontractisincludedintheMRA.OnMarch7,1994,NorConPowerPartners,L.P.("NorCon")filedacomplaintintheU.S.DistrictCourtseekingtoenjointheCompanyfromterminatingaPPAbetweenthepartiesandseekingadeclaratoryjudgmentthattheCompanyhasnorighttodemandadditionalsecurityorotherassurancesofNorCon'sfutureperformanceunderthePPA;NorConsoughtatemporaryrestrainingorderagainsttheCompanytopreventtheCompanyfromtakinganyactiononitsFebruary4,1994letter.OnMarch14,1994,theCourtenteredtheinterimreliefsoughtbyNorCon.OnApril4,1994,theCompanyfileditsanswerandcounterclaimfordeclaratoryjudgmentrelatingtotheCompany'exerciseofitsrighttodemandadequateassurance.OnNovember2,1994,NorConfiledforsummaryjudgment.OnFebruary6,1996,theU.S.DistrictCourtgrantedNorCon'smotionforsummaryjudgment.andruledthatunderNewYorklaw,theCompanydidnothavetherighttodemandadequateassurancesoffutureperformance.OnMarch25,1997,theU.S.CourtofAppealsfortheSecondCircuitorderedthatthequestionofwhetherthereexistsunderNewYorkcommerciallawtherighttodemandfirmsecurityonanelectriccontractshouldbecertifiedtotheN.Y.CourtofAppeals,thehighestNewYorkcourt,forfinalresolution.TheSecondCircuitordereffectivelystayedtheU.S.DistrictCourt'sorderagainsttheCompany,pendingfinaldispositionbytheN.Y.CourtofAppeals.AmotiontostayfurtherproceedingshasbeenmadesincethiscontractisincludedintheMRA.TheCompanycanneitherprovideanyjudgement.regardingthelikelyoutcomenoranyestimateorrangeofpossiblelossorreductionofexposureinthecasesabove.Accordingly,noprovisionforliability,ifany,thatmayresultfromanyofthesesuits.hasbeenmadeintheCompany'sfinancialstatements.IftheMRAcloseswithrespecttothe-20-ZPPPartiesmentionedabove,thentheselitigationswouldbedismissedwithrespecttosuchIPPParties(seePartII,Item7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"MasterRestructuringAgreement,andthePowerChoiceAgreement").3.ZnNovember1993,FourthBranchAssociatesMechanicville("FourthBranch")filedanactionagainsttheCompanyandseveralofitsofficersandemployeesintheNYSSupremeCourt,seekingcompensatorydamagesof$50million,punitivedamagesof$100millionandinjunctiveandotherrelatedrelief.ThelawsuitgrowsoutoftheCompany'sterminationofacontractforFourthBranchtooperateandmaintainahydroelectricplanttheCompanyownsintheTownofHalfmoon,NewYork.FourthBranch'scomplaintalsoallegesclaimsbasedontheinabilityofFourthBranchandtheCompanytoagreeontermsforthepurchaseofpowerfromanewfacilitythatFourthBranchhopedtoconstructattheMechanicvillesite.InJanuary1994,theCompanyfiledamotiontodismissFourthBranch'scomplaint.ByorderdatedNovember7,1995,theCourtgrantedtheCompany'smotiontodismissthecomplaintinitsentirety.FourthBranchfiledanappealfromtheCourt'sorder.OnJanuary30,1997,theAppellateDivisionmodifiedtheNovember7,1995courtdecisionbyreversingthedismissalofthefourthandfifthcausesofactionsetforthinFourthBranch'scomplaint.TheCompanyandFourthBranchhadalsoenteredintonegotiationsunderaFERCmediationprocess.Asaresultofthesenegotiations,theCompanyhadproposedtosellthehydroelectricplanttoFourthBranchforanamountwhichwouldnotbematerial.Znaddition,theproposalincludedaprovisionthatwouldrequirethediscontinuanceofalllitigationbetweentheparties.AttemptstoimplementthisproposalhavebeenunsuccessfulandtheCompanyhasinformedFERCthatitsparticipationinthemediationeffortshasbeenconcluded.OnJanuary14,1997,theFERCAdministrativeLawJudgeissuedareporttoFERCrecommendingthatthemediationproceedingbeterminated,leavingoutstandingaFourthBranchcomplainttoFERCthatallegesanti-competitiveconductbytheCompany.TheCompanyhasmadeamotiontodismissFourthBranch'santitrustcomplaintbeforetheFERC,whichmotionwasopposedbyFourthBranch.AdecisionfromFERConthismatterispending.TheCompanyisunabletopredicttheultimatedispositionofthelawsuitreferredtoabove.However,theCompanybelievesithasmeritoriousdefensesandintendstodefendthislawsuitvigorously.Noprovisionforliability,ifany,thatmayresultfromthislawsuithasbeenmadeintheCompany'sfinancialstatements.4~ZnMarch1993,Inter-PowerofNewYork,Znc.("Inter-Power")filedacomplaintagainsttheCompanyandcertainofitsofficersandemployeesintheNYSSupremeCourt.Inter-Poweralleged,amongothermatters,fraud,negligentmisrepresentationandbreachofcontractinconnectionwiththeCompany'sallegedterminationofaPPAinJanuary1993.Theplaintiffsoughtenforcementoftheoriginalcontractorcompensatoryandpunitivedamagesinanaggregateamountthatwouldnotexceed$1billion,excludingpre-judgmentinterest.Inearly1994,theNYSSupremeCourtdismissedtwooftheplaintiff'sclaims;thisdismissalwasupheldbytheAppellateDivision,ThirdDepartmentoftheNYSSupremeCourt.Subsequently,theNYSSupremeCourtgrantedtheCompany'smotionforsummaryjudgmentontheremainingcausesofactioninInter-Power'scomplaint.InAugust1994,Inter-PowerappealedthisdecisionandonJuly27,1995,theAppellateDivision,ThirdDepartmentaffirmedthegrantingofsummaryjudgmentastoallcounts,exceptforonedealingwithanallegedbreachofthePPArelatingtotheCompany'shavingdeclaredtheagreementnullandvoidonthegroundsthatInter-Powerhadfailedtoprovideitwithinformationregardingitsfuelsupplyinatimelyfashion.ThisonbreachofcontractclaimwasremandedtotheNYSSupremeCourtfofurtherconsideration.InJanuary1998,theNYSSupremeCourtgranted-21-theCompany'smotionforsummaryjudgmentonallremainingclaimsinthislawsuit-anddismissedthislawsuitinitsentirety.InJanuary1998,Inter-Powerfiledanoticeofappeal.5.TheDEC,inresponsetoanEPAauditoftheirenforcementpolicies,whichfoundenforcementofairregulationviolationstobeinsufficient,hasbegunaninitiativetoaddressthisissue.Asaresult,theDECisseekingpenaltiesfromallNewYorkutilitiesfor'astopacityvariancesfortheyears1994,1995and1996.Furthermore,theDECisrequiringvariousopacityreductionmeasuresandstipulatedpenaltiesforfutureexcursionsafterexecutionofaconsentorder.AllNewYorkStateutilities,includingtheCompany,whichwasnotifiedinSeptember1997,areintheprocessofnegotiatingthevarioustermsandconditionsofthedraftconsentorderwith.theDEC.Theoutcomeofthismatterisuncertainatthistimeanditisnotpossible,topredictwhatthefinancialimpacttotheCompanywillbeintermsofpenaltypaymentandimplementationofanopacityreductionprogram.Item4.Submit.ssionofMatterstoaVoteofSecure.tyHolders.OnOctober23,1997,theBoard'ofDirectorsauthorizedthesolicitationofconsentsfromitspreferredshareholders,asrequiredbytheCompany'sCertificateofIncorporation,toincreasetheamountofunsecureddebttheCompanymayissuefromthelevelpriortotheconsentofapproximately$700millionbyuptoanadditional$5billion.OnDecember3,1997,thepreferredshareholdersapprovedtheproposaltoincrease,thelevelofunsecureddebtbyavoteof3,562,645for,479,124againstand140,107abstentions.-22-ExecutiveOfficersofReistrantAllexecutiveofficersoftheCompanyareelectedonanannualbasisattheMaymeetingoftheBoardofDirectorsoruponthefillingofavacancy.Therearenofamilyrelationshipsbetweenanyoftheexecutiveofficers.Therearenoarrangementsorunderstandingsbetweenanyoftheofficerslistedbelowandanyotherpersonpursuanttowhichheorshewasselectedasanofficer.ExecutiveAgeat~123192CurrentandPriorPositionsDateComnencedilllliamE.DavisAlbertJ.Budney,Jr.B.RalphSylviaDavidJ.AfringtonllilliamF.EdwardsDarleneD.KerrGaryJ.LevineJohnH.MuellerJohnM.Powers5550574640464759ChairmanoftheBoardandChiefExecutiveOfficerViceChairmanoftheBoardofDirectorsPresidentManagingVicePresident-UtiliCorpPo~erServicesGroup(aunitofUtilicorpUnited,Inc.)President-HissouriPublicService(OperatingDivisionofUtiliCorpUnited,Inc.)3ExecutiveVicePresidentExecutiveVicePresident-ElectricGenerationandChiefNuclearOfficerExecutiveVicePresident-NuclearSeniorVicePresident-M'enResourcesSeniorVicePresidentandChiefFinancialOfficerVicePresident-FinancialPlanningExecutiveAssistanttotheChiefExecutiveOfficerandPresidentDirectorofBudgetandFinancialManagementSeniorVicePresident-EnergyDistributionSeniorVicePresident-ElectricCustomerServiceVicePresident-ElectricCustomerServiceVicePresident-GasHarketingandRatesSeniorVicePresident-Legal8CorporateRelationsSeniorVicePresident-Legal8CorporateRelationsandGeneralCounselSeniorVicePresidentandChiefNuclearOfficerSiteVicePresidentofCoamonwealthEdison'sZionPlantVicePresidentofNuclearEnergy(fortheNebraskaPublicPowerDistrict,ownerandoperatoroftheCoopernuclearplant)PlantManager-Unit2OperationsHanager-Unit2RetiredSeniorVicePresidentSeniorVicePresidentandChiefFinancialOfficerSeniorVicePresident-Finance8CorporateServicesHay1993November1992April1995PriortoJoiningtheCompanyJanuary1993January1998*December1995November1990December1990September1997December1995July1993June1989Deceeher1995January1994July1993February1991Hay1993October1992January1998~August1996July1994August1993October1992December1997Septeaher1997January1996October1990TheresaA.FlaimKapuaA.RiceStevenll.Tasker4840VicePresident-CorporateStrategicPlanningVicePresident-CorporatePlanningHanager-GasRates8IntegratedResourcePlanningCorporateSecretaryAssistantSecreiaryHanager-Legal8CorporateRelationsVicePresident-ControllerControllerHay1994April1993June1991September1994October1992July1991December1993Hay1991*OnJanuary13,1998,JohnN.HuellerwaselectedasSeniorVicePresidentandChiefNuclearOfficer,whichbecameeffective:January19,1998.NewillsucceedB.RalphSylvia,whowillremainwiththeCoaTMnyasanExecutiveVicePresidentuntilhisplannedmid-yearretirement.-23-PARTZIItem5.MarketfortheRegistrant'sCommonEquityandRelatedStockholderMatters.TheCompany'scommonstockandcertainofitspreferredseriesarelistedontheNewYorkStockExchange("NYSE").ThecommonstockisalsotradedontheBoston,Cincinnati,Midwest,PacificandPhiladelphiastockexchanges.CommonstockoptionsaretradedontheAmericanStockExchange.Thetickersymbolis"NMK."PreferreddividendswerepaidonMarch31,June30,September30andDecember31.TheCompanyestimatesthatnoneofthe1997preferredstockdividendswillconstituteareturnofcapitalandthereforeallofsuchdividendsaresubjecttoFederaltaxasordinaryincome.Thetablebelowshowsquotedmarketprices(NYSE)fortheCompany'scommonstock:HighLauHighLou1stQuarter$111/8$81/8$101/8$61/22ndQuarter977/885/861/23rdQuarter101/1681/487/863/44thQuarter-,109/1691/161075/8~JForadiscussionregardingthecommonstockdividend,seeItem7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"AccountingImplicationsofthePowerChoiceAgreementandMasterRestructuringAgreement"and"FinancialPosition,LiquidityandCapitalResources-CommonStockDividend"below.OtherStockholderMatters.TheholdersofcommonstockareentitledtoonevotepershareandmaynotcumulatetheirvotesfortheelectionofDirectors.Wheneverdividendsonpreferredstockareindefaultinanamountequivalenttofourfullquarterlydividendsandthereafteruntilalldividendsthereonarepaidordeclaredandsetasideforpayment,theholdersofsuchpreferredstockcanelectamajorityoftheBoardofDirectors.Wheneverdividendsonanypreferencestockareindefaultinanamountequivalenttosixfullquarterlydividendsandthereafteruntilalldividendsthereonarepaidordeclaredandsetasideforpayment,theholdersofsuchstockcanelecttwomemberstotheBoardofDirectors.Nodividendsonpreferredstockarenowinarrearsandnopreferencestockisnowoutstanding.Uponanydissolution,liquidationorwindingupoftheCompany'sbusiness,theholdersofcommonstockareentitledtoreceiveaproratashareofalloftheCompany'sassetsremainingandavailablefordistributionafterthefullamountstowhichholdersofpreferredandpreferencestockareentitledhavebeensatisfied.UponconsummationoftheMRA(seeItem7.Management'DiscussionandAnalysisofFinancialConditionandResultsofOperations-"MasterRestructuringAgreementandthePowerChoiceAgreement"foralistingofconditionsthatmustbemetinordertoclosetheMRA),whichisexpectedtooccurlaterthisyear,theIPPPartiesareexpectedtoown42.9millionsharesoftheCompany'scommonstock,representing23%oftheCompany'svotingsecuritiesfollowingtheissuanceofsuchshares.IntheMRA,thepartiesagreethatanyIPPPartythatreceives2%ormoreoftheoutstandingCommonStockandanydesigneesofIPPPartiesthatreceivesmorethan4.9%oftheoutstandingCommonStockupontheconsummationoftheMRAwill,togetherwithcertainbutnotallaffiliates(collectively,"2%Shareholders"),enterintocertainshareholderagreements(theaShareholdersAgreements").PursuanttoeachShareholderAgreement,the2%Shareholdersagreethatforfiveyearstheywillnotacquiremorethananadditional5%oftheoutstandingCommonStock(resultinginownershipinallcasesofnomorethan9.9%)ortakeanyactionstoattempttoacquirecontroloftheCompany,otherthancertainpermittedactionsinresponsetounsolicitedactionsbythirdparties.The2%shareholderswillgenerallyvotetheirsharesona"pass-through"basis,thatisinthesameproportionasallsharesheldbyothershareholdersarevoted,exceptthattheymayvoteintheirdiscretionforextraordinarytransactionsand,whenthereisapendingproposaltoacquiretheCompany,fordirectors.-24-TheindenturesecuringtheCompany'smortgagedebtprovidesthatretainedearningsshallbereservedandheldunavailableforthepaymentofdividendsoncommonstocktotheextentthatexpendituresformaintenanceandrepairsplusprovisionsfordepreciationdonotexceed2.25%ofdepreciablepropertyasdefinedtherein.SuchprovisionshaveneverresultedinarestrictionoftheCompany'retainedearnings.AsofMarch26,1998,therewereapproximately663300holdersofrecordofcommonstockoftheCompanyandabout4,700holdersofrecordofpreferredstock.Thechartbelowsummarizescommonstockholderownershipbysizeofholding:SizeofHolding(Shares)TotalStockholdersTotalSharesHeld1to99100to9991,000ormore3'1,05631,930~3325~66311812,6527,775,973135830724144419351-25-Item6.SelectedConsolidatedFinancialDataThefollowingtablesetsforthselectedfinancialinformationoftheConpanyforeachofthefiveyearsduringtheperiodendedDecember3'I,1997,whichhasbeenderivedfromtheauditedfinancialstatementsoftheCompany,andshouldbereadinconnectiontherewith.AsdiscussedinItem7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperationsandItem8.FinancialStatementsandS~LementaryData-uHotestoConsolidatedFinancialStatements,uthefollowingselectedfinanciaLdataisnotlikely.tobeindicativeoftheCompany'sfuturefinancialconditionorresultsofoperations.19971996>>19951993Operations:(000's)Operatingrevenues$3,966,404$3,990,653$3,917,338$4,152,178$3,933,431CosmonstockdatatBookvaluepershareatyearend.~.MarketpriceatyearendRatioofmarketpricetobookvalueatDividendyieLdatyearendBasicanddilutedearningsperaverageshareRateofreturnoncomnonequityyearend..comnon$18.03101/258.2X$.160.9X$17.9197/855.'lXS.502.8X$17.4291/254.5X11.BX$1.448.4X$17.06141/483.5X7.9X$1~005.8X$17.25201/4117.4X4.9X$1.7110.2XDividendspaidperconsnonshare..........$1.12$1.09$.95Capitalization:(000's)Cannonequity...Mon-redeemablepreferredstock........~.Mandatorilyredeemablepreferredstock......440,00076,610440,00086,?30$2,604,027$2,585,5?2$2,513,952440,00096,850$2,462,398$2,456,465440,000290,000106,000123,200Totale~~~~~~~~~~6,538,0186,590,1816,633,2166,306,2726,128,277Capitalizationratios:(includinglong-termdebtmaturingwithinoneyear):Comnonstockequity.Preferredstock......39AX7.839.0X7.937.5X8.038.6X8.538.7X6.5Financialratios:Ratioofearningstofixedcharges........Ratioofearningstofixedchargesandpreferredstockdivldendso~~,~~~~~~~~~~~~~~~Otherratios-Xofoperatingrevenues:Fuel,electricitypurchasedandgaspurchased.Otheroperationandmaintenanceexpenses....Depreciationandamortization.........Federalandforeignincometaxes,andothertaxes~~Operatingincome.1.391.1244.4X21.18.613A14.1'.571.3143.5X23.38.313.613.12.291.9040.3X20.98.117.317.51.911.6339.6X23.17.414.713.32.312.0036;1X26.97.016.217.5Miscellaneous:(000's)Grossadditionstoutilityplant....~Totalutilityplant...Aclateddepreciationandamortization.$290,75711,0?5,8744,207,830958414S352,04910,839,3413,881,726427635$345,80410,649,3013,641,4489477869S490,124S519,61210,485,33910,108,5293,449,6963,231,237964981647137ountsmcuccxtrao>naryitem,secore.teaneguatoryssuesanonungcnmcs.-26-NZAGARAMOHAWKPOWERCORPORATIONCertainstatementsincludedinthisAnnualReportonForm10-Kareforward-lookingstatementsasdefinedinSection21EoftheSecuritiesExchangeActof1934,includingthehedgeagainstupwardmovementinmarketpricesprovidedbytherestructuredandamendedPPAs,theimprovementinoperatingcashflowsasaresultoftheMRAandPowerChoice,therecoverabilityoftheMRAregulatoryassetthroughthepriceschargedforelectricservice,theeffectofaPSCnaturalgasproposalontheCompany's.resultsofoperations,expectedearningsoverthefive-yeartermofthePowerChoiceagreement,theeffectoftheeliminationoftheFACunderPowerChoiceontheCompany'sfinancialcondition,thereductioninnetincomeresultingfromthenon-cashamortizationoftheMRAregulatoryasset,theeffectoftheJanuary1998icestormdamagerestorationcostsontheCompany'scapitalrequirements,recoverabilityofenvironmentalcompliancecostsandnucleardecommissioningcoststhroughrates,andtheimprovementintheCompany'sfinancialconditionexpectedasaresultoftheMRAandtheimplementationofPowerChoice.TheCompany'sactualresultsanddevelopmentsmaydiffermateriallyfromtheresultsdiscussedinorimpliedbysuchforward-lookingstatements,duetorisksanduncertaintiesthatexistintheCompany'soperationsandbusinessenvironment,including,butnotlimitedto,mattersdescribedinthecontextofsuchforward-lookingstatements,aswellassuchotherfactorsassetforthintheNotestoConsolidatedFinancialStatementscontainedherein.Item7.Management'sDiscussionandAnalysisof'inancialConditionandResultsofOperationsEVENTSAFFECTING1997ANDTHEFUTUREOnJuly9,1997,theCompanyannouncedtheMRAtoterminate,restateoramendIPPpowerpurchasecontractsinexchangeforcash,sharesoftheCompany'scommonstockandcertainfinancialcontracts.ThetermsoftheMRAhavebeenandmaycontinuetobemodified.InFebruary1998,thePSCapprovedthePowerChoicesettlementagreement,whichincorporatesthetermsoftheMRA:UnderPowerChoice,aregulatoryassetwillbeestablishedforthecostsoftheMRAanditwillbeamortizedoveraperiodnottoexceedtenyears.TheCompany'sratesunderPowerChoicearedesignedtopermitrecoveryoftheMRAregulatoryasset.InapprovingPowerChoice,thePSClimitedtheestimatedvalueoftheMRAregulatoryassetthatcanberecoveredtoapproximately$4,000million,resultinginachargeto1997earningsof$190.0millionor85centspershare.ThePowerChoiceagreement,'whilehavingtheeffectofsubstantiallydepressingearningsduringitsfive-yearterm,willsubstantiallyimproveoperatingcashflows.InDecember1997,thepreferredshareholdersgavetheCompanyapprovaltoincreasetheamountofunsecureddebtthattheCompanymayissueby$5billion.Thisauthorizationenablestheissuanceofunsecur'eddebttoconsummatetheMRA.~ThePowerChoiceagreementcallsfortheCompanytoconductanauctiontosellallofitsfossilandhydrogenerationassets.~InearlyJanuary1998,amajoricestormcausedextensiveandcostlydamagetotheCompany'sfacilitiesinnorthernNewYork.MASTERRESTRUCTURINGAGREEMENTANDTHEPOWERCHOICEAGREEMENTTheCompanyenteredintothePPAsthataresubjecttotheMRAbecauseitwasrequiredtodosounderPURPA,whichwasintendedtoprovideincentivesforbusinessestocreatealternativeenergysources.UnderPURPA,theCompanywasrequiredtopurchaseelectricitygeneratedbyqualifyingfacilitiesofIPPsatpricesthatwerenotexpectedtoexceedthecostthatotherwisewouldhavebeenincurredbytheCompanyingeneratingitsownelectricity,orinpurchasingitfromothersources(knownas"avoidedcosts").WhilePURPAwasafederainitiative,eachstateretainedcertaindelegatedauthorityoverhowPURPAwoulbeimplementedwithinitsborders.InitsimplementationofPURPA,theStateof,-27-NewYorkpassedthe"Six-CentLaw,"establishing6CperKWhastheflooronavoidedcostsforprojectslessthan80MWinsize.TheSix-CentLawremainedinplaceuntilitwasamendedin1992todenythebenefitofthestatutetoanyfuturePPAs.TheavoidedcostdeterminationsunderPURPAwereperiodicallyincreasedbythePSCduringthisperiod.PURPAandtheSix-CentLaw,incombinationwithotherfactors,attractedlargenumbersofZPPstoNewYorkState,and,inparticular,totheCompany'sserviceterritory,duetothearea'sexistingenergyinfrastructureandavailabilityofcogenerationhosts.ThepricingtermsofsubstantiallyallofthePPAsthattheCompanyenteredintoincompliancewithPURPAandtheSix-CentLaworotherNewYorklawswerebased,attheoptionoftheIPP,eitheronadministrativelydeterminedavoidedcostsorminimumprices,bothofwhichhaveconsistentlybeenmateriallyhigherthanthewholesalemarketpricesforelectricity.SincePURPAandtheSix-CentLawwerepassed,theCompanyhasbeenrequiredtopurchaseelectricityfromZPPsinquantitiesinexcessofitsowndemandandatpricesinexcessofthatavailabletotheCompanybyinternalgenerationorforpurchaseinthewholesale-market.Infact,by1991,theCompanywasfacingapotentialobligationtopurchasepowerfromZPPssubstantiallyinexcessofitspeakdemandof6,093MW.Asaresult,the.Company'scompetitivepositionandfinancialperformancehavedeterioratedandthepriceofelectricitypaidperKWhbyitscustomershasrisensignificantlyabovethenationalaverage.Accordingly,in1991'theCompanyinitiatedaparallelstrategyofnegotiatingindividualPPAbuyouts,cancellationsandrenegotiations,andofpursuingregulatoryandlegislativesupportandlitigationtomitigatetheCompany'sobligationunderthePPAs.Bymid-1996,thisstrategyhadresultedinreducingthecapacityoftheCompany'sobligationstopurchasepowerunderitsPPAportfoliotoapproximately2,700MW.Notwithstandingthisreductionincapacity,overthesameperiodthepaymentsmadetotheZPPsundertheirPPAsrosefromapproximately$200millionin1990toapproximately$1.1billionin1997asindependentpowerfacilitiesfromwhichtheCompanywasobligatedtopurchaseelectricitycommencedoperations.TheCompanyestimatesthatabsenttheMRA,paymentsmadetotheIPPspursuanttoPPAswouldcontinuetoescalatebyapproximately$50millionperyearuntil2002.Recognizingthecompetitivetrendsintheelectricutilityindustryandtheimpracticabilityofremedyingthesituationthroughaseriesofcustomerrateincreases,inmid-1996theCompanybegancomprehensivenegotiationstoterminate,amendorrestateasubstantialportionofabove-marketPPAsinanefforttomitigatetheescalatingcostofthesePPAsaswellastopreparetheCompanyforamorecompetitiveenvironment.ThesenegotiationsledtotheMRAandthePowerChoiceagreement.MasterRestructuringAgreement.OnJuly9,1997,theCompanyenteredintotheMRAwith16IPPPartieswhosellelectricitytotheCompanyunder29PPAs.TheMRAspecificallycontemplatedthattwoZPPs,OxbowPowerofNorthTonawanda,NewYork,Inc.("Oxbow")andNorConwouldenterintofurthernegotiationsco'ncerningtheirtreatmentundertheMRA.Followingsuchnegotiations,OxbowhaswithdrawnfromtheMRA,but,basedonthevalueofitsallocationundertheMRAandthetermsofitsexistingPPA,Oxbow'swithdrawaldoesnotmateriallyimpactthecostreductionsassociatedwiththeMRA.TheCompanyandNorConhaveagreedtoreplaceNorCon'sinitialallocationundertheMRAwithanallcashallocationwhichhas,intheCompany'sestimation,avalueapproximately$60millionhigherthanNorCon'sinitialallocation.AthirdIPPPartyhasagreedtotakecashinexchangeforthesharesofcommonstockallocatedtoitintheMRA.Asaresultofthesecashallocations,thereare3,054,000fewersharesofcommonstockallocatedtotheZPPsundertheMRA.TheMRAhasbeenamendedtoexpireonJuly15(1998.TheMRAcurrentlyprovidesforthetermination,restatementoramendmentof28PPAswith15IPPs,whichrepresentapproximately80%oftheCompany'sover-marketpurchasedpowerobligations,inexchangeforanaggregateof$3,616millionincashand42.9millionsharesoftheCompany'scommonstockandcertainfinancialcontracts.TheclosingoftheMRAissubjecttoanumberofconditions,includingtheCompanyandtheIPPPartiesnegotiatingindividualrestatedandamendedcontracts,thereceiptofallregulatoryapprovals,thereceiptofallconsentsbythirdpartiesnecessaryforthetransactionscontemplatedbytheMRA(includingtheterminationoftheexistingPPAsandtheterminationoramendmentofallrelatedthirdpartyagreements),theIPPParties-28-enteringintonewthirdpartyarrangementswhichwillenableeachIPPPartytorestructureitsprojectsonareasonablysatisfactoryeconomicbasis,theCompanyhavingcompletedallnecessaryfinancingarrangementsandtheCompanyandtheIPPPartieshavingreceivedallnecessaryapprovalsfromtheirrespectiveboardsofdirectors,shareholdersandpartners.WhileoneormoreoftheIPPPartiesmayundercertaincircumstancesterminatetheMRAwithrespecttoitself,theCompany'sobligationtoclosetheMRAissubjecttoitsdeterminationthatasaresultofanysuchterminations"thebenefitsanticipatedtobereceivedbytheCompanypursuanttotheMRAhavenotbeenmateriallyandadverselyaffected.TheCompanyexpectsthatpriortotheconsummationoftheMRA,themixofconsiderationtobereceived'bytheZPPPartiesmayberenegotiated.TheforegoingisqualifiedinitsentiretybythetextoftheMRA(seeExhibit10-11).AstheConditionsDeterminationDate(thedatebywhichallIPPPartiesmustsatisfyorwaivetheirthirdpartyconditionsorwithddrawfromtheMRA)hasnotoccurred,theCompanycannotpredictwhethersuchconditionswillbesatisfied,whethersomeIPPPartiesmaywithdraw,whetherthetermsoftheMRAmightberenegotiated,orwhethertheMRAwillbeconsummated.ZntheeventtheCompanyisunabletosuccessfullycompletetheMRAandthereforeimplementPowerChoice,itwouldpursueallalternativesincludingatraditionalraterequest.TheprincipaleffectsoftheMRAaretoreducesignificantlytheCompany'sexistingpaymentobligationsunderthePPAs,whichcurrentlyconsistofapproximately2,700MWofcapacityatDecember31,1997.Whileearningswillbedepressedduringthefive-yearterm,thesavingsinannualenergypayments,coupledwiththeratesestablishedinPowerChoice,willyieldfreecashflowthatcanbededicatedtothenewdebtserviceobligationsassociatedwiththepaymentofcashtotheZPPParties.UnderthetermsoftheMRA,theCompany'ssignificantlongtermandescalatingZPPpaymentobligationswillberestructuredintoadefinedandmoremanageableobligationandaportfolioofrestatedandamendedPPAswithpriceanddurationtermsthattheCompanybelievesaremorefavorablethantheexistingPPAs.UndertheMRA,19PPAsrepresentingapproximately1,180MWofcapacitywillbeterminatedcompletelythusallowingthiscapacitytobereplacedthroughthecompetitivemarketatmarketbasedprices.TheCompanyhasnocontinuingobligationtopurchaseenergyfromtheterminatingZPPParties.AlsoundertheMRA,8PPAsrepresentingapproximately541MWofcapacitywillberestatedoneconomictermsandconditionsthataremorefavorabletotheCompanythantheexistingPPAs.Therestatedcontractshaveatermof10yearsandarestructuredasfinancialswapcontractswheretheCompanyreceivesormakespaymentstotheZPPPartiesbaseduponthedifferentialbetweenthecontractpriceandamarketreferencepriceforelectricity.Thecontractpricesarefixedforthefirsttwoyearschangingtoanindexedpricingformulathereafter.Contractquantitiesarefixedforthefull10yeartermofthecontracts.Theindexedpricingstructureensuresthatthepricepaidforenergyandcapacitywillfluctuaterelativetotheunderlyingmarketcostofgasandgeneralindicesofinflation.UntilsuchtimeasacompetitiveenergymarketstructurebecomesoperationalintheStateofNewYork,therestatedcontractsprovidetheZPPPartieswithaputoptionforthephysicaldeliveryofenergy.Additionally,onePPArepresenting42MWofcapacitywillbeamendedtoreflectashortenedtermandalowerstreamoffixedunitprices.Finally,theMRArequirestheCompanytoprovidetheZPPPartieswithanumberoffixedpriceswapcontractswithatermofsevenyearsbeginningin2003.Thefixedpriceswapcontractswillbecashsettledmonthlybaseduponastreamofdefinedquantitiesandprices.AlthoughagainsttheCompany'sforecastofmarketenergypricestherestructuredandamendedPPAsrepresentanexpectedabove-market.paymentobligation,theCompany'sportfolioofthesePPAsprovidesitanditscustomerswithahedgeagainstsignificantupwardmovementinmarketpricesthatmaybecausedbyachangeinenergysupplyordemand.Thisportfolioandmarketpurchasescontaintermsthatarebelievedtobemoreresponsivetocompetitivemarketpricechanges.(SeeItem8.FinancialStatementsandSupplementaryData"Note9.CommitmentsandContingencies-Long-termContractsforthePurchaseofElectricPower").-29-PowerChoiceAgreement.Thepowerchoiceagreementestablishesafive-yearrateplanthatwillreduceaverageresidentialandcommercialratesbyanaggregateof3.2%overthefirstthreeyears.ThisreductionwillincludecertainsavingsthatwillresultfrompartialreductionsoftheNewYorkStateGRT.Industrialcustomerswillseeaveragereductionsof25%relativeto1995pricelevels;thesedecreaseswillincludediscountscurrentlyofferedtosomeindustrialcustomersthroughoptionalandflexiblerateprograms.Thecumulativeratereductions,netofGRTsavings,areestimatedtobeapproximately$112million,tobeexperiencedonagenerallyratablebasisoverthefirstthreeyearsoftheagreement.DuringthetermofthePowerChoiceagreement,theCompanywillbepermittedtodefercertaincosts,associatedprimarilywithenvironmentalremediation,nucleardecommissioningandrelatedcosts,andchangesinlaws,regulations,rulesandorders.Inyearsfourandfiveofitsrateplan,theCompanycanrequestanannualincreaseinpricessubjecttoacapof1%oftheall-inprice,excludingcommoditycosts(e.g.,transmission,distribution,nuclear,andforecastedCTC).Inadditiontothepricecap,thePowerChoiceagreementprovidesfortherecoveryofdeferralsestablishedinyearsonethroughfourand'costvariationsintheMRAfinancialcontractsresultingfromindexingprovisionsofthesecontracts.Theaggregateofthepricecapincreaseandrecoveryofdeferralsissubjecttoanoveralllimitationofinflation.UnderthetermsofthePowerChoiceagreement,alloftheCompany'scustomerswillbeable*tochoosetheirelectricitysupplier.inacompetitivemarket.byDecember1999.TheCompanywillcontinuetodistributeelectricitythroughitsdistributionandtransmissionfacilitiesandwouldbeobligatedtobetheso-calledprovideroflastresortforthosecustomerswhodonotexercisetheirrighttochooseanewelectricitysupplier.ThePowerChoiceagreementprovidesthattheMRAandthecontractsexecutedpursuanttheretoshallbefoundtobeprudent.ThePowerChoiceagreementfurtherprovidesthattheCompanyshallhaveareasonableopportunitytorecoveritsstrandedcosts,including.thoseassociatedwiththeMRAandthecontractsexecutedthereto,throughaCTCand,undercertaincircumstances,throughexitfeesorinratesforbackupservice.\UnderthePowerChoiceagreement,anMRAregulatoryasset,aggregatingapproximately$4,000million,willbeestablished.Inthisway,thecostsoftheMRAwouldbedeferredandamortizedoveraperiodnottoexceedtenyears.TheCompany'sratesunderPowerChoicearedesignedtopermitrecoveryoftheMRAregulatoryassetandtopermitrecoveryof,andareturnon,theremainderofitsassets,asappropriate.ThePowerChoiceagreement,whilehavingtheeffectofsubstantiallydepressingearningsduringitsfive-yearterm,willsubstantiallyimproveoperatingcashflows.ThePowerChoiceagreementcallsfortheCompanytodivestallofitsfossilandhydrogenerationassets.Divestitureisintendedtobeaccomplishedthroughanauction.Winningbidswouldbeselectedwithin11monthsofPSCapprovaloftheauctionplan,whichwasfiledwiththePSCseparatelyfromthePowerChoiceagreement.TheCompanywillreceiveaportionoftheauctionsaleproceedsasanincentivetoobtainmaximumvalueinthesale.Thisincentivewouldberecoveredfromsaleproceeds.TheCompanyagreedthatifitdoesnotreceiveanacceptablebidforanasset,theCompanywillformasubsidiarytoholdanysuchassetsandthenlegallyseparatethissubsidiaryfromtheCompanythroughaspin-offtoshareholdersorotherwise.Ifabidofzeroorbelowisreceivedforanasset,theCompanymaykeeptheassetaspartofitsregulatedbusiness.TheauctionprocesswillservetoquantifyanystrandedcostsassociatedwiththeCompany'sfossilandhydrogeneratingassets.TheCompanywillhaveareasonable'pportunitytorecoverthesecoststhroughtheCTCandotherwiseasdescribedabove.Aftertheauctionprocessiscomplete,theCompanyhasagreednottoownanynon-nucleargeneratingassetsintheStateofNewYork,subjecttocertainexceptionsprovidedinthePowerChoiceagreement.UnderthetermsofthenoteindenturepreparedinconnectionwiththefinancingoftheMRA,theCompanywillberequiredtouseamajorityofthecashportionofnetproceedsfromthesaleofitsfossilandhydrogeneratingassetstoreduceindebtedness.SuchrestrictionswouldnotapplyintheeventthattheCompanywasunabletosuccessfullyconcludetheconsummationoftheMRAandthereforeofPowerchoicebutnonethelesssoldsuchassets.-30-ThePowerChoiceagreementcontemplatesthattheCompany'snuclearplantswillremainpartoftheCompany'sregulatedbusiness.TheCompanyhasbeensupportiveofthecreationofastatewideNewYorkNuclearOperatingCompanythatitexpectswould.improvetheefficiencyofnuclearunitsthroughoutthestate.ThePowerChoiceagreementstipulatesthatabsentsuchastatewidesolution,theCompanywillfileadetailedplanforanalyzingotherproposalsregardingitsnuclearassets,includingthefeasibilityofanauction,transferand/ordivestitureofsuchfacilities,within24monthsofPowerChoiceapproval.ThePowerChoiceagreementalsoallowstheCompanytoformaholdingcompanyatitselection.TheCompanyplanstoseekitsshareholders'pprovalatits1998annualmeetingtotheformationofaholdingcompany,theimplementationofwhichwouldonlyoccurfollowingvariousregulatoryapprovals.AtitspublicsessiononFebruary24,1998,thePSCvotedtoapprovethePowerChoiceagreement,whichincorporatesthetermsoftheMRA.SubjecttothesatisfactionoftheconditionstotheMRA,thePSC'sapprovalofPowerChoiceshouldallowtheCompany.toconsummatetheMRAinthefirsthalfof1998.ThePowerChoiceagreementwillonlybecomeeffectiveupontheclosingoftheMRA.InapprovingPowerChoice,thePSCmadethefollowingchanges,amongothers,totheagreement:-i)customerswhohadmadeasubstantialinvestmentinon-sitegenerationasofOctober10,1997willbegrandfatheredandnothavetopaytheCTC;ii)savingsfromanyreductionintheinterestrateassociated.withthedebtissuedinconnectionwiththeMRAfinancingascomparedtoassumptionsunderlyingtheCompany'sPowerChoicefilingwillbedeferredforfuturedisposition;andiii)changethegenerationauctionincentiveto15%ofproceedsinexcessofnetbookvaluefornon-Oswegoassetsand5%ofproceedsinexcessof$100millionforOswegoassets.InitswrittenorderdatedMarch20,1998,thePSCmadeseveralotherchangestothePowerChoiceagreement,inadditiontothosediscussedattheFebruary24session.ThePSCdeterminedtolimittheestimatedvalueoftheMRAregulatoryassetthatcanberecoveredfromcustomers,toapproximately$4,000million.TheestimatedvalueoftheMRAregulatoryassetincludestheissuanceof42.9millionsharesofcommonstock,whichthePSC,indeterminingtherecoverableamountofsuchassetvaluedat$8pershare.TheCompany'scommonstockclosedat$127/16pershareonMarch26,1998.Theaccountinimplicationsofthelimitationinvaluearediscussedunder."AccountingImplicationsofthePowerChoiceAgreementandMasterRestructuringAgreement."ThePSCalsomodifiedthereductioninaverageresidentialandcommercialrates.ThePowerChoiceagreementmeasuredthe3.2%reductionagainst1995prices.ThePSCdeterminedthatthepercentagereductionshouldbeappliedagainstthelowerof1995pricesorthemostcurrenttwelve-monthperiod.Totheextentpricesforthemostcurrenttwelve-monthperiodarelowerthan1995prices,theamountofcumulativeratereductionsdescribedbelowwillincrease.Lastly,thePSCorderedtheCompanynottoproceedtoconsummatetheMRAwithrespecttoonecontractheldbyonedeveloperuntilasatisfactoryresolutionof=acogenerationsteamhostcontractisreached.NewYorklawprovidespartiestherighttoappealtheCommission'sdecisionapprovingthePowerChoiceagreementwithinfourmonthsofthedateofthatdecision.Inaddition,partieshavetherighttopetitiontheCommissionforrehearingofthedecisionwithin30daysofthedateofthedecision.IfapetitionforrehearingisfiledandtheCommissionissuesadecisiononrehearing,partiesmayappealthedecisiononrehearingwithinfourmonthsofthedateofthedecisiononrehearing.SuchanappealorpetitionforrehearingmaybebasedonthefailureoftherecordtoshowareasonablebasisforthetermsofthePowerChoiceagreementandmayresultinanamendmentoftherecordtocorrectsuchfailure,inrenegotiationofsuchtermsorinrenegotiationofthePowerChoiceagreementasawhole.Therecanbenoassurancethat,onappealoronrehearing,theapprovalofthePowerChoiceagreementwillbeupheldorthatsuchappealorrehearingwillnotresultintermssubstantiallylessfavorabletotheCompanythanthosedescribedherein.AlloftheforegoingdiscussionofthePowerChoiceagreementis'ualifiedinitsentiretybythetextoftheagreementandPSCOrder(seeExhibits10-12and10-13).-31-ACCOUNTINGIMPLICATIONSOFTHEPOWERCHOICEAGREEMENTANDMASTERRESTRUCTURINGAGREEMENTTheCompanyconcludedasofDecember31,1996,thatthetermination,restatementoramendmentofIPPcontractsandimplementationofPowerChoicewastheprobableoutcomeofnegotiationsthathadtakenplacesincethePowerchoiceannouncement.UnderPowezChoice,theseparatednon-nucleargenerationbusinesswouldnolongerberate-regulatedonacost-of-servicebasisand,accordingly,'egulatoryassetsrelatedtothenon-nuclearpowergenerationbusiness,amountingtoapproximately$103.6million($67.4millionaftertaxor47centspershare)werechargedagainst1996income'asanextraordinarynon-cashcharge.Asdescribedunder"MasterRestructuringAgreementandthePowerChoiceAgreement,"thePSCinitswrittenoiderissuedMarch20,1998limitedtheestimatedvalueoftheMRAregulatoryassetthatcanberecoveredfromcustomerstoapproximately$4,000million.TheultimateamountoftheregulatoryassettobeestablishedmayvarybasedoncertaineventsrelatedtotheclosingoftheMRA.'TheestimatedvalueoftheMRAregulatoryassetincludestheissuanceof42.9millionsharesofcommon,stock,whichthePSC,indeterminingtherecoverableamountofsuchassetvaluedat$8pershare.BecausethevalueoftheconsiderationtobepaidtotheIPPPartiescanonlybedeterminedattheMRAclosing,thevalueofthelimitationontherecoverabilityoftheMRAregulatoryassethasbeenestimatedat$190million(85centspershare)whichhasbeenchargedto1997earnings.Thechargetoexpensewasdeterminedasthedifferencebetween$8pershareandtheCompany'sclosingcommonstockpriceonMarch26,1998of$127/16pershare,multipliedby42.9millionshares.Anyvariancefromtheestimateusedindeterminingthechargetoexpensein1997,includingchangesinthecommonstockpriceatclosing,willbereflectedinresultsofoperationsin1998.UnderPowerChoice,theCompany'sremainingelectricbusiness(nucleargenerationandelectrictransmissionanddistributionbusiness)willcontinuetoberate-regulatedonacost-of-servicebasisand,accordingly,theCompanycontinuestoapplySFASNo.71tothesebusinesses.Also,theCompany'sIPPContracts,includingthoserestructuredundertheMRAandthosenotsorestructuredwillcontinuetobetheobligationsoftheregulatedbusiness.Asdescribedunder"MasterRestructuringAgreementandthePowerChoiceAgreement,"theconsummationoftheMRA,aswellasimplementationofPowerChoice,issubjecttoanumberofcontingencies.IntheeventtheCompanyisunabletosuccessfullycompletetheMRAandthereforeimplementPowerChoice,itwouldpursueallalternativesincludingatraditionalraterequest.However,notwithstandingsucharaterequest,itislikelythatapplicationofSFASNo.71wouldbediscontinuedfortheremainingelectricbusiness,sincetheCompany'.scurrentratestructurewouldnolongerbesufficienttorecoveritscosts.Theresultingnon-cashafter-taxchargesagainstincome,basedonregulatoryassetsandliabilitiesassociatedwiththenucleargenerationandelectrictransmissionanddistributionbusinessesasofDecember31,1997,wouldbeapproximately$526.5millionor$3.65pershare.Inaddition,theCompanywouldberequiredtoreassessthecarryingamountsofitslong-livedassetsinaccordancewithSFASNo.121.SFASNo.121requireslong-livedassetsandcertainidentifiableintangiblesheldandusedbyanentitybe.reviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofanassetmaynotberecoverableorwhenassetsaretobedisposedof.Inperformingthereviewforrecoverability,theCompanyisrequiredtoestimatefutureundiscountedcashflowsexpectedtoresultfromtheuseoftheassetand/oritsdisposition.TheCompanywouldalsoberequiredtodeterminetheextenttowhichadversepurchasecommitments,ifany,arerequiredtoberecordedasobligations.Variousrequirementsunderapplicablelawandregulationsandundercorporateinstruments,includingthosewithrespecttoissuanceofdebtandequitysecurities,paymentofcommonandpreferreddividends,andcertaintypesoftransfersofassetscouldbeadverselyimpactedbyanysuchwrite-downs.SFASNo.71doesnotrequiretheCompanytoearnareturnonthe"regulatoryassetsinassessingitsapplicability.IntheeventtheMRAandPowerChoiceareimplemented,theCompanybelievesthatthepricesit,wouldchargeforelectricserviceover10years,includingtheCTC,assumingnounforeseenz'eductionindemandorbypassoftheCTCor.exitfees,willbesufficienttorecovertheMRA-32-regulatoryassetandproviderecoveryofandareturnontheremainderofitsassets,asappropriate.ZntheeventtheCompanycouldnolongerapplySFASNo.71inthefuture,itwouldberequiredtorecordanafter-taxnon-'cashchargeagainstincomeforanyremainingunamortizedregulatoryassetsandliabilities.DependingonwhenSFASNo.71wasrequiredtobediscontinued,suchchargewouldlikelybematerialtotheCompany'sreportedfinancialconditionandresultsofoperationsandtheCompany'sabilitytopaycommonandpreferreddividends.TheEmergingIssuesTaskForce("EITF")oftheFASBreachedaconsensusonIssueNo.97-4"DeregulationofthePricingofElectricity-IssuesRelatedtotheApplicationofSFASNo.71andSFASNo.101"inJuly1997.TheCompanydiscontinuedtheapplicationofSFASNo.71'andappliedSFASNo.101withrespecttothefossilandhydrogenerationbusinessatDecember31,1996,inamannerconsistentwiththeEITFconsensus.WiththeimplementationofPowerChoice,specificallytheseparationofnon-nucleargenerationasanentitythatwouldnolongerbecost-of-serviceregulated,theCompanyis-requiredtoassessthecarryingamountsofitslong-livedassetsinaccordancewithSFASNo.121.TheCompanyhasdeterminedthatthereisnoimpairmentofitsfossilandhydrogeneratingassets.Totheextenttheproceedsresultingfromthesaleofthefossilandhydroassetsarenotsufficienttoavoidaloss,theCompanywouldbeabletorecoversuchlossthroughtheCTC.ThePowerChoiceagreementprovidesfordeferralandfuturerecoveryoflosses,ifany,resultingfromthesaleofthenon-nucleargeneratingassets.TheCompany'sfossilandhydrogenerationplantassetshadanetbookvalueofapproximately$1.1billionatDecember31,1997.PSCCOMPETITIVEOPPORTUNITIESPROCEEDING-ELECTRICOnMay16,1996,thePSCissueditsOrderintheCOPScase,whichcalledforamajorrestructuringofNewYorkState'selectricindustry.TheCOPSordercalledforacompetitivewholesalepowermarketandtheintroductionofretailaccessforallelectriccustomers.Thegoalscitedinitsdecisionincludedloweringconsumerrates,increasingchoice,continuingreliabilityofservice,continuingenvironmentalandpublicpolicyprograms,mitigatingconcernsaboutmarketpowerandcontinuingcustomerprotectionandtheobligationtoserve.ThePSCdecisionintheCOPSproceedingstatesthatrecoveryofutilitystrandedcostsmaybeaccomplishedbyanon-bypassable"wirescharge"tobeimposedbydistributioncompanies..ThePSCdecisionalsostatesthatacarefulbalancingofcustomerandutilityinterestsandexpectationsisnecessary,andthatthelevelofstrandedcostrecoverywillultimatelydependupontheparticularcircumstancesofeachutility.OnJune10,1997,thePSCorderedamulti-utility,retailaccesspilotprogramthatwouldallowqualifiedfarmersandfoodprocessorstoshopfore'lectricityandotherenergyservices.ThePSCrequiredutilitiestoadjustthecurrentdeliveryratesforfarmersandfoodprocessors,whichresultedinratereductionsofabout10percentforfarmersand3percentto6percentforfoodprocessors.Deliveryunderthisprogrambeganinlate1997.TheCompanydoesnotbelievethatthisorderwillhaveamaterialadverseeffectonitsfinancialpositionorresultsofoperations.OnAugust27,1997,thePSCrequestedcommentsonitsstaff'stentativeconclusionsabouthownucleargenerationandfossilgenerationshouldbetreatedafterdecisionsaremadeontheindividualelectricrestructuringagreementscurrentlypendingbeforethePS'hePSCstaffconcludedthatbeyondthetransitionperiod(theperiodcoveredbytheindividualrestructuringagreementsincludingPowerChoice),nucleargenerationshouldoperateonacompetitivebasis.Inaddition,thePSCstaffconcludedthatasaleofgenerationplantstothirdpartiesisthepreferredmeansofdeterminingthefairmarketvalueofgenerationplantsandoffersthegreatestpotentialforthemitigationofstrandedcosts.ThePSCstaffalsoconcludedthatrecoveryofsunkcosts,includingpostshutdowncosts,wouldbesubjecttoreviewbythePSCandthisprocessshouldtakeintoaccountmitigationmeasurestakenbytheutility,includingthestepsithastakentoencouragecompetitioninitsservicearea.TheCompany'nuclegenerationassetshadanetbook'valueof$1.5billion(excludingthereservefdecommissioning)atDecember31,1997.-33-InOctober1997,themajorityofutilitieswithinterestsinnuclearpowerplants,includingtheCompany,requestedthatthe'PSCreconsideritsstaff'snuclearproposal.Znaddition,theutilitiesraisedthefollowingissues:impedimentstonuclearplantsoperatinginacompetitivemode;impedimentstothesaleofplants;responsibilityfordecommissioninganddisposalofspentfuel;safetyandhealthconcerns;andenvironmentalandfueldiversitybenefits.Znlightofalloftheseissues,theutilitiesrecommendedthatamoreformalprocessbedevelopedtoaddress'thoseissues.Thethreeinvestor-ownedutilities,RochesterGasandElectricCorporation,ConsolidatedEdisonCompanyofNewYork,'nc.andtheCompany,whicharecurrentlypursuingformationofanuclearoperatingcompanyinNewYorkState,alsofiledaresponsewiththePSCinOctober1997.Theresponsestatedthataforceddivestitureofthenuclearplantswouldadduncertaintytodevelopingastatewideapproachtooperating-theplantsandrequestedthatsuchaforceddivestitureproposalberescinded.Theresponsealsostatedthatimplementationofaconsolidatedsix-unitoperationwouldcontributetothemitigationofunrecoverednuclearcosts.TheNYPA,whichisalsopursuingformationofthenuclearoperatingcompany,submitteditsowncommentswhichweresimilartothecommentsofthethreeutilities.InFebruary1998,thePSCestablishedaformalproceedingtofurtherexamineissuesrelatedtonuclearplantsandthefeasibilityofapplyingmarket-basedpricingtothesefacilities.See"MasterRestructuringAgreementandPowerChoiceAgreement"aboveforadiscussionofthetreatmentofnuclearoperationsduringthetermofPowerchoice.FERCRVLEMAKZNGONOPENACCESSANDSTRANDEDCOSTRECOVBRYZnApril1996,theFERCissuedFERCOrder888.Order888promotescompetitionbyrequiringthatpublicutilitiesowning,operating,orcontrollinginterstatetransmissionfacilitiesfiletariffswhichofferothersthesametransmissionservicestheyprovideforthemselves,undercomparabletermsandconditions.TheCompanyhascompliedwiththisrequirementbyfilingitsopenaccesstransmissiontariffwithFERConJuly7,1996.Baseduponsettlementdiscussionswithvariousparties,aproposedsettlementwassubmittedtotheFERCinthefirstquarterof1997.ThesettlementhasnotbeenapprovedbytheFERCatthistime.HearingswereconductedinSeptember1997withnon-settlingparties.AMarch1998AdministrativeLawJudge'srecommendeddecisioninthisproceedingrecommendedlowertariffsthanthosefiledbytheCompany.TheCompanyisunabletodeterminetheultimateresolutionofthisissueorwhenadecisionwillbeissuedbyFERC.UnderFERCOrder888,theNYPPwasrequiredtofilereformedpowerpoolingagreementsthatestablishopen,non-discriminatorymembershipprovisionsandmodifyanyprovisionsthatareundulydiscriminatoryorpreferential.OnJanuary31,1997,theNYPPMemberSystems(the"MemberSystems")submittedacomprehensiveproposaltoestablishanZSO,aNewYorkStateReliabilityCouncil("NYSRC")andaNewYorkPowerExchange("NYPE")thatwillfosterafullycompetitivewholesaleelectricitymarketinNewYorkState.TheISOwouldprovideforthereliableoperationofthetransmissionsysteminNewYorkStateandprovidenondiscriminatoryopenaccesstotransmissionservicesunderasingleISOtariff.ThroughtheISO,thetransmissionowners,includingtheCompany,wouldbecompensatedfortheuseoftheirtransmissionsystemsonacost-of-servicebasis.TheNYSRCwouldestablishthereliabilityrulesandstandardsbywhichtheISOoperatesthebulkpowersystem.TheISOwouldalsoadministerthedailyelectricenergymarketandtheNYPEwouldfacilitatetheelectricenergymarketonaday-aheadbasis.OnMay2,1997,theMemberSystemsmadeasupplementalfilingrelatedtotheproposedNYSRCandonAugust15,1997,sixoftheMemberSystemsfiledanapplicationformarket-basedrateauthorityinthenewwholesalemarketstructure.OnDecember19,1997,theMemberSystemssubmittedarevisedfilingwhichreflectedthefundamentalcomponentsoftheinitialJanuary31,1997filing.However,theDecember19,1997filingprovidesforadditionalexplanatorymaterials,incorporatesFERC'sguidancesetforthinFERCordersinvolvingotherpowerpoolsandZSOs,andsetsfortharevisedgovernancestructureoftheISO.TheCompanyisunabletopredictwhenFERCwillactonthesesubmittals,orwhetheritwillapprovethefilingswithorwithout-34-modifications.However,theCompany'sPowerChoiceagreementdoesnotconditionretailaccessonthepresenceofanISO.InOrder888,theFERCalsostatedthatitwouldprovidefortherecoveryofprudentandverifi'ablewholesalestrandedcostswherethewholesalecustomer,wasabletoobtainalternativepowersuppliesasaresultofOrder888'sopenaccessmandate.Order888lefttothestatestheissueofretailstrandedcostrecovery.Wherenewlycreatedmunicipalelectricutilitiesrequiredtransmissionservicefromthedisplacedutility,theFERCstatedthatitwouldentertainrequestsforstrandedcostrecoverysincesuchmunicipalizationismadepossiblebyopenaccess.TheFERCalsoreservedtherighttoconsiderstrandedcostsonacase-by-casebasisifitappearedthatopenaccesswasbeingusedtocircumventstrandedcostreviewbyanyregulatoryagency.Numerousparties,includingtheCompany,filedrequestsforrehearingofOrder888.ZnMarch1997,theFERCissuedOrder888-A,whichgenerallyaffirmedOrder888andgrantedrehearingononlyahandfulofissues.OneofthoseissueswaswhethertheFERCwouldreviewstrandedcostsinannexationcasesasitcommittedtodoinmunicipalizationcases.ZnOrder888-AtheFERCstatedthatitwouldreviewstrandedcostsresultingfromterritorialannexationbyanexistingmunicipalelectricsystem,providedthatsystemreliedontransmissionfromthedisplacedutility.TheFERCdeniedtheCompany'srequestforrehearingonhowstrandedcostswouldbecalculatedandotherissues.InNovember1997,FERCissuedOrder888-B.ThisOrderlargelyaffirmedthepositionssetforthinOrder888-AwhileclarifyingthattheFERCrecognizestheexistenceofconcurrentstatejurisdictionoverstrandedcostsarisingfrommunicipalization.TheFERCacknowledgedinOrder888-Bthatthestatesmaybefirsttoaddresstheissueofretail-turned-wholesalestrandedcosts,andstatedthatitwillgivethestatessubstantialdeferencewheretheyhavedoneso.ZnlateJanuary1997,theCompanyprovided26communitiesinSt.LawrenceandFranklincountieswithestimatestheyrequestedofthestrandedcoststheymightbeexpectedtopayiftheywithdrawfromtheCompany'ssystemtocreategovernment-controlledutilities.Thepreliminaryestimateofthecombinedpotentialstrandedcostliabilityforthecommunitiesrangesfromalowof$225milliontoahighof$452million,dependingupontheforecastofelectricitymarketpricesthatisused.Theseamountsdonotincludethecostsofcreatingandoperatingamunicipalutility.Atthistime,21of.theoriginal26communitiesarestillpursuingthematter.Ifthese21communitieswithdrewfromtheCompany'ssystem,theCompanywouldexperienceapotentialrevenuelossofapproximately$60millionto$65millionperyear.Inaddition,theCompanyisawareofothercommunitiesthatareconsideringmunicipalization.However,theCompanyisunabletopredictwhetherthosecommunitieswouldpursuemunicipalization.ThestrandedcostcalculationswerebasedonamethodologyprescribedbytheFERC.Becausenomunicipalityhasmovedforwardwithcondemnation,thevalueoftheCompany'sfacilitieshasnotbeendeductedfromthestrandedcostestimates.Thestrandedcostsincludedintheseestimatesarethecommunities'hareofobligationsthatwereincurredonbehalfofallcustomerstofulfilltheCompany'slegalobligationstoensureadequate,reliableelectricityservice.Suchlegitimateandprudentcostsarecurrentlyincludedinelectricityrates.Government-mandatedpaymentstoZPPsrepresentthelargestsinglecomponentofthesecosts.These21communitiesseekingtowithdrawfromtheCompany'ssystemalsoproposetodisconnectentirelyfromtheCompany'systemandtotaketransmissionservicefromanotherutility.Theybelievethat,giventheprovisionsofOrder888,FERCwouldnotapprovetheCompany'srequestforstrandedcostrecoveryunderthesecircumstances.TheCompanyhasrespondedthat,regardlessoftheresultattheFERC,opportunitiesforstrandedcostrecoveryinthismattercouldalsobepursuedbeforethePSCandinastatecondemnationproceeding.(See"MasterRestructuringAgreementandthePowerChoiceAgreement.")TheCompanyisunabletopredicttheoutcomeofthismatter.OTHERFEDERALANDSTATEREGULATORYINITIATIVESPSCProposalofNewZPPOperatingandPPAManagementProcedures.InAugus1996,thePSCproposedtoexaminethecircumstancesunderwhichautilitincludingtheCompany,maylegallycurtailpurchasesfromIPPs;whetherutilitie-35-shouldbepermittedtocollectdatathatwillassistinmonitoringIPPs'ompliancewithfederalQFrequirements,uponwhichthemandatedpurchasesarepredicated;andifutilitiesshouldbeallowedtodemandsecurityfromIPPstoensuretherepaymentofamountsaccumulatedintrackingaccountsmadeundertheirpurchasedpowercontracts.ThePSCnotedthatsomeofthecurrentIPPcontractsarefarabovemarketpricesandarecausingutilitiestoseekrateincreases.Inaddition,thePSCstatedthatitsproposalwasinitiatedtoprotectratepayers,sinceitwouldensurejustandreasonableratesintheeventongoingnegotiationsbetweenutilitiesandIPPsfail.Monitoring.1nDecember1996,thePSCgavetheNewYorkStateutilities,includingtheCompany,theauthoritytocollectdatatoassisttheminmonitoringIPPs'ompliancewithbothfederalQFstandardsandstaterequirements.ThePSCstatedthatifQFsarenotmeetingrequirements,theobligationtopaythefullcontractrate,whichisfundedbyutilityratepayers,isgenerallyexcusedormitigated.Furthermore,ifthedatacollectedthroughaQFmonitoringprogramindicatesafacilityisnotmeetingfederalstandards,theutilitycouldpetitiontheFERCtodecertifytheQF,whichcouldresultinpenaltiesthat,couldincludecancellationofthecontract.AsimilarpenaltycouldbeimposedifitisdeterminedaQFhasfailedtomaintaincompliancewithstatelaw.Underthemonitoringprogram,QFs,arerequiredtosubmitdataasofMarch1eachyearforthepreviouscalendaryear.InaccordancewiththetermsoftheMRA,theCompanywillnotimplementanyQFmonitoringprogramfortheIPPParties.However,theCompanycontinuestomonitorthoseIPPsthatarenotIPPPartiesforcontinuedQFcomplianceunderPSCregulation.Curtailment.OnMay20,1997,thePSCaddressedtheproceduresunderwhichautility,includingtheCompany,maylegallycurtailpurchasesfromZPPsthatareQFs,unlesscurtailmentisspecificallyprohibitedbycontract.CurtailmentisallowedbyaFERCrule,undercertainoperationalcircumstanceswhenpurchasesfromtheQFswillexceedthecoststheutilitywouldincurifitgeneratedthepoweritself.AdvancenoticemustbeprovidedtotheQFalongwiththereasonsforsuchcurtailment,whicharesubjecttoverificationbythePSCeitherbeforeoraftercurtailment.ThePSCstatedthatPURPA,whichencouragedgenerationbyIPPs,wassupposedtoberevenue-neutralsHowever,theynotedthatthishasnotbeenthesituationinNewYorkStateandratepayershavebeenundulyburdenedbecauseoftheirlackofspecificcurtailmentprocedures.ThedecisiontopermitcurtailmentisnotlikelytoaffectthePPAscoveredbytheMRA,whichrepresentsapproximately80%.oftheCompany'sover-marketpurchasedpowerobligations,asdescribedpreviously.However,thedecisioncouldaffectmostoftheremainingZPPcontracts.TheCompanyisunabletodetermine-theeffectofthesestatementsuntilsuchatimeasthereisafinalorder.TheCompanycannotpredictwhetherthePSCwilltakeanyactiononthefirmsecurityissue.However,thefirmsecurityissuewithrespecttotheZPPPartiescoveredundertheMRAwouldbesettledupontheclosingoftheMRA.Multi-YearGasRateSettlementAgreement.TheCompany,MultipleZntervenors(anunincorporatedassociationofapproximately60largecommercialandindustrialenergyuserswithmanufacturingandotherfacilitieslocatedthroughoutNewYorkState)andPSCstaffreachedathree-yearsettlementthatwasconditionallyapprovedbythePSConDecember19,1996.ThePSCorderedconditionalapprovalonthethree-yearsettlementagreementuntilafinal,redraftedagreement,whichreflectstheCommission'sorder,issubmittedforfinalapproval.Thesettlementresultsina$10millionannualreductioninbaseratesora$30milliontotalreductionoverthethree-yeartermofthesettlement.Thisreflectsa$19millionreductionintheamountoffixednon-commoditycoststoberecoverableinbaserates,offsetbya$9millionincreaseinannualbaserates.TheCompanyestimatesthatthecombinationofin-handsupplierrefundsandfurtherreductionsinupstreampipelinecostswillbesufficienttofundthe$19millionannualreductioninnon-commoditycostrecovery.-36-Zfthenon-commoditycostreductionsexceed$57million($19millionannually)duringthethree-yearsettlementperiod,theexcess,upto$40millionwillbecreditedtoaContingencyReserveAccount("CRA")tobeutilizedforratepayerbenefitintherateyearendingOctober31,2000orbeyond.Totheextenttheactualnon-commoditycostreductionsexceed$57millionbymorethan$40million,theCompanymayretainanyexcesssubjecttoareturnonequitysharingprovision.Zntheeventthenon-commodityreductionsfallshortofthe$57millionestimate,theCompanywillbeartheriskofanyshortfall.ZntheeventthattheterminationorrestructuringofZPPcontractsresultsinmargin(revenueslessfuelcosts)orpeakshavinglosses,themarginlosseswouldbecollectedcurrentlysubjectto80%/20%(ratepayer/shareholder)sharingandthepeakshavinglosseswillbedeferredtotheCRA,subjecttolimitsspecifiedinthesettlement.Inreturnfortakingonthis.risk,theCompanyhasachievedaportionoftherevisedratestructurethathadbeenproposedtoreduceitsthroughputrisk.TheCompanyobtainedanROEcapof13.5%with50/50sharingbetweenratepayersandshareholders-in-excessof'thecap.TheCompanyalsohasanopportunitytoearnupto$2.25millionannuallyifitsgascommoditycostsarelowerthanamarketbasedtargetwithoutbeingsubjecttotheROEcap.TheCompanyhasanequal$2~25millionriskifgascommoditycostsexceedthetarget.Anadditionalmajorbenefitoftherevisedratedesignisthatthemarginmadeoneachadditionalnewcustomerwillsignificantlyincreasetotheextentadditionalthroughputdoesnotrequireadditionalupstreampipelinecapacityforservice.This,alongwiththeapprovaloftheCompany'sProgressFund,whichallowstheCompanytouseutilityrevenuesinanamountnottoexceed$11millionintotalforthepurposeofprovidingfinancingforlargecustomerstoconvertorincreasetheirgasuse,willprovidenewopportunitiesforgrowth.GenericGasRateProceeding.Asaresultofthegenericrateproceeding,inwhichthePSCorderedallNewYorkutilitiestoimplementaserviceunbundlingbeginninginMay1996,nearly3,000customershavechosentobuynaturalgasfromothersources,withtheCompanycontinuingtoprovidetransportationserviceforaseparatefee.ThesechangeshavenothadamaterialimpactontheCompany'smarginssincethemarginistraditionallyderivedfromthedeliveryserviceandnotfromthecommoditysale.Themarginfordeliveryforresidentialandcommercialaggregationservicesequalsthemarginonthetraditionalsalesserviceclasses.TodatethismigrationhasnotresultedinanystrandedcostssincethePSChasallowedtheutilitiestoassignthepipelinecapacitytothecustomersconvertingfromsalestotransportation.Thisassignmentisallowedduringathree-yearperiodendingMarch1999,atwhichtimethePSCwilldecideonmethodsfordealingwiththeremainingunassignedorexcesscapacity.Asapartofthegenericrateproceeding,allutilitiesarerequiredtofileareportwiththePSCinApril1998,describingactionsthathavebeentakentomitigatepotentialstrandedcostsascustomersmigratetotransportationservice.Znaclarifyingorderinthisproceeding,issuedSeptember4,1997,thePSChasindicatedthatitisunlikelythatutilities.willbeallowedtocontinuetoassignpipelinecapacitytodepartingcustomersafterMarch1999.Onaseparatebutparallelpath,inSeptember1997,thePSCissuedforcommentitsstaff'spositionpaperonthefutureofthenaturalgasindustry,includingrecommendationsforincreasingcompetitionandexpandingcustomer.choiceinthenaturalgasmarketplace.Thestaffproposed,amongotherthings,thatallregulatednaturalgasutilitiesexitthebusinessofpurchasingnaturalgasforcustomersoverthenextfiveyears.Thiswouldcompletethetransitionofcustomersfromsalestotransportationserviceonly.Theregulatedutilitieswouldonlydelivernaturalgaspurchasedbycustomersfromcompetitivesuppliers.ZfthisproposalisadoptedbythePSC,thenitwouldeliminatetheneedtoregulatenaturalgaspurchasingpracticessincemarketforceswouldestablishnaturalgasprices.Thepositionpaperidentifiedanumberofissuesthatwouldneedtoberesolvedinorderforthisproposaltobesuccessful.Theprimaryissuesarethepipelin'ecapacityandgassupplycontractsthatthelocalutilitieshavewithinterstatepipelinesthatextendbeyondtheproposedfive-yeartransitionperiod,theobligationoftheutilitytoserveassupplieroflastresort,andtheissueofsystemreliability.-37-TheCompanyandotherpartiessubmittedcommentsandreplycommentstothePSCinlateNovemberandDecemberof1997,respectively.WiththeexceptionoftheissuestoberesolvedbythePSC,asmentionedabove,theCompanydoesnotbelievethatthisproposalwillhaveamaterialadverseeffectonitsresultsofoperationsorfinancialcondition,sincetheCompany'snaturalgasmarginisderivedfromthedeliveryserviceandnotfromthecommoditysale.TheresolutionoftheissuesidentifiedbythePSCcouldresultinunrecoveredstrandedcostsfortheCompany.TheCompanyisunabletopredicthowthePSCwillresolvethoseissues.ForadiscussionoftheCompany'sgassupply,storageandpipelinecommitments,seeItem8.FinancialStatementsandSupplementaryData"Note9.CommitmentsandContingencies-GasSupply,StorageandPipelineCommitments.")NRCandNuclearOperatingMatters.InOctober1996,theNRCrequiredcompanieswithnuclearplantstoprovidetheNRCwithaddedconfidenceandassurancethattheirplantsareoperatedandmaintainedwithinthedesignbasis,andanydeviationsarereconciledinatimelymanner.Suchinformation,whichwasfiledwithintherequired120days,will'eusedbytheNRCtoverifythatcompaniesareincompliancewiththetermsandconditionsoftheirlicense(s)andNRCregulations.Inaddition,itwillallowtheNRCtodetermineifotherinspectionactivitiesorenforcementactionsshouldbetakenonaparticularcompany.InthelettertransmittingtherequestedinformationtotheNRC,theCompanyconcludedthatithasreasonableassur'ancethat(i)designbasisrequirementsarebeingtranslatedintooperating,maintenance,andtestingprocedures;and(ii)system,structureandcomponentconfigurationandperformanceareconsistentwiththedesignbasis.Also,theCompanyhasaneffectiveadministrativetoolfortheidentification,documentation,notification,evaluation,correction,andreportingofconditions,events,activities,andconcernsthathavethepotentialforadverselyaffectingthesafeandreliableoperationofUnit1andUnit2.InApril1997andDecember1997,theCompanyreceivednoticesfromtheNRCofa$200,000fineand$50,000fine,respectively,forviolationsatUnit1andUnit2.Thepenaltieswereforviolationsrelatedtocorrectiveactionsanddesigncontrol.TheCompanypaidthefinesandisimplementingcorrectiveaction.OnJanuary23,1998,theCompanyreceivednoticeofaproposed$55,000finefromtheNRCforviolationsofNRCrequirementsrelatedtoradioactivewasteissues.TheCompanydoesnotplantocontesttheproposedNRCfine.InJanuary1998,theNRCissueditsSystematicAssessmentofLicenseePerformance(the"SALP")reportonUnit1andUnit2,whichcoverstheperiodJune1996toNovember1997.TheSALPreport,whichisanextensiveassessmentoftheplants'erformanceintheareasofoperations,maintenance,engineeringandsupport,statedthattheperformanceofUnit1andUnit2wasgenerallygood,althoughratingswerelowerthanthepreviousassessment.TheCompanyagreeswiththeNRC'sdeterminationthatthereareareasofitsperformancethatneedimprovementandistakingseveralactionstomakethoseneededimprovements.TheCompanybelievesthatNRCsafetyenforcement,isbecomingmorestringentasindicatedbytheNRC'srequestforinformation,finesthattheCompanyhasbeenassessedandlowerSALPratingsandthattheremaybeadirectcostimpactoncompanieswithnuclearplantsasaresult.TheCompanyisunabletopredicthowsuchachangedoperatingenvironmentmayaffectitsresultsofoperationsorfinancialcondition.SomeownersofolderGeneralElectricCompanyboilingwaterreactors,includingtheCompany,haveexperiencedcrackinginhorizontalweldsintheplants'oreshrouds.Inresponsetoindustryfindings,theCompanyinstalledpre-emptivemodificationstotheUnit1coreshroudduringa1995refuelingandmaintenanceoutage.Thecoreshroud,astainlesssteelcylinderinsidethereactorvessel,surroundsthefuelanddirectstheflowofreactorwaterthroughthefuelassemblies.InspectionsconductedaspartoftheMarch1997refuelingandmaintenanceoutagedetectedcrackinginverticalweldsnotreinforcedbythe1995repairs.OnApril8,1997,theCompanyfiledacomprehensiveinspectionandanalysis-38-reportwiththeNRCthatconcludedthattheconditionoftheUnit1coreshroudsupportsthesafeoperationoftheplant.OnMay8,1997,theNRCapprovedtheCompany'srequesttooperateUnit1untilthenextscheduledmid-cycleoutage,late1998.TheCompanyagreedtoproposeaninspectionplanfortheoutageandsubmittheplantotheNRCatleastthreemonthsbeforetheoutageisscheduled.tobegin.TheCompanybelievesithasastrongtechnicalbasistooperateUnit1without,amid-cycleoutageandisseekingthenecessaryapprovalfromtheNRCtopostpone.theinspectionsuntiltheunit'srefuelingandmaintenanceoutageinspring1999,buttherecanbenoassurancethatsuchapprovalwillbegranted.'heUnit1refuelingandmaintenanceoutage,originallyplannedtobecompletedinearlyApril1997,wascompletedonMay10,1997duetothecozeshroudissue.OnSeptember15,1997,Unit"1wastakenoutofserviceduetoleakinginoneoffourback-upcondensers.,Thestandbyconderisersserveasaback-upsystemfortheremovalofreactorsteam.Thecondensersaremaintainedinareadystate-duringnormalplantoperations.Testsandinspectionswereconductedontheremainingcondensersandsimilarconditionswerefound.OnDecember10,1997,Unit1wasreturnedtoserviceafterthereplacementofallfourcondensers,whichcostapproximately$6.7million.OTHERCOMPANYEFFORTSTOADDRESSCOMPETITIVECHALLENGESTaxInitiatives.TheCompanyisworkingwithutility,customerandstaterepresentativestoexplainthenegativeimpactthatall..utilitytaxes,includingtheGRT,arehavingonratesandthestateoftheeconomy.Atthesametime,theCompanyisalsocontestingthehighrealestatetaxesitisassessedbymanytaxingauthorities,particularlythoseimposedupongeneratingfacilities.TheNewYorkStateLegislaturepassedastatebudgetinAugust1997whichincludesareductionoftheGRToverthreeyears.Forgasandelectricutilities,thetaximposedongrossincomewillbereducedfrom3.5%to3.25%onOctober1,1998,andfrom3.25%to2.5%onJanuary1,2000.Thestatetaximposedongrossearningswillremainunchangedat.75%,bringingthetotalGRTto3.25%--afullpercentagepointlowerthantoday'slevelof4.25%.ThesavingsfromthereductionoftheGRTwillbepassedontotheCompany'scustomers.TheCompanybelievesthatfurther,taxreliefisneededtorelievetheCompany'scustomersofhighenergycostsandtoimproveNewYorkState'competitivepositionastheindustrymovestowardacompetitivemarketplace.Thefollowingtablesetsforthasummaryofthecomponentsofothertaxes(exclusiveofincometaxes)incurredbytheCompanyintheyears1995through1997:Inmillions'ofdollars199719961995PropertytaxexpenseSalestaxPayrolltaxGrossReceiptsTaxOthertaxesTotaltaxexpense.$250.713.434.1184'0.1482.9$249.414~136.4184.10.5484.5$264.813.937.3190.25.2511.4Chargedtoconstruction,subsidiariesandrelatoreconitionTotalothertaxes$471.5(8.7)6.1$475.8$517.5-39-CustomerDiscounts.lnrecentyears,someindustrialcustomershavefoundalternativesuppliersoraregeneratingtheir.ownpower.Inaddition,aweakenedeconomyorattractiveenergypriceselsewherehavecontributedtootherindustrialcustomerdecisionstorelocateoiclose.Inaddressingthethreatoffurtherlossofindustrialload,thePSCestablishedguidelinestogovernflexibleelectricratesofferedbyutilitiestoretainqualifiedindustrialcustomers.Undertheseguidelines,theCompanyfiledforanewservicetariffinAugust1994(SC-11),underwhichallnewcontractratesareadministeredbasedondemonstratedindustrialandcommercialcompetitivepricingalternativesincluding,butnotlimitedto,on-sitegeneration,fuelswitching,facilityrelocationandpartialplantproductionshifting.ContractsarefortermsnottoexceedsevenyearswithoutPSCapproval.Inaddition,theCompanyhaseconomicdevelopmentprogramswhichprovidetariffbasedincentivestoretainandgrowload.AsofJanuary1998,theCompanyhas152executedcontractsunderitsflexibletariffofferings.Thesecontractshavebeensignedtomitigatethelostmarginimpactsassociatedwithcustomersexecutingthecompetitivealternativesmentionedabove.Inaddition,manyofthesecontractsincludeanincrease'nproductionlevelsand/orattractnewcustomerstotheCompany'sserviceterritory.In1997and1996,thetotalamountofcustomerdiscounts(economicdevelopmentprogramsandflexiblepricing)was$90.6millionand$75~5million,respectively.TheCompanyrecovered$46.6millionand$56.7millioninrates,respectively.PendingimplementationofPowerChoice,theCompanybudgeteditsdiscountstoincreasetoapproximately$95.4millionin1998assomediscountsgrantedin1997areineffect,foranentireyearandfurtherdiscountsaregranted.TheCompanyisaggressivelyusingSC-11toincreasesalestoexistingcustomersandtoattractnewcustomerstoitsserviceterritory.WiththereductioninindustrialpricesprovidedinPowerChoice,thelevelofdiscountsthathavebeennecessaryshoulddeclineinthefuture.REGULATORYAGREEHENTS/PROPOSALS(See"MasterRestructuringAgreementandthePowerChoiceAgreement.")1995RateOrder.OnApril21,1995,theCompanyreceivedaratedecision(1995rateorder)fromthePSCwhichapprovedanapproximately$47millionincreaseinelectricrevenuesanda$4.9millionincreaseingas.revenues.YEAR2000COMPUTERISSUEAstheyear2000approaches,theCompany,alongwithmanyothercompanies,couldexperiencepotentiallyseriousoperationalproblems,sincemanycomputerprogramsthatweredevelopedwillnotproperlyrecognizecalendardatesbeginningwiththeyear2000.Further,thereareembeddedchipscontainedwithingeneration,transmission,distributionandgasequipmentthatmaybedate-sensitive.Inthesecircumstanceswhereanembeddedchipfailstorecognizethecorrectdate,electricorgasoperationscouldbeadverselyaffected.TheCompanyisaddressingtheseissuessothatitscomputersystemsand,wherenecessary,itsembeddedchipswillprocessdatesgreaterthan1999,therebypreventinganyadverseoperationalorfinancialimpacts.TheCompanyhasbeenaddressingtheyear2000informationtechnologyissuethroughtheremediationandreplacementofexistingbusinessapplicationsandpartsofitstechnicalinfrastructure.Inlate1997,theservicesofaleadingcomputerservicesandconsultingfirmwereretainedtoconductanassessmentoftheCompany'sentireyear2000program.Asaresultoftheassessment,aCompany-wideyear2000projectmanagementofficehasbeenformedandyear2000projectmanagershavebeenappointedwithineachbusinessgroupandeffortsareunderwaytoevaluatethescopeoftheproblemforembeddedtechnologies/processcontrolsystemsinallbusinessgroupswithintheCompany.ACompany-wideprogramdirectorandan-40-executivelevelsteeringcommitteehavebeenputinplacetooverseeallaspectsoftheprogram.TheCompanyisalsoevaluatingtheexposuretoyear2000problemsofthirdpartieswithwhomtheCompanyconductsbusiness.TheCompanyexpectstocompleteaninventoryofexposures,includinganassessmentofpriorities,costsandresources,bythethirdquarterof1998.FailuresoftheCompanyand/orthirdpartycomputersystemsandembeddedchipscouldhaveamaterialimpactontheCompany'sabilitytoconductitsbusiness.Untilfurtherprogressismadeontheseefforts,managementisunabletoestimatethetotalyear2000complianceexpense,butitisintheprocessofassessingthisexpense.RESULTSOFOPERATIONSEarningsfor1997were$22.4million,or16centspershare,ascomparedto$72.1million,or50centspershare,in1996and$208.4million,or$1.44pershare,in1995.1997earningswerenegativelyimpactedbyawrite-offof$190.0millionor85centspershareassociatedwiththeportionoftheMRAregulatoryassetdisallowedinratesbythePSC,whichwasincludedinotherincomeanddeductionsintheincomestatement(see"MasterRestructuringAgreementandthePowerChoiceAgreement"and"AccountingImplicationsofthePowerChoiceAgreementandMasterRestructuringAgreement.")Inaddition,anincrease-inindustrialcustomerdiscountsof$25.2millionnotrecoveredinrates(seeOtherCompanyEffortstoAddressCompetitiveChallenges-"CustomerDiscounts"),andadeclineinhigher-marginresidentialsalesalsoadverselyimpacted1997earnings.Thelower-marginindustrial-specialsales(salesbytheCompanyonbehalfofNYPA)andindustrialsalesincreased.Asaresult,totalpublicsaleswereessentiallythesameassalesin1996.Thiswaspartiallyoffsetbyadeclineinbaddebtexpenseof$81.1millionin1997ascomparedto1996butis$15.3millionover1995.Earningsfor1996includethediscontinuedapplicationofregulatoryaccountingprinciplestotheCompany'sfossilandhydrogenerationbusiness.TheCompanyreachedthisconclusionbecausetheMarch10,1997agreement-in-principletoterminateorrestructurepowercontractswithcertainIPPsmadeprobabletheimplementationofPowerChoiceinwhichtheCompanyproposedtohaveitsnon-nucleargenerationsellpoweratcompetitivepricesinthewholesalemarket.Thediscontinuanceresultedinthewrite-offof$103.6millionofregulatoryassetsassociatedwiththefossilandhydrobusinesswhichwasincludedintheincomestatementasanextraordinarylossaftertaxof$67.4million,or47centspershare.Earningsbeforetheextraordinarylosswere$139.5millionor97centspershare.Excludingtheextraordinaryloss,earningsfor1996werelowerbecauseofanincreaseinbaddebtexpenseof$96.4millionor43centspershare(see"FinancialPosition,LiquidityandCapitalResources-LiquidityandCapitalResources").Thiswaspartiallyoffsetbya$15.0milliongainonthesaleofa50%interestinCNPthatcontributed10centspershareto1996earnings.TheCompany'srequestforatemporaryrateincreasein1996wasdeniedbythePSC;Earningsfor1995werehurtbylowersalesquantitiesofelectricityandnaturalgas,.ascomparedwithamountsusedtoestablish1995prices.Saleswereprimarilyaffectedbythe'ontinuingweakeconomicconditionsinupstateNewYork,lossofindustrialcustomers'oadtoNYPAanddiscountsgranted.Thesefactorssimilarlyimpacted1996and1997results.Inaddition,1995earningsincludedthe'recordingofaone-time,non-cashadjustmentofprioryears'emand-sidemanagement("DSM")incentiverevenues,revenuesearnedundertheUnit1operatingincentivesharingmechanismandagainonthesaleofHYDRA-COthatcollectivelyincreased1995earningsby17centspershare.TheCompany's1997earnedROEwas0.9%ascomparedto2.8%(5.4%beforeextraordinaryloss)in1996and8.4%in1995.TheCompany'sROEauthorizedinthe1995orlastratesettingprocessis11.0%fortheelectricbusinessand11.4%forthegasbusiness.Factorscontributingtoearningsbelowauthorizedlevelsin1997included,amongotherthings,thePowerChoicechargedescribedabove,.salesbelowthoseforecastedindeterminingrates,contractualincreasesincapacitypaymentstoIPPsandincreasingdiscountstocustomers.Asdiscussedunder"MasterRestructuringAgreementandthePowerChoiceAgreement"an>>AccountingImplicationsofthePowerChoiceAgreementandMasterRestructurin-41-Agreement,"theCompanyforecaststhatearningsforthefive-yeartermofthePowerChoiceagreementwillbesubstantiallydepressed.Thelevelofearningsfor1998willalsobeimpacted,inpart,bythedateofimplementationofPowerChoiceandmayalsobenegativelyimpactedbythefinancialeffectsoftheJanuary1998icestorm(seeItem8.FinancialStatementsandSupplementaryData-"Note13.SubsequentEvent").Thefollowingdiscussionandanalysishighlightsitemsthatsignificantlyaffectedoperationsduringthethree-yearperiodendedDecember31,1997.Thisdiscussionandanalysisisnotlikelytobeindicativeoffutureoperationsorearnings,particularlyinviewoftheprobabletermination,restatementoramendmentofIPPcontractsandimplementationofPowerChoice.ItalsoshouldbereadinconjunctionwithItem8.FinancialStatementsandSupplementaryDataandotherfinancialandstatisticalinformationappearingelsewhereinthisreport.Electricrevenueswere$3,309.millioninboth1997and1996,adecreaseof$26.1million,or0.8%from1995.Asshowninthefollowingtable,FACrevenuesincreased$42.8millionin1997,primarilyasaresultoftheCompany'sabilityin1997torecoverincreasedpaymentstotheIPPsthroughtheFAC.However,thisincreasewasoffsetbyadecreaseinrevenuesfromsalestootherelectricsystemsandlowerelectricsalesduetowarmerweather.UnderPowerChoice,revenuesmaydeclineascustomerschoosealternativesuppliers.However,theCompanywillrecoverstrandedcoststhroughtheCTC.See"MasterRestructuringAgreementandthePowerChoiceAgreement."Electricoperatingrevenuesdecreasedin1996,primarilyduetoadecreaseinmiscellaneouselectricrevenues.Miscellaneouselectricrevenueswerelower'n1996primarily'because1995electricrevenuesincludedtherecordingof$71.5millionofunbilled,non-cashrevenuesinaccordancewiththe1995rateorder,$13'millionofrevenuesearnedunderMERIT(anincentivemechanismrelatedtoimprovementinkeyperformanceareaswhichendedin1996)andaone-time,non-cashadjustmentofprioryear'sDSMincentiverevenuesandareductionintheDSMrebatecostprogram.However,higherelectricsalesduetocolderweather,anincreaseinsalestootherelectricsystems,anincreaseinFACrevenuesandhigherelectricrates(effectiveApril26,1995)partlyoffsetthosefactorsthatcontributedtolowerelectricrevenues.FACrevenuesincreased$28.3millionin1996,whichprimarilyreflectstheCompany'sincreasedpaymentstotheIPPsrecoveredthroughtheFAC.ElectricreverwesAmortizationofunbiliedrevenues......Baserates~~~~~~~~~~~~S(77.1)65.3$(77.'i)65.3Increase(decrease)franprioryear(Inmillionsofdollars)19971996TotalFueladjustmentclauserevenues.......ChangesinvoluneandmixofsalestoultimateconsLNlers~~~~~~~~~~~~~$~~Salestootherelectricsystems.......HERITrevenueDSHrevenue.42.8(12.7)(29.6)28.3(28.1)24.5(13.0)~26.571.1(40.8)(5.1)(13.0)~26.550.5$~26.6$~26."ITheFACiseliminatedunderthePowerChoiceagreement.ChangesinFACrevenuesaregenerallymargin-neutral(subjecttoanincentivemechanismdiscussedinItem8.FinancialStatementsandSupplementaryData-"Note1.SummaryofSignificantAccountingPolicies"),whilesalestootherutilities,becauseofregulatorysharingmechanismsandrelativelylowprices,generallyresultinlowmargincontributionstotheCompany.Thus,fluctuationsintheserevenuecomponentsdonotgenerallyhaveasignificantimpactonnetoperatingincome.ElectricrevenuesreflectthebillingofaseparatefactorforDSMprograms,whichprovidedfortherecoveryofprogramrelatedrebatecosts.-42-Electrickilowatt-hoursaleswere37.1billionin1997,39.1billionin1996and3'7.7billionin1995.The1997decreaseof2.0billionKWh,or5.1%ascomparedto1996,isrelatedprimarilytoa31.0%decreaseinsalestootherelectricsystems.(SeeItem8.FinancialStatementsandSupplementaryData-"ElectricandGasStatistics-ElectricStatistics").The1996increaseof1.4billionKWh,or3.8%ascomparedto1995,reflectsa26.2%increaseinsalestootherelectricsystemsanda1.2%increaseinsalestoultimatecustomersduetothecolderweather.SalestootherelectricsystemswerelowerprimarilyduetoareductionintheavailabilityofnucleargenerationasaresultoftheoutagesatUnit.1.TheCompanyisanticipatinglittleornogrowthin1998insalestoultimateconsumers,whichwillbesensitivetothebusinessclimateinitsserviceterritory.DetailsofthechangesinelectricrevenuesandKWhsalesbycustomergrouparehighlightedinthetablebelow:XofElectric1996ResidentialComnercialIndustrialIndustrial-Special37.1X37.316.11.9(2.0)X(03)1.25.8(2.0)X(0.1)0.64.23.1X0.23.90.5X(0.4)1.26.7TotaltoultimateconswersOtherelectricsystems94.02.5(26.1)(31.0)27.526.2(0.6)-1.41.2Total100.0X-X(5.1)X(0.8)X3.8XAsindicatedinthetablebelow,internalgenerationdecreased10.1%in1997,principallyduetotheoutageatUnit1andareductioninhydroelectricpowerasaresultoflowerthannormalprecipitationinthesummermonths.In1997,Unit1wasoutofservicefor153days,duetoaplannedrefuelingandmaintenanceoutage(whichtook68days)andfortheemergencycondenserreplacement(whichtookapproximately85days)whilein1996,Unit2wasoutofservicefora36dayplannedrefuelingandmaintenanceoutage.(See"OtherFederalandStateRegulatoryInitiatives-NRCandNuclearOperatingMatters.")TheamountofelectricitydeliveredtotheCompanybytheIPPsdecreasedbyapproximately277GWhor2.0%.However,totalIPPcostsincreasedbyapproximately$18.0millionor1.7%,asdiscussedbelow.(See"MasterRestructuringAgreementandthePowerChoiceAgreement").-43-illionsofdollars)Fuelforelectricgeneration:1997GuhCostGNhCostGMh1995XChanefromriorear1997to19961996to1995CostGIACostGMhCostCoalOilNaturalgasNuclearHydroElectricitypurchased:7,4597013946,339~2905~1177779988S106.432.28.633.0180.27,0954623198,243~3679~19798$100.621.19.247.7178.66,8415379967,272~2971~18617S97.921.320.243.3182.75.1X51.7?3.5(23.1)~21.0~10.15.8X52.6(6.5)(30.8)0.93.7X(14.0)(68.0)13.423.86.32.8X(0.9).(54.5)10.2'PPs:CapacityEnergyandtaxesTotalIPPpurchases~1352013,5200220.8885.71,106.50~1379713,797212.8875.7'1,080.5181.2~14023798.714,023~979.93.81.11.717.49.611.'IOther~9421130.2~9569130.6~9463126.5~1.5~0.31.13.2Totalgeneratedandpurchased229C11236.7233661219.1234061106.C~1.840,7391,416.943,1641,397.742,1031,289.1(5.6)1.41.42.58.4Fueladjustmentclause(1.3)(33.3)14.8(96.1)-(325.0)Losses/Companyuse3603-C037~10.0-~0.63~7136$1415.63~9127$136C.43~7684$1303.9~5.133.833.834.6XTheabovetablepresentsthetotalcostsforpurchasedelectricity,whilereflectingonlyfuelcostsforCompanygeneration.Othercostsofgeneration,suchastaxes,otheroperatingexpensesanddepreciationareincludedwithinotherincomestatementlineitems.TheCompany'smanagementofitsZPPpowersupplygenerallydividestheprojectsintothreecategories:hydroelectric,"mustrun"cogenerationandschedulablecogenerationprojects.Followingahigherthannormalspringrunoff,theprecipitationinthesummermonthswaslowerthanusual.Asaresult,hydroelectricZPPprojectsdelivered242GWhor13.7%lessunderPPAsthantheydidforthesameperiodlastyear,representingdecreasedpaymentstothoseZPPsof$15.7million.AsubstantialportionoftheCompany'sportfolioofZPPprojectsoperateona"mustrun00basis.Thismeansthattheytendtorunatmaximumproductionlevelsregardlessoftheneedfororeconomicvalueoftheelectricityproduced.Outputfrom"mustrun"cogenerationIPPswas230GWhor2.6%lowerthanproducedlastyear,inpartduetolowerenergypurchasesfromtheSitheIndependenceplant.However,paymentstothoseZPPswere$12.8millionhigher.Thiswasduetoacombinationofoutputturndownarrangementswithindividualprojectsandescalatingcontractrates.AturndownarrangementisanagreementwheretheCompanycompensatesanIPPtoreducetheoutputfromtheirfacility.Althoughoutputisreduced,theneteconomicimpactisfavorabletotheCompanyanditscustomerssincetheelectricityisreplacedfromthemarketorotherlowercostsources.44 QuantitiespurchasedfromschedulablecogenerationIPPsincreased195GWhor6.3%andpaymentsincreased$20.9million..Theincreasedpaymentsarelargelyduetoescalatingcontractratesforcapacity(fixed)andincreasedvolumesofenergy.ThetermsofthesePPAsallowtheCompanytoschedule(withcertainconstraints)energydeliveriesandpayfortheenergysupplied.Inaddition,theCompanyisrequiredtomakefixedpaymentsiftheZPPplantsremainavailablefor-service.(SeeItem8.FinancialStatementsandSupplementaryData-"Note9.CommitmentsandContingencies-Long-termContractsforthePurchaseofElectricPower").Gasrevenuesdecreasedby$24.7million,or3.6%in1997,andincreasedby$99.9million,or17.2%,in1996.Asshowninthetablebelow,gasrevenuesdecreasedin1997primaiilydue.todecreasedsalesto'ultimatecustomersasaresultofthemigrationofcommercialsalescustomerstothetransportationclass,decreasedspotmarketsalesand'decreaseinbaseratesof$5.9millioninaccordancewiththe1996rateorder.Thiswaspartiallyoffsetbyhighergasadjustmentclauserecoveriesandanincreaseinrevenuesfromthetransportationofcustomer-ownedgas(see"OtherFederalandStateRegulatoryInitiativesGenericGasRateProceeding").Gasrevenuesincreasedin1996primarilyduetoincreasedsalestoultimatecustomersduetocolderweather,increasedspotmarketsales,highergasadjustmentclauserecoveries,anincreaseinrevenuesfromthetransportationofcustomer-ownedgasandanincreaseinbaseratesof$3.1millioninaccordancewiththe1995rateorder.Ratesfortransportedgas(excludingaggregationservices)yieldlowermarginsthangassolddirectlybytheCompany.Therefore,increasesinthevolumeofgastransportationserviceshavenothadaproportionateimpactonearnings,particularlyininstanceswherecustomersthattookdirectservicefromtheCompanymovetoatransportation-onlyclass.Znaddition,changesinpurchasedgasadjustmentclauserevenuesaregenerallymargin-neutral.Increase(decrease)franprioryear(Inmillionsofdollars)19971996TotalBaserates..$(5.9)S3.1S(2.8)Transportationofcustomer-oMnedgas.....5.32.17.4Purchasedgasadjustmentclauserevenues..~45.330.876.1Spotmarketsales..Changesinvoluneandmixofsalestoultimateconsuners(30.8)~38.634.03.3~$24.7$99.9$7$.2Gassales,excludingtransportationofcustomer-ownedgasandspotmarketsales,were78.7millionDthin1997,a7.3%decreasefrom1996,anda0.3%increasefrom1995.(SeeItem8.FinancialStatementsandSupplementaryData-"ElectricandGasStatistics-GasStatistics").Thedecreasein1997wasinallultimateconsumerclasses,inpartduetothewarmerweather.Inaddition,spotmarketsales(salesforresale),whicharegenerallyfromthehigherpricedgasavailabletotheCompanyandthereforeyieldmarginsthataresubstantiallylowerthantraditionalsalestoultimatecustomers,decreased8.0millionDth.Thiswaspartiallyoffsetbyanincreaseintransportationvolumesof18.1millionDthor13.5%tocustomerspurchasinggasdirectlyfromproducers.TheCompanyhasexperiencedanincreaseincustomersofapproximately17,800since1995,primarilyintheresidentialclass,anincreaseof3.5%.-45-0 ChangesingasrevenuesandDthsalesbycustomergrouparedetailedinthetablebelow:Xof1996ResidentialCcemercial66AX22.64.5X(2.7)X(8.7)(13.0)13.3X9.4X13.06.4TotaltoUltimateconsuners90.0(0-3)(7.3)13.38.3OthergassystemsTransportationofcustomer-ownedgas8.5(5.8)10.5(6-7)13.54.3(6.9)(81.9)(81.4)Spotmarketsales1.0(82.9)(76.6)1,099.1507.0Total100.0X(3.6)X1.7X17.2X2.3XThetotalcostofgaspurchaseddecreased6.6%in1997andincreased34.0%in1996.Thecostfluctuationsgenerallycorrespondto"salesvolumechanges,asspotmarketsalesactivitydecreased,aswellaschangesingasprices.TheCompanysold2.5,10.5and1.7millionDthonthespotmarketin1997,1996and1995,respectively.Thetotalcostofgasdecreased$24.4millionin1997.Thiswastheresultofa5.3milliondecreaseinDthpurchasedandwithdrawnfromstorageforultimateconsumersales($18.8million)anda$22.5milliondecreaseinDthpurchasedforspotmarketsales,partiallyoffsetbya3.3%increaseintheaveragecostperDthpurchased($10'million)anda$6.3millionincreaseinpurchasedgascostsandcertainotheritemsrecognizedandrecoveredthroughthepurchasedgasadjustmentclause.Thetotalcostofgaspurchasedincreased$93.8millionin1996.Thiswastheresultofa9.3millionincreaseinDthpurchasedandwithdrawnfromstorageforultimateconsumersales($29'million),a$25.6millionincreaseinDthpurchasedforspotmarketsalesanda12.9%increaseintheaveragecostperDthpurchased($38.7million).Gaspurchasedforspotmarketsalesdecreased$22.5millionin1997andincreased$25.6millionin1996.TheCompany'snetcostperDthsold,aschargedtoexpenseandexcluding,spotmarketpurchases,increasedto$3.82in1997from$3.62in1996andwas$3.17in1995.Throughtheelectricandpurchasedgasadjustmentclauses,costsoffuel,purchasedpowerandgaspurchased,aboveorbelowthelevelsallowedinapprovedrateschedules,arebilledorcreditedtocustomers.TheCompany'selectricFACprovidesforapartialpass-throughoffuelandpurchasedpowercostfluctuationsfromthoseforecastinrateproceedings,withtheCompanyabsorbingaportionofincreasesorretainingaportionofdecreasestoamaximumof$15millionperrateyear.TheCompanyabsorbedlossesofapproximately$11.8million,$1.4millionand$13.1millionin1995,1996and1997,respectively.UnderPowerChoice,theFACwillbeterminated.TheCompanydoesnotbelievethattheeliminationoftheFACwillhaveamaterialadverseeffectonitsfinancialcondition,asaresultofitsmanagementof(1)pow'ersuppliesprovidedthrough:(i)theoperationofitsownpowerplants,andfuturepowerpurchasearrangementsaspartoftheplannedauctionofitsfossilandhydroassets,(ii)fixedpowerpurchasesfromNYPAandremainingIPPsand(iii)fixedandindexedswaparrangementswithIPPPartiesand(2)thetransferoftheriskassociatedwithelectricitycommoditypricestothecustomerthroughimplementationofretailaccessincludedinthePowerChoiceagreement.Otheroperationandmaintenanceexpensedecreasedin1997by$92.9million,or10.0%,ascomparedtoanincreaseof$110.3millionor13.5%in1996.Thesechangesin1996and1997eachresultprimarilyfromachangein1996inthe-46-Company'sassessmentofuncollectiblecustomeraccounts,whichgivesgreaterrecognitiontotheincreasedriskofcollectingpastduecustomerbills,resultinginincreasesintheCompany'sallowancefordoubtfulaccountsandasignificantlyhigherexpenserecognitionin1996.Baddebtexpensewas$31.2million,$127.6millionand$46.5millionin1995,1996and1997,respectively.Zn1997,write-offswere$39.0millionandtheCompanyincurreda$10.5millionincreaseinallowancefordoubtfulaccounts.Theincreaseintheallowancefordoubtfulaccountswasattributabletoincreasesinthecollectionriskassociatedwithresidentialaccountsreceivableandarrears.TheCompanyhasimplementedanumberofcollectioninitiativesthatareexpectedtoresultinlowerarrearslevelsandpotentiallylowertheallowancefordoubtfulaccounts.Otheroperationandmaintenanceexpensealsodecreasedin1997asaresultofareductioninadministrativeandgeneralexpensesof$15.8million,primarilyduetoareductioninlegalcosts.Otherincomeanddeductionsdecreasedby$200.9millionin1997andincreasedby$32.9millionin1996.Despitehigherinterestincome($12.0million)relatedtoincreasingcashbalances,"otherincomeanddeductions"decreasedin1997duetothewrite-offof$190.0millionassociatedwiththeestimatedportionoftheMRAregulatoryassetdisallowedin.ratesandlowersubsidiaryearnings.Znaddition,"otherincomeanddeductions"'aslowerin1997,since1996reflectedagainonthesaleofa50%interestinCNP($15.0million).The1996increasealsoreflectedhigherinterestincome($10.9million)asaresultofanincreaseintemporarycashinvestments.Inaddition,"otherincomeanddeductions"washigherin1996sincetherewerecustomerservicepenaltiesandcertainotheritemswrittenoffbecausetheyweredisallowedinratesin1995.Federalandforeignincometaxesdecreasedby$42.4millionin1997and$56.9millionin1996primarilyduetoadecreaseinpre-taxincome.Othertaxesdecreasedby$4.4millionin1997anddecreasedby$41.6millionin1996.The1997decreasewasprimarilyduetolowerpayrolltaxes($2.3million)andlowersalestaxes($0.7million).The1996decreasewasprimarilyasaresultoflowerrealestatetaxes($15.4million),lowerGRTs($6.1million)primarilyduetoareductionintheGRTsurchargeduring1996,lowerNewYorkStateexcessdividendtaxaccrualduetoasuspensionofthecommonstockdividend($4.6million)andyear-to-yeardifferencesintheaccountingforregulatorydeferrals($15.2million)associatedprimarilywithasettlementoftaxissueswithrespecttotheCompany'sDunkirkfacility.Interestchargesremainedfairlyconstantfortheyears1995through1997.However,dividendsonpreferredstockdecreasedby$0.9millionand$1~3millionin1997and1996,respectively.Dividendsonpreferredstockdecreasedin1997primarilyduetoareductioninpreferredstockoutstandingthroughsinkingfundred'emptionsanddecreasedin1996primarilyduetoadecreaseinthecostofvariablerateissues.Theweightedaveragelong-termdebtinterestrateandpreferreddividendratepaid,reflectingtheactualcostofvariablerateissues,changedto7.81%and7.04%,respectively,in1997from7.71%and7.09%,respectively,in1996andfrom7.77%and7.19%,respectively,in1995.EFFECTSOPCHARGINGPRICESTheCompanyisespeciallysensitivetoinflationbecauseoftheamountofcapitalittypicallyneedsandbecauseitspricesareregulatedusingaratebasemethodologythatreflectsthehistoricalcostofutilityplant.TheCompany'sconsolidatedfinancialstatementsarebasedonhistoricaleventsandtransactionswhenthepurchasingpowerofthedollarwassubstantiallydifferentthannow..Theeffectsofinflationonmostutilities,includingtheCompany,aremostsignificantintheareasofdepreciationandutilityplant.TheCompanycouldnotreplaceitsnon-nuclearutilityplantandequipmentforthehistoricalcostvalueatwhichtheyarerecordedontheCompany'sbooks.Znaddition,theCompanywouldnotreplacethesewithidenticalassetsduetotechnologicaladvancesandcompetitiveandregulatorychangesthathaveoccurredZnlightoftheseconsiderations,thedepreciationchargesinoperatingexpense-47-donotreflectthecostofprovidingserviceifnewgeneratingfacilitieswereinstalled.TheCompanywillseekadditionalrevenueorreallocateresources,ifpossible,tocoverthecostsofmaintainingserviceasassetsarereplacedorretired.FINANCIALPOSITIONSLZ{}UZDZTYANDCAPZTALRESOURCESFinancialPosition.TheCompany's.capitalstructureatDecember31,1997was52.8%long-tenndebt,7.8%preferredstockand39.4%commonequity,ascomparedto53.1%,7.9%and39.0%respectively,atDecember31,1996.Theculminationofthetermination,restatementoramendmentofIPPcontractswillsignificantlyincreasetheleverageoftheCompanytonearly65%atthetimeofclosing.ThroughtheanticipatedincreasedoperatingcashflowresultingfromtheMRAandPowerChoiceagreement,theplannedrapidrepaymentofdebtshoulddeleveragetheCompanyovertime.Bookvalueofthecommonstockwas$18.03pershareatDecember31,1997,ascomparedto$17.91pershareatDecember31,1996.WiththeissuanceofequityatbelowbookvaluetotheZPPPartiesaspartoftheMRA,bookvaluepersharewillbediluted.Inaddition,earningspersharewillbedilutedbytheeffectoftheissuancetotheIPPPartiesofapproximately42.9millionsharesoftheCompany'scommonstock.TheCompany'sEBITDAfor1997wasapproximately$897million,anduponimplementationoftheMRAandPowerChoiceisexpectedtoincreasetoapproximately$1,300millionto$1,500millionperyear..EBITDArepresentsearningsbeforeinterestcharges,interestincome,incometaxes,depreciationandamortization,andextraordinaryitems.EBITDAisanon-GAAPmeasureofcashflowsandispresentedtoprovideadditionalinformationabouttheCompany'sabilitytomeetitsfuturerequirementsfordebtservicewhichwouldincreasesignificantlyuponconsummationoftheMRA.EBITDAshouldnotbeconsideredanalternativetonetincomeasanindicatorofoperatingperformanceorasanalternativetocashflows,aspresentedontheConsolidatedStatementofCashFlows,asameasureofliquidity.The1997ratioofearningstofixedchargeswas1.39times.Theratiosofearningstofixedchargesfor1996and1995were1.57timesand2.29times,respectively.Thechangeintheratiowasprimarilyduetochangesinearningsduringtheperiod.AssumingtheMRAisimplemented,theratioofearningstofixedchargeswillsubstantiallydecreaseinthefuture,sincetheMRAandPowerChoiceagreementwillhavetheeffectofsubstantiallydepressingearningsduringitsfive-yearterm,whileatthesametimesubstantiallyimproving.operatingcashflows.TheprimaryobjectiveoftheMRAistoconvertalargeandgrowingoff-balancesheetpaymentobligationthatthreatensthefinancialviabilityoftheCompanyintoafixedandmanageablecapitalobligation.CommonStockDividend.TheBoardofDirectorsomittedthecommonstockdividendbeginningthefirstquarterof1996.ThisactionwastakentohelpstabilizetheCompany'sfinancialconditionandprovideflexibilityastheCompanyaddressesgrowingpressurefrommandatedpowerpurchasesandweakersalesandistheprimaryreasonfortheincreaseinthecashbalance.Znmakingfuturedividenddecisions,theBoardofDirectorswillevaluate,alongwithstandardbusinessconsiderations,thefinancialconditionoftheCompany,theclosingoftheMRAandimplementationofPowerChoice,orthefailuretoimplementsuchactions,contractualrestrictionsthatmightbeenteredintoinconjunctionwithfinancingtheMRA,thedegreeofcompetitivepressureonitsprices,thelevelofavailablecashflowandretainedearningsandotherstrategicconsiderations.TheCompanyexpectstodedicateasubstantialportionofitsfutureexpectedpositivecashflowtoreducetheleveragecreatedinconnectionwiththeimplementationoftheMRA.ThePowerChoiceagreementestablisheslimitstotheannualamountofcommonandpreferredstockdividendsthatcanbepaidbytheregulatedbusiness..Thelimitisbasedupontheamountofnetincomeeachyear,plusaspecifiedamountrangingfrom$50millionin1998to$100millionin2000.ThedividendlimitationissubjecttoreviewafterthetermofthePowerChoiceagreement.Furthermore,theCompanyforecaststhatearningsforthefive-yeartermofthePowerChoiceagreementwillbesubstantiallydepressed,asnon-cashamortizationoftheMRAregulatoryassetisoccurringandtheinterestcostson-48-theZPPdebtisthegreatest.See"AccountingImplicationsofthePowerChoiceAgreement'andMasterRestructuringAgreement."ConstructionandOtherCapitalRequirements.TheCompany'stotalcapital~requirementsconsistofamountsfortheCompany'sconstructionprogram(seeItem~8.FinancialStatementsandSupplementaryData-"Note9.CommitmentsandContingencies-ConstructionProgram,").TheJanuary1998icestormdamagerestorationcostsmayfurtheraddtotheserequirements(seeItem8.FinancialStatementsandSupplementaryData-"Note13.SubsequentEvent"),nucleardecommissioningfundingrequirements(SeeItem8.FinancialStatementsandSupplementaryData-"Note3.NuclearOperations-NuclearPlantDecommissioning"and-"NRCPolicyStatementandProposal"),workingcapitalneeds,maturingdebtissuesandsinkingfundprovisionsonpreferredstock,aswellasrequirementstocompletetheMRAandaccomplishtherestructuringcontemplatedbythePowerChoiceagreement.Annualexpendituresfortheyears1995to1997-forconstructionandnuclearfuel,includingrelatedAFCandoverheadscapitalized,were$345.8million,$352.1millionand$290.8million,respectively,andarebudgetedtobeapproximately$358millionfor1998andtorangefrom$279-$352millionforeachofthesubsequentfouryears.Theseestimatesincludeconstructionexpendituresfornon-nucleargenerationof$20millionto$38millionperyear.ZnadditiontotheassumedcostoftheMRArequirements,asdescribedbelow,mandatorydebtandpreferredstockretirementsareexpectedtoaddapproximatelyanother$77milliontothe1998estimate.ofcapitalrequirements.Theestimateofconstructionadditionsincludedincapitalrequirementsfortheperiod1998to2002willbereviewedbymanagementtogiveeffecttothestormrestorationcostsandtheoverallobjectiveoffurtherreducingconstructionspendingwherepossible.Seediscussionin"LiquidityandCapitalResources"sectionbelow,whichdescribeshowmanagementintendstomeetitsfinancingneedsforthisfive-yearperiod.UndertheMRA,theCompanywillpayanaggregateof$3,616millionincash.TheCompanyexpectstoissueseniorunsecureddebttofundthisrequirement,whichisexpectedtoconsistofbothdebtissuedthroughapublicmarketofferinganddebtissuestobankswhichwouldservetoreplaceitsexisting$804millionseniordebtfacility,discussedbelow.TheCompany'spreferredshareholdersgavetheCompanyapprovaltoincreasetheamountofunsecuieddebttheCompanymayissueby$5billion.Previously,theCompanywasabletoissue$700millionundertherestrictionsofitsamendedCertificateofIncorporation.ThisauthorizationwillenabletheissuanceofunsecureddebttoconsummatetheMRA.Znaddition,theCompanybelievesthattheabilitytouseunsecuredindebtednesswillincreaseitsflexibilityinplanningandfinancingitsbusinessactivities.LiquidityandCapitalResources.Externalfinancingplansaresubjecttoperiodicrevisionasunderlyingassumptionsarechangedtoreflectdevelopments,marketconditionsand,mostimportantly,conclusionoftheMRAandimplementationofPowerChoice.Theultimateleveloffinancingduringtheperiod1998through2002willbeaffectedby,amongotherthings:thetimingandoutcomeoftheMRAandthecashtaxbenefitsanticipatedbecausetheMRAisexpectedtoresultinanetoperatinglossfor1998incometaxpurposes;theimplementationofthePowerchoiceagreement,levelsofcommondividendpayments,ifany,andpreferreddividendpayments;theresultsoftheauctionoftheCompany'sfossilandhydroassets;the.Company'scompetitivepositionandtheextenttowhichcompetitionpenetratestheCompany'smarkets;uncertainenergydemandduetotheweatherandeconomicconditions;andtheeffectsoftheicestormthatstruckaportionoftheCompany'sserviceterritoryinearly1998.TheproceedsofthesaleofthefossilandhydroassetswillbesubjecttothetermsoftheCompany'smortgageindentur'eandthenoteindenturethatwillbeenteredintoinconnectionwiththeMRAdebtfinancing.TheCompanycouldalsobeaffectedbytheoutcomeoftheNRC'sconsiderationofnewrulesforadequatefinancialassuranceofnucleardecommissioningobligations.(SeeItem8.NotestoConsolidatedFinancialStatements-"Note3.NuclearOperations-NRCPolicyStatementandProposal"and"Note13.SubsequentEvent").-49-TheCompanyhasan$804millionseniordebtfacilitywithabankgroup,consistingofa$255milliontermloanfacility,a$125millionrevolvingcreditfacilityand$424millionforlettersofcredit.TheletterofcreditfacilityprovidescreditsupportfortheadjustableratepollutioncontrolrevenuebondsissuedthroughtheNYSERDA.Theinterestrateapplicabletotheseniordebtfacilityisvariablebas'edoncertainrateoptionsavailableundertheagreementandcurrentlyapproximates7.7%(butiscappedat15%).AsofDecember31,1997,theamountoutstandingundertheseniordebtfacilitywas$529million,consistingof$105millionunderthetermloanfacilityanda$424millionletterofcredit,leavingtheCompanywith$275millionofborrowingcapabilityunderthefacility.ThefacilityexpiresonJune30,1999(subjecttoearlierterminationiftheCompanyseparatesitsfossil/hydrogenerationbusinessfromitstransmissionanddistributionbusiness,oranyothersignificantrestructuringplan).TheCompanyiscurrentlynegotiatingwiththelenderstoreplacetheseniordebtfacilitywithalargerfacilitytofinanceaportionoftheMRA.Thisfacilityiscollateralizedbyfirstmortgagebondswhichwereissuedonthebasisofadditionalpropertyundertheearningstestrequiredunderthemortgagetrustindenture("FirstMortgageBonds").AsofDecember31,1997,theCompanycouldissueanadditional$1,396millionaggregateprincipalamount-ofFirstMortgageBondsundertheCompany'smortgagetrustindenture.Thisamountisbaseduponretiredbondswithoutregardtoaninterestcoveragetest.TheCompanyispresentlyprecludedfromissuingFirstMortgageBondsbasedonadditionalproperty.Althoughnoassurancecanbeprovided,theCompanybelievesthattheclosingoftheMRAandimplementationofPowerChoicewillresultinsubstantiallydepressedearningsduringitsfive-yearterm,butwillsubstantiallyimproveoperatingcashflows.Thereisriskthroughouttheelectricindustrythatcreditratingscoulddeclineiftheissueofstrandedcostrecoveryisnotsatisfactorilyresolved.ZntheeventtheMRAisnotclosed,andcomparablesolutionsarenotavailable,theCompanywillundertakeotheractionsnecessarytoactinthebestinterestsofstockholdersandotherconstituencies.Ordinarily,constructionrelatedshort-termborrowingsarerefundedwithlong-termsecuritiesonaperiodicbasis.ThisapproachgenerallyresultsintheCompanyshowingaworkingcapitaldeficit.ThishasnotbeenthecaseinthelasttwoyearsastheCompany'scashbalancehasincreased,reflectingsuspensionofthecommonstockdividendin1996.WorkingcapitaldeficitsmayalsobearesultoftheseasonalnatureoftheCompany'soperationsaswellastimingdifferencesbetweenthecollectionofcustomerreceivablesandthepaymentoffuelandpurchasedpowercosts.TheCompanybelievesithassufficientborrowingcapacitytofunddeficitsasnecessaryinthenearterm.However,theCompany'sborrowingcapacitytofundsuchdeficitsmaybeaffectedbythefactorsdiscussedaboverelatingtotheCompany'sexternalfinancialplans.Since1995,past-dueaccountsreceivablehaveincreasedsignificantly.Anumberoffactorshavecontributedtotheincrease,includingrisingprices(particularlytoresidentialcustomers).RisingpriceshavebeendrivenbyincreasedpaymentstoIPPsandhightaxesandhavebeenpassedonincustomers'ills.ThestagnanteconomyintheCompany'sserviceterritorysincetheearly1990'shasadverselyaffectedcollectionofpast-dueaccounts.Also,laws,regulationsandregulatorypoliciesimposemorestringentcollectionlimitationsontheCompanythanthoseimposedonbusinessingeneral;forexample,theCompanyfacesmorestringentrequirementstoterminateserviceduringthewinterheatingseason.Theincreaseintheallowancefordoubtfulaccountswasattributabletothereassessmentofthecollectionriskassociatedwithresidentialaccountsreceivableandarrears.TheCompanyhasimplementedanumberofcollectioninitiativesthatareexpectedtoresultinlowerarrearslevelsandpotentiallylowertheallowancefordoubtfulaccounts.TheCompanyhasandwillcontinuetoimplementavarietyofstrategiestoimproveitscollectionofpastdueaccountsandreduceitsbaddebtexpense.-50-Theinformationgatheredindevelopingthesestrategiesenabledmanagementtoupdateitsriskassessmentoftheaccountsreceivableportfolio.Basedonthisassessment,managementdeterminedthatthelevelofriskassociatedprimarilywiththeolderaccountshadincreasedandthehistoricallossexperiencenolongerapplied.Accordingly,theCompanydeterminedthatasignificantportion,ofthepast-dueaccountsreceivable(principallyofresidentialcustomers)mightbeuncollectible,andhadwritten-offasubstantialnumber'oftheseaccountsaswellasincreaseditsallowancefordoubtfulaccountsin1996.In1997and1996,theCompanycharged$46.5millionand$127.6million,respectivelytobaddebtexpense.Theallowancefordoubtfulaccountsisbasedonassumptionsandjudgmentsastotheeffectivenessofcollectionefforts.Futureresultswithrespecttocollectingthepast-duereceivablesmayprovetobedifferentfromthoseanticipated.AlthoughtheCompanyhasexperiencedalevelofimprovementincollectionefforts,futureresultsarenecessarilydependentuponthefollowingfactors,including,amongotherthings,theeffectivenessofthestrategiesdiscussedabove,thesupportofregulatorsandlegislatorstoallowutilitiestomovetowardscommercialcollectionpracticesandimprovementintheconditionoftheeconomyintheCompany'serviceterritory.TheCompanyhasbeenpursuingPowerChoicetoaddresshighpricesthataretheresultoftraditionalpriceregulation,buttheintroductionofcompetitionrequiresthatpoliciesandpracticesthatwere:centraltotraditionalregulation,includingthoseinvolvingcollections,bechangedsoasnottojeopardizethebenefitsofcompetition.Netcashprovidedbyoperatingactivitiesdecreased$162.8millionin1997primarilyduetoadecreaseof$105.9millionintheamountofaccountsreceivablesoldundertheaccountsreceivablesalesprogram(whichtheCompanyhasbudgetedtorestorein1998)partiallyoffsetbyanincreaseindeferredtaxesof$53.9million.Netcashusedininvestingactivitiesincreased$62.4millionin1997primarilyasaresultofanincreaseinothercashinvestmentsof$116.1millionoffsetbyadecreaseintheacquisitionofutilityplantof$62.9million.Netcashusedinfinancingactivitiesdecreased$106.1million,primarily~duetoanetreductionof$94.7millioninthepaymentsonlong-termdebt.Item8.FinancialStatementsandSupplementaryDataFinancialStatementsReportofManagementReportofIndependentAccountantsConsolidatedStatementsof.IncomeandRetainedEarningsforeachofthethreeyears-intheperiodendedDecember31,1997.ConsolidatedBalanceSheetsatDecember31,1997and1996.ConsolidatedStatementsofCashFlowsforeachofthethreeyearsintheperiodendedDecember31,1997.NotestoConsolidatedFinancialStatements.-51-REPORTOFMANAGEMENTTheconsolidatedfinancialstatementsoftheCompanyanditssubsidiarieswerepreparedbyandaretheresponsibilityofmanagement.FinancialinformationcontainedelsewhereinthisAnnualReportisconsistentwiththatinthefinancialstatements.Tomeetitsresponsibilitieswithrespecttofinancialinformation,managementmaintainsandenforcesasystemofinternalaccountingcontrols,whichisdesignedtoprovidereasonableassurance,onacosteffectivebasis,astotheintegrity,objectivityandreliabilityofthefinancialrecordsandprotectionofassets.Thissystemincludescommunicationthroughwrittenpoliciesandprocedures,anorganizationalstructurethatprovidesforappropriatedivisionofresponsibilityandthetrainingofpersonnel.Thissystemisalsotestedbyacomprehensiveinternalauditprogram.Inaddition,theCompanyhasaCorporatePolicyRegisterandaCodeofBusinessConduct(the"Code")thatsupplyemployeeswithaframeworkdescribinganddefiningtheCompany'overallapproachtobusinessandrequireallemployeestomaintainthehighestlevelofethicalstandardsaswellasrequiringallmanagementemployeestoformallyaffirmtheircompliancewiththeCode.ThefinancialstatementshavebeenauditedbyPriceWaterhouseLLP,theCompany'sindependentaccountants;inaccordancewithGAAP.Inplanningandperformingitsaudit,PriceWaterhouseLLPconsideredtheCompany'sinternalcontrolstructureinordertodetermineauditingproceduresforthepurposeofexpressinganopiniononthefinancialstatements,andnottoprovideassuranceontheinternalcontrolstructure.Theindependentaccountants'uditdoesnotlimitinanywaymanagement'sresponsibilityforthefairpresentationofthefinancialstatementsandallotherinformation,whetherauditedorunaudited,inthisAnnualReport.TheAuditCommitteeoftheBoardofDirectors,consistingoffiveoutsidedirectorswhoarenotemployees,meetsregularlywithmanagement,internalauditorsandPriceWaterhouseLLPtoreviewanddiscussinternalaccountingcontrols,auditexaminationsandfinancialreportingmatters.PriceWaterhouseLLPandtheCompany'sinternalauditorshavefreeaccesstomeetindividuallywiththeAuditCommitteeatanytime,withoutmanagementbeingpresent.WilliamE.DavisChairmanoftheBoardandChiefExecutiveOfficerNiagaraMohawkPowerCorporation-52-REPORTOFINDEPENDENTACCOUNTANTSTotheStockholdersandBoardofDirectorsofNiagaraMohawkPowerCorporationInouropinion,theaccompanyingconsolidatedbalancesheetsandtherelatedconsolidatedstatementsofincomeandretainedearningsandofcashflowspresentfairly,inallmaterialrespects,thefinancialpositionofNiagaraMohawkPowerCorporationanditssubsidiariesatDecember31,1997and1996,andtheresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,1997;inconformitywithgenerallyacceptedaccountingprinciples.ThesefinancialstatementsaretheresponsibilityoftheCompany'smanagement;ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.WeconductedourauditsofthesestatementsinaccordancewithgenerallyacceptedauditingstandardswhichrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsareBeeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,andevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisfortheopinionexpressedabove.AsdiscussedinNote2,theCompanybelievesthatitcontinuestomeettherequirementsforapplicationofStatementofFinancialAccountingStandardsNo.71,AccountingfortheEffectsofCertain+pcsofRegulation(SFASNo.71)foritsnucleargeneration,electrictransmissionanddistributionandgasbusinesses.IntheeventthattheCompanyisunabletocompletethetermination,restatementoramendmentoftheindependentpowerproducercontracts,thisconclusioncouldchangein1998andbeyond,resultinginmaterialadverseeffectsontheCompany'sfinancialconditionandresultsofoperations.AsdiscussedinNote2,theCompanydiscontinuedapplicationofSFASNo.71foritsnon-nucleargenerationbusinessin1996.~j~y~gag8zPSyracuse,NewYorkMarch26,1998-53-NIAGARANORAHPONERCORPORATIONANDSUBSIDIARYCOKPANIESConsolidatedStatementsofIncaacandRetainedEarningsInthousandsofdollarsFortheyearendedDecember31,199719961995Operatingreveres:tElectric$3,309,441S3,308,979'$3,335,548Operatingexpenses:Fuelforelectricgeneration.ElectricitypurchasedGaspurchased~Otheroperationandmaintenanceexpenses...Depreciationandamortization(Note'i)179,4551,236,108345,610835,282339,641181,486'1,182,892370,040928,224329,827165,9291,137,937276,232817,897317,831OtherIncaacand(Dcductiaa)PoucrChoicecharge(Note2)(190,000)Incaacbcforcinterestcharges...........393,836558,281687,103Incaaebeforefederalandforeignincmataxes...119,930280,248407,429Incomebeforeextraordinaryitem..........Extraordinaryitemforthediscontinuanceofregulatoraccountinrinciplesnetofincome59,835177,754248,036NctInde..59,835110,390248,036Balanceavailableforcaaanstock.........Dividendsoncctmonstock.............72,109208,440161,65072,10946,790Averagennherqfsharesofcammnstockoutstanding(>nthousands).BasicanddilutedearningsncCaverageshareofcoamonstockbeforeextraord>narystem......144,404S0.16144,350S0.97144,329S1.44BasicanddilutedearningsperaveragesharcofcccmonstockS0.16S0.50S1.44()DenotesdeductionTheaccccpanyingnotesareanintegralpartofthesefinancial'tatements-54-NIAGARAHOHAllKPSJERCORPORATIONANDSUBSIDIARYCQIPANIESConsolidatedBalanceSheetsInthousandsofdollars19971996ASSETSUtilityplant(Note1):ElectricplantNuclearfuelGasplantCcemonplant$8,752,865577,4091~131,541319,409$8,611,419573,0411,082,298292,591Totalutilityplant11,075,87410,839,341Currentassets:Cashincludingtemporarycashinvestmentsof$3)5,708and$223,829,respectivelyAccountsreceivable(lessallowancefordoubtfulof$62,500and$52,100,respectively)(Notes1Haterialsandsupplies,ataveragecost:CoalandoitforproductionofelectricityGasstorageOther..Prepaidtaxes.accountsand9).~378.232492,24427,64239,447118,30815,518325,398373,30520,7SS43,431120,914'11,976Regulatoryassets(Note2):RegulatorytaxassetDeferredfinancecharges.Deferredenvirowentalrestorationcosts.(Note9)..Unamortizeddebtexpense.Postretirementbenefitsotherthanpensions.....~~~399,119239,880220,00057,31256,464416,599239,880225,00065,99360,4821176824214306$9584141$9427635Theacccaponyingnotesareanintegralpartofthesefinancialstatements-55-NIAGARAHOHAlJKRNERCORPORATIONANDSUBSIDIARYC(NPANIESConsolidatedBalanceSheetsInthousandsofdollars1996Retainedearnins.679920CAPITALIZATIONANDLIABILITIESCapitalization(Note5):Cotatenstockholders'quity:Cocmonstock,issued144,419,351and144,365,214shares,respectively.....~....S144,419Capitalstockpremiunandexpense..........1,779,688S144,3651,783,725657482Non-redeemablepreferredstock.Handatorilyredeemablepreferredstock.........Lon-termdebtTotalitalizationCurrentliabilities:Long-termdebtduewithinoneyear(Note5)....~..Sinkingfundrequirementsonredeemablepreferredstock(Note5).AccountspayablePayableonoutstandingbankchecks~.~...~..~.Custcmers'epositsAccruedtaxesAccruedinterestAccruedvacationpay.OtherRegulatoryliabilities(Note2):Deferredfinancechares..Otherliabilities:Accumulateddeferredincometaxes(Notes1and7).~..Employeepensionandotherbenefits(Note8)......Deferredpensionsettlementgain............Unbilledrevenues(Note1).OtherComaitmcntsandcontingencies(Notes2and9):Liabilitforenvirormentairestoration.2,604,027440,00076,6103417381653801867,09510,120263,09523.72018,3729,00562,64336,532647565553381,320,532240,21112,43843,281414443220000$95841412,585,572440,00086,7303477879659018148,0848,870271,83032,00815,5054,21663,25236,436524555326561,357,518238,68819,26949,8811745621839918225000$9427635Theaccompanyingnotesareanintegralpartofthesefinancialstatcaents-56-NIAGARAHOHAlCPONERCORPORATIONANDSUBSIDIARTC(N(PANIESConsolidatedStatementsofCashFloMsIncrease(Decrease)inCashForthcarendedDeceaher311997Inthousandsofdollars19961995CashfloMsfromoperntingactivities:NetincomeAdjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivities:Extraordinaryitemforthediscontinuanceofregulatoryaccountingprinciples,netofincometaxes.PcwerCholcccharge.~~~~~~~~~~~Depreciationandamortization.Electricmarginrecoverable..Amortizationofnuclearfuel..Provisionfordeferredincometaxes.........~~GainonsaleofsubsidiaryUnbiliedrevenues.Netaccountsreceivable.................Materialsandsupplies.Accountspayableandaccruedexpenses..........-AccruedinterestandtaxesChanesinotheressesandiablities~~~~~~~~~~190,000339,64125,241(19,506)(6,600)(118,939)(1,306)(11~175)4,1807620467,364329,82738,077(6,870)(15,025)21,471121,1982,2658,224(11,750)35231317,83158,58834,295114,917(11,257)(71,258)56,74813,663(47,048)(35,440)20930S59,835S110,390S248,036Netcashrovidedoratinnctiviies537575700402700005CashfloMsfraninvestingactivities:Constructionadditions.Nuclearfuel.....Less:Alloganceforotherfundsusedduringconstruction.~~~~~~~~~(286,389)(4,368)5310(296,689)(55,360)3665(332,443)(13,361)1063Acquisitionofutilityplant~.~~~~......Haterialsandsuppliesrelatedtoconstruction....Accountspayableandaccruedexpensesrelatedtoconstruction.~OtherinvestmentsProceedsfromsaleofsubsidiary(netofcashsold)..(285,447)1,042(2,794)(115,533)(348,384)8,3622,05654114,600(344,741)3,346(7,112)(115,818)161~087Netcashusedininvestiactivities.........393971331611277004Cashfleamfryfinancingactivities:Proceedsfromlong-termdebt...Redemptionofpreferredstock..Reductionsoflong-termdebt..Netchangeinshort-termdebt...Dividendspaid..~.Other.(8,870)(44,600)(37,397)97105,000(10,400)(244,341)(38,281)8846346,000(10,950)(73,415)(416,750)(201,246)7495Nctincreaseincash.Cashatbeginningofyear~.~....52,834171,92359,145325,398153,47594,330Cashatendofar............S378232S325398S153475Supplementaldisclosuresofcashflmtinformation:Cashpaidduringtheyearfor:Interest............Incometaxes.~~S279,957S82331S286,497S290,352S95632S47378Theaccompanyingnotesnrcnnintegralpartofthcscfinnncialstatements-57-NotestoConsolidatedFinancialStatementsNOTE1.SummaofSiificantAccountinPoliciesTheCompanyissubjecttoregulationbythePSCandFERCwithrespecttoitsratesforserviceunderamethodologywhichestablishespricesbasedontheCompany'scost.TheCompany'saccountingpoliciesconformtoGAAP,includingtheaccountingprinciplesforrate-regulatedentitieswithrespecttotheCompany'snuclear,transmission,distributionandgasoperations(regulatedbusiness),andareinaccordancewiththeaccountingrequirementsandratemakingpracticesoftheregulatoryauthorities.TheCompanydiscontinuedtheapplicationofregulatoryaccountingprinciplestoitsfossilandhydrogenerationoperationsin1996(seeNote2).InordertobeinconformitywithGAAP,managementisrequiredtouseestimatesinthepreparationoftheCompany'sfinancialstatements.PrinciplesofConsolidation:TheconsolidatedfinancialstatementsincludetheCompanyanditswholly-ownedsubsidiaries.Intercompanybalancesandtransactionshavebeeneliminated.UtilityPlant:Thecostofadditionstoutilityplantandreplacementsofretirementunitsofpropertyarecapitalized.Costincludesdirectmaterial,labor,overheadandAFC.Replacementofminoritemsofutilityplantandthecostofcurrentrepairsandmaintenanceischargedtoexpense.Wheneverutilityplantisretired,itsoriginalcost,togetherwiththecostofremoval,lesssalvage,ischargedtoaccumulateddepreciation.ThediscontinuationofSFASNo.71didnotaffectthecarryingvalueoftheCompany'sutilityplant.AllowanceforFundsUsedDuringConstruction:TheCompanycapitalizesAFCinamountsequivalenttothecostoffundsdevotedtoplantunderconstructionforitsregulatedbusiness.AFCratesaredeterminedinaccordancewithFERCandPSCregulations.TheAFCrateineffectduring1997was9.28%.AFCissegregatedintoitstwocomponents,borrowedfundsandother,funds,andisreflectedinthe"Interestcharges"andthe"Otherincome"sections,respectively,oftheConsolidatedStatementsofIncome.TheamountofAFCcreditsrecordedineachofthethreeyearsendedDecember31,inthousandsofdollars,wasasfollows:OtherincomeInterestcharges1997$5,3104,3961996$3,6653,6901995$1,0637,987AsaresultofthediscontinuedapplicationofSFASNo.71tothefossilandhydrooperations,theCompanycapitalizesinterestcostassociatedwiththeconstructionoffossil/hydroassets.Depreciation,AmortizationandNuclearGeneratingPlantDecommissioningCosts:Foraccountingandregulatorypurposes,depreciationiscomputedonthestraight-linebasisusingthelicenselivesfornuclearandhydroclassesofdepreciablepropertyandtheaverageservicelivesforallotherclasses.Thepercentagerelationshipbetweenthetotalprovisionfordepreciationandaveragedepreciablepropertywasapproximately3%.fortheyears1995through1997.TheCompanyperformsdepreciationstudiestodetermineservicelivesofclassesofpropertyandadjuststhedepreciationrateswhennecessary.Estimateddecommissioningcosts(coststoremoveanuclearplantfromserviceinthefuture)fortheCompany'sUnit1anditsshareofUnit2arebeingaccruedovertheservicelivesoftheunits,recoveredinratesthroughanannualallowanceandcurrentlychargedtooperationsthroughdepreciation.TheCompanyexpectstocommencedecommissioningofbothunitsshortlyaftercessationofoperationsatUnit2(currentlyplannedfor2026),usingamethodwhichremovesordecontaminatestheUnitscomponentspromptlyatthattime.SeeNote3"NuclearPlantDecommissioning."TheFASBissuedanexposuredraftinFebruary1996entitled"AccountingforCertainLiabilitiesRelatedtoClosureorRemovalCostsofLong-LivedAssets."Thescopeoftheprojectincludescertainplantdecommissioningcosts,includingthoseforfossil,hydroandnuclearplants.Ifapproved,.aliabilitywouldbe-58-recognized,withacorrespondingplantasset,wheneveralegalorconstructiveobligationexiststoperformdismantlementorremovalactivities.TheCompanycurrentlyrecognizestheliabilityfornucleardecommissioningovertheservicelifeoftheplantasanincreasetoaccumulateddepreciationanddoesnotrecognizetheclosureorremovalobligationassociatedwithitsfossilandhydroplants.TheCompany'sPowerChoiceagreementprovidesfortherecoveryofnuclear~decommissioningcosts.AsdiscussedinNote2,theCompanyintendstosellits~fossilandhydrogeneratingassetsthroughanauctionprocess.Totheextenttheassetsaresold,theeffectofthisexposuredraftontheCompanyshouldbemitigated.However,theCompanycannotpredicttheresultsoftheauction.Theadoptionoftheproposedstandardisnotexpectedtoimpactthecashflowfromtheseassets.TheFASBcontinuestodiscusstheissuesaddressedintheexposuredraft,aswellasthetimingofitsimplementation.Amortizationofthecostofnuclearfuelisdeterminedonthebasisofthequantityofheatproducedforthegenerationofelectricenergy.Thecostofdisposalofnuclearfuel,whichpresentlyis$.001perKWhofnetgenerationavailableforsale,isbased-uponacontract=withtheDOE.Thesecostsarechargedtooperatingexpenseandrecoveredfromcustomersthroughbaseratesorthroughthefueladjustmentclause.Revenues:Revenuesarebasedoncyclebillingsrenderedtocertaincustomersmonthlyandothersbi-monthlyforenergyconsumedandnotbilledattheendofthefiscalyear.AtDecember31,1997and1996,approximately$8.6millionand$11.1million,respectively,ofunbilledelectricrevenuesremainedunrecognizedinresultsofoperations,areincludedin"Otherliabilities."UndertheCompany'sPowerChoiceagreement,theamount,ofunrecognizedelectricunbilledrevenueasofthePowerChoiceimplementationdatewillbenettedagainstcertainotherregulatoryassetsandliabilities.Thereafter,changesinelectricunbilledrevenueswillnolongerbedeferred.In1995,theCompanyused$71.5millionofelectricunbilledrevenuestoreducethe1995revenuerequirement.AtDecember31,1997and1996,$34.7millionand$38.8million,respectively,ofunbilledgasrevenuesremainunrecognizedinresultsofoperationsandmaybeusedtoreducefuturegasrevenuerequirements.TheunbilledrevenuesincludedinaccountsreceivableatDecember31,1997and1996,were$211.9millionand$218.5million,respectively.TheCompany'stariffsincludeelectricandgasadjustmentclausesunderwhichenergyandpurchasedgascosts,respectively,aboveorbelowthelevelsallowedinapprovedrateschedules,arebilledorcreditedtocustomers.TheCompany,asauthorizedbythePSC,chargesoperationsforenergyandpurchasedgascostincreasesintheperiodofrecovery.ThePSChasperiodicallyauthorizedtheCompanytomakechangesinthelevelofallowedenergyandpurchasedgascostsincludedinapprovedrateschedules.Asaresultofsuchperiodicchanges,aportionofenergycostsdeferredatthetimeofchangewouldnotberecoveredormaybeoverrecoveredunderthenormaloperationoftheelectricandgasadjustmentclauses.However,theCompanyhastodatebeenpermittedtodeferandbillorcreditsuchportionstocustomers,throughtheelectricandgasadjustmentclauses,overaspecifiedperiodoftimefromtheeffectivedateofeachchange.TheCompany'selectricFACprovidesforpartialpass-throughoffuelandpurchasedpowercostfluctuationsfromamountsforecast,withtheCompanyabsorbingaportionofincreasesorretainingaportionofdecreasesuptoamaximumof$15millionperrateyear.Thereafter,100%ofthefluctuationispassedontoratepayers.TheCompanyalsoshareswithratepayeisfluctuationsfromamountsforecastfornetresalemarginandtransmissionbenefits,withtheCompanyretaining/absorbing40%andpassing60%throughtoratepayers.Theamountsretainedorabsorbedin1995through1997werenotmaterial.UnderthePowerChoiceagreement,theFACwillbediscontinued.InDecember1996,theCompany,MultipleIntervenorsandthePSCstaffreachedathreeyeargassettlementthatwasconditionallyapprovedbythePSC.Theagreementeliminatedthegasadjustmentclauseandestablishedagascommoditycostadjustmentclause("CCAC").TheCompany'sgasCCACprovidesforthecollectionorpassbackofcertainincreasesordecreasesfromthebasecommoditycostofgas.ThemaximumannualriskorbenefittotheCompanyi$2.25million.Allsavingsandexcesscostsbeyondthatamountwillflowratepayers.Foradiscussionoftheratemakingassociatedwithnon-commodityga-59-costs,seeItem7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"OtherFederalandStateRegulatoryInitiativesMulti-YearGasRateSettlementAgreement."FederalIncomeTaxes:AsdirectedbythePSC,theCompanydefersanyamountspayablepursuanttothealternativeminimumtaxrules.Deferredinvestmenttaxcreditsareamortizedovertheusefullifeoftheunderlyingproperty.StatementofCashFlows'heCompanyconsidersallhighlyliquidinvestments,purchasedwitharemainingmaturityofthreemonthsorless,tobecashequivalents.EarningsPerShare:Basicearningspershare("EPS")iscomputedbasedontheweightedaveragenumberofcommonsharesoutstandingfortheperiod.ThenumberofoptionsoutstandingatDecember31,1997,1996and1995thatcouldpotentiallydilutebasicEPS,(butareconsideredantidilutiveforeachperiodbecausetheoptionsexercisepricewasgreaterthantheaveragemarketpriceofcommonshares),isimmaterial.Therefore,thecalculationofbothbasicanddilutiveEPSarethesameforeachperiod.Reclassifications:CertainamountsfromprioryearshavebeenreclassifiedontheaccompanyingConsolidatedFinancialStatementstoconformwiththe1997presentation.Comprehensive1ncome:InJune1997,FASBissuedSFASNo.130.SFASNo.130.establishes-standardsforreportingcomprehensiveincome.Comprehensiveincomeisthechangeintheequityofacompany,notincludingthosechangesthatresultfromshareholdertransactions.Allcomponentsofcomprehensiveincomearerequiredtobereportedinanewfinancialstatementthatisdisplayedwithequalprominenceasexistingfinancialstatements.TheCompanywillberequiredtoadoptSFASNo.130onJanuary1,1998.TheCompanydoesnotexpectthatadoptionofSFASNo.130willhaveasignificantimpactonitsreportinganddisclosurerequirements.SegmentDisclosures:AlsoinJune1997,FASBissuedSFASNo.131.SFASNo.131establishesstandardsforadditionaldisclosureaboutoperatingsegmentsforinterimandannualfinancialstatements.Morespecifically,itrequiresfinancialinformationtobedisclosedforsegmentswhoseoperatingresultsarereviewedbythechiefoperatingofficerfordecisionsonresourceallocation.Italsorequiresrelateddisclosuresaboutproductandservices,geographicareasandmajorcustomers.TheCompanywillberequiredtoadoptSFASNo.131forthefiscalyearendingDecember31,1998.TheCompanydoesnotexpectthattheadoptionofSFASNo.131willhaveasignificantimpactonitsreportinganddisclosurerequirements.PensionandOtherPostretirementBenefits:InFebruary1998,FASBissuedSFASNo.132.SFASNo.132revisesemployers'isclosuresaboutpensionandotherpostretirementbenefitplans.Itdoesnotchangethemeasurementorrecognitionofthoseplans.Itstandardizesthedisclosurerequirementsforpensionsandotherpostretirementbenefitstotheextentpracticableandrequiresadditionalinformationonchangesinthebenefitobligationsandfairvaluesofplanassets.TheCompanywillberequiredtoadoptSFASNo.132forthefiscalyearendingDecember31,1998.TheCompanydoesnotexpecttheadoptionofSFASNo.132willhaveasignificantimpactonitsreportinganddisclosurerequirements.NOTS2.RateandRelatoIssuesandContinenciesTheCompany'sfinancialstatementsconformtoGAAP,includingtheaccountingprinciplesforrate-regulatedentitieswithrespecttoitsregulatedoperations.Substantively,theseprinciplespermitapublicutility,regulatedonacost-of-servicebasis,todefercertaincostswhichwouldotherwisebechargedtoexpense,whenauthorizedtodosobytheregulator.Thesedeferredcostsareknownasregulatoryassets,whichinthecaseoftheCompanyareapproximately$937million,netofapproximately$240millionofregulatoryliabilitiesatDecember31,1997.Theseregulatoryassetsareprobableofrecovery.Theportionofthe$937millionwhichhasbeenallocatedtothenucleargenerationandelectrictransmissionanddistributionbusinessis-60-approximately$810million,whichisnetofapproximately$240millionofregulatoryliabilities:Regulatoryassetsallocatedtotherate-regulatedgasdistributionbusinessare$127million.Generally,regulatoryassetsandliabilitieswereallocatedtotheportionofthebusinessthatincurredtheunderlyingtransactionthatresultedintherecognitionoftheregulatoryasset.orliability.Theallocationmethodsusedbetweenelectricandgasareconsistentwiththoseusedinpriorregulatoryproceedings.TheCompanyconcludedasofDecember31,1996.thatthetermination,restatementoramendmentofIPPcontractsandimplementationofPowerChoicewastheprobableoutcomeofnegotiationsthathadtakenplacesincethePowerChoiceannouncement.UnderPowerChoice,theseparatednon-nucleargenerationbusinesswouldnolongerberate-regulatedonacost-of-servicebasisand,accordingly,regulatoryassetsrelatedtothenon-nuclearpowergenerationbusiness,amountingtoapproximately$103.6million($67.4millionaftertaxor47centspershare)waschargedagainst1996incomeasanextraordinarynon-cashcharge.ThePSCinitswrittenorderissuedMarch20,1998approvingPowerChoice,determinedtolimittheestimatedvalueoftheMRAregulatoryassetthatcanberecoveredfromcustomerstoapproximately$4,000million.TheultimateamountoftheregulatoryassettobeestablishedmayvarybasedoncertaineventsrelatedtotheclosingoftheMRA.Theestimatedvalue,oftheMRAregulatoryassetincludestheissuanceof42.9millionsharesofcommonstock,whichthePSCindeterminingtherecoverableamountofsuchasset,valuedat$8pershare.BecausethevalueoftheconsiderationtobepaidtotheIPPPartiescanonlybedeterminedattheMRAclosing,thevalueofthelimitationontherecoverabilityoftheMRAregulatoryassethasbeenestimatedat$190million(85centspershare)whichhasbeenchargedto1997earnings.Thechargetoexpensewasdeterminedasthedifferencebetween$8pershareandtheCompany'sclosingcommonstockpriceonMarch26,1998of$127/16pershare,multipliedby42.9millionshares.Anyvariancefromtheestimateusedindeterminingthechargetoexpensein1997,includingchangestothecommonstockpriceatclosing,will.bereflectedinresultsofoperationsin1998.UnderPowerChoice,theCompany'sremainingelectricbusiness(nucleargenerationandelectrictransmissionanddistributionbusiness)willcontinuetoberate-regulatedonacost-of-servicebasisand,accordingly,theCompancontinuestoapplySFASNo.71tothesebusinesses.Also,theCompany'sIPPcontracts,includingthoserestructuredundertheMRAandthosenotsorestructuredwillcontinuetobetheobligationsoftheregulatedbusiness.SFASNo.71doesnotrequiretheCompanytoearnareturnontheregulatoryassetsinassessingitsapplicability.TheCompanybelievesthatthepricesitwillchargeforelectricserviceover10years,includingtheCTC,assumingnoreductionindemandorbypassoftheCTCorexitfees,willbesufficienttorecovertheMRAregulatoryassetandtoproviderecoveryofandareturnontheremainderofitsassets,asappropriate.IntheeventtheCompanycouldnolo'ngerapplySFASNo.71inthefuture,itwouldberequiredtorecordanafter-taxnon-cashchargeagainstincomeforanyremainingunamortizedregulatoryassetsandliabilities.DependingonwhenSFASNo.71wasrequiredtobediscontinued,suchchargewouldlikelybematerialtotheCompany'sreportedfinancialconditionandresultsofoperationsandtheCompany'sabilitytopaydividends.ThePowerChoiceagreement,whilehavingtheeffectofsubstantiallydepressingearningsduringitsfive-yearterm,willsubstantiallyimproveoperatingcashflows.TheEITFoftheFASBreachedaconsensusonIssueNo.97-4"DeregulationofthePricingofElectricity-IssuesRelatedtotheApplicationofSFASNo.71andSFASNo.101"inJuly1997.Asdiscussedpreviously,theCompanydiscontinuedtheapplicationofSFASNo.71andappliedSFASNo.101withrespecttothefossilandhydrogenerationbusinessatDecember31,1996,inamannerconsistentwiththeEITFconsensus.WiththeimplementationofPowerChoice,specificallytheseparationofnon-'ucleargenerationasanentitythatwouldnolongerbecost-of-serviceregulated,theCompanyisrequiredtoassessthecarryingamountsofitslong-livedassetsinaccordancewithSFASNo.121.SFASNo.121requireslong-liveassetsandcertainidentifiableintangiblesheldandusedbyanentitytobreviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethat-61-thecarryingamountofanassetmaynotberecoverableorwhenassetsaretobedisposedof.Inperformingthereviewforrecoverability,theCompanyisrequiredtoestimatefutureundiscountedcashflowsexpectedtoresultfromtheuseoftheassetand/oritsdisposition.TheCompanyhasdeterminedthatthereisnoimpairmentofitsfossilandhydrogeneratingassets.Totheextenttheproceedsresultingfromthesaleofthefossilandhydroassetsarenotsufficienttoavoidaloss,theCompanywouldbeabletorecoversuchlossthroughtheCTC.ThePowerChoiceagreementprovidesfordeferralandfuturerecoveryoflosses,ifany,resultingfromthesaleofthenon-nucleargeneratingassets.TheCompany'sfossilandhydrogenerationplantassetshadanetbookvalueofapproximately$1.1billionatDecember31,1997.AsdescribedinItem7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"MasterRestructuringAgreementandthePowerChoiceAgreement,"theconclusionofthetermination,restatementoramendmentofIPPcontracts,andclosingof,thefinancingnecessarytoimplementsuchtermination,restatementoramendment,aswellasimplementationofPowerChoice,issubjecttoanumberofcontingencies.ZntheeventtheCompanyisunabletosuccessfullybringtheseeventstoconclusion,itislikelythatapplicationofSFASNo.71wouldbediscontinued.Theresultingnon-cashafter-taxchargesagainstincome,basedonregulatoryassetsandliabilitiesassociatedwiththenucleargenerationandelectrictransmissionanddistributionbusinessesasofDecember31,1997,wouldbeapproximately$526.5millionor$3.65pershare.Variousrequirementsunderapplicablelawandregulationsandundercorporateinstruments,includingthosewithrespecttoissuanceofdebtandequitysecurities,paymentofcommonandpreferreddividendsandcertaintypesoftransfersofassetscouldbeadverselyimpactedbyanysuchwrite-downs.TheCompanyhasrecordedthefollowingregulatoryassetsonitsConsolidatedBalanceSheetsreflectingtherateactionsofitsregulators:Regulatorytaxassetrepresentstheexpectedfuturerecoveryfromratepayersofthetaxconsequencesoftemporarydifferencesbetweentherecordedbookbasesandthetaxbasesofassetsandliabilities.Thisamountisprimarilytimingdifferencesrelatedtodepreciation.Theseamountsareamortizedandrecoveredastherelatedtemporarydifferencesreverse.InJanuary1993,thePSCissuedaStatementofInterimPolicyonAccountingandRatemakingProceduresthatrequiredadoptionofSFASNo.109onarevenue-neutralbasis.DeferredfinancechargesrepresentthedeferralofthediscontinuedportionofAFCrelatedtoCWZPatUnit2whichwasincludedinratebase.Zn1985,'ursuanttoPSCauthorization,theCompanydiscontinuedaccruingAFConCWIPforwhicha,cashreturnwasbeingallowed.Thisamount,whichwasaccumulatedindeferreddebitandcreditaccountsuptothecommercialoperationdateofUnit2,awaitsfuturedispositionbythePSC.AportionofthedeferredcreditcouldbeutilizedtoreducefuturerevenuerequirementsoveraperiodshorterthanthelifeofUnit2,withalikeamountofdeferreddebitamortizedandrecoveredinratesovertheremaininglifeofUnit2.PowerChoiceprovidesfornetting,andtherebyeliminationofthedebitand,creditbalancesofdeferredfinancecharges.DeferredenvironmentalrestorationcostsrepresenttheCompany'sshareoftheestimatedcoststoinvestigateandperformcertainremediationactivitiesatbothCompany-ownedsitesandnon-ownedsiteswithwhichitmaybeassociated.TheCompanyhasrecordedaregulatoryassetrepresentingtheremediationobligationstoberecoveredfromratepayers.PowerChoiceandtheCompany'sgassettlementprovidefortherecoveryofthesecostsoverthesettlementperiods.TheCompanybelievesfuturecosts,beyondthesettlementperiods,willcontinuetoberecoveredinrates.SeeNote9-"EnvironmentalContingencies."Unamortizeddebtexpenserepresentsthecoststoissueandredeemcertainlong-termdebtsecuritieswhichwereretiredpriortomaturity.TheseamountsareamortizedasinterestexpenseratablyoverthelivesoftherelatedissuesinaccordancewithPSCdirectives.PostretirementbenefitsotherthanpensionsrepresenttheexcessofsuchcostsrecognizedinaccordancewithSFASNo.106overtheamountreceivedinrates.InaccordancewiththeP'SCpolicystatement,postretirementbenefitcostsotherthanpensionsarebeingphased-intoratesoverafive-yearperiodand-62-amountsdeferredwillbeamortizedandrecoveredoveraperiodnottoexceed20years.SubstantiallyalloftheCompany'sregulatoryassetsdescribedabovearebeingamortizedtoexpenseandrecoveredinratesoverperiodsapprovedintheCompany'selectricandgasratecases,respectively.NOTE3.NuclearerationsNuclearPlantDecommissioning:TheCompany'ssitespecificcostestimatesfordecommissioningUnit1anditsownershipinterestinUnit2atDecember31,1997areasfollows:SiteStudy(year)EndofPlantLife(year)RadioactiveDismantlementtoBegin(year)20262028Unit1Unit21995199520092026MethodofDecommissioningDelayedDIsmantlamentImnediateDismantlementCostofDecamnissioning(inJanuary1998dollars)InmillionsofdoLLarsRadioactiveComponentsNon-radioactiveComponentsFuelDryStorage/ContinuingCare$481117$676$2014843$292TheCompanyestimatesthatbythetimedecommissioningiscompleted,theabovecostswillultimatelyamountto$1.7billionand$.9billionforUnit1andUnit2,respectively,usingapproximately3.5%asanannualinflationfactor.Inadditiontothecostsmentionedabove,theCompanyexpectstoincurpost-shutdowncostsforplantrampdown,insuranceandpropertytaxes.In1998dollars,thesecostsareexpectedtoamountto$119millionand$63millionforUnit1andtheCompany'sshareofUnit2,respectively.Theamountswillescalateto$210millionand$190millionforUnit1andtheCompany'sshareofUnit2,respectively,bythetimedecommissioningiscompleted.In1997,theCompanymadeadjustmentstothecashflowassumptionsatUnit1forfueldrystorage,radioactivecostcomponents,propertytaxandinsurance,tomoreaccuratelyreflecttheestimatedcostofeachcostcomponent.Therevisionsreducedthetotalcostestimatebyapproximately$10million(in1998dollars).NRCregulationsrequireownersofnuclearpowerplantstoplacefundsintoanexternaltrusttoprovideforthecostofdecommissioningradioactiveportionsofnuclearfacilitiesandestablishminimumamountsthatmustbeavailableinsuchatrustatthetimeofdecommissioning.TheannualallowanceforUnit1andtheCompany'sshareofUnit2wasapproximately$23.7million,foreachofthethreeyearsendedDecember31,1997.Theamountwasbaseduponthe1993NRCminimumdecommissioningcostrequirementsof$437millionand$198million(in1998dollars)forUnit1andtheCompany'sshareofUnit2,respectively.InOpinionNo.95-21,theCompanywasauthorized,untilthePSCordersotherwise,tocontinuetofundtotheNRCminimumrequirements.PowerChoicepermitsraterecoveryforallradioactiveandnon-radioactivecostcomponentsforbothunits,includingpost-shutdowncosts,basedupontheamountsestimatedinthe1995sitespecificstudiesdescribedabove,whicharehigherthantheNRCminimum.Thereisnoassurancethatthedecommissioningallowancerecoveredinrateswillultimatelyaggregateasufficientamounttodecommissiontheunits.TheCompanybelievesthatifdecommissioningcostsarehigherthancurrentlyestimated,thecostswouldultimatelybeincludedintherateprocess'ecommissioningcostsrecoveredinratesarereflectedin"Accumulateddepreciationandamortization"'onthebalancesheetandamountto$266.8millionand$217~7millionatDecember31,1997and1996,respectivelyforbothunitsAdditionallyatDecember31,1997,thefairvalueoffundsaccumulatedinthCompany'sexternaltrustswere$164.7millionforUnit1and$51.0millionfo-63-itsshareofUnit2.Thetrustsareincludedin"Otherpropertyandinvestments."Earningsontheexternaltrustaggregated$40.3millionthroughDecember31,1997and,becausetheearningsareavailabletofunddecommissioning,havealsobeenincludedin"Accumulateddepreciationandamortization.>>Amountsrecoveredfornon-radioactivedismantlementareaccumulatedinaninternalreservefundwhichhasanaccumulatedbalanceof$45.2millionatDecember31,1997.NRCPolicyStatementandProposal.TheNRCissuedapolicystatementontheRestructuringandEconomicDeregulationoftheElectricUtilityIndustry(the"PolicyStatement")in1997.ThePolicyStatementaddressestheNRC'sconcernsabouttheadequacyofdecommissioningfundsandaboutthepotentialimpactonoperationalsafety.CurrentNRCregulationsallowautilitytosetasidedecommissioningfundsannuallyovertheestimatedlifeofaplant.ThePolicyStatementdeclarestheNRCwill:Continuetoconductreviewsoffinancialqualifications,decommissioningfundingandantitrustrequirementsofnuclearpowerplants;Establishandmaintainworkingrelationshipswithstateandfederalrateregulators;Identifyallnuclearpowerplantowners,indirectaswellasdirect;andRe-evaluatetheadequacyofcurrentregulationsinlightofeconomicandotherchangesresultingfromratederegulation.InadditiontotheabovePolicyStatement,theNRCisproposingtoamenditsregulationsondecommissioningfundingtoreflectconditionsexpectedfromderegulationoftheelectricpowerindustry.Theamendedrulewould:Revisethedefinitionofan"electricutility"toreflectchangescausedbyrestructuringwithintheindustry.Definea"Federallicensee"asanylicenseewhichhasthefullfaithandcreditbackingoftheUnitedStatesgovernment.Onlysuchlicenseescouldusestatementsofintenttomeetdecommissioningfinancialassurancerequirementsforpowerreactors.Requirenuclear.powerplantlicenseestoreportto.theNRConthestatusoftheirdecommissioningfundsatleastonceeverythreeyearsandannuallywithinfiveyearsoftheplannedendofoperation.NRC'spresentrulecontainsnosuchrequirementbecauseStateandFederalrate-regulatingbodiesactivelymonitorthesefunds.Aderegulatednuclearutilitywouldhavenosuchmonitoring.Permitnuclearlicenseestotake~creditonearningsforprepaiddecommissioningtrustfundsandexternalsinkingfundsfromthetimethefundsaresetasidethroughtheendofthedecommissioningperiod.Thepresentruledoesnotpermitsuchcreditbecauseitassumedthatinflationandtaxeswoulderodeanyinvestmentreturn.NRChasdecided,however,thatthispositionisnotborneoutbyhistoricalperformanceofinflation-adjustedfundsinvestedinU.S.Treasuryinstruments.TheCompanyisunabletopredicttheoutcomeofthismatter.PSCStaff'sTentativeConclusionsontheFutureofNuclearGeneration:OnAugust27,'997,thePSCrequestedcommentsonitsstaff'stentativeconclusionsabouthownucleargenerationandfossilgenerationshouldbetreatedafterdecisionsaremadeontheindividualelectricrestructuringagreementscurrentlypendingbeforethePSC.ThePSCstaffconcludedthatbeyondthetransitionperiod(theperiodcoveredbythevariousNewYorkutility'estructuringagreements,includingPowerChoice),nucleargenerationshouldoperateonacompetitivebasis.Inaddition,thePSCstaffconcludedthatasaleofgenerationplantstothirdpartiesisthepreferredmeansofdeterminingthefairmarketvalueofgenerationplantsandoffersthegreatestpotentialforthemitigationofstrandedcosts.ThePSCstaffalsoconcludedthatrecoveryofsunkcosts,includingpostshutdowncosts,wouldbesubjecttoreviewbythePSCandthisprocessshouldtakeintoaccountmitigationmeasurestakenbytheutility,includingthestepsithastakentoencouragecompetitioninitsservicearea.InOctober1997,themajorityofutilitieswithinterestsinnuclearpowerplants,includingtheCompany,requestedthatthePSCreconsideritsstaff'snuclearproposal.Inaddition,theutilitiesraisedthefollowingissues:impedimentstonuclearplantsoperatinginacompetitivemode;impedimentstothe-64-saleofplants;responsibilityfordecommissioninganddisposalofspentfuel;safetyandhealthconcerns;andenvironmentalandfueldiversitybenefits.Inlightofalloftheseissues,theutilitiesrecommendedthatamoreformalprocessbedevelopedto.addressthoseissues.Thethreeinvestor-ownedutilities,RochesterGasandElectricCorporation,ConsolidatedEdisonCompanyofNewYork,Inc.andtheCompany,whicharecurrentlypursuingformationofanuclearoperatingcompanyinNewYorkState,alsofiledaresponsewiththePSCinOctober1997.Theresponsestatedthataforceddivestitureofthenuclearplantswouldadduncertaintytodevelopingastatewideapproachtooperatingtheplantsandrequestedthatsuchaforceddivestitureproposalberescinded.Theresponsealsostatedthatimplementationofaconsolidatedsix-unitoperationwouldcontributetothemitigationofunrecoverednuclearcosts.NYPA,whichisalsopursuingformationofthenuclearoperatingcompany,submitteditsowncommentswhichweresimilartothecommentsofthethreeutilities.PowerChoicecontemplatesthattheCompany'snuclearplantswillremainpartoftheCompany'sregulatedbusinessandthattheCompanywillcontinueeffortstopursueastatewidesolutionsuchastheNewYorkNuclearOperatingCompany.Thesettlementstipulatesthatabsentastatewidesolution,theCompanywillfileadetailedplanforanalyzingproposedsolutionsforitsnuclearassets,includingthefeasibilityofanauction,transferand/ordivestiturewithin24monthsofPowerChoiceapproval.AtDecember31,1997,thenetbookvalueoftheCompany'snuclearassetswasapproximately$1.5billion,excludingthereservefordecommissioning.NuclearLiabilityInsurance:TheAtomicEnergyActof1954,asamended,requiresthepurchaseofnuclearliabilityinsurancefromtheNuclearInsurancePoolsinamountsasdeterminedbytheNRC.Atthepresenttime,theCompanymaintainstherequired$200millionofnuclearliabilityinsurance.Withrespecttoanuclearincidentatalicensedreactor,thestatutorylimitfortheprotectionofthepublicunderthePrice-AndersonAmendmentsActof1988whichisinexcessofthe$200millionofnuclearliabilityinsurance,iscurrently$8.2billionwithoutthe5%surchargediscussedbelow.Thislimitwouldbefundedbyassessmentsofupto$75.5millionforeachofthe110presentlylicensednuclearreactorsintheUnitedStates,payableataratenottoexceed$10millionperreactorperyear.Suchassessmentsaresubjecttoperiodicinflationindexingandtoa5%surchargeiffundsproveinsufficienttopayclaims.Withthe5%surchargeincluded,thestatutorylimitis$8.6billion.TheCompany'sinterestinUnits1and2couldexposeittoamaximumpotentialloss,foreachaccident,of$111.8million(with5%assessment)throughassessmentsof$14.1millionperyearintheeventofaseriousnuclearaccidentatitsownoranotherlicensedU.S.commercialnuclearreactor.Theamendmentsalsoprovide,amongotherthings,thatinsuranceandindemnitywillcoverprecautionaryevacuations,whetherornotanuclearincidentactuallyoccurs.NuclearPropertyInsurance:TheNineMilePointNuclearSitehas$500millionprimarynuclearpropertyinsurancewiththeNuclearInsurancePools(ANI/MRP).Znaddition,thereis$2.25billioninexcessofthe$500millionprimarynuclearinsurancewithNuclearElectricInsuranceLimited("NEIL").Thetotalnuclearpropertyinsuranceis$2.75billion.NEILalsoprovidesinsurancecoverageagainsttheextraexpenseincurredinpurchasingreplacementpowerduringprolongedaccidentaloutages.Theinsuranceprovidescoverageforoutagesfor156weeks,aftera21-weekwaitingperiod.NEILinsuranceissubjecttoretrospectivepremiumadjustmentunderwhichtheCompanycouldbeassesseduptoapproximately$11.3millionperloss.LowLevelRadioactiveWaste:TheCompanycurrentlyusestheBarnwell,SouthCarolinawastedisposalfacilityforlowlevelradioactivewaste;however,continuedaccesstoBarnwellisnotassuredandtheCompanyhasimplementedalowlevelradioactivewastemanagementprogramsothatUnit1andUnit2arepreparedtoproperlyhandleinterimon-sitestorageoflowlevelradioactivewasteforatleasta10yearperiod.-65-UndertheFederalLowLevelWastepolicyAmendmentActof1985,NewYorkStatewasrequiredbyJanuary1,1993tohavearrangedforthedisposalofalllowlevelradioactivewastewithinthestateorinthealternative,contractedforthedisposalatafacilityoutsidethestate.Todate,NewYorkStatehasmadenofundingavailabletosupportsitingforadisposalfacility.NuclearFuelDisposalCost:ZnJanuary1983,theNuclearWastePolicyActof1982(the"NuclearWasteAct")establishedacostof$.001,perKWhofnetgenerationforcurrentdisposalofnuclearfuelandprovidesforadeterminationoftheCompany'sliabilitytotheDOEforthedisposalofnuclearfuelirradiatedpriorto1983.TheNuclearWasteActalsoprovidesthreepaymentoptionsforliquidatingsuchliabilityandtheCompanyhaselectedtodelaypayment,withinterest,untiltheyearinwhichtheCompanyinitiallyplanstoshipirradiatedfueltoanapprovedDOEdisposalfacility.AsofDecember31,1997,theCompanyhasrecordedaliabilityof$114.3millionforthedisposalofnuclearfuelirradiatedpriorto1983.ProgressindevelopingtheDOEfacilityhasbeenslowanditisanticipatedthattheDOEfacilitywillnotbereadytoacceptdeliveriesuntilatleast2010.However,inJuly1996,theUnitedStatesCircuitCourtofAppealsfortheDistrictofColumbiaruledthattheDOEmustbeginacceptingspentfuelfromthenuclearindustrybyJanuary31,1998eventhoughapermanentstoragesitewillnotbereadybythen.TheDOEdidnotappealthisdecision.OnJanuary31,1997,theCompanyjoinedanumberofotherutilities,states,stateagenciesandregulatorycommissionsinfilingasuitintheU.S.CourtofAppealsfortheDistrictofColumbiaagainsttheDOE.ThesuitrequestedthecourttosuspendtheutilitiespaymentsintotheNuclearWasteFundandtoplacefuturepaymentsintoanescrowaccountuntiltheDOEfulfillsitsobligationtoacceptspent.fuel.OnJune3,1997,theDOEnotifiedutilitiesthat.itlikelywillnotmeetitsJanuary31,1998deadlineandthatthedelaywasunavoidablepursuanttothetermsofthestandardcontractwithDOEforfueldisposal.DOEalsoindicateditwasnotobligatedtoprovideafinancialremedyforsuchunavoidabledelay.OnNovember14;1997theUnitedStatesCourtofAppealsfortheDistrictofColumbiaCircuitissuedawritofmandamusprecludingDOEfromexcusingitsowndelayonthegroundsthatithasnotyetpreparedapermanentrepositoryorinterimstoragefacility.OnDecember11,1997,27utilities,includingtheCompany,petitionedtheDOEtosuspendtheirfuturepaymentstotheNuclearWasteFunduntiltheDOEbeginsmovingfuelfromtheirplantsites.ThepetitionfurthersoughtpermissiontoescrowpaymentstothewastefundbeginninginFebruary1998.OnJanuary12,1998,theDOEdeniedthepetition.TheCompanyisunabletodeterminethefinaloutcomeofthismatter.~TheCompanyhasseveralalternatives.underconsiderationtoprovideadditionalstoragefacilities,asnecessary.EachalternativewilllikelyrequireNRCapproval,mayrequireotherregulatoryapprovalsandwouldlikelyrequireincurringadditionalcosts,whichtheCompanyhasincludedin'itsdecommissioningestimatesforbothUnit1anditsshareofUnit2.TheCompanydoesnotbelievethatthepossibleunavailabilityoftheDOEdisposalfacilityuntil2010willinhibitoperationofeitherUnit.-66-NOTE4.Jointl-OwnedGeneratinFacilitiesThefollowingtablereflectstheCompany'sshareofjointly-ownedgeneratingfacilitiesatDecember31,1997.TheCompanyisrecgxiredtoprovideitsrespectiveshareoffinancingforanyadditionstothefacilities.Poweroutputandrelatedexpensesaresharedbasedonproportionateownership.TheCompany'sshareofexpensesassociatedwith.thesefacilitiesisincludedintheappropriateoperatingexpensesintheConsolidatedStatementsof.Zncome.UnderPowerChoice,theCompanywilldivestallofitsfossilandhydrogenerationassetswithanet.bookvalueof$1.1billion,'ncludingitsinterestsinjointly-ownedfacilities.InthousandsofdollarsRosetonSteamStationUnits.Ho;~1and2(a)..~~.PercentageOwnershipUtilitPlant$96,110AcctlatedDerecintion$54,130ConstructionMorkinProgress$432OswegoSteamStationUnitHo.6(b>......~.NineNilePointNuclearStationUnitNo.2(c>76$270,316$1,507,721$125,089$327,006$39$6,748,(a)TheremainingownershipinterestsareCentralHudsonGasandElectricCorporation(>>CentralHudson>>),theoperatoroftheplant(35X),andConsolidatedEdisonCompanyofNewYork,Inc.(40X)~OutputofRosetonUnitsNo.1and2,whichhaveacapabilityof1,200,000Ol,issharedinthesameproportionsasthecotenants'espectiveownershipinterests.(b)TheCospanyistheoperator.TheremainingownershipinterestisRochesterGasandElectric(>>RGB>>)(24X).OutputofOswegoUnitNo.6,whichhasacapabilityof850,000Ol,issharedinthesameproportionsasthecotennnts'espectiveownershipinterests.(c)TheCompanyistheoperator.TheremainingownershipinterestsareLongIslandLightingCcmpnny(>>LILCO>>)(18X),NewYorkStateElectric8GnsCorporation(>>NYSEG>>)(18X),RGSE(14X),andCentralHudson(9X).OutputofUnit2,whichhasacapabilityof1,143,000Gl,issharedinthesameproportionsasthecotennnts'espectiveownershipinterests.InJune1997,LILCOandLongIslandPowerAuthority(>>LIPA>>)enteredintoanagreement,whereby,uponcompletionofcertaintransactions,LILCO'sstockwouldbesoldtoLIPA.ItisanticipatedthatLIPAwouldownLILCO's18XownershipinterestinUnit2.InJuly1997,theHewYorkStatePublicAuthoritiesControlBoardunanimouslyapprovedtheagreementsrelatedtotheLIPAtransaction,subJecttocertainconditions,andLILCO'sstockholderssubsequentlyapprovedthistransaction.-67-italizationALSTOCKTheCompanyisauthorizedtoissue185,000,000sharesofctxtmonstock,$1parvalue;3,400,000sharesofpreferredstock,$100parvalue;19,600,000sharesofpreferredstock,$25parvalue;and8,000,000sharesofpreferencestock,$25parvalue.Thetablehelotsmmarizeschangesinthecapitalstockissuedandoutstandingandtherelatedcapitalaccountsfor1995,1996and1997:CotnnonStock$1rvalueSharesAmount*$100rvalueSharesNon-Redeemable~PreferredStockRedeemable~Shares$25rvalueNon-Redeemable"Redeemable~CapitalStockPremiunandExpense(Net)*Deccaher31~1994:IssuedRedeaptionsForeigncurrencytranslationadjustment20,65721(18,000)144,311,466$144,3112,376,000$210,000(1,800)(366,000)(9,150)1,3193,141$27,600(a)12,774,005$230,000$89,350(a)$1,779,504Oeceaher31,1995:Issued.144,332,123$144,3322,358,000$210,00033,09133$25,800(a)12,408,005$230,000$80,200(a)$1,784,247214RedemptionsForeigncurrencytranslationadjustment(18,000)(1,800)(344,000)(8,600)(28)(708)Oeceaher31,1996:Issued144,365,214$144,3652,340,000$210,00054,13754$24,000(a)12,064,005$230,000$71,600(a)$1,783,725426RedemptionsForeigncurrencytranslationadjustment(18,000)(1,800)(282,801)(7,070)104(4,567)Deceaher31~1997144,419,351$144,4192,322,000$210,000~Inthousandsofdollars(a)IncludessinkingfundrequirementsdueMithinoneyear.$22,200(a)11,781,204'230,000$64,530(a)$1,779,6MThecunuiativeamountofforeigncurrencytranslationadjustmentatDecetther31,1997Mas$(15,448)~-68-NON-REDEEMABLEPREFERREDSTOCK(OptionallyRedeemable)TheCompanyhadcertainissuesofpreferredstockwhichprovideforoptionalredemptionatDecember31,asfollows:InthousandsofdollarsRedemptionpricepershare(Beforeaddingace+minteddividends)SeriesPreferred3.40K3.60K3.90K4.'le4.85K5.25K6.10K7.72KShares$100parvalue:200,000350,000240,000210,000250,000200,000250,000400,0001997S20,00035,00024,00021,00025,00020,00025,00040,000S20,00035,00024,00021,00025,00020,00025,00040,000$103.50104.85106.00102.00102.00102.00101.00102.36Preferred$25parvalue:9.50K6,000,000AdjustableRate-150,000150,00025.00(a)SeriesASeriesC1,200,0002,000,00030,00050,000$440,00030,00050,000$44000025.0025.00(a)Notredeemableuntil1999.-69-MANDATORILYREDEKHABLEPREFERREDSTOCKAtDecember31,.theCompanyhadcertainissuesofpreferredstock,asdetailedbelow,whichprovideformandatoryandoptionalredemption.TheseseriesrequiremandatorysinkingfundsforannualredemptionandprovideoptionalsinkingfundsthroughwhichtheCompanymayredeem,atpar,alikeamountofadditionalshares(limitedto120,000sharesofthe7.45%series).Theoptiontoredeemadditionalamountsisnotcumulative.TheCompany'fiveyearmandatorysinkingfundredemptionrequirementsforpreferredstock,inthousands,for1998through2002areasfollows:$10,120;$7,620;$7,620;$7,620and$3,050,respectively.TheaggregatepreferenceofpreferredsharesuponinvoluntaryliquidationoftheCompanyistheaggregateparvalueofsuchshares,plusanamountequaltothedividendsaccumulatedandunpaidonsuchsharestothedateofpaymentwhetherornotearnedordeclared.SeriesPreferred$100parvalue:1996Inthousandsofdollars1996Redemptionpricepershare(Beforeaddingaccumlateddividends)Eventualminiaun7.45KPreferred$25parvalue:240,000$24,000$101.69$100.007.85K8.375KAdjustableRate-SeriesB731,204100,000914,005200,0001,750,0001,750,000ssinkingfundrirements18,2802,50043,75086,73010,120$76,61022,8505,00043,75095,6008,870$86,73025.2825.0025.0025.0025.00-70-LONG-TERMDEBTLong-termdebtatDecember31consistedofthefollowing:Series'ueinthousandsofdollars1996Firstsertgagebonds:61/4X61/2X91/2X67/BX91/4X57/8).67/By.73/BX8X65/BX93/4X73/4X*65/8).91/2X83/4'X81/2X77/BX*87/8X*7.2X1997199820002001200120022003200320042005200520062013202120222023202420252029S60,000150,000210,000100,0002M,00085,000220,000300,0DD110,000150,000275,00045,600150,000150,000165,000210,00075,000115,705S40,00060,000150,000210,000100,000230,00085,000220,000300,000110,000150,000275,00045,600150,000150,000165,000210,00075,000115,705TotalFirstHortgageBondsPrasissorynotes:~AdjustableRateSeriesdueJuly1,2015December1,2023December1,2025"December1,2026Harch1,2027July1,2027TermLoanAgreementUnsecurednotespayable:HediumTermNotes,Variousrates,due2000-2004OtherUnamortizedremiua(discount)TOTALLMG-TERHDEBTLesslong-termdebtduewithinoneear*Tax-exemptpollutioncontrolrelatedissues2,801,305100,00069,80075,00050,00025,76093,200105,00020,000154,'295(9884)3,484,47667095$34173812,841,305100,00069,80075,00050,00025,76093,200105,00020,000156,606(10708)3,525,96348084$3477'879-71-SeveralseriesofFirstMortgageBondsandPromissoryNoteswereissuedtosecurealikeamountoftax-exemptrevenuebondsissuedbyNYSERDA.Approximately$414millionofsuchsecuritiesbearinterestatadailyadjustableinterestr'ate(withaCompanyoptiontoconverttootherrates,includingafixedinterestratewhichwouldrequiretheCompanytoissueFirstMortgageBondstosecurethedebt)whichaveraged3.63%for1997and3.46%for1996andaresupportedbybankdirectpaylettersofcredit.PursuanttoagreementsbetweenNYSERDAandtheCompany,proceedsfromsuchissueswereusedfor.thepurposeoffinancingtheconstructionofcertainpollutioncontrolfacilitiesattheCompany'sgeneratingfacilitiesortorefundoutstandingtax-exemptbondsandnotes(seeNote6).Otherlong-termdebtin1997consistsofobligationsundercapitalleasesofapproximately$29.7million,aliabilitytotheDOEfornuclearfueldisposalofapproximately$114.3millionandaliabilityforZPPcontractterminationsofapproximately$10.3million.Theaggregatematuritiesoflong-termdebtforthefiveyearssubsequenttoDecember31,1997,excludingcapitalleases,inmillions,areapproximately$64,$108,$158,$310and$230xespectively.TheCompany'saggregatematuritieswillincreasesignificantlyuponclosingoftheMRA.SeeZtem7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"MasterRestructuringAgreementandthePowerChoiceAgreement."NOTS6.BankCreditArranementsTheCompanyhasan$804millionseniordebtfacilitywithabankgroupconsistingofa$255milliontermloanfacility,a$125,millionrevolvingcreditfacilityand$424millionforlettersofcredit.TheletterofcreditfacilityprovidescreditsupportfortheadjustableratepollutioncontrolrevenuebondsissuedthroughtheNYSERDAdiscussedinNote5.AsofDecember31,1997,theamountoutstandingundertheseniordebtfacilitywas$529million,consistingof$105millionunderthetermloanfacilityanda$424millionletterofcredit,leavingtheCompanywith$275millionofborrowingcapabilityunderthefacility.ThefacilityexpiresonJune30,1999(subjecttoearlierterminationiftheCompanyseparatesitsfossil/hydrogenerationbusinessfromitstransmissionand~~distributionbusiness,oranyothersignificantrestructuringplan).Theinterestrateapplicabletothefacilityisvariablebasedoncertainrateoptionsavailableundertheagreementandcurrentlyapproximates7.7%(butcappedat15%).TheCompanyiscurrentlynegotiatingwiththelenderstoreplacetheseniordebtfacilitywithalargerfacilitytofinancepartoftheMRA.TheCompanydidnothaveanyshort-termdebtoutstandingatDecember31,1997and1996.-72-NOTB7.PederalandPoreiIncomeTaxesSeeNote9-"TaxAssessments."ComponentsofUnitedStatesandforeignincomebeforeincometaxes:Inthousandsofdollars,199719961995UnitedStates.$125,027Foreign.(1,621)Consolidatineliminations................"3476$269,12828,52217402$400,08717,60910267Incomebeforeextraordinaritemandincometaxes....$119930$280248$407429Followingisasummaryof-thecomponentsofFederalandforeignincometaxandareconciliationbetweentheamountofFederalincometaxexpensereportedintheConsolidatedStatementsofIncomeandthecomputedamountatthestatutorytaxrate:CoaponentsofFederalandforeignincmataxes:Inthousandsofdollars1996~1995Currenttaxexpense:Federal~......~~...S77,56577565S96,011370899719$67,366390071266Deferredtaxexpense:Federal............(18,664).,382Forefn............119423931747084,002412588127Total.......................S60095$102494$159393ReconciliationbetweenFederalandforeignindetaxesandthetaxcoastedatprevailingU.S.statutoryrateoninccsebeforeincmetaxes:Ctedtax....................S41975S98087$142601Increase(reduction)attributabletofloM-throughofcertaintaxadjustments:DepreciationCostofremovalDeferredinvestmenttaxcreditamortizationther036,411(8,168)(7,454)26691812028,103(8,849)(8,018)6829440731,033~(90247)~(8,589)359516792Federalandforeinincometaxes..........S60095$102494$159393AtDecember31,thedeferredtaxliabilities(assets)werecomprisedofthefollowing:'Inthousandsofdollars19971996I3ouerChoicecharge.........S(66,500)Alternativeminiatetax......(17,448)Unbilledrevenue.........(88,859)other...............~2CT438Totaldeterredtaxassets..~4202C5Depreciationrelated.......1,358,827Investmenttaxcreditrelated...79,858Other.302072Totaldeicrredtcxliabilities1740777Accmrmlatcddeierrcdincometaxes.01320532*Doesnotincludethedeferredtaxbenefitof$36,theextraordinaryitemforthediscontinuanceprinciples.s(64,313)(83,577)~237850>~38574071,421,55084,294237CIC17C325881357518273in1996associatedwithofregulatoryaccounting-73-NOTB8.PensionandOtherRetirementPlansTheCompanyandcertainofitssubsidiarieshavenon-contributory,defined-benefitpensionplanscoveringsubstantiallyalltheiremployees.Benefitsarebasedontheemployee'syearsofserviceandcompensationlevel.TheCompany'sgeneralpolicyistofundthepensioncostsaccruedwithconsiderationgiventothemaximumamountthatcanbedeductedforFederalincometaxpurposes.Netpensioncostfor1997,1996and1995includedthefollowingcomponents:InthousandsofdollarsServicecost-benefitsearnedduringtheperiod....Interestcostonprojectedbenefitobligation~....Actualreturnonplanassets.~...~Netamortizationanddeferral.............S27,10075g200(188,200)100,400S25,00071,700(134,100)55,700S22,50073,000(215,600)140,300Totensioncost1S14500$'18300$20200(1)$3.2millionfor1997,$3.8millionfor1996and$4.1millionfor1995wasrelatedtoconstructionlaborand,accordingly,Maschargedtoconstructionprojects.Thefollowincrtablesetsforththeplan'sfundedstatusandamountsrecognizedintheCompany'sConsolidatedBalanceSheets:AtDecerher31Actuarialpresentvalueofaccumjlatedbenefitobligations:VestedbenefitsNon-vestedbenefits..Inthousandsofdollars1996S990,415$803,20283,107Accumulatedbenefitobligations.1,063,845Additionalamountsrelatedtoprojectedpayincreases......~....108,M3886,309141,472Projectedbenefitsobligationforservicerenderedtodate.......~.1,172,4281,027,781Planassetsatfairvalue,consistingprimarilyoflistedstocks,bonds,otherfixedincomeobligationsandinsurancecontracts.....(1,304,338)(1,159,822)Planassetsinexcessofprojectedbenefitobligations...........UnrecognizednetobligationatJanuary1,1987beingrecognizedoverapproximately19years.......~~~~~~~~~~~\~Unrecognizednetgainfromactualreturnonplanassetsdifferentfromthat,assumed.~~~~~~~~~~~~~~~~Unrecognizednetgainfrompastexperiencedifferentfromthatassunedandeffectsofchangesinassurptionsamortizedover10years.....Priorservicecostnotyetrecognizedinnetperiodicpensioncost:....(131,910)(19,446)2&5,10019,920(50,473)(132,041)(22,005)219,68066,129(49,651)Pensionliabilitincludedintheconsolidatedbalancesheets.......S83191$82112PrincipleActuarialAssumptions(X):DiscountRate.Rateofincreaseinfuturecompensationlevels(plusmeritincreases).~Lon-termrateofreturnonlanassets.7.002.509.257.502.509.25-74-Inadditiontoprovidingpensionbenefits,theCompanyanditssubsidiariesprovidecertainhealthcareandlifeinsurancebenefitsforactiveandretiredemployeesanddependents.Undercurrentpolicies,substantiallyalloftheCompany'semployeesmay,beeligibleforcontinuationofsomeofthesebenefitsuponnormalorearlyretirement.TheCompanyaccountsforthecostofthesebenefitsinaccordancewithPSCpolicyrequirementswhichcomplywithSFASNo.106.TheCompanyhasestablishedvarioustruststofunditsfuturepostretirementbenefitobligation.In1997,1996and1995,theCompanymadecontributionstosuchtrustsofapproximately$13.5million,$28.5millionand$53.1million,respectively,whichrepresenttheamountreceivedinratesandfromcotenants.Netpostretirementbenefitcostfor1997,1996and1995includedthefollowingcomponents:Servicecost-benefitsattributedtoserviceduringtheperiod....InterestcostonaccmalatedbenefitobligationInthousandsofdollars199719961995$12,300$12,900$12,60037,50045,400Actualreturnonplanassets..~~~~~(24,500)(12,900)(11,200)Amortizationofthetransition'obligationover20years......~.Hetamortization.10,9009,50013,50018,800600014,600Totalpostretirementbenefitcost$43,000$57,000$80,200.Thefollowingtablesetsforththeplan'sfundedstatusandamountsrecognizedintheCompany'sConsolidatedBalanceSheets:Actuarialpresentvalueofaccumlatedbenefitobligations:Retiredandsurvivingspouses.........Activeeligible~.Activeineligible.Accumlatedbenefitobligation.AtDecember31Inthousandsofdollars19971W6~$392,832$370,25931,03069441519,851470,730Planassetsatfairvalue,consistingprimarilyoflistedstocks,bondsandotherfixedobligationsAccumulatedpostretirementbenefitobligationinexcessofplanassets..Unrecognizednetlossfrompastexperiencedifferentfromthatassignedandeffectsofchangesinassumptions...~...~..........Priorservicecostnotyetrecognizedinpostretirementbenefitcost...Unrecognizedtransitionobligationbeingamortizedover20years.....Accruedpostretirementbenefitliabilityincludedintheconsolidatedbalancesheet~~~~~~~~0~~~~~~~~~(181101)(143071)338,750327,659(48,466)(36,048)30,M639,205(163,350)(174,240)$157,020$156,576Principalactuarialassumptions()l):DiscountrateLong-termrateofreturnonplanassets..Healthcarecosttrendrate:Pre65'~~Post-65..7.009.257.006.007.508.008.00-75-During1996,theCompanychangedtheeligibilityrequirementsforplanbenefitsforemployeeswhoretireafterMay1,1996.Generally,planbenefitsarenowaccruedforeligibleparticipantsbeginningafterage45.Previoustothischange,theCompanyaccruedthesebenefitsovertheemployees'ervicelife.Theeffectofthischangeresultedinadecreaseintheaccumulatedbenefitobligationforactiveineligibleemployees.AtDecember31,1997,theassumedhealthcosttrendratesgraduallydeclineto5.0%in2001.Ifthehealthcarecosttrendratewasincreasedbyonepercent,theaccumulatedpostretirementbenefitobligationasofDecember31,1997wouldincreasebyapproximately6.7%andtheaggregateoftheserviceandinterestcostcomponentofnetperiodicpostretirementbenefitcostfortheyearwouldincreasebyapproximately5.8%.TheCompanyrecognizestheobligationtoprovidepostemploymentbenefitsiftheobligationisattributabletoemployees'astservices,rightstothosebenefitsarevested,paymentisprobableandtheamountofthebenefitscanbereasonablyestimated.AtDecember31,1997and1996,theCompany'spostemploymentbenefitobligationisapproximately$13~3millionand$13million,respectively.NOTE9.CommitmentsandContinenciesSeeNote2.Long-termContractsforthePurchaseofElectricPower:AtJanuary1,1998,theCompanyhadlong-termcontractstopurchase,electricpowerfromthefollowinggeneratingfacilitiesownedbyNYPA:FacilityNiagara-hydroelectricproject.....St.LaMrence-hydroelectricproject...Blenheim-Gilboa-pumpedstoragegeneratingstation...........Expirationdateofcontract200720072002PurchasedcapacityinN951270Estimatedannualcacitcost$27,369,0001,300,0007,500,0001,325$36,169,000Thepurchasecapacitiesshownabovearebasedonthecontractscurrentlyineffect.Theestimatedannualcapacitycostsaresubjecttopriceescalationandareexclusiveofapplicableenergycharges.ThetotalcostofpurchasesunderthesecontractsandtherecentlycancelledcontractwithFitzpatricknuclearplantwasapproximately,inmillions,$91.0,$93.3and$92.5fortheyears1997,1996and1995,respectively.InMay1997,theCompanycancelleditscommitmenttopurchase110MWofcapacityfromtheFitzpatrickfacility.TheCompanycontinuestohaveacontractwithFitzpatricktopurchaseforresaleupto46MWofpowerforNYPA'seconomicdevelopmentcustomers.UndertherequirementsofPURPA,theCompanyisrequiredtopurchasepowergeneratedbyIPPs,asdefinedtherein.TheCompanyhas141'PAswith148facilities,ofwhich143areonline,amountingtoapproximately2,695MWofcapacityatDecember31,1997.Ofthisamount2,382MWisconsideredfirm.Thefollowingtableshowsthepaymentsforfixedandothercapacitycosts,andenergyandrelatedtaxestheCompanyestimatesitwillbeobligatedtomakeunderthesecontractswithoutgivingeffecttotheMRA.Thepaymentsaresubjecttothetestedcapacityandavailabilityofthefacilities,schedulingandpriceescalation.-76-(Znthousandsofdollars)SchedulableFixedCostsVariableCostsYearCapacityOtherEnergyandTaxesTotal1998$247,7401999252,1302000242,0302001244,6202002248,940$41,42042,45044,08045,65047,330$906,590943,720974,0801,042,3801,063,830$1,195,7501,238,3001,260,1901,332,6501,360,100Thecapacityandotherfixedcostsrelatetocontractswith11facilities,wheretheCompanyisrequiredtomakecapacityandotherfixedpayments,includingpaymentswhenafacilityisnotoperatingbutavailableforservice.These11facilitiesaccountforapproximately774MWofcapacity,withcontractlengthsrangingfrom20to35years.ThetermsoftheseexistingcontractsallowtheCompanytoscheduleenergydeliveriesfromthefacilitiesandthenpayfortheenergydelivered.TheCompanyestimatesthefixedpaymentsunderthesecontractswillaggregatetoapproximately$8billionovertheirterms,usingescalatedcontractrates.ContractsrelatingtotheremainingfacilitiesinserviceatDecember31,1997,requiretheCompanytopayonlywhenenergyisdelivered,exceptwhentheCompanydecidesthatitwouldbebettertopayaparticularprojectareducedenergypaymenttohavetheprojectreduceitshighpricedenergydeliveriesasdescribedbelow.TheCompanycurrentlyrecoversschedulablecapacitythroughbaseratesand.energypayments,taxesandotherschedulablefixedcoststhroughtheFAC.TheCompanypaidapproximately$1,106million,$1,088millionand$980millionin1997,1996and1995for13,500,000MWh,13,800,000MWhand14;000,000MWh,respectively,ofelectricpowerunderallZPPcontracts.OnJuly9,1997,theCompanyannouncedtheMRAtoterminate,restateoamendcertainZPPpowerpurchasecontracts.Asaresultofnegotiations,thecurrentlyprovidesforthetermination,restatementoramendmentof28PPAswith15ZPPs,inexchangeforanaggregateofapproximately$3,616millionincashand42.9millionsharesoftheCompany'scommonstockandcertainfixedpriceswapcontracts.UnderthetermsoftheMRA,theCompanywouldterminatePPAsrepresentingapproximately1,180MWofcapacityandrestatecontractsrepresenting583MWofcapacity.Therestatedcontractsarestructuredtobeintheformoffinancialswapswithfixedpricesforthefirsttwoyearschangingtoanindexedpricingformulathereafter.Thecontractquantitiesarefixedforthefulltenyeartermofthecontracts.TheMRAalsorequirestheCompanytoprovidetheZPPPartieswithanumberoffixedpriceswapcontractswithatermofsevenyearsbeginningin2003.ThetermsoftheMRAhavebeenandcontinuetobemodified.Since1996,theCompanyhasnegotiated2longtermandseverallimitedtermcontractamendmentswherebytheCompanycanreducetheenergydeliveriesfromthefacilities.ThesereducedenergyagreementsresultedinareductionofZPPdeliveriesofapproximately1,010,000MWhand984,000MWhduring1997and1996,respectively.SaleofCustomerReceivables:TheCompanyhasestablishedasingle-purpose,wholly-ownedfinancingsubsidiary,NMReceivablesCorp.,whosebusinessconsistsofthepurchaseandresaleofanundividedinterestinadesignatedpoolofcustomerreceivables,includingaccruedunbilledrevenues.Forreceivablessold,theCompanyhasretainedcollectionandadministrativeresponsibilitiesasagentforthepurchaser.Ascollectionsreducepreviouslysoldundivided'nterests,newreceivablesarecustomarilysold.NMReceivablesCorp.hasitsownseparatecreditorswhich,uponliquidationofNMReceivablesCorp.,willbeentitledtobesatisfiedoutofitsassetspriortoanyvaluebecomingavailabletotheCompany.Thesaleofreceivablesareinfeesimpleforareasonablequivalentvalueandarenotsecuredloans.SomereceivableshavebecontributedintheformofacapitalcontributiontoNMReceivablesCorp.infesimpleforreasonablyequivalentvalue,andallreceivablestransferredtoNM-77-ReceivablesCorp.areassetsownedbyNMReceivablesCorp.infeesimpleandarenotavailabletopaytheparentCompany'screditors.AtDecember31,1997and1996,$144.1and$250million,respectively,ofreceivableshadbeensoldbyNMReceivables,Corp.toathirdparty.Theundividedinterestinthedesignatedpoolofreceivableswassoldwithlimitedrecourse.Theagreementprovidesforaformulabasedlossreservepursuanttowhichadditionalcustome'rreceivablesareassignedtothepurchasertoprotect'gainstbaddebts.AtDecember31,1997,theamountofadditionalreceivablesassignedtothepurchaser,asalossreserve,wasapproximately$64.4million.Althoughthisrepresentstheformula-basedamountofcreditexposureatDecember31,1997undertheagreement,historicall'osseshavebeensubstantiallyless.Totheextentactuallossexperienceofthepoolreceivablesexceedsthelossreserve,thepurchaserabsorbstheexcess.ConcentrationsofcreditrisktothepurchaserwithrespecttoaccountsreceivablearelimitedduetotheCompany'slarge,diversecustomerbasewithinitsserviceterritory.TheCompanygenerallydoesnotrequirecollateral,i.e.,customerdeposits.TaxAssessments:TheInternalRevenueService("IRS")hasconductedanexaminationoftheCompany'sfederalincometaxreturnsfortheyears1989and1990andissuedaRevenueAgents'eport.TheZRShasraisedanissueconcerningthedeductibilityofpaymentsmadetoZPPsinaccordancewithcertaincontractsthatincludeaprovisionforatrackingaccount.AtrackingaccountrepresentsamountsthatthesemandatedcontractsrequiredtheCompanytopayIPPsinexcessoftheCompany'savoidedcosts,includingacarryingcharge.TheZRSproposestodisallowacurrentdeductionforamountspaidinexcessoftheavoidedcostsoftheCompany.AlthoughtheCompanybelievesthatanysuchdisallowancesfortheyears1989and1990willnothaveamaterialimpactonitsfinancialpositionorresultsofoperations,itbelievesthatadisallowancefortheseabove-marketpaymentsfortheyearssubsequentto1990couldhaveamaterialadverseaffectonitscashflows.TotheextentthatcontractsinvolvingtrackingaccountsareterminatedorrestatedoramendedundertheMRAwithIPPPartiesasdescribedinNote2,theeffectsofanyproposeddisallowancewouldbemitigatedwithrespecttotheZPPPartiescoveredundertheMRA.TheCompanyisvigorouslydefendingitspositiononthisissue.TheZRSiscurrentlyconductingitsexaminationoftheCompany'sfederalincometaxreturnsfortheyears1991through1993.EnvironmentalContingencies:Thepublicutilityindustrytypicallyutilizesand/orgeneratesinitsoperationsabroadrangeofhazardousandpotentiallyhazardouswastesandby-products.TheCompanybelievesitishandlingidentifiedwastesandby-productsinamannerconsistentwithfederal,stateandlocalrequirementsandhasimplementedanenvironmentalauditprogramtoidentifyanypotentialareasofconcernand,aidincompliancewithsuchrequirements.TheCompanyisalsocurrentlyconductingaprogramtoinvestigateandrestore,asnecessarytomeetcurrentenvironmentalstandards,certainpropertiesassociatedwithitsformergasmanufacturingprocessandotherpr'opertieswhichtheCompanyhaslearnedmaybecontaminatedwithindustrialwaste,aswellasinvestigatingidentifiedindustrialwastesitesastowhichitmaybedeterminedthattheCompanycontributed.TheCompanyhasalsobeenadvisedthatvariousfederal,stateorlocalagenciesbelievecertainpropertiesrequireinvestigationandhasprioritizedthesitesbasedonavailableinformationinordertoenhancethemanagementofinvestigationandremediation,ifnecessary.TheCompanyiscurrentlyawareof124siteswithwhichithasbeenormaybeassociated,including76whichareCompany-owned.ThenumberofownedsitesincreasedastheCompanyhasestablishedaprogramtoidentifyandactivelymanagepotentialareasofconcernatitselectricsubstations.Thiseffortresultedinidentifyinganadditional32sites.Withrespecttonon-ownedsites,theCompanymayberequiredtocontributesomeproportionateshareofremedialcosts.Althoughonepartycan,asamatteroflaw,beheldliableforalloftheremedialcostsatasite,regardlessoffault,inpracticecostsareusuallyallocatedamongPRPs.InvestigationsateachoftheCompany-ownedsitesaredesignedto(1)determineifenvironmentalcontaminationproblemsexist,(2)ifnecessary,determinetheappropriateremedialactionsand(3)whereappropriate,identifyotherpartieswhoshouldbearsomeorallofthecostofremediation.Legal-78-actionagainstsuchotherpartieswillbeinitiatedwhereappropriate.Aftersiteinvestigationsarecompleted,theCompanyexpectstodeterminesite-specificremedialactionsandtoestimatetheattendantcostsforrestoration.However,sinceinvestigationsareongoingformostsites,theestimatedcostofremedialactionissubjecttochange.Estimatesofthecostofremediationandpost-remedialmonitoringarebaseduponavarietyoffactors,includingidentifiedorpotentialcontaminants;location,sizeanduseofthesite;proximitytosensitiveresources;statusofregulatoryinvestigationandknowledgeofactivitiesandcostsatsimilarlysituatedsites.Additionally,theCompany'sestimatingprocessincludesaninitiativewherethesefactorsaredevelopedandreviewedusingdirectinputandsupportobtainedfromtheDEC.ActualCompanyexpendituresaredependentuponthetotalcostofinvestigationandremediationandtheultimatedeterminationoftheCompany'sshareofresponsibilityforsuchcosts,aswellasthefinancialviabilityofotheridentifiedresponsiblepartiessinceclean-upobligationsarejointandseveral.TheCompanyhasdeniedanyresponsibilityatcertainofthesePRPsitesandiscontestingliabilityaccordingly.AsaconsequenceofsitecharacterizationsandassessmentscompletedtodateandnegotiationswithPRPs,theCompanyhasaccruedaliabilityintheamountof$220million,whichisreflectedintheCompany'sConsolidatedBalanceSheetsatDecember31,1997.Thepotentialhighendoftherangeispresentlyestimatedatapproximately$650million,includingapproximately$285millionintheunlikelyeventtheCompanyisrequiredtoassume100%responsibilityatnon-ownedsites.TheamountaccruedatDecember31,1997,incorporatestheadditionalelectricsubstations,previouslymentioned,andachangeinthemethodusedtoestimatetheliabilityfor27oftheCompany'slargestsitestorelyuponadecisionanalysisapproach.Thismethodincludesdevelopingseveralremediationapproachesforeachofthe27sites,usingthefactorspreviouslydescribed,andthenassigningaprobabilitytoeachapproach.TheprobabilityrepresentstheCompany'sbestestimateofthelikelihoodoftheapproachoccurringusinginputreceiveddirectlyfromtheDEC.Theprobablecostsforeachapproacharethencalculatedtoarriveatanexpectedvalue.Whilethisapproachcalculatesarangeofoutcomesforeachsite,theCompanyhasaccruedthesumoftheexpectedvaluesforthesesites.TheamountaccruedfortheCompany'remainingsitesisdeterminedthroughfeasibilitystudiesoengineeringestimates,theCompany'sestimatedshareofaPRPallocationorwhernobetterestimateisavailable,the,lowendofarangeofpossibleoutcomes.Inaddition,theCompanyhasrecordedaregulatoryassetrepresentingtheremediationobligationstoberecoveredfromratepayers.Powerchoiceprovidesforthecontinuedapplicationofdeferralaccountingforcostdifferencesresultingfromthiseffort.InOctober1997,theCompanysubmittedadraftfeasibilitystudytotheDEC,whichincludedtheCompany'sHarborPointsiteandfivesurroundingnon-ownedsites.Thestudyindicatesarangeofviableremedialapproaches,however,afinaldeterminationhasnotbeenmadeconcerningtheremedialapproachtobetaken.Thisrangeconsistsofalowendof$22millionandahighendof$230million,withanexpectedvaluecalculationof$51million,whichisincludedintheamountsaccruedatDecember31,1997.TherangerepresentsthetotalcoststoremediatethepropertiesanddoesnotconsidercontributionsfromotherPRPs.TheCompanyanticipatesreceivingcommentsfromtheDEConthedraftfeasibilitystudybythespringof1999.Atthistime,theCompanycannotdefinitivelypredictthenatureoftheDECproposedremedialactionplanortherangeofremediationcostsit'willrequire.WhiletheCompanydoesnotexpecttoberesponsiblefortheentirecosttoremediatethese.properties,itisnotpossibleatthistimetodetermineitsshareofthecostofremediation.InMay1995,theCompanyfiledacomplaintpursuanttoapplicableFederalandNewYorkStatelaw,intheU.S.DistrictCourtfortheNorthernDistrictofNewYorkagainstseveraldefendantsseekingrecoveryofpastandfuturecostsassociatedwiththeinvestigationandremediationoftheHarborPointandsurroundingsites.Inamotioncurrentlypendingbeforethecourt,theNewYorkStateAttorneyGeneralhasmovedtodismisstheCompany'sclaimsagainsttheStateofNewYork,theNewYorkStateDepartmentofTransportation,theThruwayAuthorityandCanalCorporation.TheCompanyhasopposedthismotion.ThecasemanagementorderpresentlycallsforthecloseofdiscoveryonDecember31,1998.AsaresultheCompanycannotpredicttheoutcomeofthependinglitigationagainstothe-79-PRPsortheallocationoftheCompany'sshareofthecoststoremediatetheHarborPointandsurroundingsites.Whereappropriate,theCompanyhasprovidednoticesofinsuranceclaimstocarrierswithrespecttotheinvestigationandremediationcostsformanufacturedgasplant,industrialwastesitesandsitesforwhichtheCompanyhasbeenidentifiedasaPRP.Todate,theCompanyhasreachedsettlementswithanumberofinsurancecarriers,resultinginpaymentstotheCompanyofapproximately$36million,netofcostsincurredinpursuingrecoveries.UnderPowerChoicetheelectricportionorapproximately$32millionwillbeamortizedover10years.Theremainingportionrelatestothegasbusinessandisbeingamortizedoverthethreeyearsettlementperiod.ConstructionProgram:TheCompanyiscommittedtoanongoingconstructionprogramtoassuredeliveryofitselectricandgasservices.TheCompanypresentlyestimatesthattheconstructionprogramfortheyears1998through2002willrequireapproximately$1.4billion,excludingAFCandnuclearfuel.Fortheyears1998through2002,theestimates,inmillions,are$328,$269,$264,$275and$300,respectively,whichincludes$26,$25,$22,$20and$38,respectively,relatedtonon-nucleargeneration.Theimpactoftheicestorm(seeNote13)ontheconstructionprogramwillnotbeknownuntilrestorationeffortshavebeencompleted.Theseamountsarereviewedbymanagementascircumstancesdictate.UnderPowerChoice,theCompanywillseparate,throughsaleorspin-off,theCompany'snon-nuclearpowergenerationbusinessfromtheremainderofthebusiness.GasSupply,StorageandPipelineCommitments:Inconnectionwithitsgasbusiness,theCompanyhaslong-termcommitmentswithavarietyofsuppliersandpipelinestopurchasegascommodity,providegasstoragecapabilityandtransportgascommodityoninterstategaspipelines.ThetablebelowsetsforththeCompany'sestimatedcommitmentsatDecember31,1997,forthenextfiveyears,andthereafter.(1nthousandsofdollars)YearGasStoraePieline1998199920002001$103)99078,38056,11053,140$95,72099,49081,55060,170200239,86026,610Thereafter155,56071,130Withrespecttofirmgassupplycommitments,theamountsarebaseduponvolumesspecifiedinthecontractsgivingconsiderationfortheminimumtakeprovisions.CommoditypricesarebasedonNewYorkMercantileExchangequotesandreservationcharges,whenapplicable.Forstorageandpipelinecapacitycommitments,amountsarebaseduponvolumesspecifiedinthecontracts,andrepresentdemandchargespricedatcurrentfiledtariffs.AtDecember31,1997,theCompany'firmgassupplycommitmentsextendthroughOctober2006,whilethegasstorageandtransportationcommitmentsextendthroughOctober2012.BeginninginMay1996,asaresultofagenericrateproceeding,theCompanywasrequiredtoimplementserviceunbundling,wherecustomerscouldchoosetobuynaturalgasfromsourcesotherthantheCompany.TodatethemigrationhasnotresultedinanystrandedcostssincethePSChasallowedutilitiestoassignthepipelinecapacitytothecustomerschoosinganothersupplier.Thisassignmentisallowedduringathree-yearperiodendingMarch1999,atwhichtimethePSCwilldecideonmethodsfordealingwiththeremainingunassignedorexcesscapacity.InSeptember1997,thePSCindicatedthatitisunlikelyutilitieswillbeallowedtocontinuetoassignpipelinecapacitytodepartingcustomersafterMarch1999.TheCompanyisunabletopredicthowthePSCwillresolvetheseissues.-80-NOTE10.PairValueofFinancialandDerivativePinancialInstrumentsThefollowingmethodsandassumptionswereusedtoestimatethefairvalueofeachclassoffinancialinstruments:Cashandshort-terminvestments:Thecarryingamountapproximatesfairvaluebecauseoftheshortmaturityofthefinancialinstruments.Long-termdebtandmandatorilyredeemablepreferredstock:Thefairvalueoffixedratelong-termdebtandredeemablepreferredstockisestimatedusingquotedmarketpriceswhereavailableordiscountingremainingcashflowsattheCompany'sincrementalborrowingrate.ThecarryingvalueofNYSERDAbondsandotherlong-termdebtareconsideredtoapproximatefairvalue.Derivativefinancialinstruments:Thefairvalueoffuturesandforwardcontractsaredeterminedusingquotedmarketpricesandbrokerquotes.ThefinancialinstrumentsheldorissuedbytheCompanyareforpurposesotherthantrading.TheestimatedfairvaluesoftheCompany'sfinancialinstrumentsareasfollows:AtDecember31,Inthousandsofdollars.,1996Cashandshort-terminvestments~.~.Mandatorilyredeemablepreferredstock.Long-termdebt:FirstHortgagebonds.Heditm-termnotesPromissorynotes...OtherCarryingAaxxmtS378,23286,7302,801,30520,000413,760229,634FairValueS378,23287,3282,878,36822,944413,760229,634CarryingAmountS325,39895,6002,841,30520,000413,760228,461FairValueS325,39886,5162,690,70721,994413,760'eln1997,theCompany'senergymarketingsubsidiarybegantoengageinbothtradingandnon-tradingactivitiesgenerallyusinggasfuturesandelectricandgasforwardcontracts.AtDecember31,1997,forbothtradingandnon-tradingactivities,thefairvalueoflong'andshortpositionswasapproximately$59.9millionand$57.6million,respectively.ThesefairvaluesexceedtheweightedaveragefairvalueofopenpositionsfortheperiodendingDecember31,1997.Thepositionsaboveextendforaperiodoflessthanoneyear.Withrespecttothe'seactivitiestheCompanydoesnothaveanymaterialcounterpartycreditriskatDecember31,1997.Transactionsenteredintofortradingpurposesareaccountedforonamark-to-marketbasiswithchangesinfairvaluerecognizedasagainorlossintheperiodofthechange.AtDecember31,1997,theopentradingpositionsconsistedofoff-balancesheetelectricandgasforwardcontracts.Thesepositionsconsistedoflongandshortelectricforwardcontractswithfairvaluesof$45.3million(1,878,000MWh)and$44.3million(1,778,000MWh),respectively,andlongandshortgasforwardcontractswithfairvaluesof$9.4million(7.1millionDth)and$10.2million(7.3millionDth),respectively.Thequantitiesaboverepresentnotionalcontractquantities.TheeffectsoftradingactivitiesontheCompany's1997resultsofoperationswerenotmaterial.Activitiesfornon-tradingpurposesgenerallyconsistoftransactionsenteredintotohedg'ethemarketfluctuationsofcontractualandanticipatedcommitments.Gasfuturescontractsareprimarilyusedforhedgingpurposes.Thechangeinfairvalueofthesetransactionsaredeferreduntilthegainorlossonthehedgeditemisrecognized.Thefairvalueofopenpositionsfornon-tradingpurposesatDecember31,1997,aswellastheeffectoftheseactivitieontheCompany'resultsofoperationsforthesameperiodending,wasnmaterial.-81-TheCompany'sinvestmentsindebtandequitysecuritiesconsistoftrustfundsforthepurposeoffundingthenucleardecommissioningofUnit1anditsshareofUnit2(seeNote3-"NuclearPlantDecommissioning"),short-terminvestmentsheldbyOpinacEnergyCorporation(asubsidiary)andatrustfundforcertainpensionbenefits.TheCompanyhasclassifiedallinvestmentsindebtandequitysecuritiesasavailableforsaleandhasrecordedallsuchinvestmentsattheirfairmarketvalueatDecember31,1997.Theproceedsfromthesaleofinvestmentswere$159.7million,$99.4millionand$70.3millionin1997,1996and1995,respectively.Netrealizedandunrealizedgainsandlossesrelatedtothenucleardecommissioning,trustarereflectedin"Accumulateddepreciationandamortization"ontheConsolidatedBalanceSheets,whichisconsistentwiththemethodusedbytheCompanytoaccountforthedecommissioningcostsrecoveredinrates.TheunrealizedgainsandlossesrelatedtotheinvestmentsheldbyOpinacEnergyCorporationandthepensiontrus'tareincluded,netof0tax,in"Commonstockholders'quity"ontheConsolidatedBalanceSheets,whiletherealizedgainsandlossesareincludedin"Otherincomeanddeductions"ontheConsolidatedIncomeStatements.TherecordedfairvaluesandcostbasisoftheCompany'sinvestmentsindebtandequitysecuritiesisasfollows:AtDecember31,Inthousandsofdollars1996SecurityTypeU.S.GovermentObligations..~.~ComnercialPaper..TaxExerptObligations.....CorporateObligations.r~~~~~~~~GrossUnrealizedCostGain(Loss)FairValue106,0351,542107,57780,1155,884(55)85,94492,94917,368(830)109,4873025--30255296260$26650~$0095322029S14,136S1,864S(4)S15,996GrossUnrealizedCostGain(Loss)FairValue75,5903,209(147)78,65262,7238,524(422)70,82525062506$256176$14DD2~06D2$269576$24,782S1,530S(33)S26,27990,495739-91,234Usingthespecificidentificationmethodtodeterminecost,thegrossrealizedgainsandgrossrealizedlosseswere:YearEndedDecember31Realizedgains.....Realizedlosses....1997$30487Inthousandsofdollars$2,1218061995$2,523328ThecontractualmaturitiesoftheCompany'sinvestmentsindebtsecuritiesisasfollows:Inthousandsof'dollarsAtDecember31,1997Lessthan1year.1yearto5years5yearsto10years.............Dueafter10years....~~.......FairValue$106,67710,84552,526113,946Cost$105,13510,65450,351104,353-82-NOTB11.StockBasedComensationUndertheCompany'sstockcompensationplans,stockunitsandstockappreciationrights("SARs")maybegrantedtoofficers,keyemployeesanddirectors.Inaddition,theCompany'splansallowforthegrantofstockoptionstoofficers.In1997,1996and1995theCompanygranted209,918unitsand296,300SARs,291,228unitsand376,600SARsand169,500unitsand414,000SARs,respectively.Also,in'995theCompanygranted85,375stockoptions.AtDecember31,1997,therewere668,132units,1,086,900SARsand298,583optionsoutstanding.Stockunitsarepayableincashattheendofadefinedvestingperiod,determinedatthedateofthegrant,basedupontheCompany'sstockpriceforadefinedperiod.SARsbecomeexercisable,asdeterminedatthegrantdate,andarepayableincashbasedupontheincreaseintheCompany'sstockpricefromaspecifiedlevel.Assuch,fortheseawards,compensationexpenseisrecognizedoverthevestingperiodoftheawardbaseduponchangesintheCompany'sstockpriceforthatperiod.Optionsweregrantedovertheperiod1992to1995andbecomeexercisablethreeyearsandexpiretenyearsfromthe'grantdate.TheseoptionsareallconsideredtobeantidilutiveforEPScalculations.Includedintheresultsofoperationsfortheyearsending1997and1996,isapproximately$3.2and$2.6million,respectively,relatedtotheseplans.AspermittedbySFASNo.123-"AccountingforStock-BasedCompensation"("SFASNo.123")theCompanyhaselectedtofollowAccountingPrinciplesBoardOpinionNo.25-"AccountingforStockIssuedtoEmployees"(APBNo.25)andrelatedinterpretationsinaccountingforitsemployeestockoptions.UnderAPBNo.25,nocompensationexpenseisrecognizedforstock,optionsbecausetheexercisepriceoftheCompany'semployeestockoptions.equalsthemarketpriceoftheunderlyingstockonthegrantdate.SincestockunitsandSARsarepayable.incash,theaccountingunderAPBNo.25andSFASNo.123isthesame.Therefore,thepro-formadisclosureofinformationregardingnetincome,asrequiredbySFASNo.123,relatesonlytotheCompany'soutstandingstockoptions,theeffectofwhichisimmaterialtothefinancialstatementsfortheyearsended1997,1996and1995.Thereisnoeffectonearningspersharefortheseyearsresultingfromthepro-formaadjustmentstonetincome.-83-NOTE12.XnformationReardintheElectricandGasBusinessesTheCompanyisengagedprincipallyinthebusinessofproduction,purchase,transmission,distributionandsaleofelectricityandthepurchase,distribution,saleandtransportationofgasinNewYorkState.TheCompanyprovideselectricservicetothepublicinanareaofNewYorkStatehavinga.totalpopulationofabout3,500,000,includingamongothers,thecitiesofBuffalo,Syracuse,Albany,Utica,Schenectady,NiagaraFalls,WatertownandTroy.TheCompanydistributesortransportsnaturalgasinareasofcentral,northernandeasternNewYorkhavingatotalpopulationofabout1,700,000nearlyallwithintheCompany'selectricservicearea.CertaininformationregardingtheCompany'selectricandnaturalgassegmentsissetforthinthefollowingtable.Generalcorporateexpenses,propertycommontobothsegmentsanddepreciationofsuchcommonpropertyhavebeenallocatedtothesegmentsinaccordancewiththepracticeestablishedforregulatorypurposes.Identifiableassetsincludenetutilityplant,materialsandsupplies,deferredfinancecharges,deferredrecoverableenergycostsandcertainotherregulatoryandotherassets.Corporateassetsconsistofotherpropertyandinvestments,cash,accountsreceivable,prepayments,unamortizeddebtexpenseandcertainotherregulatory'andotherassets.AtDecember31,1997,totalplantassetsconsistedofapproximately24%Nuclear,20%Fossil/Hydro,42%TransmissionandDistribution,11%Gasand3%Common.Inthousandsofdollars199719961995OperatingrcveraessElectric...........$3,309,441656963$3,308,97968167C$3,335,548581790Total.................$3966404$3990653$3917338Operatingincose:Electric~..SS~~~~~~~GS462,24096599$438,59083748$587,28296752Total.s558839$522338S684034OtherInuecand(deductions)sElectrlcSubtotelo~~~~~~Otherincome..InterestcharesS190000368,83924,997273906s522,33835,943278033s684,0343,069279674Incomebeforefederalandforeinincometaxes$119930S280248S407429Federalandforeignindetaxes:Elec'trIc~~~~~~~~asGTotalncomeoreextraorsnarstemS30,0903000560095$133,24626147s79,57422920102494159393DepreciationandemrtizationsElectric.as~~~~~~GTotalConstructionexpenditures(includingnuclearfuel):Electric..as,~,~~~~~~GTotalS3'11,68327958S339641S221,91568842S290757S302,82527002S329827S277,505745C4$352049S292,99524836$317831S285,72260082S345804Identifiableassets:Elect/ic~~~~~~~~~GaS~~~~~~~~~~Total~~~~~~~~CorrateassetsTotalassets$7,257,16311850018,442,16411C1977$9584141$7,592,28711230458,715,332762537$7,372,37012031848,575,554852081$9427635$9477869-84-Note13.SubseentEventInearlyJanuary1998,amajoricestormandfloodingcausedextensivedamageinalargeareaofnorthernNewYork.TheCompany'selectrictransmissionanddistributionfacilitiesinanareaofapproximately7,000squaremilesweredamainterruptingservicetoapproximately120,000oftheCompany'customers,approximately300,000people.TheCompanyhadtorebuildmuchofitstransmisanddistributionsystemtorestorepowerinthisarea.BytheendofJanuary19servicetoallcustomerswasrestored;however,thefinalcostsofthestormwillnotbeknownascrewscontinuetomakefinalrepairstotemporarymeasurestorestoreserviceandsalvageoperations"cannotbecompleteduntilspring.Thepreliminaryestimateofthetotalcostoftherestorationandrebuildeffortscouldexceed$125million.Aportionofthecostwillbecapitalized;however,atthistime,theCompanyisunabletodeterminethecapitalportionuntilrebuildeffortshavebeencompletedandalllabor,materialandothercosts,includingchargesfromotherutilitiesandcontractors,havebeenreceivedandanalyzed.TheCompanyispursuingfederaldisasterreliefassistanceandisworkingwithitsinsurancecarrierstoassesswhatportionoftherebuildcostsarecoveredbyinsurancepolicies.TheCompanyisalsoanalyzingpotentialavailableoptionsforstatefinancialaid.TheCompanyisunabletodeterminewhatrecoveries,ifany,itmayreceivefromthesesources.Absentrecovery,theCompanywouldfaceachargetoearningsinthefirstquarterof1998toreflectitsestimateofunrecoverable,non-capitalizedcosts.-85-NOTE14.uarterlFinancialDataUnauditedOperatingrevenues,operatingincome,netincome(loss)andearnings(loss)percommonsharebyquartersfrom1997,1996and1995,respectively,areshowninthefollowingtable.TheCompany,initsopinion,hasincludedalladjustmentsnecessaryforafairpresentationoftheresultsofoperationsforthequarters.Duetotheseasonalnatureoftheutilitybusiness,theannualamountsarenotgeneratedevenlybyquarterduringtheyear.TheCompany'squarterlyresultsofoperationsreflecttheseasonalnatureofitsbusiness,withpeakelectricloadsinsummerandwinterperiods.Gassalespeakinthewinter.InthousandsofdollarsQuarterEndedDecember31,199719961995Operatingrevenues$960,304971,106966,478Operatingincome$86,024117,832132,228Netincome(loss)$(115,619)(25,808)27,874BasicandDilutedEarnings(loss)percomnonshare$(.86)(.24)~13Septaaber30,199719961995$896,570895,713887,231$110,17447,119142,732$31,683(12,916)46,941$.15(.16).26dam30,199719961995$945,698960,771938,816$130,704142,755152,297$40,74952,99254,485'$.22~30.31March31,199719961995$1~163,8321,163,0631,'124,813"$231,937214,632256,777$103,02296,122118,736$.65.60.75Inthefourthquarterof1997theCompanywrote-off$190.0million(85centspershare)fortheestimatedamountoftheMRAregulatoryassetdisallowedinratesbythePSC.Inthefourthquarterof1996theCompanyrecordedanextraordinaryitemforthediscontinuanceofregulatoryaccountingprinciplesof$103.6million(47centspercommonshare).Inthethirdquarterof1996theCompanyincreasedtheallowancefordoubtfulaccountsby$68.5million(31centspercommonshare).Inthefourthquarterof1995,theCompanyrecorded$16.9million(8centspercommonshare)forMERITearnedinaccordancewiththe1991Agreement.-86-OwnedDecember31ELECTRICANDGASSTATISTICSELECTRICCAPABILITYThousandsofKMX19961995Coal01l*o~~~~~~DualFuel-Oil/GasNuclearHydroPurchased:NewYorkPowerAuthority1,3606467001,082661~444916.77.98.613.38.154.61,3336367001,0826174~3681,3166367001,082665~4399Hydro~-Nuclear....IPPs.~.Totalcapability**.......~~Electricpeakload1,32523K~33770077~815616.21,310110~29.~240645.4~3826100.0~8194~60211,325110~2390~3825~8224~6211*In1994,OswegoUnitNo.5(anoil-firedunitwithacapabilityof8500000)wasputintolong-termcoldstandby,butcouldbereturnedtoserv>ceintfireemonths.*~Availablecapabilitycanbeincreasedduringheavyloadperiodsbypurchasesfromneighboringinterconnectedsystems.Hydrostationcapab>lityisbasedonaverageDecemberstream-flowconditions.-87-ELECTRICSTATISTICSElectricsales(HillionsofQIh):Residential.CowercialIndustrialIndustrial-Special.Hunicipalservice...Otherelectricsystems9,90511,5527,1914,5072353,74610,10911,5647,1484,3262465,43110,05511,6137,0614,0532294,30537,13639,12737,684Electricreveres(Thousandsofdollars):Residential.CoemercielIndustrialIndustrial-Special.Hunicipalservice..OtherelectricsystemsHiscellaneous$1,227,2451,233,417531,16461,82054,54583,794117,456$1,252,1651,237,385~524,85858,44453,795113,39153,698$1,214,8481,237,502523,99656,25050,86088,936143,625Electriccustaaers(Average):ResidentialComerciel.Industrial.Industrial-Special.Other$3,309,4411,404,345146,0391,970851,519$3,308,9791,405,083145,1492,045991,302$3,335,5481,399,725144,7312I122831,488Residential(Average):AnnualGlhusepercustomer..........CosttocustomerperKMh........'nnualrevenuepercustomer..........1,553,9587,05312.39e1,567,2357,19512.39e$891.171,561,6577,18412.08e$867.92-88-GASSTATISTXCSGasSales(ThousandsofDth):ResidentialComnerc1a1lndustl'lelo~~~~~~~~~~~~~~~55,20322,0691,38156,72825,3532,77051,84223,8182,660TotalsalesSpotIMIket~~~~~78,6812,45184,88110,45978,481'1.723Totalgasdelivered233,945230,011224,817GasReveraIes(Thousandsofdollars):Residential.Colllercialindustrial~~~~~~~~~~~~~Othergassystems.............$436,136148,2136,549130$417,348162,27513,325138$368,391143,64311,530762Spotmarket.Transportationofcustomer-ownedgas~~6,34655,65737,12450,3813,09648,290GasCustaaers(Average):Residential.CoIIIIlcIc1al~~~~~~~~~~~~~~~~IndustrialOther484,862.40,955186$681,674477,78641,266206$581,790471,94840,9452251Residential(Average):Annualdekathermusepercustomer.....CosttocustomerperDth..........Annualrevenuepercustomer........Maximmldaygassendout(Dth).......526,852113.9$7.90$899.511~133,370519,977118.7$7.36$873.501,152,996513,771109.8$7.11$780.581,211,252-89-Item9.ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure.tTheCompanyhasnothingtoreportfor'hisitem.ZBB~IIItem10.DirectorsandExecutiveOfficersoftheRegistrant.BusinessBackgroundofDirectorsCLASSIDIRECTORS-TERMSEXPIRINGIN1998ALBERT'.BUDNEY,JR.President,NiagaraMohawkPowerCorporationDirectorsince1995Mr.Budney,age50,waselectedPresidentoftheCompanyin1995.Mr.BudneywaspreviouslyemployedbyUtiliCorpUnited,Inc.,anenergyservicescompany,asManagingVicePresidentoftheUtiliCorpPowerServicesGroupandasPresidentoftheMissouriPublicServiceDivision.Mr.BudneyjoinedUtiliCorpUnited,Inc.in1993.Priortothat,hewasVicePresidentofStone&WebsterEngineeringCorp.,wherehemanagedtheengi'neeringfirm'sBostonBusinessDevelopmentDepartment.DirectorofPlumStreetEnterprises,Inc.("PlumStreet");CanadianNiagaraPowerCompany,Limited("CNP");andUtilitiesMutualInsuranceCompany.PresidentofOpinacNorthAmerica,Inc.("OpinacNA"),awholly-ownedsubsidiaryoftheCompany.OpinacNAholds100%ofPlumStreetand,throughitssubsidiary,OpinacEnergyCorporation("Opinac"),a50percentinterestinCNP.EDMUNDM.DAVISAttorneyDirectorsince1970MemberofCompensation&Succession,CorporatePublicPolicy&EnvironmentalAffairs,andFinanceCommitteesoftheBoardMr.Davis,age68,retiredin1995asofcounseltoHiscock&Barclay,LLP,Syracuse,NY,Attorneys-at-Law.Mr.Daviswasapartnerandhadbeenassociatedwiththelawfirmsince1957.DR.BONNIEGUITONHILLPresidentandChiefExecutiveOfficerofTheTimesMirrorFoundationandVicePresidentofTheTimesMirrorCompanyDirectorsince1991MemberofAudit,CorporatePublicPolicy&EnvironmentalAffairs,andFinanceCommitteesoftheBoardDr.Hill,age56,PresidentandChiefExecutiveOfficerofTheTimesMirrorFoundation,-anon-profitinstitution,andVicePresidentofTheTimesMirrorCompany,anewsandinformationcompany,locatedinLosAngeles,CA.Dr.HillservedasDeanandProfessorofCommerceoftheMcIntireSchoolofCommerceattheUniversityofVirginiafrom1992-1996.Priortothat,sheservedastheSecretaryofStateandConsumerServicesAgencyfortheStateofCalifornia.DirectorofAKSteelCorporation;CrestarFinancialCorporation;HersheyFoodsCorporation;andLouisiana-PacificCorporation.-90-HENRYA.PANASCI,JR.Chairman,CygnusManagementGroup,LLCDirectorsince1988MemberofCompensation&Succession,CorporatePublicPolicyandEnvironmentalAffairs,andFinanceCommitteesoftheBoardMr.Panasci,age69,ChairmanofCygnusManagementGroup,LLC,aconsultingfirmspecializinginventurecapitalandprivateinvestmentslocatedinSyracuse,NY.Mr.Panasciretiredin1996asChairmanoftheBoardandChiefExecutiveOfficerofFay'sIncorporated,adrugstorechain.Mr.Panascico-foundedFay'sDrugCo.,Inc.,withhisfather,in1958.DirectorofNationalAssociationofChainDrugStores.CLASSIZDIRECTORS-TERMSEXPIRINGIN1999WILLIAMF.ALLYNPresidentandChiefExecutiveOfficerofWelchAllyn,Inc.Directorsince1988MemberofAudit,Compensation&Succession,andNuclearOversightCommitteesoftheBoardMr.Allyn,age62,PresidentandChiefExecutiveOfficerofWelchAllyn,Inc.,SkaneatelesFalls,NY,amanufacturerofmedicaldiagnosticinstrumentation,baicodereadersandopticalscanningdevices.Mr.AllynjoinedWelchAllyn,Inc.in1962andwaselectedtohispresentpositionin1980.DirectorofONBANCorp.,Inc.;OnBank&TrustCompany;OneidaLimited;andPerfexCorporation.WILLIAM-E.DAVISChairmanoftheBoardandChiefExecutiveOfficer,oftheCompanyDirectorsince1992ChairpersonofExecutiveCommitteeoftheBoardMr.Davis,age55,waselectedChairmanoftheBoardandChiefExecutiveOfficeroftheCompanyin1993.Mr.DavisjoinedtheCompanyin1990andwaselectedSeniorVicePresidentinApril1992,servinginthatcapacityuntilelectedVice-Chairman,oftheBoardoftheCompanyinNovember1992.DirectorofOpinacNA;PlumStreet;Opinac;CNP;andUtilitiesMutualInsuranceCompany.Mr.DavisisalsotheChairmanoftheBoardofPlumStreet'andholdsthepositionofSecretary,UtilitiesMutualInsurance.Company.WILLIAMJ.DONLONFormerChairmanoftheBoardandChiefExecutiveOfficeroftheCompanyDirectorsince1980Mr.Donlon,age68,retiredin1993asChairmanoftheBoardandChiefExecutiveOfficeroftheCompanywith45yearsserviceasanactiveemployee.DirectorofOpinac;ONBANCorp.,Znc.;andOnBank&TrustCompany.ANTHONYH.GIOIAChairmanandChiefExecutiveOfficerofGioiaManagement,Inc.Directorsince1996MemberofExecutive,Compensation&Succession,andNuclearOversightCommitteesoftheBoardMr.Gioia,age56,ChairmanandChiefExecutiveOfficerofGioiaManagement,Inc.,aholdingcompanyforseveralcompanies,includingthreepackagingcompanieslocatedinBuffaloandLockport,NY.Mr.Gioiahasheldhispresent-91-positionsince1987.~~DR.PATTIMcGZLLPEExecutiveDirTERSONectoroftheCouncilforInternationalExchangeofScholarsDirectorsince1988MemberofExecutive,Audit(Chairperson),andCorporatePublicPolicy&EnvironmentalAffairsCommitteesoftheBoardDr.Peterson,age54,ExecutiveDirectoroftheCouncilforInternationalExchangeofScholars,anon-profitorganizationlocatedinWashington,DC.From1996to1997,Dr.PetersonwasaSeniorFellowoftheCornellInstituteforPublicAffairs,CornellUniversity,Ithaca,NY.Dr.PetersonalsoservedasPresidentofSt.LawrenceUniversityfrom1987-1996.Priortothat,shewasPresidentofWellsCollege.SheholdsthetitlePresidentEmeritaatbothinstitutions.IndependentTrusteeofJohnHancockMutualFunds.CLASSIIZDIRECTORS-TERMSEXPIRING.IN2000,LAWRENCEBURKHARDT,IIINuclearConsultantDirectorsince1988ChairpersonofNuclearOversightCommitteeoftheBoardMr.Burkhardt,age65,independentconsultanttothenuclearindustrysince1990.Priortohisretirementin1990,Mr.BurkhardtwasemployedbytheCompanyandservedasExecutiveVicePresidentofNuclearOperations.DirectorofMACTEC,Inc.,formerlyManagementAnalysisCompany.DOUGLASM.COSTLEDistinguishedSeniorFellowandChairmanoftheBoardoftheInstituteforSustainableCommunitiesDirectorsince1991MemberofExecutive,Audit,CorporatePublicPolicy&.EnvironmentalAffairs(Chairperson),andNuclearOversightCommitteesoftheBoardMr.Costle,age58,DistinguishedSeniorFellowandChairmanoftheBoardoftheInstituteforSustainableCommunities,anon-profitorganizationlocatedinMontpelier,VT.Mr.Costlehasheldhispresentpositionsince1991.FormerDeanoftheVermontLawSchoolinSouthRoyalton,Vermont,andAdministratoroftheU.S.EnvironmentdlProtectionAgency.IndependentTrusteeofJohnHancockMutualFunds.DONALDB.RIEFLERFinancialMarketConsultantDirectorsince1978MemberofExecutive,Audit,Finance(Chairperson),andNuclearOversightCommitteesoftheBoardMr.Riefler,age70,financialmarketconsultantandadvisortoJ.P.Morgan,FloridaFSB,PalmBeach,FL,aprivatebankingconcernaffiliat'edwithJ.P.Morgan&Co.,Inc.Priortohisretirementin1991,Mr.RieflerwasChairmanoftheMarketRiskCommitteeforJ.P.Morgan&Co.IncorporatedandMorganGuarantyTrustCompanyofNewYork.STEPHENB.SCHWARTZRetiredSeniorVicePresident,InternationalBusinessMachinesCorporationDirectorsince1992-92-MemberofExecutive,Compensation&Succession(Chairperson),andFinanceCommitteesoftheBoardtMr.Schwartz,age63,retiredasSeniorVicePresidentofInternationalBusinessMachinesCorporationin1992.Mr.SchwartzjoinedIBM"in1957andwaselectedSeniorVicePresidentin1990.DirectorofMFRI,Inc.TheinformationregardingexecutiveofficersappearsattheendofPartIofthisForm10-KAnnualReport.SECTION16(A)BENEFICIALOWNERSHIPREPORTINGCOMPLIANCESection16(a)oftheSecuritiesandExchangeActof1934requirestheCompany'sdirectors,executiveofficersandbeneficialownersofmorethan10percentofanyclassofequitysecuritiesoranyotherpersonsubjecttoSection16("reportingpersons")tofileinitialreportsofownershipandreportsofchangesinownershipoftheCompany'sequitysecuritieswiththeSecuritiesandExchangeCommissionandtheNewYorkStockExchange.BasedsolelyonareviewofthecopiesofsuchformsandwrittenrepresentationsfromtheCompany'sdirectorsandexecutiveofficers,theCompanybelievesthatduringtheprecedingyearthereportingpersonshavecompliedwithallSection16(a)filingrequirements.Item11.ExecutiveCompensationBOARDOFDIRECTORS'OMPENSATIONANDSUCCESSIONCOMMITTEEREPORTONEXECUTIVECOMPENSATIONTheCompensationandSuccessionCommitteeoftheBoardofDirectors(the"Committee")iscomposedentirelyofnon-employeedirectors.TheCommitteehasresponsibilityforrecommendingofficersalariesandfortheadministrationoftheCompany'sofficerincentivecompensationplansasdescribedinthisreport.TheCommitteemakesrecommendationstotheBoardoDirectorswhichmakesfinalofficercompensationdeterminations.ThisCommitteereportdescribestheCompany'sexecutiveofficercompensationpolicies,thecomponentsofthecompensationprogram,andthemannerinwhich1997compensationdeterminationsweremadefortheCompany'sChairmanoftheBoardandChiefExecutiveOfficer,Mr.WilliamE.Davis.The1997ExecutiveOfficerCompensationProgramwascomposedentirelyofbasesalary,frozenat1995levels,and1997grantsofstockunitsandstockappreciationrights("SARs")madepursuanttotheLong-TermIncentivePlanadoptedbytheBoardofDirectorsonSeptember25,1996(the"LTIP"),asdescribedlaterinthisreport.BASESALARYTheCommitteeseekstoensurethatsalariesoftheCompany'sofficers,includingexecutiveofficers,remaincompetitivewithlevelspaidtocomparablepositionsamongotherUPS.electricandgasutilitieswithcomparablerevenues(collectivelyreferredtoasthe"ComparatorUtilities").TheCommitteebelievesthatcompetitivesalariesprovidethefoundationoftheCompany'sofficercompensationprogramandareessentialfortheCompanytoattractandretainqualifiedofficers,especiallyinlightoftheincreasingcompetitionwithintheindustry.Eachofficerpositionhasbeenassignedtoacompetitivesalaryrange.TheCommitteeintendstoadministersalarieswithinthe25thto75thpercentilesofpracticewithrespecttothoseComparatorUtilities.The1997averagesalaryofthefivenamedexecutiveofficersfalls-93-below25thpercentilecompetitivelevels.Sinceexecutiveofficersalarieswerefrozenat1995levels,asaconditionforreceiptof1995stockincentivegrants,thecompetitivenessofannualexecutiveofficercompensationisheavilydependentonstock-relatedincentivesintheformofstockunitsandstockappreciationrightsgrantedunderthe1995StockIncentivePlan("SIP")andtheLTIP.1995STOCKINCENTIVEPLANOnDecember14,1995,theBoardofDirectorsapprovedtheS1PtopromotethesuccessandenhancethevalueoftheCompanythroughtheretentionandcontinuedmotivationoftheCompany'sofficersandtofocustheireffortstowardtheexecutionofbusinessstrategiesdirectedtowardimprovingfinancialreturnstoshareholders'wardsundertheSIPconsistedofstockunitsandSARs.Thesestockunitgrantswillbepaidincashin1998basedonthefairmarketvalueoftheCompany'scommonstockduringthelast12consecutivetradingdaysin1997($9.922).UndertheSIP,dividendsarecredited(inanamountequivalenttodividendspaid,ifany,ontheCompany'scommonstock)withrespecttoallstockunitsgranted.Thesecreditsarereinvestedattheprevailingstockprice,therebyincreasingthenumberofstockunitspayableattheendoftheperiod.NodividendswerecreditedtoSIPstockunits.TheSARsfirstbecameexercisableonJanuary2,1998,andmaybeexerciseduntiltheyexpireonDecember31,2002.TheSIPwasstructuredsothatanycompensationearnedbyofficersduringthetwo-yearperiod1996and1997,otherthanbasesalary,willbebasedontheCompany'syear-end1997stockpriceandtotalreturnsrealizedbyshareholdersduringthisperiod.Accordingly,participants(includingtheexecutiveofficerslistedintheSummhryCompensationTable)didnotreceiveanysalaryincreases(excepttoreflectpromotions),annualincentivecompensationpaymentsorstockoptiongrantsduring1996and1997.Generallyspeaking,SIPgrantswerestructuredsothattheCompany'sstockpricewouldhavetomorethandoubleduringthistwo-yearperiodinorderforthetotalcompensationoftheparticipantstoapproximatemediancompetitivelevels.TheCommitteedoesnotintendtomakefurtherSIPgrantsotherthanthe1995stockunitgrantswhichbecamepayableonDecember31,1997andthe1995stockappreciationrightsgrantswhichbecameexercisableonJanuary2,1998andexpireonDecember31,2002.Long-termincentivegrantsweremadein1996,1997,and1998undertheLTIPdescribedbelow.LONG-TERMINCENTIVEPLANBecausetheCommitteeseekstoprovideacontinuousprogramoflong-termstockincentives,onSeptember25,1996theBoardofDirectorsadoptedtheLTIPandapprovedstockunitandSARgrantsforthe1996-1998period.Thesestockunitgrantswillbepaidincashinearly1999.Dividendsarecredited(inanamountequivalenttodividendspaid,ifany,ontheCompany'scommonstock)withrespecttothe1996-1998stockunitgrants,whicharereinvestedattheprevailingstockprice,therebyincreasingthenumberofstockunitspayableinearly1999.ThepaymentvalueofthestockunitswillbebasedontheaveragefairmarketvalueoftheCompany'scommonstockduringthelast12consecutivetradingdaysin1998.The1996LTIPSARgrantsfirstbecomeexercisableonJanuary2,1999,andmaybeexerciseduntiltheyexpireonDecember31,2005.OnJanuary29,1997,theBoardofDirectorsapprovedthegrantofLTIPstockunitsandSARsforthe1997-1999performanceperiod.Thesestockunits,andaccumulateddividendstockunits,willbepaidinearly2000basedonthe averagefairmarketvalueoftheCompany'scommonstockduringthelasttwelveconsecutivetradingdaysin1999.TheSARsfirstbecomeexercisableonJanuary2,2000,andcanbeexerciseduntil,theyexpireonDecember31,2006.Thesizeofboththe1996-1998and1997-1999LTIPstockunitandSARgrantsweredetermined,basedonthepriceofthe.Company'scommonstockatthetimethesegrantsweremade,sothatthecombinationoftheofficers'urrentsalariesplusthegrantdatepresentvalueofSIP,andLT1Pgrantsforthe1996-1998and1997-1999performanceperiods,wouldapproximatethe50thpercentileofcomparatorutilitytotalcompensationpracticeforthethree-yearperiod1995through1997.ThecompetitivenessoftheactualcompensationrealizedfromSIPandthe1996-1998and1997-1999LTIPgrantsisdependentonthemarketvalueoftheCompany'scommonstockattheendof1997,1998,and1999.TheBoardofDirectorsalsoapprovedaJanuary19,1998grantofLTIPstockunitsandSARsfortheperiod1998-2000.Thesestockunits,and'nyaccumulateddividendstockunits,willbepaidinearly2001basedontheaveragefairmarketvalueoftheCompany'scommonstockduringthelast12consecutivetradingdaysin2000.TheSARswillfirstbecomeexercisableonJanuary2,2001,andcanbeexerciseduntiltheyexpireonDecember31,2007.The1998stockunitandSARgrantsweredeterminedsothattheaveragecurrentsalaryandtheaveragegrantdatepresentvalueofthe1998LT1Pgrantsforthefivenamedexecutiveofficerswouldapproximatethe50thpercentileof1997comparatorutilitytotalcompensationpractice.Throughthecombinationofbasesalary,and,during1996,1997and1998,stockunitandSARgrants',theCommitteeseekstofocustheeffortsofofficerstowardimproving,annuallyandoverthelonger-term,thefinancialreturnsfortheCompany'sshareholders.COMPENSATIONOFWILLIAME.DAVIS,CHAIRMANOFTHEBOARDANDCHIEFEXECUTIVEOFFICERMr.DavisbecameChiefExecutiveOfficeronMay1,1993.InApril1996,Mr.Davisvoluntarilyreducedhisannualsalaryfroma'evelof$490,000tothecurrentlevelof$450,500.TheCommitteehasbeenadvisedbyitsconsultantthatMr.Davis'997salaryfallswellbelowthe25thpercentilerelativetotheChiefExecutiveOfficersoftheComparatorUtilities.OnDecember13,1995,theBoardgrantedMr..Davis25,000stockunitsand142,500'ARs,withanexercisepriceof$10.75,underthe1995StockIncentivePlan.Assetforthabove,SIPstockunitswillbepaidtoMr.Davisandtheothernamedexecutiveofficersin1998.Mr.Davis'IPstockunitandSARgrantswereintendedtoprovidecompetitivetotalcompensationopportunitiesduringthe1996and1997period,dependingontheCompany'sstockprice,consideringthathissalarywouldnotbeincreasedandthathewouldreceivenoannualincentivecompensationpaymentsandnostockoptionsduringthistwo-yearperiod.Aspreviouslyindicated,theCommitteeandtheBoardofDirectorsseektoprovideacontinuousprogramoflong-termstockincentivesbeyond1997whenSIPstockunitgrantsbecamepayableandSIPSARgrantsbecameexercisable.Accordingly,onSeptember25,1996theBoardofDirectorsapprovedagrantof45,000stockunitsand90,000SARs,withanexercisepriceof$8.00,forMr.Davisforthe1996-1998performanceperiod.OnJanuary29,1997theBoardofDirectorsapprovedagrantof35,000stockunitsand70,000SARs,withanexercisepriceof$10.30,forthe1997-1999performanceperiod..Boththe1996-1998and1997-1999grantsweremadeunderthetermsoftheLTIP.Thesizeofthe1996-1998and1997-1999LTIPgrantsforMr.Daviswasdeterminedsothatthegrantdatepresentvalueofbothgrants,incombinationwithhis-95-currentsalaryandhisSIPgrants,wouldapprox'imatethe50thpercentileforComparatorUtilitychiefexecutiveofficersduringthe1995-1997period.ThecompetitivenessofthecompensationMr.DavisactuallyrealizesfromtheSIPandLTIPgrantsisdependentonthemarketvalueoftheCompany'scommonstockattheendof1997,1998,and1999.Aspreviouslyindicated,theBoardofDirectorsapprovedaJanuary19,1998grantofLTIPstockunitsandSARsforMr.Davisfortheperiod1998-2000.Thesizeofthesegrantswasdeterminedsothatthesumofhiscurrentsalaryplusthegrantdatepresentvalueofthe1998stock.unitandSARgrantswouldfallapproximatelymidway,betweenthe25thand50thpercentilesof1997totalcompensationpracticeforelectric/gasutilitiesofcomparablesize.TheCommitteeisawareofthelimitationsthattaxlegislationhasplacedonthetaxdeductibilityofcompensationinexcessof$1millionwhichispaidinanyyeartoanexecutiveofficer.Currentlynoneoftheexecutiveofficershasreceivedcompensationsubjecttosuchlimitations.TheCommitteewillcontinuetomonitordevelopmentsinthisareaandtakeappropriateactionstopreservethetaxdeductibilityofcompensationpaidtoexecutiveofficers,shouldthisbecomenecessary.SubmittedbytheCompensationandSuccessionCommitteeoftheBoardofDirectors:StephenB.Schwartz,ChairpersonWilliamF.AllynEdmundM.DavisAnthonyH.GioiaHenryA.Panasci,Jr.-96-EXECUTZVECOMPENSATIONThetablebelowsetsforthallcompensationpaidbytheCompanyforservicesrenderedinallcapacitiesduringthefiscalyearsendedDecember31,1997,December31,1996andDecember31,1995,totheChairmanofthe'BoardandChiefExecutiveOfficerandtoeachoftheotherfourmosthighlycompensatedexecutiveofficersoftheCompanyforthefiscalyearendedDecember31,1997.SUMMARYCOMPENSATIONTABLEFiscalYears1997,1996and1995NamePositionYearAnnualCompensationSalary($)(A)Bonus(S)OtherAnnualCompensation(S)(C)W.E.DavisChairmanofthe1997BoardandChief1996ExecutiveOfficer1995450,501462,351473,542000'1000A.J.Budney,Jr.Presidentand1997ChiefOperating1996Officer1995315,002315,002236,2510050,000(B)1102,95632I727B.R.SylviaExecutiveVice1997President19961995295,001295,001295,00111000J.W.PowersSeniorVicePresidentD.D.KerrSeniorVicePresident199719961995199719961995210,190211,002209,251210,001210,001191,0851100011000NameW.E.DavisPositionYearChairmanofthe1997BoardandChief1996ExecutiveOfficer1995371,875360,000246,87570,00090,000152,50042,35843,36535,729Long-TermCompensationAwardsRestrictedSecuritiesAllOtherStockUnderlyingCompensation(S)Awards($)(D)Options/SARs(I)(E)A.J.Budney,Jr.PresidentandChiefOperating.Officer199719961995185,938180,000148,12535,00045,00076,00016,43624,97548,541B.R.SylviaExecutiveVicePresident199719961995117,938114,00098,75022,20028,50049,00011,15310,17424,832J.W.PowersSeniorVicePresidentD.D.KerrSeniorVicePresident19971996199519971996199585,000142,000085,00082,00074,06316,00030,00022,00016,00020,50031,500187'7830,54158,4667,9539,4157,338-97-(A)IncludesallemployeecontributionstotheEmployees'avingsFundPlan.(B)1995bonusforMr.Budneyrepresentsabonusfor1995guaranteedatthetimehewashiredifearningspersharethresholdswerenotmetundertheOfficerIncentiveCompensationPlan(anannualincentivecompensationplanadoptedbytheBoardofDirectorsonDecember13,1990,andsuspendedfor1996and1997asaconditionofparticipationintheSIP).(C)1996and1995OtherAnnualCompensationforMr.Budneyrepresentsamountsreimbursedforpaymentoftaxesassociatedwithrelocationexpenses.1997OtherAnnualCompensationforMessrs.Davis,Budney,SylviaandPowersandMs.Kerrrepresentsamountsreimbursedforpaymentoftaxesassociatedwithnon-cashcompensation.(D)In1995,57,500stockunitsweregrantedpursuanttotheSIPadoptedbytheBoardstockunitsvestedandbecamepayableonequivalentswerecreditedonthesestocktablewerecalculatedbymultiplyingthepriceofthecompany'sstock($9.875)on1995).totheabovenamedexecutiveofficersofDirectorsonDecember14,1995.TheseDecember31,1997.Nodividendunits.The1995valueslistedinthestockunitsgrantedbytheclosingmarketthedateofthegrant(December31,In1996,109,750stockunitsweregrantedtotheabovenamedexecutiveofficerspursuanttotheLTIPadoptedbytheBoardofDirectorsonSeptember25,1996.Thesegrantsweremadeforthethree-yearperiodJanuary.1,1996,throughDecember31,1998,andvestandbecomepayableonDecember31,1998.The1996valueslistedinthetablewerecalculatedbymultiplyingthestockunitsgrantedby$8.00,thepriceatthetimethesestockunitgrantsweredetermined.Dividendequivalents,ifany,willbecreditedonthesegrantsandwillbepaidwhentherelatedstockunitsarepaid.ForMr.Powers,thevaluealsoincludesthevalueofstockunitsgrantedin1996underthe1995SIP.In1997,79,600stockunitsweregrantedtotheabovenamedexecutiveofficerspursuanttotheLTIPadoptedbytheBoardofDirectorsonSeptember25,1996.Thesegrantsweremadeforthethree-yearperiodJanuary1,1997,throughDecember31,1999,andvestandbecomepayableonDecember31,1999.The1997valueslistedinthetablewerecalculatedbymultiplyingthestockunitsgrantedby$10.625,thepriceatthetimethesestockunitgrantswere,determined.Dividendequivalents,ifany,willbecreditedonthesegrantsandwillbepaidwhentherelatedstockunitsarepaid.Asoftheendofthe1997fiscalyear,basedonaclosingmarketpriceof$10.50,Mr.Davisheld105,000stockunitshavingamarketvalueof$1,102;500;Mr.Budneyheld55,000stockunitshavingamarketvalueof$577,500;Mr.Sylvi.aheld35,350stockunitshavingamarketvalueof$371,175'r.Powersheld25,750stockunits,havingamarketvalueof$270,375;andMs.Kerrheld25,750stockunitshavingamarketvalueof$270,375.AllOtherCompensationfor1997includes:employercontributionstotheCompany'sEmployees'avingsFundPlan:Mr.Davis($4,800),Mr.Sylvia($4,800),Mr.'owers($4,800),andMs.Kerr($4,800);taxableportionoflifeinsurancepremiums:Mr.Davis($13,743),Mr.Budney($2,436),Mr.Sylvia($3,537),Mr.Powers($3,528),andMs'err($1,653);employercontributionstotheCompany'sExcessBenefitPlan:Mr.Davis($8,715),Mr.Sylvia($1,837),Mr.Powers($560),andMs.Kerr($1,500);directorfeesreceivedfromOpinacEnergyCorporation:'r.Davis($15,000),Mr.Budney($14,000),andMr.Powers($11,000);lumpsumpaymentforaccrued,unusedvacationuponretirement:Mr.Powers($62,490);severanceallowancepaidpursuanttoEmploymentAgreement:Mr.Powers($105,500);personaltravelallowance:Mr.Sylvia($979).-98-Thefollowingtablediscloses,fortheChairmanoftheBoardandChiefExecutiveOfficer,Mr.WilliamE.Davisandtheothernamedexecutiveofficers,thenumberandtermsofSARsgrantedduringthefiscalyearendedDecember31,1997.Option/SARGrantsinLastFiscalYearIndividualGrantsNameW.E.A.J.B.R.J.W.D.D.DavisBudney,Jr.SylviaPowersKerrNumberofSecuritiesUnderlyingOptions/SARsGranted~(I)70,00035,00022,20016,00016,000%ofTotalOptions/SARsGrantedtoEmployeesInFiscalYear23.62%11.81%7.49%5.40%5.40'%xerciseorBasePrice($/Sh)10.3010.30'0.3010.3010.30NameW.E.A.J.B.R.J.W.D.D.DavisBudney,Jr.SylviaPowersKerrExpirationDate(A)12/31/200612/31/200612/31/200612/31/200612/31/2006GrantDatePresentValue($)(B)249,200124,60079,03256,96056,960(A)SARsgrantedin1997undertheLTIPbecomeexercisableJanuary2,2000.AllSARsbecomeexercisableuponachangeincontrol.(B)ThegrantdatepresentvalueofSARsiscalculatedusingtheBlack-ScholesOptionPricingModelwiththefollowingassumptions:marketpriceof.thestockat.the,September29,1997grantdate($10.30);exercisepriceofrightsthatexpireonDecember31,2006($10.30);stockvolatility(0.2957);dividendyield(2.86%);riskfreerate(6.00%);exerciseterm(10years);Black-Scholesratio(0.3454);andBlack-Scholesvalue($3.56)forrightsthatexpireonDecember31,2006.Stockvolatilityanddividendyieldassumptionsarebasedon36monthsofresultsfortheperiodendingDecember31,1997.ThefollowingtablesummarizesexercisesofoptionsbytheChairmanoftheBoardandChiefExecutiveOfficer,Mr.WilliamE.Davis,andtheothernamedexecutiveofficers,thenumberofunexercisedoptionsheldbythemandthespread(thedifferencebetweenthecurrentmarketpriceofthestockandtheexercisepriceoftheoption,totheextentthatmarketpriceattheendoftheyearexceedsexerciseprice)onthoseunexercisedoptionsforfiscalyearendedDecember31,1997.-99" AggregatedOption/SARExercisesinandFiscalYear-EndOptionValuesLastFiscalYearNumberofSecuritiesUnderlyingUnexercisedOptions/SARsAtFiscalYearEnd(I)NameW.E.A.J.B.R.J.W.D.D.DavisBudney,Jr.SylviaPowersKerrSharesAcquiredonValueExercise(I)Realized($)Exercisable32,625013,0009,0006,000ValueofUnexercisedOptions/SARsAtFiscalYear-End($)(A)Unexercisable312,500156,00099,70068,00068,000NameW.E.A.J.B.R.J.W.D.D.DavisBudney,Jr.SylviaPowersKerrExercisableUnexercisable239,000119,50075,69078,20054,450(A)CalculatedbasedontheclosingmarketpriceoftheCompany'scommonstockonDecember31,1997($10.50).NIAGARAMOHAWKPOWERCORPORATIONComparisonofFive-YearCumulativeTotalReturn(1)vs'&P500,EEIandPeerGroupofEasternRegionUtilities[ILLUSTRATIONOFPERFORMANCEGRAPH--ATTACHED)199219931994199519961997NMPCSGP500IndexEEZIndex.PeerGroup100.00100.00100.00100.00110.4683.26110.08111.53111.66-97.28109.1593.8760.67153.45123.91124'663.07188.68123.13122.0267.07251'3159.17158.83Assumes$100investedonDecember31,1992inNiagaraMohawk'sstock,S&P500,EEZandEasternRegionutilities.Alldividendsassumedtobereinvestedoverthefive-yearperiod.Inprioryears,theCompanyhascompareditsfive-yeartotalshareholderreturnstoapeergroupcomprisedofthe23easternregionutilitieslistedlistedbelow.Infutureyears,theCompanyintendstocompareitstotalshareholderreturnstotheEdisonElectricInstituteCombinationGasandElectricInvestor-OwnedUtilitiesIndex("EEIIndex"),whichisapublishedindustryindex.Inviewofthenationwidederegulationoftheelectricandgasutilityindustry,theCompanybelievesthatanationalpeergroup,suchastheEEIIndex,ismoreappropriatethantheregionalutilitypeergroupusedinprioryears.Furthermore,theEEIIndexismoreappropriatesinceitiscomposedentirelyofcombinationelectricandgasutilities,likeNiagaraMohawk.-100-PEERGROUPOFEASTERNREGIONUTILITIES:.AlleghenyEnergyInc.AtlanticEnergy,Inc.BaltimoreGas&ElectricCompanyBostonEdisonCompanyCentralHudsonGas&ElectricCorp.CentralMainePowerCo.ConsolidatedEdisonCo.ofNewYork,DQE,Inc.NortheastUtilitiesOrange&RocklandUtilitiesInc.PECOEnergyCompanyPP&LResourcesIncPublicServiceEnterpriseGroupinc.RochesterGas&ElectricCorp.TheUnitedIlluminatingCompanyDelmarvaPower&LightCo.EasternUtilitiesAssociatesGeneralPublicUtilit'iesCorp.'KeyspanEnergyCorp.LongIslandLightingCo.NationalFuelGasCompanyInc.NewEnglandElectricSystemNewYorkStateElectric&GasCorp.(1)TotalreturnsforeachEasternRegionUtilityweredeterminedinaccordancewiththeSecuritiesandExchangeCommission'sregulations,i.e.,weightedaccordingtoeachissuer'sstockmarketcapitalization.RETIREMENTBENEFITSThefollowingtableillustratesthemaximumaggregatepensionbenefit,withcertaindeductionsforSocialSecurity,payablebytheCompanyunderboththeNiagaraMohawkPensionPlan("BasicPlan")andtheCompany'sSupplementalExecutiveRetirementPlan("SERP")toanofficerinspecifiedaveragesalaryandyears-of-serviceclassifications.SuchbenefitamountshavebeencalculatedasthougheachofficerselectedastraightlifeannuityandretiredonDecember31,1997atage65.Theamountofcompensationtakenintoaccountunderatax-qualifiedplanissubjecttocertainannuallimits(adjustedforincreasesinthecostofliving,$150,000in1996and$160,000in1997).Thislimitationmayreducebenefitspayabletohighlycompensatedindividuals.ANNUALRETIREMENTALLOWANCE3-YearAverageAnnualSalary10YearsService*20YearsService30YearsService40YearsService$150,000225,000300,000375,000450,000525,000$21,09023,55523,86923,86923,86923,869$81,948126,948171,948216,948261,948306,948$81,948126,948171,948216,948261,948306,948$81,948126,948171,948216,948261,948306,948*Subjecttofive-yearaverageannualsalary.ThecreditedyearsofserviceundertheBasicPlanandtheSERPfortheindividualslistedintheSummaryCompensationTableareMr.Davis,8years;Mr.Budney,3years;Mr.'Sylvia,7years;Mr.Powers,34years;Ms.Kerr,24years.TheBasicPlan,anoncontributory,tax-qualifieddefinedbenefitplan,providesallemployeesoftheCompanywithaminimumretirementbenefitrelatedtothehighestconsecutivefive-yearaveragecompensation.-101-CompensationcoveredbytheBasicPlanincludesonlytheparticipant'sbasesalaryorpay,subjecttothemaximumannuallimitnotedabove.Directorswhoarenotemployeesarenoteligibletoparticipate.TheSERPisanonqualified,noncontributorydefinedbenefitplanprovidingadditionalbenefitstocertainofficersoftheCompanyuponretirementafterage55whohave20ormoreyearsofemployment.TheCommitteemaygrantexceptionstotheserequirements.TheSERPprovidesforpaymentmonthlyofanamountequaltothegreaterof(i)60%ofmonthlybasesalaryaveragedoverthefinal36monthsofemployment,lessbenefitspayableundertheBasicPlan,retirementbenefitsaccruedduringpreviousemploymentandone-halfofthemaximumSocialSecuritybenefittowhichtheparticipantmaybeentitledatthetimeofretirement,or(ii)benefitspayableundertheBasicPlanwithoutregardtotheannualbenefitlimitationsimposedbytheInternalRevenueCode.ParticipantsintheSERPmayelecttoreceivetheirbenefitinalumpsumpaymentprovidedcertainestablishedcriteriaaremet.1EMPLOYEEAGREEMENTSTheCompanyenteredintoemploymentagreementswithMessrs.Davis,Budney,SylviaandPowersandMs.Kerr,effectiveasofDecember20,1996,whichsupersededtheirprioragreementswiththeCompany.Theagreementshaveathree-yearterm,and,unlesseitherpartygives60dayspriornoticetothecontrary,theagreementsareextendedattheendofeachyearforanadditionalyear.Intheeventofachangeincontrol(asdefinedintheagreement),theagreementwillremainineffectforaperiodofatleast36monthsthereafterunlessanoticenottoextendthetermoftheagreementwasgivenatleast18monthspriortothechangeincontrol.Theagreementsprovidethattheexecutivewillreceiveabasesalaryattheexecutive'scurrentannualsalaryorsuchgreateramountdeterminedbytheCompanyandthattheexecutivewillbeabletoparticipateintheCompany'sincentivecompensationplansaccordingtotheirterms.Inaddition,theexecutiveisentitledtobusinessexpensereimbursement,vacation,sickleave,perquisites,fringebenefits,insurancecoverageandothertermsandconditionsoftheagreementasareprovidedtoemployee'softheCompanywithcomparablerankandseniority.UnderanamendmenttotheagreementseffectiveasofJune9,1997,ifanexecutivehascompletedeightyearsofserviceandattainedage55atthetimeoftheexecutive'sterminationofemployment,theexecutive(andeligibledependents)willbeentitledtocoverageformedical,prescriptiondrug,dentalandhospitalizationbenefitsequaltothoseprovidedbytheCompanyonMarch26,1997forthe'emainderof.the.executive'.slifewithallpremiumsthereforepaidbytheCompany.Ifanexecutivehascompletedeightyearsofservicebuthasnotattainedage55uponterminatingemployment,suchbenefitswillbeprovidedwhentheexecutiveattainsage55.Theemploymentagreementsalsoprovidethattheexecutive'sbenefitsundertheSERPwillbebasedontheexecutive'ssalary,annualincentiveawardsandSIPawards,asapplicable.Further,iftheexecutive'semploymentisterminatedbytheCompanywithoutcause(whetherpriortoorafterachangeincontrol),orbytheexecutiveforgoodreasonaftera'hangeincontrol,oraftercompletingeightyearsofservice,theagreementsprovidethattheexecutivewillbedeemedfullyvestedundersuchplanwithoutreductionforearlycommencement.Iftheexecutiveisunderage55atthetimeofsuchtermination,theexecutivewillbeentitledtoafullyvestedbenefitundertheSERPuponattainingage55,withoutreductionforearlycommencement.Theagreementsrestrictundercertaincircumstancespriortoachangeincontroltheexecutive'sabilitytocompetewiththeCompanyandtouseconfidentialinformationconcerningtheCompany.Intheeventofadispute-102-oyeranexecutive'srightsundertheexecutive'sagreementfollowingachangeincontroloftheCompany,theCompanywillpaytheexecutive.'sreasonablelegalfeeswithrespecttothedisputeunlesstheexecutive'sclaimsarefountobefrivolous.Iftheexecutive'semploymentisterminatedbytheCompanywithoutcausepriortoachangeincontrol(asdefinedintheagreement),theexecutivewillbeentitledtoalumpsumseverancebenefitinanamountequaltotwotimestheexecutive'sbasesalaryplusanamountequaltotwotimesthegreateroftheexecutive's(i)mostrecentannualincentiveawardor(ii)averageannualincentiveawardpaidoverthepreviousthreeyears(aportionofthevalueoftheSIPawardstotheexecutivewillbetreatedasincentiveawardsfor1996and1997forthispurpose)~Inaddition,theexecutivewillreceiveaprorataportionoftheincentiveawardwhichwouldhavebeenpayabletotheexecutiveforthefiscalyearinwhichterminationofemploymentoccursprovidedthattheexecutivehasbeenemployedfor180daysinsuchfiscalyear.Intheeventofsuchterminationofemployment,theexecutivewillalso.beentitledtocontinuedparticipationintheCompany'semployeebenefitplansfortwoyears,coverageforthebalanceoftheexecutive'slifeunderalifeinsurancepolicyprovidingadeathbenefitequalto2.5timestheexecutive'sbasesalaryatterminationandpaymentbytheCompanyoffeesandexpensesoranyexecutiverecruitingorplacementfirminseekingnewemployment.If,followingachangeincontrol,theexecutive'semploymentisterminatedbytheCompanywithoutcauseorbytheexecutiveforgoodreason(asdefinedintheagreement),theexecutivewillbeentitledtoalumpsumseverancebenefitequaltofourtimestheexecutive'sbasesalary..Theexecutivewillalsobeentitledtotheadditionalbenefitsreferredtointhelastsentenceoftheprecedingparagraph,exceptthatemployeebenefitplancoverageformedical,prescriptiondrug,dentalandhospitalizationbenefitswillcontinuefortheremainderoftheexecutive'slifewithallpremiumsthereforpaidbytheCompanyandcoverageunderotheremployeebenefitplanswillcontinueforfouyears.IntheeventthatthepaymentstotheexecutiveuponterminationofemploymentfollowingachangeincontrolwouldsubjecttheexecutivetotheexcisetaxonexcessparachutepaymentsundertheInternalRevenueCode,theCompanywillreimbursetheexecutiveforsuchexcisetax(andtheincometaxandexcisetaxonsuchreimbursement).InNovember1994,theCompanyenteredintoasupplementalagreementwithMr.Powersinexchangefor.hisforegoingretirementundertheCompany'sVoluntaryEmployeeReductionProgramandcontinuingemploymentwiththeCompanyuntilDecember31,1996.ThisagreementwasmodifiedbyanagreementbetweenMr.PowersandtheCompanyenteredintoinOctober1996inexchangeforhisforegoingretirementonDecember31,1996,andcontinuingemploymentwiththeCompanyforupto12additionalmonths.Mr.PowersretiredfromtheCompanyeffectiveDecember31,1997.Undertheagreements,Mr.PowersbecameentitledtoalumpsumpaymentfollowingthesuccessfulclosingofthesaleofHYDRA-COEnterprises,Inc.,andtoaseveranceallowanceequaltoone-halfofhisannualsalaryineffectonDecember31,*1996,whichwaspaid.tohiminJanuary1997.TheagreementsalsoprovidethatMr.Powerswouldbeentitledto(i)aSIPawardof7,500stockunitsand9,500SARs,whichwouldbefullyvested(assumingretirementduring1997)andpayable(inthecaseofstockunits)orexercisable(inthecaseofSARs')onDecember31,1997,(ii)long-termincentivegrantsequivalenttothoseprovidedtootherseniorvicepresidentsforthe1996-1998and1997-1999cycles(proratedforhisperiodofserviceduringthosecycles),(iii)alumpsumpaymentforunusedvacationfor1995,1996and1997uponretirementand(iv)"grandfathered"retireemedicalcoveragesineffectonDecember31,1996.UndertheagreementsMr.PowersalsoisentitledtoabenefitundertheCompany'sSERPnoblessthanhis-103-benefitcalculatedasofNovember1994,andtohavethefeeshereceivedasamemberoftheboardofdirectorsofOpinacEnergyCorporation,(orwouldhavereceivedintheeventthatsuchfeesareeliminated)takenintoaccountincalculatinghisbenefitunderthisplanperiod.InJanuary1997,theCommitteeagreedthatifMr.PowerselectedtoreceivealumpsumpaymentofhisbenefitundertheSERP(whichhedid),itwouldbebasedonadiscountratenohigherthantheapplicablediscountrateineffectundertheplanonDecember31,1996.COMPENSATIONOFDIRECTORSDirectorswhoarenotemployeesoftheCompanyreceiveanannualretainerof$20,000and$1,000perBoardmeetingattended;DirectorswhoarenotemployeesandwhochairanyofthestandingBoardCommitteesreceiveanadditionalannualfeeof$3,000andthosewhoserveonanyofthestandingBoardCommittees,includingthechair,receive$850perCommitteemeetingattended.TheCompanyalsoreimbursesitsdirectorsfortravel,lodgingandrelatedexpensestheyincurinattendingBoardandCommitteemeetings.TheBoardofDirectorsterminatedtheOutsideDirectorRetirement.PlaneffectiveDecember31,1995.Theplanpaidannualretirementbenefitsequaltotheannualretainerineffectatthetimeofretirementtooutsidedirectorswhoretiredonorafterage65with10yearsofservice.Directors'nderage60hadthepresentvalueoftheiraccruedbenefitsasofDecember31,1995convertedintodeferredstockunitsofequivalentvaluewhichbecomepayableuponthedirector'sterminationfromtheBoard.Directorsage60orolderweregivenanelectionto(1)continuetoreceivegrandfatheredretirementbenefitsbasedontheannualretainerin1995,(2)convertthepresentvalueoftheiraccruedbenefitsintodeferredstockunits,or(3)receivehalfthegrandfatheredretirementbenefitandconverthalfthepresentvalueoftheiraccruedbenefitintodeferredstockunits.FourdirectorselectedtocontinuetoreceivethegrandfatheredRetirementPlanbenefits.DeferredStockUnits("DSUs"),administeredinaccordancewiththetermsoftheOutsideDirectorDeferredStockUnitPlanadoptedbytheBoardofDirectorsonDecember2,1996,arepaidwhenapersonceasestobeanoutsidedirector,eitherinalumpsumorinfiveequalannualinstallments.ThefizstDSUinstallmentpaymentwouldbemadeshortlyafterthedirector'sserviceendsandtheotherinstallmentswould.be.paid.on.thefirstthroughfourthanniversariesofsuchdate,basedontheprevailingstockpriceatthattime.DSUsarecreditedwithrespecttoanydividendspaidduringthetermoftheirdeferral.SuchdividendcreditsarereinvestedintoDSUsofequivalentcurrentvaluebasedontheprevailingpriceoftheCompany'scommonstockatthattime.Commencingin1996,andannuallythereafter,eachoutsidedirectoriscreditedwithDSUsequalinvalueto50%oftheprevailingyear'sannualretainer(60tforCommitteeChairs).Accordingly,alloutsidedirectorswerecreditedwith1,168DSUs(1,402forCommitteeChairs)basedonaclosingstockpriceof$8.5625onMay7,1997.ThebeneficialstockownershiptableinItem12,showstheDSUswhichhavebeencreditedtoeachoftheoutsidedirectorsunderthisplanasofMarch10,1998.TheCompanyprovidescertainhealthandlifeinsurancebenefitstodirectorswhoarenotemployeesoftheCompany'.Eachoutsidedirectorcoveredunderthe-104-Company'shealthcareplanscontributesapproximately20percentofthemonthlycostsassociatedwiththeseplans.During1997,thefollowingdirectorsreceivedtheindicatedbenefitsundertheforegoingarrangements:Mr.Burkhardt($3,689),Mr.Costle($3,178),Mr.EdmundDavis($6,602),Mr.Donlon($204),Mr.Gioia($4,077),Dr.Hill($3,306),Hr.Panasci($212),Dr.Peterson($2,361),Hr.Riefler($4,856)andHr.Schwartz($384).Hr.Burkhardtreceivedaconsultingfeeof$18,000during1997.COMPENSATIONANDSUCCESSIONCOMMITTEEINTERLOCKSANDINSIDERPARTICIPATIONDirectorsAllyn,EdmundDavis,Gioia,PanasciandSchwartz,al'1ofwhomarenon-employeedirectors,arethemembersoftheCompensationandSuccessionCommittee.Nopersonservingduring1997asamemberoftheCompensationandSuccessionCommitteeoftheBoardservedasanofficeroremployeeoftheCompanyoranyofitssubsidiariesduringorpriorto1997.Nopersonservingduring1997asanexecutiveofficeroftheCorporationservesorhasservedasadirectororamemberofthecompensationcommitteeofanyotherentitythathasanexecutiveofficerwhoservesorhasservedeitherasamemberoftheCompensationandSuccession'CommitteeorasamemberoftheBoardofDirectorsofNiagaraMohawkPowerCorporation.Item12.SecurityOwnershipofCertainBeneficialOwnersandManagement.SECURITYOWNERSHIPOFCERTAINBENEFICIALOWNERSThefollowingtableshowsthepersons(asthetermisusedinSection13(d)(3)oftheSecuritiesExchangeActof1934)knowntotheCompanytoownmorethanfivepercent(5%)oftheCompany'scommonstockasofDecember31,1997.TitleofNameandAddressofAmountandNatureofPercentClassBeneficialOwnerBeneficialOwnershipOfClassCommonStockFMRCorp.14,441,831(1)82DevonshireStreetBoston,Massachusetts0210910.00%CommonStockFidelityManagementTrustCo.11,829,786(2)82DevonshireStreetBoston,Massachusetts021098.19%CommonStockThePrudentialInsuranceCompanyofAmerica8,404,245(3)751BroadStreetNewark,NewJersey07102-37775.82%(1)Includes1,873,631shareswithrespecttowhichFMRCorp.hassolevotingpowerand14,441,831withsolepowertodisposeortodirectdispositionasreportedonSchedule13G,datedFebruary14,1998,filedwiththeSEC.(2)TheaboverepresentssharesintheCompany'sNon-RepresentedandRepresentedEmployees'avingsFundPlans.FidelityManagementTrustCompanyservesasTrustee.TheTrusteewillvoteallsharesofcommonstockheldintheTrustsestablishedforthePlansinaccordancewiththedirectionsreceivedfromtheemployeesparticipatinginthePlans.TheTrusteewillvotesharesforwhichitreceivesnoinstructionsinthesameproportionasitvotessharesforwhichitreceivesinstructions.-105-(3)Includes789,900shareswithrespecttowhichPrudentialInsuranceCompanyofAmericahassolevotingpower;7,575,445shareswithsharedpowertovote;789,900shareswithsolepowertodisposeortodirectdisposition;and7,614,345shareswithsharedpowertodispose,asreportedonSchedule13G,datedFebruary10,1998,filedwiththeSEC.TheCompanybelievesthatholdersofapproximately88.2%oftheCompany'scommonstockoutstandingasofDecember31,1997,electedtoholdtheirshares,notintheirownnames,butinthenamesofbankingorfinancialintermediaries.Accordingly,asofthatdate,127,431,405shareswereregisteredinthenomineenameofTheDepositoryTrustCompany,Cede&Co.SECURZTYOWNERSHIPOFDZRECTORSANDEXECUTZVEOFFICERSThefollowingtablereflectssharesoftheCompany'scommonstockbeneficiallyowned(ordeemedtobebeneficiallyownedpursuanttotherulesoftheSecuritiesandExchangeCommission)asofMarch10,1998,byeachdirectoroftheCompany,eachofthenamedexecutiveofficersintheSummaryCompensationTablebelowandthecurrentdirectorsandexecutiveofficersof,theCompanyasagroup.Thetablealsoliststhenumberofstockunitscreditedtodirectors,namedexecutiveofficersandthedirectorsandexecutiveofficersoftheCompanyasagroupasofMarch10,1998,pursuanttotheCompany'scompensationandbenefitprograms.Novotingrightsareassociatedwithstockunits.TitleofClassCommonStockNameandAddressofBeneficialOwnerDirectors:WilliamF.AllynAlbertJ.Budney,Jr.LawrenceBurkhardt,IIlDouglasM.CostleEdmundM.DavisWilliamE.DavisWilliamJ.DonlonAnthonyH.GioiaBonnieGuitonHillHenryA.Panasci,Jr.PattiMcGillPetersonDonaldB.RieflerStephenB.SchwartzAmountandNatureofBeneficialOwnership*1,00010,500(1)4525002,27445,238(2)15,343(3)5001,0002,500'5001,000500PercentOfClass**NamedExecutives:B.RalphSylviaJohnW.PowersDarleneD.Kerr22,787(4)26,659(5)15,726(6)AllDirectorsandExecutiveOfficers(23)asagroup197,260(7)-106-TitleofClassCommonStockNameandAddressofBeneficialOwnerDirectors:WilliamF.AllynAlbertJ.Budney,Jr.LawrenceBurkhardt,IZI,DouglasM.CostleEdmundM.DavisWilliamE.DavisWilliamJ.DonlonAnthonyH.GioiaBonnieGuitonHillHenryA.Panasci,Jr.PattiMcGillPeterson~DonaldB.RieflerStephenB.SchwartzNumberofStockUnitsHeld9,158(8)72,500(9)2,773(8)9,551(8)26,386(8)140,000(9)02,311(8)8,077(8)2,311(8)11,199(8)25,877(8)11,204(8)NamedExecutives:B.RalphSylviaJohnW.PowezsDarleneD.Kerr46,450(9)25,750(9)36,850(9)AllDirectorsandExecutiveOfficers(23)asagroup569,297*BasedoninformationfurnishedtotheCompanybytheDirectorsandExecutiveOfficers.ZncludessharesofcommonstockcreditedundertheEmployees'avingsFundPlanasofMarch10,1998.~*Lessthanonepercent.(1)Includesoptionsfor10,000sharesofcommonstockexercisablewithin60days.(2)Includespresentlyexercisableoptionsfor42,625sharesofcommonstock.(3)Includespresentlyexercisableoptionsfor13,333sharesofcommonstock.(4)Includespresentlyexercisableoptionsfor18,000sharesofcommonstock.(5)Includespresentlyexercisableoptionsfor12,000sharesofcommonstock.(6)Includespresentlyexercisableoptionsfor9,000sharesofcommonstock.(7)Includespresentlyexercisableoptionsfor141,083sharesofcommonstock.(8)RepresentsdeferredstockunitsgrantedpursuanttotheOutsideDirectorDeferredStockUnitPlan.Novotingrightsareassociatedwithdeferredstockunits.Foradditionalinformationregardingdeferredstockunits,refertoItem11.ExecutiveCompensation-"CompensationofDizectors".(9)Representsstockunitsgrantedin1995pursuanttotheSIPandin1996,1997and1998pursuanttotheLTZP.Novotingrightsareassociatedwithstockunits.Foradditionalinformationregardingstockunitsgrantedtonamedexecutives,refertoItem11'xecutiveCompensation-"Long-TermIncentivePlan").InadditiontothesharesoftheCompany'scommonstock,AlbertJ.Budney,Jr.indirectlyowns100sharesoftheCompany'sPreferredStock,9H%Series.Item13.CertainRelationshipsandRelatedTransactions.TheCompanyhasnothingtoreportforthisitem.P-107-PARTZVItem14.Exhibits,FinancialStatementSchedules,andReportsonFormS-K.(a)CertaindocumentsfiledaspartoftheForm10-K.(1)INDEXOFFINANCIALSTATEMENTSReportofIndependentAccountantsConsolidatedStatementsofIncomeandRetainedEarningsforeachofthethreeyearsintheperiodendedDecember31,1997ConsolidatedBalanceSheetsatDecember31,1997andConsolidatedStatementsofCashFlowsforeachofthethreeyearsintheperiodendedDecember31,,1997NotestoConsolidatedFinancialStatements1996SeparatefinancialstatementsoftheCompanyhavebeenomittedsinceitisprimarilyanoperatingcompanyandallconsolidatedsubsidiariesarewholly-owneddirectlyorbysubsidiaries.(2)ThefollowingfinancialstatementschedulesoftheCompanyfortheyearsendedDecember31,1997,1996and1995areincluded:ReportofIndependentAccountantsonFinancialStatementScheduleConsolidatedFinancialStatementSchedule:IZ--ValuationandQualifyingAccountsandReservesTheFinancialStatementScheduleaboveshouldbereadinconjunctionwiththeConsolidatedFinancialStatementsinPartIZ,Item8(FinancialStatementsandSupplementaryData).Schedulesotherthanthosementionedaboveareomittedbecausetheconditionsrecpxiringtheirfilingdonotexistorbecausetherecyxiredinformationisgiveninthefinancialstatements,includingthenotesthereto.(3)ListofExhibits:SeeExhibitIndex.(b)ReportsonForm8-K:Form8-KReportingDate-October10,1997Itemreported-Item5.OtherEvents.RegistrantfiledinformationconcerningthePowerChoicesettlement~Form8-KReportingDate-February11,1998Itemreported-Item5.OtherEvents.RegistrantfiledinformationconcerningtheJanuary1998icestorm.(c)Exhibits.SeeExhibitIndex.(d),FinancialStatementSchedule.See(a)(2)above.-108-REPORTOFINDEPENDENTACCOUNTANTSONFINANCIALSTATEMENTSCHEDULETotheBoardofDirectorsofNiagaraMohawkPowerCorporationOurauditsoftheconsolidatedfinancialstatementsofNiagaraMohawkPowerCorporationreferredtoinourreportdatedMarch26,1998appearinginthisForm10-KalsoincludedanauditoftheFinancialStatementSchedulelistedinItem14(a)ofthisForm10-K.Inouropinion,thisFinancialStatementSchedulepresentsfairly,inallmaterialrespects,theinformationsetforththereinwhenreadinconjunctionwiththerelatedconsolidatedfinancialstatements.PRICEWATERHOUSELLPSyracuse,NewYorkMarch26,1998-109-NIAGARAHOHAWRPOWBRCORPORATIONANDSUBSZDZARYCOMPANIESSCHEDULEZZ-VALUATIONAND{}UALZFYZNGACCOUNTSANDRESERVES(ZnThousandsofDollars)Page1of2ColumnADescriptionAllowanceforDoubtfulAccounts-deductedfromAccountsReceivableintheConsolidatedBalanceSheets199719961995ColumnBBalanceatBeginningofPeriod$52,09620,0003,600ChargedtoCostsandExpenses46,549127,64831,284ColumnCAdditionsChargedtoOtherAccounts$3,000(b)800(b)16400(b)ColumnDDeductions(a)$39,09796,352.31,284ColumnEBalanceatEndofPeriod$62,54852,09620,000(a)Uncollectibleaccountswrittenoffnetofrecoveriesof$14,416,$12,842,and$10,830in1997,1996and1995,respectively.(b)TheCompanyincreaseditsallowancefordoubtfulaccountsin1995andrecordedaregulatoryassetof$16,400,whichreflectstheamountthattheCompanyexpects.torecoverinrates.In1996,regulatoryassetincreasedby$800to$17,200andin1997,regulatoryassetincreased$3,000to$20,200.-110-NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESSCHEDULEZZ-VALUATIONANDQUALIFYINGACCOUNTSANDRESERVES(ZnThousandsofDollars)Page2of2ColumnAColumnBColumnCAdditionsColumnDColumnEDescriptionBalanceatBeginningofPeriodChargedtoCostsandExpensesChargedtoOtherAccountsDeductionsBalanceatEndofPeriod(c)MiscellaneousValuationReserves199719961995$37,74039,42629,197$2,20710,26118,719$$4,04911,9478,490$35,89837,74039,426(c)Thereservesrelateprimarilytocertaininventoryandnon-ratebaseproperties.11-NIAGARAMOHAWKPOWERCORPORATZONExhibit1ndexInthefollowingexhibitlist,NMPCreferstotheCompanyandCNYPreferstoCentralNewYorkPowerCorporation,apredecessorcompany.EachdocumentreferredtobelowisincorporatedbyreferencetothefilesoftheCommission,unlessthereferencetothedocumentinthelistisprecededbyanasterisk.PreviousfilingswiththeCommissionareindicatedasfollows:A--NMPCC--NMPCF--CNYPG--CNYPV--NMPCX--NMPCZ-.-NMPCCC--NMPCDD--NMPCGG--NMPCHH--NMPCII--NMPCJJ--NMPCKK--NMPCOO--NMPCQQ--NMPCSS--NMPCTT--NMPCW--NMPCCCC--NMPCZZZ--NMPCOOO--NMPCPPP--NMPCQQQ--NMPCRRR--NMPCRegistrationRegistrationRegistrationRegistrationRegistzationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationStatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.Statement.No.StatementNo.StatementNo.StatementNo.StatementNo.Statement,No.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.2-8214;2-8634;2-3414/2-5490;2-10501I'-12443I2-13285;2-16193;2-18995;2-25526;2-26918)2-29575)2-35112;2-38083;2-49570;2-51934;2-52852;2-54017;2-59500;2-70860(2-90568;33-32475;33-38093(33-47241;33-59594;b--NMPCc--NMPCd--NMPCe--NMPCf--NMPCg--NMPCh--NMPCi--NMPCj-.-NMPCk--NMPCl--NMPCm--NMPCn--NMPCo--NMPCAnnualReportonForm10-KforyearendedDecember31,1990;andAnnualReportonForm10-KforyearendedDecember31,1992;andAnnualReportonForm10-KforyearendedDecember31,1993;andAnnualReportonForm10-KforyearendedDecember31,1994;andAnnualReportonForm10-KforyearendedDecember31,1995;andAnnualReportonForm10-KforyearendedDecember31,1996.QuarterlyReportonForm10-QforquarterendedMarch31,1993;andQuarterlyReportonForm10-Qforquarterended-September30,1993;QuarterlyReportonForm10-QforquarterendedJune30,1995;andQuarterlyReportonForm10-QforquarterendedSeptember30,1996;QuarterlyReportonFozm10-QforquarterendedJune30,1997;andQuarterlyReportonForm10-QforquarterendedSeptember30,1997.RepoitonForm8-KdatedJuly9,1997;andReportonForm8-KdatedOctober10,1997.InaccordancewithParagraph4(iii)ofItem601(b)of.RegulationS-K,theCompanyagreestofurnishtotheSecuritiesandExchangeCommission,uponrequest,acopyoftheagreementscomprisingthe$804millionseniordebtfacilitythattheCompanycompletedwithabankgroupduringMarch1996.Thetotalamountoflong-termdebtauthorizedundersuchagreementdoesnotexceed10percentofthetotalconsolidatedassetsoftheCompanyanditssubsidiaries.-112-IncorationReferenceExhibitNo.3(a)(1)3(a)(2)3(a)(3)DescritionofInstnment--CertificateofConsolidationofHewYorkPowerandLightCorporation,BuffaloNiagaraElectricCorporationandCentralHewYorkPo~erCorporation,filedintheofficeoftheNewYorkSecretaryofState,January5,1950.--CertificateofAmendmentofCertificateofIncorporationofNMPC,filedintheofficeoftheHewYorkSecretaryofState,January5,1950.--CertificateofAmerxhcntofCertificateofIncorporationofNMPC,pursuanttoSection36oftheStockCorporationLawofNewYork,filedAugust22,1952,intheofficeoftheHcwYorkSecretaryofState.PreviousFiliPreviousExhibitDesition3(a)(2)3(a)(3)3(a)(4)3(a)(5)3(a)(6)3(a)(7)3(a)(8)3(a)(9)--CertificateofHMPCpursuanttoSection11oftheStockCorporationLawofHewYorkfiledMay5,1954intheofficeoftheHewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofHMPC,pursuanttoSection36oftheStockCorporationLawofNewYork,filedJanuary9,1957intheofficeoftheNewYorkSecretaryofState.--CertificateofHMPCpursuanttoSection11oftheStockCorporationLawofHewYork,filedMay22,1957inthcofficeoftheNewYorkSecretaryofState.--CertificateofNMPCpursuanttoSection11oftheStockCorporationLawofNewYork,filedFebruary18,1958intheofficeoftheHewYorkSecretaryofState.--CertificateofAmendncntofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofHewYork,filedMay5,1965intheofficeoftheHewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofKMPCunderSection805oftheBusinessCorporationLawofHewYork,filedAugust24,1967intheofficeoftheHewYorkSecretaryofState.3(a)(4)3(a)(5)3(a)(6)3(a)(7)3(a)(8)3(a)(9)3(a)(10)3(a)(11)--CertificateofAmendnentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYork,filedAugust19,1968intheofficeoftheHewYorkSecretaryofState.--CertificateofAmcrxhentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofNewYork,filedSeptember22,1969intheofficeoftheNewYorkSecretaryofState.3(a)('10)3(a)(11)3(a)(12)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYork,filedMay12,1971intheofficeoftheNewYorkSecretaryofState.3(a)(12)-113-ExhibitNo.3(a)(13)3(a)(14)3(a)(15)3(a)(16)3(n)(17)3(a)(18)3(a)(19)3(a)(20)3(a)(21)3(a)(22)3(a)(23)3(a)(24)DescritionofInstrunent--CertificateofAmendmentofCertificateofIncorporationofNHPCunderSection805oftheBusinessCorporationLawofNewYork,filedAugust18,1972intheofficeoftheNewYorkSecretaryofState.--CertificateofAmendsentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYork,filedJune26,1973intheofficeoftheNewYorkSecretaryofState.--CertificateofAmendnentofCertificateofIncorporationofNHPCunderSection805oftheBusinessCorporationLawofNewYork,filedMay9,1974intheofficeoftheNewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofNHPCunderSection805oftheBusinessCorporationLawofNewYork,filedHarch12,1975intheofficeoftheNewYorkSecretaryofState.--CertificateofAmenchentofCertificateofIncorporationofNHPCunderSection805oftheBusinessCorporationLawofMewYork,filedHay7,1975intheofficeoftheNewYorkSecretaryofState.--CertificateofAmerdnentofCertificateofIncorporationofNHPCunderSection805oftheBusinessCorporntionLawofNewYork,filedAugust27,1975intheofficeoftheNewYorkSecretaryofState.--CertificateofAmerdnentofCertificateofIncorporationofNHPCunderSection805oftheBusinessCorporationLawofNewYork,filedHay7,1976intheofficeoftheNewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledSeptember28,1976intheofficeoftheNewYorkSecretaryofStnte.--CertificateofAmendmentofCertificateofIncorporationofNHPCunderSection805oftheBusinessCorporationLawofNewYorkfiledJanuary27,1978intheofficeoftheNewYorkSecretaryofState.--CertificateofAmerdnentofCertificateofIncorporationofNHPCunderSection.805oftheBusinessCorporationLawofNewYorkfiledHay8,1978intheofficeoftheNewYorkSecretaryofState.--CertificateofCorrectionoftheCertificateofAmendmentfiledHay7,1976oftheCertificateofIncorporationunderSection105oftheBusinessCorporationLawofNewYorkfiledJuly13,1978intheofficeoftheNewYorkSecretaryofState.--CertificateofAmendnentofCertificateofIncorporationofNHPCunderSection805oftheBusinessCorporationLawofNewYorkfiledJuly17,1978intheofficeoftheNewYorkSecretaryofState.IncorationReference3(a)(13)3(a)(14)3(a)(15)3(a)(16)3(a)(17)3(a)(18)3(a)(19)3(a)(20)3(a)(21)3(a)(22)3(a)(23)3(a)(24)-114-IncorationReferenceExhibitNo.3(a)<25)3(a)(26)3(a)(27)3(a)(28)3(a)(29)3(a)(30)3(a)(31)3(a)(32)3(a)(33)3(a)<34)3(a)(35)3(a)(36)DoseritionofInstruncnt--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofHewYorkfiledMarch3,1980intheofficeoftheHewYorkSecretaryofState.--CertificateofAmenchentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofHewYorkfiledMarch31,1981intheofficeoftheHewYorkSecretary'ofState.--CertificateofAmendnentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledMarch31,1981intheofficeoftheNewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledApril22,1981intheofficeoftheHewYorkSecretaryofState.--CertificateofAmerxhentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofHewYorkfiledMay8,1981intheofficeoftheNewYorkSecretaryofState.--CertificateofAmenchentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledApril26,1982intheofficeoftheHewYorkSecretaryofState.--CertificateofAmerxhentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofHewYorkfiledJanuary24,1983intheofficeoftheHewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledAugust3,1983intheofficeoftheHewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofHewYorkfiledDeceaher27,1983intheofficeoftheHewYorkSecretaryofState.--CertificateofAmerdnentofCertificateofIncorporationofNMPCunderSection,805oftheBusinessCorporationLawofHewYorkfiledDecember27,1983intheofficeoftheNewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofHewYorkfiledJune4,1984intheofficeoftheHewYorkSecretaryofState.--CertificateofAmenchentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofHewYorkfiledAugust29,'1984intheofficeoftheHewYorkSecretaryofState.PreviousFiliPreviousExhibitDesition3(a)<25)3(a)(26)3<a)(27)3(a)(28)3(a)(29)3(a)(30)3(a)(31)3(a)(32)3(a)(33)3(a)(34)3(a)(35)3(a)(36)-115-IncorationReferenceExhibitNo.3(a)(37)3(a)(38)3(a)(39)3(a)(40)3(a)(41)3(a)(42)3(a)(43)3(a)(44)3(a)(45)3(a)(46)<<3(b)'(a)4(b)(1)DescritionofInstrunent--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofHewYorkfiledApril17,1985,intheofficeoftheNewYorkSecretaryofState.--CertificateofAmendnentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofHewYorkfiledMay3,1985,intheofficeoftheHewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledDecember24,1986intheofficeoftheHewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledJune1,1987intheofficeoftheHewYorkSecretaryofState.--CertificateofAmendnentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledJuly16,1987intheofficeoftheHewYorkSecretaryofState.--CertificateofAmerxhentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledMay27,1988intheofficeoftheHewYorkSecretaryofState.--CertificateofAmendnentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledSeptember27,1990intheofficeoftheNewYorkSecretaryofState.--CertificateofAmerxhentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporation"LawofNewYorkfiledOctober18,1991intheofficeoftheHewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofNewYork.filedMay5,1994intheofficeoftheNewYorkSecretaryofState.-.CertificateofAmendmentofCertificateofIncorporationofHMPCunderSection805oftheBusinessCorporationLawofHewYorkfiledAugust5,1994intheofficeoftheNewYorkSecretaryofState.--By-LawsofNMPC,asamendedFebruary26,1998.--Agreementtofurnishcertaindebtinstrwents.--MortgageTrustIndenturedatedasofOctober1,1937betweenNMPC(formerlyCNYP)andMarineMidlandBank,N.A.(formerlynamedTheMarineMidlandTrustCompanyofHewYork),asTrustee.PreviousFiliPreviousExhibitDesition3(a)(37)3(a)(38)3(a)(39)3(a)(40)3(a)(41)3(a)(42)3(a)(43)3(a)(44)3(a)(45)3(a)(46)4(b)<<*FiledOctober15,1937aftereffectivedateofRegistrationStatementHo.2-3414.-116-IncarationReferenceExhibitNo.4(b)(2)4(b)(3)4(b)(4)4(b)(5)4(b)(6)4(b)(7)4(b)(8)4(b)(9)4(b)(10)4(b)('11)4(b)(12)4(b)(13)4(b)(14)4(b)(15)4(b)(16)4(b)(17)4(b)(18)4(b)(19)4(b)(20)DescritionofInstrunent--SupplementalIndenture.datedasofDecember1,1938,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofApril15,1939,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofJuly1,1940,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofOctober1,1944,supplementaltoExhibit4(1)~--SupplementalIndenturedatedasofJune1,1945,supplementaltoExhibit4(1)~--SupplementalIndenturedatedasofAugust17,1948,supplementaLtoExhibit4(1).--SupplementalIndenturedatedasofDecesher31,1949,supplementaltoExhibit4(1).--SupplementalIndenture,datedasofJanuary1,1950,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofOctober1,1950,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofOctober19,1950,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofFebruary20,1953,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofApril25,1956,supplementaltoExhibit4(1):-.SupplementalIndenturedatedasofMarch15,1960,supplementaLtoExhibit4(1).--SupplementalIndenturedatedasofOctober1,1966,supplementaltoExhibit4('I).--SupplementalIndenturedatedasofJuly15,1967,supplementaLtoExhibit4(1).--SupplementalIndenturedatedasofAugust1,'1967,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofAugust1,1968,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofMarch15,1977,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofAugust'I,1977,supplementaltoExhibit4(1)~PreviousFiliGCCGGCCCPreviousExhibitDesition2-32-42-57-62-82-97.97-'107-1'I7-'124-164-192-232-274-294-302-302-394(b)(40)-117-IncorationReferenceExhibitNo.4(b)(21)4(b)(22)4(b)(23)4(b)(24)4(b)(25)4(b)(26)4(b)(27)4(b)(28)4(b)(29)4(b)(30)4(b)(31)4(b)(32)4(b)(33)4(b)(34)4(b)(35)4(b)(36)DescryitionofInstrunent--SupplementalIndenturedatedasofMarch1,1978,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofJune15,1980,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofNovember1,1985,supplementaltoExhibit4('I).--SupplementalIndenturedatedasofOctober1,1989,supplementaltoExhibit4(1)~--SupplementalIndenturedatedasofJune1,1990,supplementaltoExhibit4(1)~--SupplementalIndenturedatedasofNovember1,1990,supplementaltoExhibit4(1)..-SupplementalIndenturedatedasofMarch1,'1991,supplementaltoExhibit4('I).--SupplementalIndenturedatedasofOctober1,199I,supplementaLtoExhibit4(1).--SupplementalIndenturedatedasofApril1,1992,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofJune.1,1992,supplementaltoExhibit4(1).--SuppLementalIndenturedatedasofJuly1,1992,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofAugust1,1992,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofApril'I,'1993,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofJuly1,1993,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofSeptember1,1993,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofHarch1,1994,supplementaltoExhibit4(1).PreviousFiliCCCCCCPPPpppaaaQQQRRRRRRRRRPreviousExhibitDesition4(b)(42)4(b)(46)4(b)(64)4(b)(73)4(b)(74)4(b)(75)4(b)(76)4(b)(77)4(b)('78)4(b)(79)4(b)(80)4(b)(81)4(b)(82)4(b)(83)4(b)(84)4(b)(85)4(b)(37)4(b)(38)4(b)(39)--SupplementalIndenturedatedasofJuly1,1994,supplementaltoExhibit4(1).e--SupplementalIndenturedatedasofHay1,1995,supplementaltoExhibit4(1).--AgreementdatedasofAugust16,1940,betgeenCNYP,TheChaseNationalBankoftheCityofNewYork,asSuccessorTrustee,andTheHarineHidlandTrustCompanyofNewYork,asTrustee.4(86)4(87)7-23-118-ExhibitNo.DescritionofInstrcinentIncorationReference10.110.210-310-4--AgreementdatedMarch'I,1957betweenthePo~erAuthorityoftheStateofNewYorkandNMPCastosale,transmissionanddispositionofSt.Lawrencepower.--AgreementdatedFebruary10,1961betweenthePowerAuthorityoftheStateofHewYorkandNMPCastosale,transmissionanddispositionofNiagararedevelopmentpower.;-AgreementdatedJuly26,1961betweenthePowerAuthorityoftheStateofHewYorkandNMPCsupplementaltoExhibit10-2.--AgreementdatedasofMarch23,1973betweenthePowerAuthorityoftheStateofNewYorkandHMPCastothesale,transmissionanddispositionofBlenheim-Gilboapower.DDDD13-11'13-613-75-810.510-6a10-6b10-710-Ba-.AgreementdatedJanuary23,1970betweenConsolidatedGasSupplyCorporation(formerlynamedHewYorkStateHaturalGasCorporation)andNMPC.KK--HewYorkPowerPoolAgreementdatedasofFebruary1,1974betweenHMPCandsixotherHewYorkutilitiesandthePowerAuthorityoftheStateofHewYork.--NewYorkPowerPoolAgreementdatedasofApril27,1975betweenHMPCandsixotherHewYorkelectricutilitiesandthePowerAuthorityoftheStateofHewYork(thepartiestotheAgreementhavepetitionedtheFederalPowerCottmissionforanorderpermittingsuchAgreement,whichincreasesthereservefactorofallpartiesfrom.14to.18,tosupersedetheHewYorkPowerPoolAgreementdatedasofFebruary1,1974).--AgreementdatedasofOctober3'I,1968betweenHMPC,CentralHudsonGas8ElectricCorporationandConsolidatedEdisonCompanyofNewYork,Inc.astoJointElectricGeneratingPlant(theRosetonStation).--MemoranchaofUnderstandingdatedas5-85-105-10b5-1010-Bb10-Bc10.9aofMay30,1975betweenNMPCandRochesterGas8ElectricCorporationwithrespecttoOswegoUnitHo.6.--MemorandclaofUnderstandingdatedasofMay30,1975betweenHMPCandRochesterGasandElectricCorporationwithrespecttoOswegoUnitHo.6.--BasicAgreementdatedasofSeptember22,1975betweenHMPCandRochesterGasandElectricCorporationwithrespecttoOswegoUnitNo.6.--MemoranchlnofUnderstandingdatedasofMay30,1975betweenNMPCandfourotherNewYorkelectricutilitieswithrespecttoNineMilePointNuclearStationUnitNo.2~SSSSSS5-135-'135-13b5-14-119-IncorationReferenceExhibitNo.10-9b10-9cDescritionofInstrment--BasicAgreementdatedasofSeptember22,1975betweenNHPCandfourotherNewYorkelectricutilitieswithrespecttoNineHilePointNuclearStationUnitNo.2.--NineHilePointNuclearStationUnitNo.2OperatingAgreement.PreviousFiliPreviousExhibitDesition5-14b10-1910-10a10-10b10-1110-12<<10-13<<10-14(A)10-15-.MemorarxhmofUnderstandingdatedasofHay16,1974,asamendedMay30,1975,bet~canNHPCandthreeotherNewYorkelectricutilitieswithrespecttotheSterlingNuclearStation.SS--BasicAgreementdatedasofSeptember22,1975betweenNHPCandthreeotherNewYorkelectricutilitieswithrespecttotheSterlingNuclearStations.--MasterRestructuringAgreement,datedasofJuly9,1997,betweentheCon@anyandthesixteenindependentpowerproducerssignatorythereto.--PowerChoicesettlementfiledwiththePSConOctober10,1997--PSCOpinionandOrderregardingapprovalofthePowerChoicesettlementagreementwithPSC,issuedandeffectiveMarch20,1998.--PreferredConsent,December,1997--NHPCOfficers'ncentiveCompensationPlan-PlanDocunent.b5-155-15b10.2899-910-16<A)10-16(A)10-17(A)10-18(A)10-19<<(A)10-20(A)10-21(A)10-22(A)10-23(A)10-24(A)10-25(A)10-26-.NHPCLongTermIncentivePlan-PlanDocunent.--NHPCManagementIncentiveCompensationPlan-PlanDocunent.--CEOSpecialAwardPlan.--NHPCDeferredCompensationPlan.--AmendnenttoNHPCDeferredCompensationPlan--NHPCPerformanceShareUnitPlan.--NHPC1992StockOptionPlan.--NHPC1995StockIncentivePlan--EmploymentAgreementbetweenNMPCandDavidJ.Arrington,Sr.VicePresident,HunanResources,datedDecember20,1996.--EmploymentAgreementbetweenNHPCandAlbertJ~Budney,Jr.,PresidentandChiefOperatingOfficer,datedDecember20,1996.--EmploymentAgreementbetweenNHPCandIllI(1amE.Davis,ChairmanoftheBoardandChiefExecutiveOfficer,datedDecember20,1996.10-110-1710-210-1610.1710-1810-3110-1710-1810-19(A)ManagementcontractorcompensatoryplanorarrangementrequiredtobefiledasanexhibitpursuanttoItem601ofRegulationS-K.-120-IncorationReferenceExhibitNo.DescritionofInstrtmentPreviousFiliPreviousExhibitDesition(A)10-27--EmploymentAgreementbetweenNHPCandDarleneD.Kerr,Sr.VicePresident,EnergyDistribution,datedDecember20,1996.10-20(A)10-28(A)10-29(A)10-30(A)10-31(A)10-32(A)10-33(A)10-34(A)10-35*(A)10-36(A)10-37--EmploymentAgreementbetweenNHPCandGaryJ.Lavine,Sr.VicePresident,LegalandCorporateRelations,datedDecember20,1996.--EmploymentAgreementbetweenNHPCandJohnW.Powers,Sr.VicePresidentandChiefExecutiveOfficer,datedDecember20,1996.--EmploymentAgreementbetweenNMPCandB.RalphSylvia,ExecutiveVicePresident,ElectricGenerationandChiefNuclearOfficer,datedDecember20,1996.--EsploymentAgreementbetweenNHPCandTheresaA.Flaim,VicePresident-CorporateStrategicPlanning,datedDecember20,1996.--EmploymentAgreementbetweenNMPCandStevenW.Tasker,VicePresident-Controller,datedDecember20,1996.--EmploymentAgreementbetweenNHPCandKapuaA.Rice,CorporateSecretary,datedDecember20,1996.--AmendmenttoEmploymentAgreementbetweenNHPCandDavidJ.Arrington,AlbertJ.Budney,Jr.,WilliamE.Davis,DarleneD.Kerr,GaryJ.Lavine,JohnW.PowersandB.RalphSylvia,datedJune9,1997.--EmploymentAgreementbetweenNMPCandWilliamF.Edwards,datedSepterher25,1997.m--EmploymentAgreementbetweenNHPCandJohnH.Hueller,datedJanuary19,1998.--DeferredStockUnitPlanforOutsideDirectors.g10-2110-2210-2310-2410-25'10-2610-310-410-27*11--Statementsettingforththecoaputationofaveragenumberofsharesofcosmonstockoutstanding.<<12--StatementsShowingComputationsofCertainFinancialRatios.<<21--SubsidiariesoftheRegistrant.*23<<27--ConsentofPriceWaterhouseLLP,independentaccountants.--FinancialDataSchedule.(A)ManagementcontractorcompensatoryplanorarrangementrequiredtobefiledasanexhibitpursuanttoItem601ofRegulationS-K.-121-NXAGARAMOHAWKPOWERCORPORATIONANDSUBSIDZARZESCOMPUTATIONOPAVBRAGENUMBEROPSHARESOPCOMMONSTOCKOUTSTANDXNGYearEndedDeceeher31(1)SharesofCotatonStock(2)NumberofDays~nnixxxndin(3)ShareDays~2xIAverageNumberofSharesOutstandingasShownonConsolidatedStatementsofincome(3DividedbyNumberofDasinYearJanuary1-Deceaher31Sharesissuedatvarioustisesduringtheperiod-Acquisition-SyracuseQburbanGasCcapany,Inc.144,365,2145413714441935'I52,693,303,11014260096.527075632061444042031996January1-December31Sharesissuedatvarioustimesduringtheyear-Aisition-SyracusenGasCompany,Inc.144,332,1233309114436521452,825,557,018639765352831954671144349603January1-December31Sharesissued-DividendReinvestmentPlan-January31Acquisition-SyracuseSuburbanGasCompany,inc.-October4144,311,46619,016I6411443321233653358952,673,68500906,370,36014604952680201499144329319Numberofdaysoutstandingnotshownassharesrepresentanaccwalationofweekly,monthlyandquarterlyissuesthroughouttheyear.Sharedaysforsharesissuedarebasedonthetotalnutrherofdayseachsharewasoutstandingduringtheyear.Note:Earningspersharecalculatedonbothabasicanddilutedbasisarethesameduetotheeffectsofrounding.-122-NIAGARANOHANKP(NERCORPORATIONANDSUBSIDIARTCNIPANIESStatementShoMingCoaputationsofRatioof.EarningstoFixedCharges,RatioofEarningstoFixedChargesuithoutAFCandRatioofEarningstoFixedChargesandPreferredStockDiviA.NetIncomeperStatementsofIncomeB.TaxesBasedonIncomeorProfitsC.Earnings,BeforeIncomeTaxesD.FixedCharges(a)E.EarningsBeforeIncomeTaxesandFixedChargesF.AllowanceforFundsUsedDuringConstructionG.EarningsBeforeIncomeTaxesandFixedChargeswithoutAFCPreferredDividendFactor:H.PreferredDividendRequirementsI.RatioofPre-TaxIncometoNetIncome(C/A)J.PreferredDividendFactor(HxI)K.FixedChargesasabove(0)L.FixedChargesandPreferredDividendsConhinedH.RatioofEarningstoFixedCharges(E/D)N~RatioofEarningstoFixedChargesuithoutAFC(G/D)O.RatioofEarningstoFixedChargesandPreferredDividendsCombined(E/L)1997$59,83560095119,930$110,39066221176,611424,3819706$414675.484,9347355$4775790373972.00$74,79430445153792450382011.60$61,250300323$3695731.391.571.361.551.121.31304451'00323YearEndedDeceaher311995$248,0361994$176,98490509079$713352$5946480395960336731.641.63$64,937$54,887314973315274$379910$3701612.291.912.261.891.901.63159393111469407,429288,45331I973315274722,402603,7271993$271,831147075418,906319197738,10316232$721871"0310571.54$49,060319197$3602572.00(a)Includesaportionofrentalsdeemedrepresentativeoftheinterestfactor:$26,149for1997,$26,600for1996,$27,312for1995$29,396for1994and$27,821for1993~/-123-Exhibit21NIAGARAMOHAWKPOWERCORPORATZONANDSUBSIDIARYCOMPANIESSubsidiariesoftheRegistrantNameofComanStateofOranizationOpinacNorthAmerica,Inc.(Note1)DelawareNMUranium,Znc.EMCO-TECH,Inc.(Note2)-NMHoldings,Inc.(Note3)MoreauManufacturingCorporationBeebeeIslandCorporationNMReceivablesCorp.TexasNewYorkNewYorkNewYorkNewYorkNewYorkNote1:Note2:Note3:AtDecember31,1997,OpinacNorthAmerica,.Znc.ownsOpinacEnergyCorporationandPlumStreetEnterprises,Inc.OpinacEnergyCorporationhasa50percentinterestinCNP,whichisincorporatedintheProvinceofOntario,Canada.CNPownsCowleyRidgePartnership(anAlberta,Canadageneralpartnership)andCanadianNiagaraWindPowerCompany,Znc.(incorporatedintheProvinceofAlberta,Canada).PlumStreetEnterprises,Znc.,("PlumStreet")anunregulatedcompany,isincorporatedintheStateofDelaware.PlumStreetownsPlumStreetEnergyMarketing,Inc.(incorporatedintheStateofDelaware),GlobalEnergyEnterprisesIndiaPrivateLimited,90%ofDolphinInvestmentsInternational,Inc.(acorporationorganizedandexistingunderthelawsofNevis,WestIndies,whichowns45%ofAtlantisEnergieSystemsAG(acorporationorganizedandexistingunderthelawsoftheFederalRepublicofGermany)),25%ofTelergyJointVentureand26%ofDirectGlobalPower,inc.EMCO-TECH,Inc.isinactiveatDecember31,1997.AtDecember31,1997,NMHoldings,Znc.ownsSalmonShores,Inc.,MoreauPark,Inc.,Riverview,Inc.,HudsonPointe,Znc.,UpperHudsonDevelopment,Znc.,LandManagementaDevelopment,Inc.,OPropco,Znc.andLandWest,Inc.-124-

~~EXHIBIT23CONSENTOFINDEPENDENTACCOUNTANTSWeherebyconsenttotheincorporationbyreferenceintheRegistrationStatementonFormS-8(Nos.33-36189,3342771and333-13781)andtotheincorporationbyreferenceintheProspectusconstitutingpartoftheRegistrationStatementonFormS-3(Nos.33-50703,33-51073,33-54827and33-55546)ofNiagaraMohawkPowerCorporationofourreportdatedMarch26,1998appearingintheCompany'sForm10-KdatedMarch26,1998.WealsoconsenttotheincorporationbyreferenceofourreportontheFinancialStatementSchedule,whichappearsinthisForm10-KPRICEWATERHOUSELLPSyracuse,NewYorkMarch26,1998-125-SIGNATURESPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theRegistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.NIAGARAMOHAWKPOWERCORPORATION(Registrant)Date:March26,1998BysStevenW.TaskerStevenW.TaskerVicePresident-ControllerandPrincipalAccountingOfficerPursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheRegistrantandinthecapacitiesandonthedatesindicated.SiciaatureTitleDatesWilliamF.AllWilliamF.AllynDirectorMarch26,1998sAlbertJ.BudneJr.AlbertJ.Budney,Jr.Director,PresidentMarch26,1998sLawrenceBurkhardtIIIDirectorLawrenceBurkhardt,IIIMarch26,1998sDoulasM.CostleDouglasM.CostleDirectorMarch26,1998sEdmundM.DavisEdmundM.DavisDirectorMarch26,1998sWilliamE.DavisWilliamE.DavisChairmanoftheBoardofDirectorsandChiefExecutiveOfficerMarch26,1998-126-SicinatureTitleDatesWilliamJ.DonlonWilliamJ.DonlonDirectorMarch26,1998sAnthonH.GioiaAnthonyH.GioiaDirectorMarch26,1998sBonnieGuitonHillBonnieGuitonHillDirectorMarch26,1998sHenA.PanasciJr.HenryA.Panasci,Jr.DirectorMarch26,1998sPattiMcGillPetersonPattiMcGillPetersonDirectorMarch26,1998sDonaldB.RieflerDonaldB.RieflerDirectorMarch26,1998sStehenB.SchwartzStephenB.SchwartzDirectorMarch26,1998sWilliamF.EdwardsWilliamF.EdwardsSeniorVicePresidentandChiefFinancialOfficerMarch26,1998sStevenW.TaskerStevenW.TaskerVicePresident-ControllerandPrincipalAccountingOfficerMarch26,1998-127-L7SECURITIESANDEXCHANGECOMMISSIONWashington,D.C.20549FORMI0-K/AAmendmentNo.22ANNUALREPORTPURSUANTTOSECTION13OR15(5)OFTHESECURITIESEXCHANGEACTOF1934ForthefiscalyearendedDecember31,1997ORTRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthetransitionperiodfromtoCommissionFileNumber:1-2987NiagaraMohawkPowerCorporation(Exactnameofregistrantasspecifiedinitscharter)StateofNewYork(Stateorotherjurisdictionofincorporationororganization)300ErieBoulevardWestSyracuse,NewYork(Addressofprincipalexecutiveoffices)154265555(I.R.S.EmployerIdentificationNo.)13202(ZipCode)(315)474-1511Reistrant'stelehonenumber,includinareacode6.10%Series7.72%SeriesSecuritiesregisteredpursuanttoSection12(g)oftheAct:NoneSecuritiesregisteredpursuanttoSection12(b)oftheAct:(EachclassisregisteredontheNewYorkStockExchange)TitleofeachclassCommonStock($1parvalue)PreferredStock($100parvalue-cumulative):3.40%Series4.10%Series3.60%Series4.85%Series3.90%Series5.25%SeriesPreferredStock($25parvalue-cumulative):9.50%SeriesAdjustableRateSeriesA8SeriesCIndicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YES[X)NO[jIndicatebycheckmarkifdisdosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestofregistrant'sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-KlXJStatetheaggregatemarketvalueofthevotingstockheldbynon-affiliatesoftheregistrant.~~Approximately$1,800,000,000atMarch26,1998.dicatethenumberofsharesoutstandingofeachoftheregistrant'sclassesofcommonstock,asofthelatestpracticabledate.Commonstock,$1parvalue,outstandingatNlarch26,1998-144,419,351

NIAGARAMOHAWKPOWERCORPORATIONINFORMATIONREQUIREDINFORM10-K/AItemNumberGlossaryofTermsPARTIIItem6.Item7.Item8.PARTIVSelectedConsolidatedFinancialData.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations.FinancialStatementsandSupplementaryData.38Item14.Exhibits,FinancialStatementSchedules,andReportsonForm8-K.86Signatures105 NIAGARAMOHAWKPOWERCORPORATIONIGLOSSARYOFTERMSTERMDEFINITIONAFCCNPCOPSCTCDECDOEAllowanceforFundsUsedDuringConstructionCanadianNiagaraPowerCompany,LimitedCompetitiveOpportunitiesProceedingCompetitiveTransitionChargesNewYorkStateDepartmentofEnvironmentalConservationU.S.DepartmentofEnergyDthDekatherm:onethousandcubicfeetofgaswithaheatcontentof1,000BritishThermalUnitspercubicfootEBITDAEarningsbeforeInterestCharges,InterestIncome,IncomeTaxes,DepreciationandAmortization,AmortizationofNuclearFuel,AllowanceforFundsUsedDuringConstruction,MRARegulatoryAssetamortization,non-cashregulatorydeferralsandotheramortizationsandextraordinaryitems(anon-GAAPmeasureofcashflow)FACFuelAdjustmentClause:aclauseinarateschedulethatprovidesforanadjustmenttothecustomer'sbillifthecostoffuelvariesfromaspecifiedunitcostFASBFERCGAAPGRTFinancialAccountingStandardsBoardFederalEnergyRegulatoryCommissionGenerallyAcceptedAccountingPrinciplesGrossReceiptsTaxGigawatt-hour:onegigawatt-hourequalsonebillionwatt-hoursIPPIndependentPowerProducer:anypersonthatownsoroperates,inwholeorinpart,oneormoreIndependentPowerFacilitiesIPPPartyIndependentPowerProducersthatareapartytotheMRA ISOKWIndependentSystemOperatorKilowatt:onethousandwatts.Kilowatt-hour:aunitofelectricalenergyequaltoonekilowattofpowersuppliedortakenfromanelectriccircuitsteadilyforonehourMERITMeasuredEquityReturnIncentiveTermMasterRestructuringAgreement-anagreementtoterminate,restateoramendIPPPartypowerpurchaseagreementsMRAregulatoryassetRecoverablecoststoterminate,restateoramendIPPPartycontracts,whicharedeferredandamortizedunderPowerChoiceMWMegawatt:onemillionwattsMegawatt-hour:onethousandkilowatt-hoursNRCNYPANYPPU.S.NuclearRegulatoryCommissionNewYorkPowerAuthorityNewYorkPowerPoolNYPPMemberSystemsEightMemberSystemsare:thesevenNewYorkStateinvestor-ownedelectricutilitiesandNYPANYSERDANewYorkStateEnergyResearchandDevelopmentAuthorityPowerChoiceagreementCompany'sfive-yearelectricrateagreement,whichincorporatestheMRA,approvedinFebruary1998PPAPowerPurchaseAgreement:long-termcontiactsunderwhichautilityisobligatedtopurchaseelectricityfromanIPPatspecifiedratesPRPPotentiallyResponsiblePartyPSCNewYorkStatePublicServiceCommissionPURPAPublicUtilityRegulatoryPoliciesActof1978,asamended.OneoffivebillssignedintolawonNovember8,1978,astheNationalEnergyAct.Itsetsforthproceduresandrequirementsapplicabletostateutilitycommissions,electricandnaturalgasutilitiesandcertainfederal regulatoryagencies.Amajoraspectofthislawisthemandatorypurchaseobligationfromqualifyingfacilities.QFQualifyingFacility:anindividual(orcorporation)thatownsand/oroperatesageneratingfacilitybutisnotprimarilyengagedinthegenerationorsaleofelectricpower.QFsareeitherpowerproductionorcogenerationfacilitiesthatqualifyunderSection201ofPURPA.ROEReturnonCommonStockEquitySFASNo.71StatementofFinancialAccountingStandardsNo.71"AccountingfortheEffectsofCertainTypesofRegulation"SFASNo.101StatementofFinancialAccountingStandardsNo.101"RegulatedEnterprises-AccountingfortheDiscontinuanceofApplicationofFASBStatementNo.71"SFASNo.106StatementofFinancialAccountingStandardsNo.106"Employers'ccountingforPostretirementBenefitsOtherThanPensions"SFASNo.109SFASNo.121StatementofFinancialAccountingStandardsNo.109"AccountingforIncomeTaxes"StatementofFinancialAccountingStandardsNo.121"AccountingfortheImpairmentofLong-LivedAssetsandforLong-LivedAssetstoBeDisposedOf'FASNo.130SFASNo.131StatementofFinancialAccountingStandardsNo.130"ReportingComprehensiveIncome"StatementofFinancialAccountingStandardsNo.131"DisclosuresaboutSegmentsofanEnterpriseandRelatedInformation"SFASNo.132StatementofFinancialAccountingStandardsNo.132"Employers'isclosureaboutPensionsandOtherPostretirementBenefits"strandedcostsUtilitycoststhatmaybecomeunrecoverableduetoachangeintheregulatoryenvironmentUnit1Unit2NineMilePointNuclearStationUnitNo.1NineMilePointNuclearStationUnitNo.2 NIAGARAMOHAWKPOWERCORPORATIONITEM6.SELECTEDCONSOLIDATEDFINANCIALDATAThefollowingtablesetsforthselectedfinancialinformationoftheCompanyfor,eachofthefiveyearsduringtheperiodendedDecember31,1997,whichhasbeenderivedfromtheauditedfinancialstatementsoftheCompany,andshouldbereadinconnectiontherewith.AsdiscussedinItem7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperationsandItem8.FinancialStatementsandSupplementaryData-"NotestoConsolidatedFinancialStatements,"thefollowingselectedfinancialdataisnotlikelytobeindicativeoftheCompany'sfuturefinancialconditionorresultsofoperations.19971996*199519941993Operations:(000's)OperatingrevenuesNetincomeCommonstockdata:183,335110,390248,036176,984271,831$3~966'04$3'90'53$3917338$4152'78$3'33431BookvaluepershareatyearendMarketpriceatyearendRatioofmarketpricetobookvalueatyearendDividendyieldatyearendBasicanddilutedearningsperaveragecommonshare$18.89101/255.6%$1.01$17.9197/855.1%$.50$17.4291/254.5%11.8%$1.44$17.06141/483.5%7.9%$1.00$17.25201/4117.4%4.9%$1.71RateofreturnoncommonequityDividendspaidpercommonshareDividendpayoutratio5.5%2.8%$1.1277.8%5.8%$1.09109.0%10.2%$.9555.6%Capitalization:(000's)Commonequity$2,727,527$2,585,572$2,513,952$2,462,398$2,456,465Non-zedeemablepreferredstock440,000440,000440,000~440,000290,000MandatorilyredeemablepreferredstockIong-tenndebt76,6103,417'8186,730'\3,477,87996'SO106t000123~2003~5824143i297~8743g258~6126,661,5186e5901816~633i2166~306i2726i128~277 19971996"199519941993Long-termdebtmaturingwithinoneyear67,09548,08465,06477,971216,185TOTALS6@728~613S6g638'65S6p698'80S6g384'43S6g344/462Capitalizationratios:{includinglong-termdebtmaturingwithinoneyear)CommonstockequityPreferredstock40.5%7.739.0%7.937.5%8.038.6%8.538.7%6.5Long-termdebt51.853.154.552.954.8Financialratios:RatioofearningstofixedchargesRatioofearningstofixedchargesandpreferredstockdividends2.021.671.571.312.291.901.911.632.312.00Otherratios-%ofoperatingrevenues:Fuel,electricitypurchasedandgaspurchased44,4%43.5%40.3%39.6%36.1%OtheroperationandmaintenanceexpensesDepreciationandamortizationFederalandforeignincometaxes,andothertaxesOperatingincomeBalanceavailableforcommonstock21.18.615.114.13.723.'38.313.613.11.820.98.117.317.55.323.17.414.713.33.526.97.016.217.56.1Miscellaneous:(000's)GrossadditionstoutilityplantS290757S352~049S345'04S490~124S519~612TotalutilityplantAccumulateddepreciationandamortizationTotalassets11,075,8744,207,8309,584,14110,839,34110,649,30110,485,33910,108,5293~881'263~641~4483g449~6963~231'37l9g4276359~477~8699g649~8169g471'27+Amountsincludeextraordinaryitem,seeNote2.RateandRegulatoryIssuesandContingencies.

NIAGARAMOHAWKPOWERCORPORATIONCertainstatementsincludedinthisAnnualReportonForm10-Kareforward-lookingstatementsasdefinedinSection21EoftheSecuritiesExchangeActof1934,includingthehedgeagainstupwardmovementinmarketpricesprovidedbytherestructuredandamendedPPAs,theimprovementinoperatingcashflowsasaresultoftheMRAandPowerChoice,therecoverabilityoftheMRAregulatoryassetthroughthepriceschargedforelectricservice,theeffectofaPSCnaturalgasproposalontheCompany'sresultsofoperations,expectedearningsoverthefive-yeartermofthePowerChoiceagreement,theeffectoftheeliminationoftheFACunderPowerChoiceontheCompany'sfinancialcondition,thereductioninnetincomeresultingfromthenon-cashamortizationoftheMRAregulatoryasset,theeffectoftheJanuary1998icestormdamagerestorationcostsontheCompany'scapitalrequirements,recoverabilityofenvironmentalcompliancecostsandnucleardecommissioningcoststhroughrates,andtheimprovementintheCompany'sfinancialconditionexpectedasaresultoftheMRAandtheimplementationofPowerChoice.TheCompany'sactualresultsanddevelopmentsmaydiffermateriallyfromtheresultsdiscussedinorimpliedbysuchforward-lookingstatements,duetorisksanduncertaintiesthatexistintheCompany'soperationsandbusinessenvironment,including,butnotlimitedto,mattersdescribedinthecontextofsuchforward-lookingstatements,aswellassuchotherfactorsassetforthintheNotestoConsolidatedFinancialStatementscontainedherein.ITEM7.MANAGEMENT'SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONSEVENTSAFFECTING1997ANDTHEFUTURE'nJuly9,1997,theCompanyannouncedtheMRAtoterminate,restateoramendIPPpowerpurchasecontractsinexchangeforcash,sharesoftheCompany'scommonstockandcertainfinancialcontracts.ThetermsoftheMRAhavebeenandmaycontinuetobemodified.InFebruary1998,thePSCapprovedthePowerChoicesettlementagreement,whichincorporatesthetermsoftheMRA.UnderPowerChoice,aregulatoryassetwillbeestablishedforthecostsoftheMRAanditwillbeamortizedoveraperiodgenerallynottoexceedtenyears.TheCompany'sratesunderPowerChoicearedesignedtopermitrecoveryoftheMRAregulatoryasset.InapprovingPowerChoice,thePSClimitedtheestimatedvalueoftheMRAregulatoryassetthatcanberecoveredtoapproximately$4,000million,whichisexpectedtoresultinachargetothesecondquarterof1998earningsof$190.0millionor85centspershareupontheclosingoftheMRA.ThePowerChoiceagreement,whilehavingtheeffectofsubstantiallydepressingearningsduringitsfive-yearterm,willsubstantiallyimproveoperatingcashflows.InDecember1997,thepreferredshareholdersgavetheCompanyapprovaltoincreasetheamountofunsecureddebtthattheCompanymayissueby$5billion.ThisauthorizationenablestheissuanceofunsecureddebttoconsummatetheMRA.

ThePowerChoiceagreementcallsfortheCompanytoconductanauctiontosellallofitsfossilandhydrogenerationassets.InearlyJanuary1998,amajoricestormcausedextensiveandcostlydamagetotheCompany'sfacilitiesinnorthernNewYork.MASTERRESTRUCTURINGAGREEMENTANDTHEPOWERCHOICEAGREEMENTTheCompanyenteredintothePPAsthataresubjecttotheMRAbecauseitwasrequiredtodosounderPURPA,whichwasintendedtoprovideincentivesforbusinessestocreatealternativeenergysources.UnderPURPA,theCompanywasrequiredtopurchaseelectricitygeneratedbyqualifyingfacilitiesofIPPsatpricesthatwerenotexpectedtoexceedthecostthatotherwisewouldhavebeenincurredbytheCompanyingeneratingitsownelectricity,orinpurchasingitfromothersources(knownas"avoidedcosts").WhilePURPAwasafederalinitiative,eachstateretainedcertaindelegatedauthorityoverhowPURPAwouldbeimplementedwithinitsborders.InitsimplementationofPURPA,theStateofNewYorkpassedthe"Six-CentLaw,"establishing6centsperKWhastheflooronavoidedcostsforprojectslessthan80MWinsize.TheSix-CentLawremainedinplaceuntilitwasamendedin1992todenythebenefitofthestatutetoanyfuturePPAs.TheavoidedcostdeterminationsunderPURPAwereperiodicallyincreasedbythePSCduringthisperiod.PURPAandtheSix-CentLaw,incombinationwithotherfactors,attractedlargenumbersofIPPstoNewYorkState,and,inparticular,totheCompany'sserviceterritory,duetothearea'sexistingenergyinfrastructureandavailabilityofcogenerationhosts.ThepricingtermsofsubstantiallyallofthePPAsthattheCompanyenteredintoincompliancewithPURPAandtheSix-CentLaworotherNewYorklawswerebased,attheoptionoftheIPP,eitheronadministrativelydeterminedavoidedcostsorminimumprices,bothofwhichhaveconsistentlybeenmateriallyhigherthanthewholesalemarketpricesforelectricity.SincePURPAandtheSix-CentLawwerepassed,theCompanyhasbeenrequiredtopurchaseelectricityfromIPPsinquantitiesinexcessofitsowndemandandatpricesinexcessofthatavailabletotheCompanybyinternalgenerationorforpurchaseinthewholesalemarket.Infact,by1991,theCompanywasfacingapotentialobligationtopurchasepowerfromIPPssubstantiallyinexcessofitspeakdemandof6,093MW.Asaresult,theCompany'scompetitivepositionandfinancialperformancehavedeterioratedandthepriceofelectricitypaidperKWhbyitscustomershasrisensignificantlyabovethenationalaverage.Accordingly,in1991theCompanyinitiatedaparallelstrategyofnegotiatingindividualPPAbuyouts,cancellationsandrenegotiations,andofpursuingregulatoryandlegislativesupportandlitigationtomitigatetheCompany'sobligationunderthePPAs.Bymid-1996,thisstrategyhadresultedinreducingthecapacityoftheCompany'sobligationstopurchasepowerunder.itsPPAportfoliotoapproximately2,700MW.Notwithstandingthisreductionincapacity,overthesameperiodthepaymentsmadetotheIPPsundertheirPPAsrosefromapproximately$200millionin1990toapproximately$1.1billionin1997asindependentpowerfacilitiesfromwhichtheCompanywasobligatedtopurchaseelectricitycommencedoperations.TheCompanyestimatesthatabsenttheMRA,paymentsmadetotheIPPspursuanttoPPAswouldcontinuetoescalatebyapproximately$50millionperyearuntil2002.

Recognizingthecompetitivetrendsintheelectricutilityindustryandtheimpracticabilityofremedyingthesituationthroughaseriesofcustomerrateincreases,inmid-1996theCompanybegancomprehensivenegotiationstoterminate,amendorrestateasubstantialportionofabove-marketPPAsinanefforttomitigatetheescalatingcostofthesePPAsaswellastopreparetheCompanyforamorecompetitiveenvironment.ThesenegotiationsledtotheMRAandthePowerChoiceagreement.MASTERRESTRUCTURINGAGREEMENT.OnJuly9,1997,theCompanyenteredintotheMRAwith16IPPPartieswhosellelectricitytotheCompanyunder29PPAs.TheMRAspecificallycontemplatedthattwoIPPs,OxbowPowerofNorthTonawanda,NewYork,Inc.("Oxbow")andNorConwouldenterintofurthernegotiationsconcerningtheirtreatmentundertheMRA.Followingsuchnegotiations,OxbowhaswithdrawnfromtheMRA,but,basedonthevalueofitsallocationundertheMRAandthetermsofitsexistingPPA,Oxbow'swithdrawaldoesnotmateriallyimpactthecostreductionsassociatedwiththeMRA.TheCompanyandNorConhaveagreedtoreplaceNorCon'sinitialallocationundertheMRAwithanallcashallocationwhichhas,intheCompany'sestimation,avalueapproximately$60millionhigherthanNorCon'sinitialallocation.AthirdIPPPartyhasagreedtotakecashinexchangeforthesharesofcommonstockallocatedtoitintheMRA.Asaresultofthesecashallocations,thereare3,054,000fewersharesofcommonstockallocatedtotheIPPsundertheMRA.TheMRAhasbeenamendedtoexpireonJuly15,1998.TheMRAcurrentlyprovidesforthetermination,restatementoramendmentof28PPAswith15IPPs,whichrepresentapproximately80%oftheCompany'sover-marketpurchasedpowerobligations,inexchangeforanaggregateof$3,616millionincashand42.9millionsharesoftheCompany'scommonstockandcertainfinancialcontracts.TheclosingoftheMRAissubjecttoanumberofconditions,includingtheCompanyandtheIPPPartiesnegotiatingindividualrestatedandamendedcontracts,thereceiptofallregulatoryapprovals,thereceiptofallconsentsbythirdpartiesnecessaryforthetransactionscontemplatedbytheMRA(includingtheterminationoftheexistingPPAsandtheterminationoramendmentofallrelatedthirdpartyagreements),theIPPPartiesenteringintonewthirdpartyarrangementswhichwillenableeachIPPPartytorestructureitsprojectsonareasonablysatisfactoryeconomicbasis,theCompanyhavingcompletedallnecessaryfinancingarrangementsandtheCompanyandtheIPPPartieshavingreceivedallnecessaryapprovalsfromtheirrespectiveboardsofdirectors,shareholdersandpartners.WhileoneormoreoftheIPPPartiesmayundercertaincircumstancesterminatetheMRAwithrespecttoitself,theCompany'sobligationtoclosetheMRAissubjecttoitsdeterminationthatasaresultofanysuchterminationsthebenefitsanticipatedtobereceivedbytheCompanypursuanttotheMRAhavenotbeenmateriallyandadverselyaffected.TheCompanyexpectsthatpriortotheconsummationoftheMRA,themixofconsiderationtobereceivedbytheIPPPartiesmayberenegotiated.TheforegoingisqualifiedinitsentiretybythetextoftheMRA(seeExhibit10-11).AstheConditionsDeterminationDate(thedatebywhichallIPPPartiesmustsatisfyorwaivetheirthirdpartyconditionsorwithdrawfromtheMRA)hasnotoccurred,theCompanycannotpredictwhethersuchconditionswillbesatisfied,whethersomeIPPPartiesmaywithdraw,whetherthetermsoftheMRAmightberenegotiated,orwhethertheMRAwillbeconsummated.IntheeventtheCompanyisunabletosuccessfullycompletetheMRAandthereforeimplementPowerChoice,itwouldpursueallalternativesincludingatraditionalraterequest.10 TheprincipaleffectsoftheMRAaretoreducesignificantlytheCompany'sexistingpaymentobligationsunderthePPAs,whichcurrentlyconsistofapproximately2,700MWofcapacityatDecember31,1997.Whileearningswillbedepressedduringthefive-yearterm,thesavingsinannualenergypayments,coupledwiththeratesestablishedinPowerChoice,willyieldfreecashflowthatcanbededicatedtothenewdebtserviceobligationsassociatedwiththepaymentofcashtotheIPPParties.UnderthetermsoftheMRA,theCompany'ssignificantlongtermandescalatingIPPpaymentobligationswillberestructuredintoadefinedandmoremanageableobligationandaportfolioofrestatedandamendedPPAswithpriceanddurationtermsthattheCompanybelievesaremorefavorablethantheexistingPPAs.UndertheMRA,19PPAsrepresentingapproximately1,180MWofcapacitywillbeterminatedcompletelythusallowingthiscapacitytobereplacedthroughthecompetitivemarketatmarketbasedprices.TheCompanyhasnocontinuingobligationtopurchaseenergyfromtheterminatingIPPParties.AlsoundertheMRA,8PPAsrepresentingapproximately541MWofcapacitywillberestatedoneconomictermsandconditionsthataremorefavorabletotheCompanythantheexistingPPAs.Therestatedcontractshaveatermof10yearsandarestructuredasfinancialswapcontractswheretheCompanyreceivesormakespaymentstotheIPPPartiesbaseduponthedifferentialbetweenthecontractpriceandamarketreferencepriceforelectricity.Thecontractpricesarefixedforthefirsttwoyearschangingtoanindexedpricingformulathereafter.Contractquantitiesarefixedforthefull10yeartermofthecontracts.Theindexedpricingstructureensuresthatthepricepaidforenergyandcapacitywillfluctuaterelativetotheunderlyingmarketcostofgasandgeneralindicesofinflation.UntilsuchtimeasacompetitiveenergymarketstructurebecomesoperationalintheStateofNewYork,therestatedcontractsprovidetheIPPPartieswithaputoptionforthephysicaldeliveryofenergy.Additionally,onePPArepresenting42MWofcapacitywillbeamendedtoreflectashortenedtermandalowerstreamoffixedunitprices.Finally,theMRArequirestheCompanytoprovidetheIPPPartieswithanumberoffixedpriceswapcontractswithatermofsevenyearsbeginningin2003.Thefixedpriceswapcontractswillbecashsettledmonthlybaseduponastreamofdefinedquantitiesandprices.AlthoughagainsttheCompany'sforecastofmarketenergypricestherestructuredandamendedPPAsrepresentanexpectedabove-marketpaymentobligation,theCompany'sportfolioofthesePPAsprovidesitanditscustomerswithahedgeagainstsignificantupwardmovementinmarketpricesthatmaybecausedbyachangeinenergysupplyordemand.Thisportfolioandmarketpurchasescontaintermsthatarebelievedtobemoreresponsive'ompetitivemarketpricechanges.(SeeItem8.FinancialStatementsandSupplementaryData-"Note9.CommitmentsandContingencies-Long-termContractsforthePurchaseofElectricPower").POWERCHOICEAGREEMENT.ThePowerChoiceagreementestablishesafive-yearrateplanthatwillreduceaverageresidentialandcommercialratesbyanaggregateof3.2%overthefirstthreeyears.ThisreductionwillincludecertainsavingsthatwillresultfrompartialreductionsoftheNewYorkStateGRT.Industrialcustomerswillseeaveragereductionsof25%relativeto1995pricelevels;thesedecreaseswillincludediscountscurrentlyofferedtosomeindustrial11 customersthroughoptionalandflexiblerateprograms.Thecumulativeratereductions,netofGRTsavings,areestimatedtobeapproximately$112million,tobeexperiencedonagenerallyratablebasisoverthefirstthreeyears'oftheagreement.DuringthetermofthePowerChoiceagreement,theCompanywillbepermittedtodefercertaincosts,associatedprimarilywithenvironmentalremediation,nucleardecommissioningandrelatedcosts,andchangesinlaws,regulations,rulesandorders.Inyearsfourandfiveofitsrateplan,theCompanycanrequestanannualincreaseinpricessubjecttoacapof1%oftheall-inprice,excludingcommoditycosts(e.g.,transmission,distribution,nuclear,andforecastedCTC).Inadditiontothepricecap,thePowerChoiceagreementprovidesfortherecoveryofdeferralsestablishedinyearsonethroughfourandcostvariationsintheMRAfinancialcontractsresultingfromindexingprovisionsofthesecontracts.Theaggregateofthepricecapincreaseandrecoveryofdeferralsissubjecttoanoveralllimitationofinflation.UnderthetermsofthePowerChoiceagreement,alloftheCompany'scustomerswillbeabletochoosetheirelectricitysupplierinacompetitivemarketbyDecember1999TheCompanywillcontinuetodistributeelectricitythroughitsdistributionandtransmissionfacilitiesandwouldbeobligatedtobetheso-calledprovideroflastresortforthosecustomerswhodonotexercisetheirrighttochooseanewelectricitysupplier.ThePowerChoiceagreementprovidesthattheMRAandthecontractsexecutedpursuanttheretoshallbefoundtobeprudent.ThePowerChoiceagreementfurtherprovidesthattheCompanyshallhaveareasonableopportunitytorecoveritsstrandedcosts,includingthoseassociatedwiththeMRAandthecontractsexecutedthereto,throughaCTCand,undercertaincircumstances,throughexitfeesorinratesforbackupservice.UnderthePowerChoiceagreement,anMRAregulatoryasset,aggregatingapproximately$4,000million,willbeestablished.Inthisway,thecostsoftheMRAwouldbedeferredandamortizedoveraperiodgenerallynottoexceedtenyears.TheCompany'sratesunderPowerChoicearedesignedtopermitrecoveryoftheMRAregulatoryassetandtopermitrecoveryof,andareturnon,theremainderofitsassets,asappropriate.ThePowerChoiceagreement,whilehavingtheeffectofsubstantiallydepressingearningsduringitsfive-yearterm,willsubstantiallyimproveoperatingcashflows.ThePowerChoiceagreementcallsfortheCompanytodivestallofitsfossilandhydrogenerationassets.Divestitureisintendedtobeaccomplishedthroughanauction.Winningbidswouldbeselectedwithin11monthsofPSCapprovaloftheauctionplan,whichwasfiledwiththePSCseparatelyfromthePowerChoiceagreement.TheCompanywillreceiveaportionoftheauctionsaleproceedsasanincentivetoobtainmaximumvalueinthesale.Thisincentivewouldberecoveredfromsaleproceeds.TheCompanyagreedthatifitdoesnotreceiveanacceptablebidforanasset,theCompanywillformasubsidiarytoholdanysuchassetsandthenlegallyseparatethissubsidiaryfromtheCompanythroughaspin-offtoshareholdersorotherwise.Ifabidofzeroorbelowisreceivedforanasset,theCompanymaykeeptheassetaspartofitsregulatedbusiness.TheauctionprocesswillservetoquantifyanystrandedcostsassociatedwiththeCompany'sfossilandhydrogeneratingassets.TheCompanywillhaveareasonableopportunitytorecoverthesecoststhroughtheCTCandotherwiseasdescribedabove.Aftertheauctionprocessiscomplete,theCompanyhasagreednottoownanynon-nuclear12 generatingassetsintheStateofNewYork,subjecttocertainexceptionsprovidedinthePowerChoiceagreement.UnderthetermsofthenoteindenturepreparedinconnectionwiththefinancingoftheMRA.theCompanywillberequiredtouseamajorityofthecashportionofnetproceedsfromthesaleofitsfossilandhydrogeneratingassetstoreduceindebtedness.SuchrestrictionswouldnotapplyintheeventthattheCompanywasunabletosuccessfullyconclude.theconsummationoftheMRAandthereforeofPowerChoicebutnonethelesssoldsuchassets.ThePowerChoiceagreementcontemplatesthattheCompany'snuclearplantswillremainpartoftheCompany'sregulatedbusiness.TheCompanyhasbeensupportiveofthecreationofastatewideNewYorkNuclearOperating,Companythatitexpectswouldimprovetheefficiencyofnuclearunitsthroughoutthestate.ThePowerChoiceagreementstipulatesthatabsentsuchastatewidesolution,theCompanywillfileadetailedplanforanalyzingotherproposalsregardingitsnuclearassets,includingthefeasibilityofanauction,transferand/ordivestitureofsuchfacilities,within24monthsofPowerChoiceapproval.ThePowerChoiceagreementalsoallowstheCompanytoformaholdingcompanyatitselection.TheCompanyplanstoseekitsshareholders'pprovalatits1998annualmeetingtotheformationofaholdingcompany,theimplementationofwhichwouldonlyoccurfollowingvariousregulatoryapprovals.AtitspublicsessiononFebruary24,1998,thePSCvotedtoapprovethePowerChoiceagreement,whichincorporatesthetermsoftheMRA.SubjecttothesatisfactionoftheconditionstotheMRA,thePSC'sapprovalofPowerChoiceshouldallowtheCompanytoconsummatetheMRAinthefirsthalfof1998.ThePowerChoiceagreementwillonlybecomeeffectiveupontheclosingoftheMRA.InapprovingPowerChoice,thePSCmadethefollowingchanges,amongothers,totheagreement:i)customerswhohadmadeasubstantialinvestmentinon-sitegenerationasofOctober10,1997willbegrandfatheredandnothavetopaytheCTC;ii)savingsfromanyreductionintheinterestrateassociatedwiththedebtissuedinconnectionwiththeMRAfinancingascomparedtoassumptionsunderlyingtheCompany'sPowerChoicefilingwillbedeferredforfuturedisposition;andiii)changethegenerationauctionincentiveto15%ofproceedsinexcessofnetbookvaluefornon-Oswegoassetsand5%ofproceedsinexcessof$100millionforOswegoassets.InitswrittenorderdatedMarch20,1998,thePSCmadeseveralotherchangestothePowerChoiceagreement,inadditiontothosediscussedattheFebruary24session.ThePSCdeterminedtolimittheestimatedvalueoftheMRAregulatoryassetthatcanberecoveredfromcustomers,toapproximately$4,000million.TheestimatedvalueoftheMRAregula-:::ryassetincludestheissuanceof42.9millionsharesofcommonstock,whichthePSC,indeter;:iiningtherecoverableamountofsuchassetvaluedat$8pershare.TheCompany'scommonstoc::closedat$127/16pershareonMarch26,1998.Theaccountingimplicationsofthelimitatioiiiivaluearediscussedunder"AccountingImplicationsofthePowerChoiceAgreementandMas:.i'estructuringAgreement."ThePSCalsomodifiedthereductioninaverageresidential:.i:dcommercialrates.ThePowerChoiceagreementmeasuredthe3.2%reductionagainst19.5prices.ThePSCdeterminedthatthepercentagereductionshouldbeappliedagainstthelowerof1995pricesorthemostcurrenttwelve-monthperiod.Totheextentpricesforthemostcurrenttwelve-monthperiodarelowerthan1995prices,theamountofcumulativeratereductions13 describedbelowwillincrease.Lastly,thePSCorderedtheCompanynottoproceedtoconsummatetheMRAwithrespecttoonecontractheldbyonedeveloperuntilasatisfactoryresolutionofacogenerationsteamhostcontractisreached.NewYorklawprovidespartiestherighttoappealtheCommission'sdecisionapprovingthePowerChoiceagreementwithinfourmonthsofthedateofthatdecision.Inaddition,partieshavetherighttopetitiontheCommissionforrehearingofthedecisionwithin30daysofthedateofthedecision.IfapetitionforrehearingisfiledandtheCommissionissuesadecisiononrehearing,partiesmayappealthedecisiononrehearingwithinfourmonthsofthedateofthedecisiononrehearing.SuchanappealorpetitionforrehearingmaybebasedonthefailureoftherecordtoshowareasonablebasisforthetermsofthePowerChoiceagreementandmayresultinanamendmentoftherecordtocorrectsuchfailure,inrenegotiationofsuchtermsorinrenegotiationofthePowerChoiceagreementasawhole.Therecanbenoassurancethat,onappealoronrehearing,theapprovalofthePowerChoiceagreementwillbeupheldorthatsuchappealorrehearingwillnotresultintermssubstantiallylessfavorabletotheCompanythanthosedescribedherein.AlloftheforegoingdiscussionofthePowerChoiceagreementisqualifiedinitsentiretybythetextoftheagreementandPSCOrder(seeExhibits10-12and10-13).ACCOUNTINGIMPLICATIONSOFTHEPOWERCHOICEAGREEMENTANDMASTERRESTRUCTURINGAGREEMENTTheCompanyconcludedasofDecember31,1996,thatthetermination,restatementoramendmentofIPPcontractsandimplementationofPowerChoicewastheprobableoutcomeofnegotiationsthathadtakenplacesincethePowerChoiceannouncement.UnderPowerChoice,theseparatednon-nucleargenerationbusinesswouldnolongerberate-regulatedonacost-of-servicebasisand,accordingly,regulatoryassetsrelatedtothenon-nuclearpowergenerationbusiness,amountingtoapproximately$103.6million($67.4millionaftertaxor47centspershare)werechargedagainst1996incomeasanextraordinarynon-cashcharge.Asdescribedunder"MasterRestructuringAgreementandthePowerChoiceAgreement,"thePSCinitswrittenorderissuedMarch20,1998limitedtheestimatedvalueoftheMRAregulatoryassetthatcanberecoveredfromcustomerstoapproximately$4,000million.TheultimateamountoftheregulatoryassettobeestablishedmayvarybasedoncertaineventsrelatedtotheclosingoftheMRA.TheestimatedvalueoftheMRAregulatoryassetincludestheissuanceof42.9millionsharesofcommonstock,whichthePSC,indeterminingtherecoverableamountofsuchassetvaluedat$8pershare.BecausethevalueoftheconsiderationtobepaidtotheIPPPartiescanonlybedeterminedattheMRAclosing,.thealueofthelimitationontherecoverabilityoftheMRAregulatoryassetisexpectedtoberecordedasachargetoexpenseinthesecondquarterof1998upon'theclosingoftheMRA.Thechargetoexpensewillbedeterminedasthedifferencebetween$8pershareandtheCompany'sclosingcoinmonstockpriceonthedatetheMRAcloses,multipliedby42.9millionshares,UsingtheCompany'scommonstockpriceonMarch26,1998of127/16pershare,thechargetoexpensewouldbeapproximately$190million(85centspershare).14 UnderPowerChoice,theCompany'sremainingelectricbusiness(nucleargenerationandelectrictransmissionanddistributionbusiness)willcontinuetoberate-regulatedonacost-of-servicebasisand,accordingly,theCompanycontinuestoapplySFASNo.71tothesebusinesses.Also,theCompany'sIPPcontracts,includingthoserestructuredundertheMRAandthosenotsorestructuredwillcontinuetobetheobligationsoftheregulatedbusiness.Asdescribedunder"MasterRestructuringAgreementandthePowerChoiceAgreement,"theconsummationoftheMRA,aswellasimplementationofPowerChoice,issubjecttoanumberofcontingencies.TheEmergingIssuesTaskForce("EITF")oftheFASHreachedaconsensusonIssueNo.97-4"DeregulationofthePricingofElectricity-IssuesRelatedtotheApplicationofSFASNo.71andSFASNo.101"inJuly1997.TheCompanydiscontinuedtheapplicationofSFASNo.71andappliedSFASNo.101withrespecttothefossilandhydrogenerationbusinessatDecember31,1996,inamannerconsistentwiththeEITFconsensus.Inaddition,EITF97-4doesnotrequiretheCompanytoearnareturnonregulatoryassetsthatarisefromaderegulatingtransitionplaninassessingtheapplicabilityofSFASNo.71.IntheeventtheMRAandPowerChoiceareimplemented,theCompanybelievesthattheregulatedcashflowstobederivedfrompricesitwouldchargeforelectricserviceover10years,includingtheCTC,assumingnounforeseenreductionindemandorbypassoftheCTCorexitfees,willbesufficienttorecovertheMRAregulatoryassetandproviderecoveryofandareturnontheremainderofitsassets,asappropriate.IntheeventtheCompanycouldnolongerapplySFASNo.71inthefuture,itwouldberequiredtorecordanafter-'taxnon-cashchargeagainstincomeforanyremainingunamortizedregulatoryassetsandliabilities.DependingonwhenSFASNo.71wasrequiredtobediscontinued,suchchargewouldlikelybematerialtotheCompany'sreportedfinancialconditionandresultsofoperationsandtheCompany'sabilitytopaycommonandpreferreddividends.ThePowerChoiceagreementwhilehavingtheeffectofsubstantiallydepressingearningsduringitsfive-yearterm,willsubstantiallyimproveoperatingcashflows.IntheeventtheCompanyisunabletosuccessfullycompletetheMRAandthereforeimplementPowerChoice,itwouldpursueallalternativesincludingatraditionalraterequest.However,notwithstandingsucharaterequest,itislikelythatapplicationofSFASNo.71wouldbediscontinuedfortheremainingelectricbusiness,sincetheCompany'scurrentratestructurewouldnolongerbesufficienttorecoveritscosts.Theresultingnon-cashafter-taxchargesagainstincome,basedonregulatoryassetsandliabilitiesassociatedwiththenucleargenerationandelectrictransmissionanddistributionbusinessesasofDecember31,1997,wouldbeapproximately$526.5millionor$3.65pershare.Inaddition,theCompanywouldberequiredtoreassessthecarryingamountsofitslong-livedassetsinaccordancewithSFASNo.'.!.SFASNo.121requireslong-livedassetsandcertainidentifiableintangiblesheldandused-anentitybereviewedforimpairmentwhenevereventsorchangesincircumstancesindicatetha~.hecarryingamountofanassetmaynotberecoverableorwhenassetsaretobedisposedr'nperformingthereviewforrecoverability,theCompanyisrequiredtoestimatefutureundiscountedcashflowsexpectedtoresultfromtheuseoftheassetand/oritsdispositi..TheCompanywouldalsoberequiredtodeterminetheextenttowhichadversepurchasecommitments,ifany,arerequiredtoberecordedasobligations.Variousrequirements';derapplicablelawandregulationsandundercorporateinstruments,includingthosewithrespectto15 issuanceofdebtandequitysecurities.paymentofcommonandpreferreddividends,andcertaintypesoftransfersofassetscouldbeadverselyimpactedbyanysuchwrite-downs.WiththeimplementationofPowerChoice,specificallytheseparationofnon-nucleargenerationasanentitythatwouldnolongerbecost-of-serviceregulated,theCompanyisrequiredtoassessthecarryingamountsofitslong-livedassetsinaccordancewithSFASNo.121.TheCompanyhasdeterminedthatthereisnoimpairmentofitsfossilandhydrogeneratingassets.Totheextenttheproceedsresultingfromthesaleofthefossilandhydroassetsarenotsufficienttoavoidaloss,theCompanywouldbeabletorecoversuchlossthroughtheCTC.ThePowerChoiceagreementprovidesfordeferralandfuturerecoveryoflosses,ifany,resultingfromthesaleofthenon-nucleargeneratingassets.TheCompanybelievethatitwillbepermittedtorecordaregulatoryassetforanysuchlossinaccordancewithEITF97-4.TheCompany'sfossilandhydrogenerationplantassetshadanetbookvalueofapproximately$1.1billionatDecember31,1997.PSCCOMPETITIVEOPPORTUNITIESPROCEEDING-ELECTRICOnMay16,1996,thePSCissueditsOrderintheCOPScase,whichcalledforamajorrestructuringofNewYorkState'selectricindustry.TheCOPSordercalledforacompetitivewholesalepowermarketandtheintroductionofretailaccessforallelectriccustomers.Thegoalscitedinitsdecisionincludedloweringconsumerrates,increasingchoice,continuingreliabilityofservice,continuingenvironmentalandpublicpolicyprograms,mitigatingconcernsaboutmarketpowerandcontinuingcustomerprotectionandtheobligationtoserve.ThePSCdecisionintheCOPSproceedingstatesthatrecoveryofutilitystrandedcostsmaybeaccomplishedbyanon-bypassable"wirescharge"tobeimposedbydistributioncompanies.ThePSCdecisionalsostatesthatacarefulbalancingofcustomerandutilityinterestsandexpectationsisnecessary,andthatthelevelofstrandedcostrecoverywillultimatelydependupontheparticularcircumstancesofeachutility.OnJune10,1997,thePSCorderedamulti-utility,retailaccesspilotprogramthatwouldallowqualifiedfarmersandfoodprocessorstoshopforelectricityandotherenergyservices.ThePSCrequiredutilitiestoadjustthecurrentdeliveryratesforfarmersandfoodprocessors,whichresultedinratereductionsofabout10percentforfarmersand3percentto6percentforfoodprocessors.Deliveryunderthisprogrambeganinlate1997.TheCompanydoesnotbelievethatthisorderwillhaveamaterialadverseeffectonitsfinancialpositionorresultsofoperations.OnAugust27,1997,thePSCrequestedcommentsonitsstaffstentativeconclusionsabouthownucleargenerationandfossilgenerationshouldbetreatedafterdecisionsaremadeontheindividualelectricrestructuringagreementscurrentlypendingbeforethePSC.ThePSCstaffconcludedthatbeyondthetransitionperiod(theperiodcoveredbytheindividualrestructuringagreementsincludingPowerChoice),nucleargenerationshouldoperateonacompetitivebasis.Inaddition,thePSCstaffconcludedthatasaleofgenerationplantstothirdpartiesisthepreferredmeansofdeterminingthefairmarketvalueofgenerationplantsandoffersthegreatestpotentialforthemitigationofstrandedcosts.ThePSCstaffalsoconcludedthatrecoveryofsunkcosts,includingpostshutdowncosts,wouldbesubjecttoreviewbythePSCandthis16 processshouldtakeintoaccountmitigationmeasurestakenbytheutility,includingthestepsithastakentoencouragecompetitioninitsservicearea.TheCompany'snucleargenerationassetshadanetbookvalueof$1.5billion(excludingthereservefordecommissioning)atDecember31,1997.InOctober1997,themajorityofutilitieswithinterestsinnuclearpowerplants,includingtheCompany,requestedthatthePSCreconsideritsstaffsnuclearproposal.'naddition,theutilitiesraisedthefollowingissues:impedimentstonuclearplantsoperatinginacompetitivemode;impedimentstothesaleofplants;responsibilityfordecommissioninganddisposalofspentfuel;safetyandhealthconcerns;andenvironmentalandfueldiversitybenefits.Inlightofalloftheseissues,theutilitiesrecommendedthatamoreformalprocessbedevelopedtoaddressthoseissues.Thethreeinvestor-ownedutilities,RochesterGasandElectricCorporation,ConsolidatedEdisonCompanyofNewYork,Inc.andtheCompany,whicharecurrentlypursuingformationofanuclearoperatingcompanyinNewYorkState,alsofiledaresponsewiththePSCinOctober1997.Theresponsestatedthataforceddivestitureofthenuclearplantswouldadduncertaintytodevelopingastatewideapproachtooperatingtheplantsandrequestedthatsuchaforceddivestitureproposalberescinded.Theresponsealsostatedthatimplementationofaconsolidatedsix-unitoperationwouldcontributetothemitigationofunrecoverednuclearcosts.TheNYPA,whichisalsopursuingformationofthenuclearoperatingcompany,submitteditsowncommentswhichweresimilartothecommentsofthethreeutilities.InFebruary1998,thePSCestablishedaformalproceedingtofurtherexamineissuesrelatedtonuclearplantsandthefeasibilityofapplyingmarket-basedpricingtothesefacilities.See"MasterRestructuringAgreementandPowerChoiceAgreement"aboveforadiscussionofthetreatmentofnuclearoperationsduringthetermofPowerChoice.FERCRULEMAKINGONOPENACCESSANDSTRANDEDCOSTRECOVERYInApril1996,theFERCissuedFERCOrder888.,Order888promotescompetitionbyrequiringthatpublicutilitiesowning,operating,orcontrollinginterstatetransmissionfacilitiesfiletariffswhichofferothersthesametransmissionservicestheyprovideforthemselves,undercomparabletermsandconditions.TheCompanyhascompliedwiththisrequirementbyfilingitsopenaccesstransmissiontariffwithFERConJuly7,1996.Baseduponsettlementdiscussionswithvariousparties,aproposedsettlementwassubmittedtotheFERCinthefirstquarterof1997.ThesettlementhasnotbeenapprovedbytheFERCatthistime.HearingswereconductedinSeptember1997withnon-settlingparties.AMarch1998AdministrativeLawJudge'recommendeddecisioninthisproceedingrecommendedlowertariffsthanthosefiledbytheCompany.TheCompanyisunabletodeterminetheultimateresolutionofthisissueorwhenadecisionwillbeissuedbyFERC.UnderFERCOrder888,theNYPPwasrequiredtofilereformedpowerpoolingagreementsthatestablishopen,non-discriminatorymembershipprovisionsandmodifyanyprovisionsthatareundulydiscriminatoryorpreferential.OnJanuary31,1997,theNYPPMemberSystems(the17 "MemberSystems")submittedacomprehensiveproposaltoestablishanISO,aNewYorkStateReliabilityCouncil("NYSRC")andaNewYorkPowerExchange("NYPE")thatwillfosterafullycompetitivewholesaleelectricitymarketinNewYorkState.TheISOwouldprovideforthereliableoperationofthetransmissionsysteminNewYorkStateandprovidenondiscriminatoryopenaccesstotransmissionservicesunderasingleISOtariff.ThroughtheISO,thetransmissionowners,includingtheCompany,wouldbecompensatedfortheuseoftheirtransmissionsystemsonacost-of-servicebasis.TheNYSRCwouldestablishthereliabilityrulesandstandardsbywhichtheISOoperatesthebulkpowersystem.TheISOwouldalsoadministerthedailyelectricenergymarketandtheNYPEwouldfacilitatetheelectricenergymarketonaday-aheadbasis.OnMay2,1997,theMemberSystemsmadeasupplementalfilingrelatedtotheproposedNYSRCandonAugust15,1997,sixoftheMemberSystemsfiledanapplicationformarket-basedrateauthorityinthenewwholesalemarketstructure.OnDecember19,1997,theMemberSystemssubmittedarevisedfilingwhichreflectedthefundamentalcomponentsoftheinitialJanuary31,1997filing.However,theDecember19,1997filingprovidesforadditionalexplanatorymaterials,incorporatesFERC'sguidancesetforthinFERCordersinvolvingotherpowerpoolsandISOs,andsetsfortharevisedgovernancestructureoftheISO.TheCompanyisunabletopredictwhenFERCwillactonthesesubmittals,orwhetheritwillapprovethefilingswithorwithoutmodifications.However,theCompany'sPowerChoiceagreementdoesnotconditionretailaccessonthepresenceofanISO.InOrder888,theFERCalsostatedthatitwouldprovidefortherecoveryofprudentandverifiablewholesalestrandedcostswherethewholesalecustomerwasabletoobtainalternativepowersuppliesasaresultofOrder888'sopenaccessmandate.Order888lefttothestatestheissueofretailstrandedcostrecovery.Wherenewlycreatedmunicipalelectricutilitiesrequiredtransmissionservicefromthedisplacedutility,theFERCstatedthatitwouldentertainrequestsforstrandedcostrecoverysincesuchmunicipalizationismadepossiblebyopenaccess.TheFERCalsoreservedtherighttoconsiderstrandedcostsonacase-by-casebasisifitappearedthatopenaccesswasbeingusedtocircumventstrandedcostreviewbyanyregulatoryagency.Numerousparties,includingtheCompany,filedrequestsforrehearingofOrder888.InMarch1997,theFERCissuedOrder888-A,whichgenerallyaffirmedOrder888andgrantedrehearingononlyahandfulofissues.OneofthoseissueswaswhethertheFERCwouldreviewstrandedcostsinannexationcasesasitcommittedtodoinmunicipalizationcases.InOrder888-AtheFERCstatedthatitwouldreviewstrandedcostsresultingfromterritorialannexationbyanexistingmunicipalelectricsystem,providedthatsystemreliedontransmissionfromthedisplacedutility.TheFERCdeniedtheCompany'srequestforrehearingonhowstrandedcostswouldbecalculatedandotherissues.InNovember1997,FERCissuedOrder888-B.ThisOrderlargelyaffirmedthepositionssetforthinOrder888-AwhileclarifyingthattheFERCrecognizestheexistenceofconcurrentstatejurisdictionoverstuddedcostsarisingfrommunicipalization.TheFERCacknowledgedinOrder888-Bthatthestatesmaybefirsttoaddresstheissueofretail-turned-wholesalestrandedcosts,andstatedthatitwillgivethestatessubstantialdeferencewheretheyhavedoneso.InlateJanuary1997,theCompanyprovided26communitiesinSt.LawrenceandFranklincountieswithestimatestheyrequestedofthestrandedcoststheymightbeexpectedtopayiftheywithdrawfromtheCompany'ssystemtocreategovernment-controlledutilities.Thepreliminary18 estimateofthecombinedpotentialstrandedcostliabilityforthecommunitiesrangesfromalowof$225milliontoahighof$452million,dependingupontheforecastofelectricitymarketpricesthatisused.Theseamountsdonotincludethecostsofcreatingandoperatingamunicipalutility.Atthistime,21oftheoriginal26communitiesarestillpursuingthematter.Ifthese21communitieswithdrewfromtheCompany'ssystem,theCompanywouldexperienceapotentialrevenuelossofapproximately$60millionto$65millionperyear.Inaddition,theCompanyisawareofothercommunitiesthatareconsideringmunicipalization.However,theCompanyisunabletopredictwhetherthosecommunitieswouldpursuemunicipalization.ThestrandedcostcalculationswerebasedonamethodologyprescribedbytheFERC.Becausenomunicipalityhasmovedforwardwithcondemnation,thevalueoftheCompany'sfacilitieshasnotbeendeductedfromthestrandedcostestimates.Thestrandedcostsincludedintheseestimatesarethecommunities'hareofobligationsthatwereincurredonbehalfofallcustomerstofulfilltheCompany'slegalobligationstoensureadequate,reliableelectricityservice.Suchlegitimateandprudentcostsarecurrentlyincludedinelectricityrates.Government-mandatedpaymentstoIPPsrepresentthelargestsinglecomponentofthesecosts.These21communitiesseekingtowithdrawfromtheCompany'ssystemalsoproposetodisconnectentirelyfromtheCompany'ssystemandtotaketransmissionservicefromanotherutility.Theybelievethat,giventheprovisionsofOrder888,FERCwouldnotapprovetheCompany'srequestforstranded'ostrecoveryunderthesecircumstances.TheCompanyhasrespondedthat,regardlessoftheresultattheFERC,opportunitiesforstrandedcostrecoveryinthismattercouldalsobepursuedbeforethePSCandinastatecondemnationproceeding.(See"MasterRestructuringAgreementandthePowerChoiceAgreement.")TheCompanyisunabletopredicttheoutcomeofthismatter.OTHERFEDERALANDSTATEREGULATORYINITIATIVESPSCPROPOSALOFNEWIPPOPERATINGANDPPAMANAGEMENTPROCEDURES.InAugust1996,thePSCproposedtoexaminethecircumstancesunderwhichautility,includingtheCompany,maylegallycurtailpurchasesfromIPPs;whetherutilitiesshouldbepermittedtocollectdatathatwillassistinmonitoringIPPs'ompliancewithfederalQFrequirements,uponwhichthemandatedpurchasesarepredicated;andifutilitiesshouldbeallowedtodemandsecurityfromIPPstoensuretherepaymentofamountsaccumulatedintrackingaccountsmadeundertheirpurchasedpowercontracts.ThePSCnotedthatsomeofthecurrentIPPcontractsarefarabovemarketpricesandarecausingutilitiestoseekrateincreases.Inaddition,thePSCstatedthatitsproposalwasinitiatedtoprotectratepayers,sinceitwouldensurejustandreasonableratesintheeventongoingnegotiationsbetweenutilitiesandIPPsfail.MONITORING.InDecember1996,thePSCgavetheNewYorkStateutilities,includingtheCompany,theauthoritytocollectdatatoassisttheminmonitoringIPPs'ompliancewithbothfederalQFstandardsandstaterequirements.ThePSCstatedthatifQFsarenotmeetingrequirements,theobligationtopaythefullcontractrate,whichisfundedbyutilityratepayers,isgenerallyexcusedormitigated.Furthermore,ifthedatacollectedthroughaQFmonitoringprogramindicatesafacilityisnotmeetingfederalstandards,theutilitycouldpetitiontheFERC19 todecertifytheQF,whichcouldresultinpenaltiesthatcouldincludecancellationofthecontract.AsimilarpenaltycouldbeimposedifitisdeterminedaQFhasfailedtomaintaincompliancewithstatelaw.Underthemonitoringprogram,QFsarerequiredtosubmitdataasofMarch1eachyearforthepreviouscalendaryear.InaccordancewiththetermsoftheMRA,theCompanywillnotimplementanyQFmonitoringprogramfortheIPPParties.However,theCompanycontinuestomonitorthoseIPPsthatarenotIPPPartiesforcontinuedQFcomplianceunderPSCregulation.CURTAILMENT.OnMay20,1997,thePSCaddressedtheproceduresunderwhichautility,includingtheCompany,maylegallycurtailpurchasesfromIPPsthatareQFs,'nlesscurtailmentisspecificallyprohibitedbycontract.CurtailmentisallowedbyaFERCrule,undercertainoperationalcircumstanceswhenpurchasesfromtheQFswillexceedthecoststheutilitywouldincurifitgeneratedthepoweritself.AdvancenoticemustbeprovidedtotheQFalongwiththereasonsforsuchcurtailment,whicharesubjecttoverificationbythePSCeitherbeforeoraftercurtailment.ThePSCstatedthatPURPA,whichencouragedgenerationbyIPPs,wassupposedtoberevenue-neutral.However,theynotedthatthishasnotbeenthesituationinNewYorkStateandratepayershavebeenundulyburdenedbecauseoftheirlackofspecificcurtailmentprocedures.Thedecisiontopermitcurtailmentisnotlikelytoaffectthe'PPAscoveredbytheMRA,whichrepresentsapproximately80%oftheCompany'sover-marketpurchasedpowerobligations,asdescribedpreviously.However,thedecisioncouldaffectmostoftheremainingIPPcontracts.TheCompanyisunabletodeterminetheeffectofthesestatementsuntilsuchatimeasthereisafinalorder.TheCompanycannotpredictwhetherthePSCwilltakeanyactiononthefirmsecurityissue.However,thefirmsecurityissuewithrespecttotheIPPPartiescoveredundertheMRAwouldbesettledupontheclosingoftheMRA.MULTI-YEARGASRATESETTLEMENTAGREEMENT.TheCompany,MultipleIntervenors(anunincorporatedassociationofapproximately60largecommercialandindustrialenergyuserswithmanufacturingandotherfacilitieslocatedthroughoutNewYorkState)andPSCstaffreachedathree-yearsettlementthatwasconditionallyapprovedbythePSConDecember19,1996.ThePSCorderedconditionalapprovalonthethree-yearsettlementagreementuntilafinal,redraftedagreement,whichreflectstheCommission'sorder,issubmittedforfinalapproval.Thesettlementresultsina$10millionannualreductioninbaseratesora$30milliontotalreductionoverthethree-yeartermofthesettlement.Thisreflectsa$19millionreductionintheamountoffixednon-commoditycoststoberecoverableinbaserates,offsetbya$9millionincreaseinannualbaserates.TheCompanyestima'testhatthecombinationofin-handsupplierrefundsandfurtherreductionsinupstreampipelinecostswillbesufficienttofundthe$19millionannualreductioninnon-commoditycostrecovery.Ifthenon-commoditycostreductionsexceed$57million($19millionannually)duringthethree-yearsettlementperiod,theexcess,upto$40millionwillbecreditedtoaContingencyReserveAccount("CRA")tobeutilizedforratepayerbenefitintherateyearendingOctober31,2000orbeyond.Totheextenttheactualnon-commoditycostreductionsexceed$57millionby20 morethan$40million,theCompanymayretainanyexcesssubjecttoareturnonequitysharingprovision.Intheeventthenon-commodityreductionsfallshortofthe$57millionestimate,theCompanywillbeartheriskofanyshortfall.IntheeventthattheterminationorrestructuringofIPPcontractsresultsinmargin(revenueslessfuelcosts)orpeakshavinglosses,themarginlosseswouldbecollectedcurrentlysubjectto80%/20%(ratepayer/shareholder)sharingandthepeakshavinglosseswillbedeferredtotheCRA,subjecttolimitsspecifiedinthesettlement.Inreturnfortakingonthisrisk,theCompanyhasachievedaportionoftherevisedratestructurethathadbeenproposedtoreduceitsthroughputrisk.TheCompanyobtainedanROEcapof13.5%with50/50sharingbetweenratepayersandshareholdersinexcessofthecap.TheCompanyalsohasanopportunitytoearnupto$2.25millionannuallyifitsgascommoditycostsarelowerthanamarketbasedtargetwithoutbeingsubjecttotheROEcap.TheCompanyhasanequal$2.25millionriskifgascommoditycostsexceedthetarget.Anadditionalmajorbenefitoftherevisedratedesignisthatthemarginmadeoneachadditionalnewcustomerwillsignificantlyincreasetotheextentadditionalthroughputdoesnotrequireadditionalupstreampipelinecapacityforservice.This,alongwiththeapprovaloftheCompany'sProgressFund,whichallowstheCompanytouseutilityrevenuesinanamountnottoexceed$11millionintotalforthepurposeofprovidingfinancingforlargecustomerstoconvertorincreasetheirgasuse.willprovidenewopportunitiesforgrowth.GENERICGASRATEPROCEEDING.Asaresultofthegenericrateproceeding,inwhichthePSCorderedallNewYorkutilitiestoimplementaserviceunbundlingbeginninginMay1996,nearly3,000customershavechosentobuynaturalgasfromothersources,withtheCompanycontinuingtoprovidetransportationserviceforaseparatefee.ThesechangeshavenothadamaterialimpactontheCompany'smarginssincethemarginistraditionallyderivedfromthedeliveryserviceandnotfromthecommoditysale.Themarginfordeliveryforresidentialandcommercialaggregationservicesequalsthemarginonthetraditionalsalesserviceclasses.TodatethismigrationhasnotresultedinanystrandedcostssincethePSChasallowedtheutilitiestoassignthepipelinecapacitytothecustomersconvertingfromsalestotransportation.Thisassignmentisallowedduringathree-yearperiodendingMarch1999,atwhichtimethePSCwilldecideonmethodsfordealingwiththeremainingunassignedorexcesscapacity.Asapartofthegenericrateproceeding,allutilitiesarerequiredtofileareportwiththePSCinApril1998,describingactionsthathavebeentakentomitigatepotentialstrandedcostsascustomersmigratetotransportationservice.Inaclarifyingorderinthisproceeding,issuedSeptember4,1997,thePSChasindicatedthatitisunlikelythatutilitieswillbeallowedtocontinuetoassignpipelinecapacitytodepartingcustomersafterMarch1999.Onaseparatebutparallelpath,inSeptember1997,thePSCissuedforcommentitsstaffspositionpaperonthefutureofthenaturalgasindustry,includingrecommendationsforincreasingcompetitionandexpandingcustomerchoiceinthenaturalgasmarketplace.Thestaffproposed,amongotherthings,thatallregulatednaturalgasutilitiesexitthebusinessofpurchasingnaturalgasforcustomersoverthenextfiveyears.Thiswouldcompletethetransitionofcustomersfromsalestotransportationserviceonly.Theregulatedutilitieswouldonlydelivernaturalgaspurchasedbycustomersfromcompetitivesuppliers.IfthisproposalisadoptedbythePSC,thenitwouldeliminatetheneedtoregulatenaturalgaspurchasingpracticessincemarketforceswouldestablishnaturalgasprices.21 Thepositionpaperidentifiedanumberofissuesthatwouldneedtoberesolvedinorderforthisproposaltobesuccessful.Theprimaryissuesarethepipelinecapacityandgassupplycontractsthatthelocalutilitieshavewithinterstatepipelinesthatextendbeyondtheproposedfive-yeartransitionperiod,theobligationoftheutilitytoserveassupplieroflastresort,andtheissueofsystemreliability.TheCompanyandotherpartiessubmittedcommentsandreplycommentstothePSCinlateNovemberandDecemberof1997,respectively.WiththeexceptionoftheissuestoberesolvedbythePSC,asmentionedabove,theCompanydoesnotbelievethatthisproposalwillhaveamaterialadverseeffectonitsresultsofoperationsorfinancialcondition,sincetheCompany'snaturalgasmarginisderivedfromthedeliveryserviceandnotfromthecommoditysale.TheresolutionoftheissuesidentifiedbythePSCcouldresultinunrecoveredstrandedcostsfortheCompany.TheCompanyisunabletopredicthowthePSCwillresolvethoseissues.ForadiscussionoftheCompany'sgassupply,storageandpipelinecommitments,seeItem8.FinancialStatementsandSupplementaryData-"Note9.CommitmentsandContingencies-GasSupply,StorageandPipelineCommitments.")NRCANDNUCLEAROPERATINGMATTERS.InOctober1996,theNRCrequiredcompanieswithnuclearplantstoprovidetheNRCwithaddedconfidenceandassurancethattheirplantsareoperatedandmaintainedwithinthedesignbasis,andanydeviationsarereconciledinatimelymanner.Suchinformation,whichwasfiledwithintherequired120days,willbeusedbytheNRCtoverifythatcompaniesareincompliancewiththetermsandconditionsoftheirlicense(s)andNRCregulations.Inaddition,itwillallowtheNRCtodetermineifotherinspectionactivitiesorenforcementactionsshouldbetakenonaparticularcompany.InthelettertransmittingtherequestedinformationtotheNRC,theCompanyconcludedthatithasreasonableassurancethat(i)designbasisrequirementsarebeingtranslatedintooperating,maintenance,andtestingprocedures;and(ii)system,structureandcomponentconfigurationandperformanceareconsistentwiththedesignbasis.Also,theCompanyhasaneffectiveadministrativetoolfortheidentification,documentation,notification,evaluation,correction,andreportingofconditions,events,activities,andconcernsthathavethepotentialforadverselyaffectingthesafeandreliableoperationofUnit1andUnit2.InApril1997andDecember1997,theCompanyreceivednoticesfromtheNRCofa$200,000fineand$50,000fine,respectively,forviolationsatUnit1andUnit2.Thepenaltieswereforviolationsrelatedtocorrectiveactionsanddesigncontrol.TheCompanypaidthefinesandisimplementingcorrectiveaction.OnJanuary23,1998,theCompanyreceivednoticeofaproposed$55,000finefromtheNRCforviolationsofNRCrequirementsrelatedtoradioactivewasteissues.TheCompanydoesnotplantocontesttheproposedNRCfine.InJanuary1998,theNRCissueditsSystematicAssessmentofLicenseePerformance(the"SALP")reportonUnit1andUnit2,whichcoverstheperiodJune1996toNovember1997.TheSALPreport,whichisanextensiveassessmentoftheplants'erformanceintheareasofoperations,maintenance,engineeringandsupport,statedthattheperformanceofUnit1andUnit22, 2wasgenerallygood,althoughratingswerelowerthanthepreviousassessment.TheCompanyagreeswiththeNRC'sdeterminationthatthereareareasofitsperformancethatneedimprovementandistakingseveralactionstomakethoseneededimprovements.TheCompanybelievesthatNRCsafetyenforcementisbecomingmorestringentasindicatedbytheNRC'srequestforinformation,finesthattheCompanyhasbeenassessedandlowerSALPratingsandthattheremaybeadirectcostimpactoncompanieswithnuclearplantsasaresult.TheCompanyisunabletopredicthowsuchachangedoperatingenvironmentmayaffectitsresultsofoperationsorfinancialcondition.'omeownersofolderGeneralElectricCompanyboilingwaterreactors,includingtheCompany,haveexperiencedcrackinginhorizontalweldsintheplants'oreshrouds.Inresponsetoindustryfindings,theCompanyinstalledpre-emptivemodificationstotheUnit1coreshroudduringa1995refuelingandmaintenanceoutage.Thecoreshroud,astainlesssteelcylinderinsidethereactorvessel,surroundsthefuelanddirectstheflowofreactorwaterthroughthefuelassemblies.InspectionsconductedaspartoftheMarch1997refuelingandmaintenanceoutagedetectedcrackinginverticalweldsnotreinforcedbythe1995repairs.OnApril8,1997,theCompanyfiledacomprehensiveinspectionandanalysisreportwiththeNRCthatconcludedthattheconditionoftheUnit1coreshroudsupportsthesafeoperationoftheplant.COnMay8,1997,theNRCapprovedtheCompany'srequesttooperateUnit1untilthenextscheduledmid-cycleoutage,late1998.TheCompanyagreedtoproposeaninspectionplanfortheoutageandsubmittheplantotheNRCatleastthreemonthsbeforetheoutageisscheduledtobegin.TheCompanybelievesithasastrongtechnicalbasistooperateUnit1withoutamid-cycleoutageandisseekingthenecessaryapprovalfromtheNRCtopostponetheinspectionsuntiltheunit'srefuelingandmaintenanceoutageinspring1999,buttherecanbenoassurancethatsuchapprovalwillbegranted.TheUnit1refuelingandmaintenanceoutage,originallyplannedtobecompletedinearlyApril1997,wascompletedonMay10,1997duetothecore'shroudissue.OnSeptember15,1997,Unit1wastakenoutofserviceduetoleakinginoneoffourback-upcondensers.Thestandbycondensersserveasaback-upsystemfortheremovalofreactorsteam.Thecondensersaremaintainedinareadystateduringnormalplantoperations.Testsandinspectionswereconductedontheremainingcondensersandsimilar-conditionswerefound.OnDecember10,1997,Unit1wasreturnedtoserviceafterthereplacementofallfourcondensers,whichcostapproximately$6.7million.OTHERCOMPANYEFFORTSTOADDRESSCOMPETITIVECHALLENGESTAXINITIATIVES.TheCompanyisworkingwithutility,customerandstaterepresentativestoexplainthenegativeimpactthatallutilitytaxes,includingtheGRT,arehavingonratesandthestateoftheeconomy.Atthesametime,theCompanyisalsocontestingthehighrealestatetaxesitisassessedbymanytaxingauthorities,particularlythoseimposedupongeneratingfacilities.23 TheNewYorkStateLegislaturepassedastatebudgetinAugust1997whichincludesareductionoftheGRToverthreeyears.Forgasandelectricutilities,thetaximposedongrossincomewillbereducedfrom3.5%to3.25%onOctober1,1998,andfrom3.25%to2.5%onJanuary1,2000.Thestatetaximposedongrossearningswillremainunchangedat.75%,bringingthetotalGRTto3.25%-afullpercentagepointlowerthantoday'slevelof4.25%.ThesavingsfromthereductionoftheGRTwillbepassedontotheCompany'scustomers.TheCompanybelievesthatfurthertaxreliefisneededtorelievetheCompany'scustomersofhighenergycostsandtoimproveNewYorkState'scompetitivepositionastheindustrymovestowardacompetitivemarketplace.Thefollowingtablesetsforthasummaryofthecomponentsofothertaxes(exclusiveofincometaxes)incurredbytheCompanyintheyears1995through1997:Inmillionsoidollars199719961995PropertytaxexpenseSalestaxPayrolltaxGrossReceiptsTaxOthertaxes$250.713.434.1184.60.1$249.4$264.814.113.936.437.3184.1190.20.55.2TotaltaxexpenseChargedtoconstruction,subsidiariesandregulatoryrecognitionTotalothertaxes482.9484.5511.4<11.41(8.7)6.1$471.5$475.8$517.5sssssssssssssssssssssssssssssssssssssssssassaassssssssasssssssCUSTOMERDISCOUNTS.Inrecentyears,someindustrialcustomershavefoundalternativesuppliersoraregeneratingtheirownpower.Inaddition,aweakenedeconomyorattractiveenergypriceselsewherehavecontributedtootherindustrialcustomerdecisionstorelocateorclose.Inaddressingthethreatoffurtherlossofindustrialload,thePSCestablishedguidelinestogovernflexibleelectricratesofferedbyutilitiestoretainqualifiedindustrialcustomers.Undertheseguidelines,theCompanyfiledforanewservicetariffinAugust1994(SC-11),underwhichallnewcontractratesareadministeredbasedondemonstratedindustrialandcommercialcompetitivepricingalternativesincluding,butnotlimitedto,on-sitegeneration,fuelswitching,facilityrelocationandpartialplantproductionshifting.ContractsarefortermsnottoexceedsevenyearswithoutPSCapproval.Inaddition,theCompanyhNeconomicdevelopmentprogramswhichprovidetariffbasedincentivestoretainandgrowload.AsofJanuary1998,theCompanyhas152executedcontractsunderitsflexibletariffofferings.Thesecontractshavebeensignedtomitigatethelostmarginimpactsassociatedwithcustomersexecutingthe'competitivealternativesmentionedabove.Inaddition,manyofthesecontractsincludeanincreaseinproductionlevelsand/orattractnewcustomerstotheCompany'sserviceterritory.24 In1997and1996,thetotalamountofcustomerdiscounts(economicdevelopmentprogramsandflexiblepricing)was$90.6millionand$75.5million,respectively.TheCompanyrecovered$46.6millionand$56.7millioninrates,respectively.PendingimplementationofPowerChoice,theCompanybudgeteditsdiscountstoincreasetoapproximately$95.4millionin1998assomediscountsgrantedin1997areineffectforanentireyearandfurtherdiscountsaregranted.TheCompanyisaggressivelyusingSC-11toincreasesalestoexistingcustomersandtoattractnewcustomerstoitsserviceterritory.WiththereductioninindustrialpricesprovidedinPowerChoice,thelevelofdiscountsthathavebeennecessaryshoulddeclineinthefuture.REGULATORYAGREEMENTS/PROPOSALS(See"MasterRestructuringAgreementandthePowerChoiceAgreement.")1995RATEORDER.OnApril21,1995,theCompanyreceivedaratedecision(1995rateorder)fromthePSCwhichapprovedanapproximately$47millionincreaseinelectricrevenuesanda$4.9millionincreaseingasrevenues.YEAR2000COMPUTERISSUEAstheyear2000approaches,theCompany,alongwithmanyothercompanies,couldexperiencepotentiallyseriousoperationalproblems,sincemanycomputerprogramsthatweredevelopedwillnotproperlyrecognizecalendardatesbeginningwiththeyear2000.Further,thereareembeddedchipscontainedwithingeneration,transmission,distributionandgasequipmentthatmaybedate-sensitive.Inthesecircumstanceswhereanembeddedchipfailstorecognizethecorrectdate,electricorgasoperationscouldbeadverselyaffected.TheCompanyisaddressingtheseissuessothatitscomputersystemsand,wherenecessary,itsembeddedchipswillprocessdatesgreaterthan1999,therebypreventinganyadverseoperationalorfinancialimpacts.TheCompanyhasbeenaddressingtheyear2000informationtechnologyissuethroughtheremediationandreplacementofexistingbusinessapplicationsandpartsofitstechnicalinfrastructure.Inlate1997,theservicesofaleadingcomputerservicesandconsultingfirmwereretainedtoconductanassessmentoftheCompany'sentireyear2000program.Asaresultoftheassessment,aCompany-wideyear2000projectmanagementofficehasbeenformedandyear2000projectmanagershavebeenappointedwithineachbusinessgroupandeffortsareunderwaytoevaluatethescopeoftheproblemforembeddedtechnologies/processcontrolsystemsinallbusinessgroupswithintheCompany.ACompany-wideprogramdirectorandanexecutivelevelsteeringcommitteehavebeenputinplacetooverseeallaspectsoftheprogram.TheCompanyisalsoevaluatingtheexposuretoyear2000problemsofthirdpartieswithwhomtheCompanyconductsbusiness.TheCompanyexpectstocompleteaninventoryofexposures,includinganassessmentofpriorities,costsandresources,bythethirdquarterof1998.FailuresoftheCompanyand/orthirdpartycomputersystemsandembeddedchipscouldhaveamaterialimpactontheCompany'sabilitytoconductitsbusiness.Untilfurtherprogressismadeontheseefforts,managementisunabletoestimatethetotalyear2000complianceexpense,butitisintheprocessofassessingthisexpense.25 RESULTSOFOPERATIONSEarningsfor1997were$145.9million,or$1.01pershare,ascomparedto$72.1million,or50centspershare,in1996and$208.4million,or$1.44pershare,in1995.Incomparingyear-to-yearresults,earningsin1996reflectcertainsignificanteventsthatwerenotrepeatedin1997.Earningsin1996werereducedbyanafter-taxwrite-offof$67;4million,or47centspershare.associatedwiththediscontinuedapplicationofregulatoryaccountingprinciplestotheCompany'sfossilandhydrogenerationbusiness.LargelyasaresultoftheCompany's1996assessmentoftheincreasedriskofcollectingsignificantlyhigherlevelsofpast-duecustomerbills,baddebtexpensein1996w'ashigherthanin1997by$81.1million,reducingearningsin1996,comparedto1997,by37centspershare.However,earningsin1996wereaidedbya$15millionafter-taxgainonthesaleofa50percentinterestinCNPwhichadded10centspershareto1996earnings.Industrialcustomerdiscountsnotrecoveredinratesin1997exceeded1996levelsby$25.2million,reducing1997ear'ningsby11centspershare(seeOtherCompanyEffortstoAddressCompetitiveChallenges-"CustomerDiscounts.")Inaddition,adeclineinhigher-marginresidentialsalesalsoadverselyimpacted1997earnings.Thelower-marginindustrial-specialsales(salesbytheCompanyonbehalfofNYPA)andindustrialsalesincreased.Asaresult,totalpublicsaleswereessentiallythesameassalesin1996.Earningsfor1995werehurtbylowersalesquantitiesofelectricityandnaturalgas,ascomparedwithamountsusedtoestablish1995prices.SaleswereprimarilyaffectedbythecontinuingweakeconomicconditionsinupstateNewYork,lossofindustrialcustomers'oadtoNYPAanddiscountsgranted.Thesefactorssimilarlyimpacted1996and1997results.Inaddition,1995earningsincludedtherecordingofaone-time,non-cashadjustmentofprioryears'emand-sidemanagement("DSM")incentiverevenues,revenuesearnedundertheUnit1operatingincentivesharingmechanismandagainonthesaleofHYDRA-COthatcollectivelyincreased1995earningsby17centspershare.TheCompany's1997earnedROEwas5.5%ascomparedto2.8%(5.4%beforeextraordinaryloss)in1996and8.4%in1995.TheCompany'sROEauthorizedinthe1995orlastratesettingprocessis11.0%fortheelectricbusinessand11.4%forthegasbusiness.Factorscontributingtoearningsbelowauthorizedlevelsin1997included,amongotherthings,salesbelowthose'orecastedindeterminingrates,contractualincreasesincapacitypaymentstoIPPsandincreasingdiscountstocustomers.Asdiscussedunder"MasterRestructuringAgreementandthePowerChoiceAgreement"and"AccountingImplicationsofthePowerChoiceAgreementandMasterRestructuringAgreement,"theCompanyforecaststhatearningsforthefive-yeartermofthe,PowerChoiceagreementwillbesubstantiallydepressed.Thelevelofearningsfor1998willalsobeimpacted,inpart,bythedateofimplementationofPowerChoice,thePowerChoicechargeof$190millionexpectedtobetakeninthesecondquarterof1998andmayalsobenegativelyimpactedbythefinancialeffectsoftheJanuary1998icestorm(seeItem8.FinancialStatementsandSupplementaryData-"Note13.SubsequentEvent").Thefollowingdiscussionandanalysishighlightsitemsthatsignificantlyaffectedoperationsduringthethree-yearperiodendedDecember31,1997.Thisdiscussionandanalysisisnotlikelytobeindicativeoffutureoperationsorearnings,particularlyinviewoftheprobabletermination,restatementoramendmentofIPPcontractsandimplementationofPowerChoice.It26 alsoshouldbereadinconjunctionwithItem8.FinancialStatementsandSupplementaryDataandotherfinancialandstatisticalinformationappearingelsewhereinthisreport.ELECTRICREVENUESwere$3,309millioninboth1997and1996,adecreaseof$26.1million,or0.8%from1995.Asshowninthefollowingtable,FACrevenuesincreased$42.8millionin1997,primarilyasaresultoftheCompany'sabilityin1997torecoverincreasedpaymentstotheIPPsthroughtheFAC.However,thisincreasewasoffsetbyadecreaseinrevenuesfromsalestoother.electricsystemsandlowerelectricsalesduetowarmerweather.UnderPowerChoice,revenuesmaydeclineascustomerschoosealternativesuppliers.However,theCompanywillrecoverstrandedcoststhroughtheCTC.See"MasterRestructuringAgreementandthePowerChoiceAgreement."Electricoperatingrevenuesdecreasedin1996,primarilyduetoadecreaseinmiscellaneouselectricrevenues.Miscellaneouselectricrevenueswerelowerin1996primarilybecause1995electricrevenuesincludedtherecordingof$71.5millionofunbilled,non-cashrevenuesinaccordancewiththe1995rateorder,$13.0millionofrevenuesearnedunderMERIT(anincentivemechanismrelatedtoimprovementinkeyperformanceareaswhichendedin1996)andaone-time,non-cashadjustmentofprioryear'sDSMincentiverevenuesandareductionintheDSMrebatecostprogram.However,higherelectricsalesduetocolderweather,anincreaseinsalestootherelectricsystems,anincreaseinFACrevenuesandhigherelectricrates(effectiveApril26,1995)partlyoffsetthosefactorsthatcontributedtolowerelectricrevenues.FACrevenuesincreased$28.3millionin1996,whichprimarilyreflectstheCompany'sincreasedpaymentstotheIPPsrecoveredthroughtheFAC.INCREASE(DECREASE)FROMPRIORYEAR(Inmillionsoidollars)ELECTRICREVENUES19971996TOTALAmortizationotunbilledrevenuesBaseratesFuelad)ustmentclauserevenuesChangesinvolumeandmixotsalestoultimateconsumersSalestootherelectricsystemsMERITrevenueDSMrevenue<C>$42.8<C>$(77.1)65.328.3<C>$(77.1)65.371.1(29.6)$0.5HHaa%%P%24.5(13.0)(26.5)$(26.6)(5.1)(13.0)(26.5)$(26.1)(12.7)(28.1)(40.8)TheFACiseliminatedunderthePowerChoiceagreement.ChangesinFACrevenuesaregenerallymargin-neutral(subjecttoanincentivemechanismdiscussedinItem8.FinancialStatementsandSupplementaryData-"Note1.SummaryofSignificantAccountingPolicies"),whilesalestootherutilities,becauseofregulatorysharingmechanismsandrelativelylowprices,generallyresultinlowmargincontributionstotheCompany.Thus,fluctuationsintheserevenuecomponentsdonotgenerallyhaveasignificantimpactonnetoperatingincome.Electric27 revenuesreflectthebillingofaseparatefactorforDSMprograms,whichprovidedfortherecoveryofprogramrelatedrebatecosts.ELECTRICKILOWATT-HOURSALESwere37.1billionin1997,39.1billionin1996and37.7billionin1995.The1997decreaseof2.0billionKWh,or5.1%ascomparedto1996,isrelatedprimarilytoa31.0%decreaseinsalestootherelectricsystems.(SeeItem8.FinancialStatementsandSupplementaryData-"ElectricandGasStatistics-ElectricStatistics").The1996increaseof1.4billionKWh,or3.8%ascomparedto1995,reflectsa26.2%increaseinsalestootherelectricsystemsanda1.2%increaseinsalestoultimatecustomersduetothecolderweather.SalestootherelectricsystemswerelowerprimarilyduetoareductionintheavailabilityofnucleargenerationasaresultoftheoutagesatUnit1.TheCompanyisanticipatinglittleornogrowthin1998insalestoultimateconsumers,whichwillbesensitivetothebusinessclimateinitsserviceterritory.DetailsofthechangesinelectricrevenuesandKWhsalesbycustomergrouparehighlightedinthetablebelow:INCREASE(DECREASE)FROMPRIORYEAR1997~OFELECTRC19971996CLASSOFSERVICEREVENUESREVENUESSALESREVENUESSALESResidentialCommercialIndustrialIndustrial-SpecialMunicipalservice37.1$37'16.11.91.6,(2.0)%(0.3)1.25.81.4(2.0)%(0.1)0.64.2(4.5)3.1%0.511(0.4)0.21.23.96.75.87.4TotaltoultimateconsumersOtherelectricsystemsMiscellaneous94.0(0.6)1.4~1.22.5(26.1)(31.0)27.526.23.570.4(100.0)(57.8)(17.7)TOTAL100.0i(5.1)%(0.8)%3.8%Asindicatedinthetablebelow,internalgenerationdecreased10.1%in1997,principallyduetotheoutageatUnit1andareductioninhydroelectricpowerasaresultoflowerthannormalprecipitationinthesummermonths.In1997,Unitl,wasoutofservicefor153days,duetoaplannedrefuelingandmaintenanceoutage(whichtook68days)andfortheemergencycondenserreplacement(whichtookapproximately85days)whilein1996,Unit2wasoutofservicefora36dayplannedrefuelingandmaintenanceoutage.(See"OtherFederalandStateRegulatoryInitiatives-NRCandNuclearOperatingMatters.")TheamountofelectricitydeliveredtotheCompanybytheIPPsdecreasedbyapproximately277GWhor2.0%.However,totalIPPcostsincreasedbyapproximately$18.0millionor1.7%,asdiscussedbelow.(See"MasterRestructuringAgreementandthePowerChoiceAgreement").28

%ChangefromPriorYear1997199619951997to19961996to1995(Inmillionsofdollars)GwhCostGWhCostGwhCostGWhCostGWhCostFuelforelectricgeneration:CoalOilNaturalgasNuclearHydro7,4597013946,3392,90517,798-S106.432.28.633.0180.27,0954623198,2433,67919,798S100.621.19.247.7178.66,8415379967I2722,97118,617S97.921.320.243.3182.75.1%51.723.5(23.1)(21.0)(10.1)5.8%52.6(6.5)(30.8)0.93.7%(14.0)(68.0)13.423.86.32.8'%0.9)(54.5)10.2(2.2)Electricitypurchased:IPPs:CapacityEnergyandtaxes13,520220.8885.713,797212.8875.714,023:181.2798.7(2')3.81.1(1.6)17.49.6TotalIPPpurchasesOther13,5209,4211,106.5130.222,9411,236.713,7979,569.23,3661,088.5130.614,0239,4631,219.123,486979.9126.51,106.4(2.0)(1.5)(1.8)1.7(0.3)(1.611.1(0.5)11.13.210.2TotalgeneratedandpurchasedFuelad)ustmentclauseLosses/Companyuse40,7391,416.9(1.3)3,60343,1644,0371,397.742,103(33.3)4,4191,289.1(5.6)14.8(10.8)1.4(96.1)2.5(8.6)(325.0)37,136Sl,415.6SSSEWSa39,127RRSSSS1,364.437,684S1,303.9(5.1)%3.8%RPRSRRRRaasasssassasasOSSESSES3.8%WRSRRS4.6%

Theabovetablepresentsthetotalcostsforpurchasedelectricity,whilereflectingonlyfuelcostsforCompanygeneration.Othercostsofgeneration,suchastaxes,otheroperatingexpensesanddepreciationareincludedwithinotherincomestatementlineitems.TheCompany'smanagementofitsIPPpowersupplygenerallydividestheprojectsintothreecategories:hydroelectric,"mustrun"cogenerationandschedulablecogenerationprojects.Followingahigherthannormalspringrunoff,theprecipitationinthesummermonthswaslowerthanusual.Asaresult,hydroelectricIPPprojectsdelivered242GWhor13.7%lessunderPPAsthantheydidforthesameperiodlastyear,representingdecreasedpaymentstothoseIPPsof$15.7million.AsubstantialportionoftheCompany'sportfolioofIPPprojectsoperateona"mustrun"basis.Thismeansthattheytendtorunatmaximumproductionlevelsregardlessoftheneedfororeconomicvalueoftheelectricityproduced.Outputfrom"mustrun"cogenerationIPPswas230GWhor2.6%lowerthanproducedlastyear,inpartduetolowerenergypurchasesfromtheSitheIndependenceplant.However,paymentstothoseIPPswere$12.8millionhigher.Thiswasduetoacombinationofoutputturndownarrangementswithindividualprojectsandescalatingcontractrates.AturndownarrangementisanagreementwheretheCompanycompensatesanIPPtoreducetheoutputfromtheirfacility.Althoughoutputisreduced,theneteconomicimpactisfavorabletotheCompanyanditscustomerssincetheelectricityisreplacedfromthemarketorotherlowercostsources.QuantitiespurchasedfromschedulablecogenerationIPPsincreased195GWhor6.3%andpaymentsincreased$20.9million.Theincreasedpaymentsarelargelyduetoescalatingcontractratesforcapacity(fixed)andincreasedvolumesofenergy.ThetermsofthesePPAsallowtheCompanytoschedule(withcertainconstraints)energydeliveriesandpayfortheenergysupplied.Inaddition,theCompanyisrequiredtomakefixedpaymentsiftheIPPplantsremainavailableforservice.(SeeItem8.FinancialStatementsandSupplementaryData-"Note9.CommitmentsandContingencies-Long-termContractsforthePurchaseofElectricPower").GASREVENUESdecreasedby$24.7million,or3.6%in1997,andincreasedby$99.9million,or17.2%,in1996.Asshowninthetablebelow,gasrevenuesdecreasedin1997primarilyduetodecreasedsalestoultimatecustomersasaresultofthemigrationofcommercialsalescustomerstothetransportationclass,decreasedspotmarketsalesandadecreaseinbaseratesof$5.9millioninaccordancewiththe1996rateorder.Thiswaspartiallyoffsetbyhighergasadjustmentclauserecoveriesandanincreaseinrevenuesfromthetransportationofcustomer-ownedgas(see"OtherFederalandStateRegulatoryInitiatives-GenericGasRateProceeding").Gasrevenuesincreasedin1996primarilyduetoincreasedsalestoultimatecustomersduetocolderweather,increasedspotmarketsales,highergasadjustmentclauserecoveries,anincreaseinrevenuesfromthetransportationofcustomer-ownedgasandanincreaseinbaseratesof$3.1millioninaccordancewiththe1995rateorder.Ratesfortransportedgas(excludingaggregationservices)yieldlowermarginsthangassolddirectlybytheCompany.Therefore,increasesinthevolumeofgastransportationserviceshave30 nothadaproportionateimpactonearnings,particularlyininstanceswherecustomersthattookdirectservicefromtheCompanymovetoatransportation-onlyclass.Inaddition,changesinpurchasedgasadjustmentclauserevenuesaregenerallymargin-neutral.INCREASE(DECREASE)E'ROl4PRIORYEAR(Znmillionsofdollars)GASREVENUES19971996TOTALBaseratesTransportationofcustomer-ownedgasPurchasedgasadjustmentclauserevenuesSpotmarketsalesChangesinvolumeandmixofsalestoultimateconsumers(38.6)29.9$(24.7)"S99.9(8.8)875.2OSRRSWwS(5.9)83.1S.(2.8)5.32.17,445.330.876.1(30.8)34.03.3GASSALES,excludingtransportationofcustomer-ownedgasandspotmarketsales,were78.7millionDthin1997,a7.3/odecreasefrom1996,anda0.3'/oincreasefrom1995.(SeeItem8.FinancialStatementsandSupplementaryData-"ElectricandGasStatistics-GasStatistics").'Thedecreasein1997wasinallultimateconsumerclasses,inpartduetothewarmerweather.Inaddition,spotmarketsales(salesforresale),whicharegenerallyfromthehigher.pricedgasavailabletotheCompanyandthereforeyieldmarginsthataresubstantiallylowerthantraditionalsalestoultimatecustomers,decreased8.0millionDth.Thiswaspartiallyoffsetbyanincreaseintransportationvolumesof18.1millionDthor13.5'/otocustomerspurchasinggasdirectlyfromproducers.TheCompanyhasexperiencedanincreaseincustomersofapproximately17,800since1995,primarilyintheresidentialclass,anincreaseof3.5/o.31 ChangesingasrevenuesandDthsalesbycustomergrouparedetailedinthetablebelow:INCREASE(DECREASE)FROMPRIORYEAR1997%OFGAS19971996.CLASSOFSERVICEREVENUESREVENUESSALESREVENUESSALESResidentialCommercialIndustrial66.4%22.61.04.5%(8.7)(50.9)(2.7)%(13.0)(50.1)13.3%13.015.69.4%6.44.1TotaltoultimateconsumersOthergassystemsTransportationofcustomer-ownedgasSpotmarketsalesMiscellaneous90.08.51.00.5(0.3)(5.8)(7.3)13.38.3(6.7)(81.9)(81.4)10.513.54.3(6.9)(82.9)(76.6)1,099.1507.0263.1(82.2)TOTAL100.0t(3.6)01.7%1I.2%2.3%Thetotalcostofgaspurchaseddecreased6.6%in1997andincreased34.0%in1996.Thecostfluctuationsgenerallycorrespondtosalesvolumechanges,asspotmarketsalesactivitydecreased,aswellaschangesingasprices.TheCompanysold2.5,10.5and1.7millionDthonthespotmarketin1997,1996and1995,respectively.Thetotalcostofgasdecreased$24.4millionin1997.Thiswastheresultofa5.3milliondecreaseinDthpurchasedandwithdrawnfromstorageforultimateconsumersales($18.8million)anda$22.5milliondecreaseinDthpurchasedforspotmarketsales,partiallyoffsetbya3.3%increaseintheaveragecostperDthpurchased($10.7million)anda$6.3millionincreaseinpurchasedgascostsandcertainotheritemsrecognizedandrecoveredthroughthepurchasedgasadjustmentclause.Thetotalcostofgaspurchasedincreased$93.8millionin1996.Thiswastheresultofa9.3millionincreaseinDthpurchasedandwithdrawnfromstorageforultimateconsumersales($29.6million),a$25.6millionincreaseinDthpurchasedforspotmarketsalesanda12.9%increaseintheaveragecostperDthpurchased($38.7million).Gaspurchasedforspotmarketsalesdecreased$22.5millionin1997andincreased$25.6millionin1996.TheCompany'snetcostperDthsold,aschargedtoexpenseandexcludingspotmarketpurchases,increasedto$3.82in1997from$3.62in1996andwas$3.17in1995.Throughtheelectricandpurchasedgasadjustmentclauses,costsoffuel,purchasedpowerandgaspurchased,aboveorbelowthelevelsallowedinapprovedrateschedules,arebilledorcreditedtocustomers.TheCompany'selectricFACprovidesforapartialpass-throughoffuelandpurchasedpowercostfluctuationsfromthoseforecastinrateproceedings,withtheCompanyabsorbingaportionofincreasesorretainingaportionofdecreasestoamaximumof$15millionperrateyear.TheCompanyabsorbedlossesofapproximately$11.8million,$1.4millionand$13.1millionin1995,1996and1997,respectively.UnderPowerChoice,theFACwillbeterminated.TheCompanydoesnotbelievethattheeliminationoftheFACwillhaveamaterialadverseeffectonitsfinancialcondition,asaresultofitsmanagementof(1)powersuppliesprovidedthrough:(i)theoperationofitsownpowerplants,andfuturepowerpurchasearrangementsaspartoftheplannedauctionofitsfossilandhydroassets,(ii)fixedpower32 purchasesfromNYPAandremainingIPPsand(iii)fixedandindexedswaparrangementswithIPPPartiesand(2)thetransferoftheriskassociatedwithelectricitycommoditypricestothecustomerthroughimplementationofretailaccessincludedinthePowerChoiceagreement.OTHEROPERATIONANDMAINTENANCEEXPENSEdecreasedin1997by$92.9million.or10.0%,ascomparedtoanincreaseof$110.3millionor13.5%in1996.Thesechangesin1996and1997eachresultprimarilyfromachangein1996intheCompany'sassessmentofuncollectiblecustomeraccounts,whichgivesgreaterrecognitiontotheincreasedriskofcollectingpastduecustomerbills,resultinginincreasesintheCompany'sallowancefordoubtfulaccountsandasignificantlyhigherexpenserecognitionin1996.Baddebtexpensewas$31.2million,$127.6millionand$46.5millionin1995,1996and1997,respectively.In1997,write-offswere$39.0millionandtheCompanyincurreda$10.5millionincreaseinallowancefordoubtfulaccounts.Theincreaseintheallowancefordoubtfulaccountswasattributabletoincreasesinthecollectionriskassociatedwithresidentialaccountsreceivableandarrears.TheCompanyhasimplementedanumberofcollectioninitiativesthatareexpectedtoresultinlowerarrearslevelsandpotentiallylowertheallowancefordoubtfulaccounts.Otheroperationandmaintenanceexpensealsodecreasedin1997asaresultofareductioninadministrativeandgeneralexpensesof$15.8million,primarilyduetoareductioninlegalcosts.OTHERINCOMEdecreasedby$10.9millionin1997andincreasedby$32.9millionin1996.Despitehigherinterestincome($12.0million)relatedtoincreasingcashbalances,"otherincome"waslowerin1997,since1996.reflectedagainonthesaleofa50%interestinCNP($15.0million).The1996increasealsoreflectedhigherinterestincome($10.9million)asaresultofanincreaseintemporarycashinvestments.Inaddition,"otherincome"washigherin1996sincetherewerecustomerservicepenaltiesandcertainotheritemswrittenoffbecausetheyweredisallowedinratesin1995.FEDERALANDFOREIGNINCOMETAXESincreasedby$24.1millionin1997primarilyduetoanincreaseinpre-taxincomeanddecreasedby$56.9millionin1996primarilyduetoadecreaseinpre-taxincome.Othertaxesdecreasedby$4.4millionin1997anddecreasedby$41.6millionin1996.The1997decreasewasprimarilyduetolowerpayrolltaxes($2.3million)andlowersalestaxes($0.7million).The1996decreasewasprimarilyasaresultoflowerrealestatetaxes($15.4million),lowerGRTs($6.1million)primarilyduetoareductionintheGRTsurchargeduring1996,lowerNewYorkStateexcessdividendtaxaccrualduetoasuspensionofthecommonstockdividend($4.6million)andyear-to-yeardifferencesintheaccountingforregulatorydeferrals($15.2million)associatedprimarilywithasettlementoftaxissueswithrespecttotheCompany'sDunkirkfacility.INTERESTCHARGESremainedfairlyconstantfortheyears1995through1997.However,dividendsonpreferredstockdecreasedby$0.9millionand$1.3millionin1997and1996.respectively.Dividendsonpreferredstock'decreasedin1997primarilyduetoareductioninpreferredstockoutstandingthroughsinkingfundredemptionsanddecreasedin1996primarilyduetoadecreaseinthecostofvariablerateissues.Theweightedaveragelong-termdebtinterestrateandpreferreddividendratepaid,reflectingtheactualcostofvariablerateissues,changedto7.81%and7.04%,respectively,in1997from7.71%and7.09%,respectively,in1996andfrom7.77%and7.19%,respectively,in1995.33 EFFECTSOFCHANGINGPRICESTheCompanyisespeciallysensitivetoinflationbecauseoftheamountofcapitalittypicallyneedsandbecauseitspricesareregulatedusingaratebasemethodologythatreflectsthehistoricalcostofutilityplant.TheCompany'sconsolidatedfinancialstatementsarebasedonhistoricaleventsandtransactionswhenthepurchasingpowerofthedollarwassubstantiallydifferentthannow.Theeffectsofinflationonmostutilities,includingtheCompany,aremostsignificantintheareasofdepreciationandutilityplant.TheCompanycouldnotreplaceitsnon-nuclearutilityplantandequipmentforthehistoricalcostvalueatwhichtheyarerecordedontheCompany'sbooks.Inaddition,theCompanywouldnotreplacethesewithidenticalassetsduetotechnologicaladvancesandcompetitiveandregulatorychangesthathaveoccurred.Inlightoftheseconsiderations,thedepreciationchargesinoperatingexpensesdonotreflectthecostofprovidingserviceifnewgeneratingfacilitieswereinstalled.TheCompanywillseekadditionalrevenueorreallocateresources,ifpossible,tocoverthecostsofmaintainingserviceasassetsarereplacedorretired.FINANCIALPOSITION,LIQUIDITYANDCAPITALRESOURCESFINANCIALPOSITION.TheCompany'scapitalstructureatDecember31,1997was51.8%long-termdebt,7.7%preferredstockand40.5%commonequity,ascomparedto53.1%,7.9%and39.0%respectively,atDecember31,1996.Theculminationofthetermination,restatementoramendmentofIPPcontractswillsignificantlyincreasetheleverageoftheCompanytonearly65%atthetimeofclosing.ThroughtheanticipatedincreasedoperatingcashfiowresultingfromtheMRAandPowerChoiceagreement,theplannedrapidrepaymentofdebtshoulddeleveragetheCompanyovertime.Bookvalueofthecommonstockwas$18.89pershareatDecember31,1997,ascomparedto$17.91pershareatDecember31,1996.WiththeissuanceofequityatbelowbookvaluetotheIPPPartiesaspartoftheMRA,bookvaluepersharewillbediluted.Inaddition,earningspersharewillbedilutedbytheeffectoftheissuancetotheIPPPartiesofapproximately42.9millionsharesoftheCompany'scommonstock.TheCompany'sEBITDAfor1997wasapproximately$962million,anduponimplementationoftheMRAandPowerChoiceisexpectedtoincreasetoapproximately$1,200millionto$1,300millionperyear.EBITDArepresentsearningsbeforeinterestcharges,interestincome,incometaxes,depreciationandamortization,amortizationofnuclearfuel,allowanceforfundsusedduringconstruction,non-cashregulatorydeferralsandotheramortizationsandextraordinaryitems.EBITDAisanon-GAAPmeasureofcashflowsandispresentedtoprovideadditionalinformationabouttheCompany'sabilitytomeetitsfuturerequirementsfordebtservicewhichwouldincreasesignificantlyuponconsummationoftheMRA.EBITDAshouldnotbeconsideredanalternativetonetincomeasanindicatorofoperatingperformanceo'"asanalternativetocashflows,aspresentedontheConsolidatedStatementofCashFlows,asameasureofliquidity.34 The1997ratioofearningstofixedchargeswas2.02times.Theratiosofearningstofixedchargesfor1996and1995were1.57timesand2.29times,respectively.Thechangeintheratiowasprimarilyduetochangesinearningsduringtheperiod.AssumingtheMRAisimplemented,theratioofearningstofixedchargeswillsubstantiallydecreaseinthefuture,sincetheMRAandPowerChoiceagreementwillhavetheeffectofsubstantiallydepressingearningsduringitsfive-yearterm,whileatthesametimesubstantiallyimprovingoperatingcashflows.TheprimaryobjectiveoftheMRAistoconvertalargeandgrowingoff-balancesheetpaymentobligationthatthreatensthefinancialviabilityoftheCompanyintoafixedandmanageablecapitalobligation.COMMONSTOCKDIVIDEND.TheBoardofDirectorsomittedthecommon'stockdividendbeginningthefirstquarterof1996.ThisactionwastakentohelpstabilizetheCompany'sfinancialconditionandprovideflexibilityastheCompanyaddressesgrowingpressurefrommandatedpowerpurchasesandweakersalesandistheprimaryreasonfortheincreaseinthecashbalance.Inmakingfuturedividenddecisions,theBoardofDirectorswillevaluate,alongwithstandardbusinessconsiderations,thefinancialconditionoftheCompany,theclosingoftheMRAandimplementationofPowerChoice,orthefailuretoimplementsuchactions,contractualrestrictionsthatmightbeenteredintoinconjunctionwithfinancingtheMRA,thedegreeofcompetitivepressureonitsprices,thelevelofavailablecashflowandretainedearningsandotherstrategicconsiderations.TheCompanyexpectstodedicateasubstantialportionofitsfutureexpectedpositivecashflowtoreducetheleveragecreatedinconnectionwiththeimplementationoftheMRA.ThePowerChoiceagreement'establisheslimitstotheannualamountofcommonandpreferredstockdividendsthatcanbepaidbytheregulatedbusiness.Thelimitisbasedupontheamountofnetincomeeachyear,plusaspecifiedamountrangingfrom$50millionin1998to$100millionin2000.ThedividendlimitationissubjecttoreviewafterthetermofthePowerChoiceagreement.Furthermore,theCompanyforecaststhatearningsforthefive-yeartermofthePowerChoiceagreementwillbesubstan'tiallydepressed,asnon-cashamortizationoftheMRAregulatoryassetisoccurringandtheinterestcostsontheIPPdebtisthegreatest.See"AccountingImplicationsofthePowerChoiceAgreementandMasterRestructuringAgreement."CONSTRUCTIONANDOTHERCAPITALREQUIREMENTS.TheCompany'stotalcapitalrequirementsconsistofamountsfortheCompany'sconstructionprogram(seeItem8.FinancialStatementsandSupplementaryData-"Note9.CommitmentsandContingencies-Cons'truction'rogram,").TheJanuary1998icestormdamagerestorationcostsmayfurtheraddtotheserequirements(seeItem8.FinancialStatementsandSupplementaryData-"Note13.SubsequentEvent"),nucleardecommissioningfundingrequirements(SeeItem8.FinancialStatementsandSupplementaryData-"Note3.-NuclearOperations-NuclearPlantDecommissioning"and-"NRCPolicyStatementandProposal"),workingcapitalneeds,maturingdebtissuesandsinkingfundprovisionsonpreferredstock,aswellasrequirementstocompletetheMRAandaccomplishtherestructuringcontemplatedbythePowerChoiceagreement.Annualexpentiituresfortheyears1995to1997forconstructionandnuclearfuel,includingrelatedAFCandoverheadscapitalized,were$345.8million,$352.1millionand$290.8million,'respectively,andarebudgetedtobeapproximately$358millionfor1998andtorangefrom$279-$352millionforeachofthesubsequentfouryears.Theseestimatesincludeconstructionexpendituresfornon-nucleargenerationof$20millionto$38millionperyear.35 InadditiontotheassumedcostoftheMRArequirements,asdescribedbelow,mandatorydebtandpreferredstockretirementsareexpectedtoaddapproximatelyanother$77milliontothe1998estimateofcapitalrequirements.Theestimateofconstructionadditionsincludedincapital~requirementsfortheperiod1998to2002willbereviewedbymanagement-togiveeffecttothestormrestorationcostsandtheoverallobjectiveoffurtherreducingconstructionspendingwherepossible.Seediscussionin"LiquidityandCapitalResources"sectionbelow,whichdescribeshowmanagementintendstomeetitsfinancingneedsforthisfive-yearperiod.UndertheMRA,theCompanywillpayanaggregateof$3,616millionincash.TheCompanyexpectstoissueseniorunsecureddebttofundthisrequirement,whichisexpectedtoconsistofbothdebtissuedthroughapublicmarketofferinganddebtissuestobankswhichwouldservetoreplaceitsexisting$804millionseniordebtfacility,discussedbelow.TheCompany'spreferredshareholdersgavetheCompanyapprovaltoincreasetheamountofunsecureddebttheCompanymayissueby$5billion.Previously,theCompanywasabletoissue$700millionundertherestrictionsofitsamendedCertificateofIncorporation.ThisauthorizationwillenabletheissuanceofunsecureddebttoconsummatetheMRA.Inaddition,theCompanybelievesthattheabilitytouseunsecuredindebtednesswillincreaseitsflexibilityinplanningandfinancingitsbusinessactivities.LIQUIDITYANDCAPITALRESOURCES.Externalfinancingplansaresubjecttoperiodicrevisionasunderlyingassumptionsarechangedtoreflectdevelopments,marketconditionsand,mostimportantly,conclusionoftheMRAandimplementationofPowerChoice.Theultimateleveloffinancingduringtheperiod1998through2002willbeaffectedby,amongotherthings:thetimingandoutcomeoftheMRAandthecashtaxbenefitsanticipatedbecausetheMRAisexpectedtoresultinanetoperatinglossfor1998incometaxpurposes;theimplementationofthePowerChoiceagreement,levelsofcommondividendpayments,ifany,andpreferreddividendpayments;theresultsoftheauctionoftheCompany'sfossilandhydroassets;theCompany'scompetitivepositionandtheextenttowhichcompetitionpenetratestheCompany'smarkets;uncertainenergydemandduetotheweatherandeconomicconditions;andtheeffectsoftheicestormthatstruckaportionoftheCompany'sserviceterritoryinearly1998.TheproceedsofthesaleofthefossilandhydroassetswillbesubjecttothetermsoftheCompany'smortgageindentureandthenoteindenturethatwillbeenteredintoinconnectionwiththeMRAdebtfinancing.TheCompanycouldalsobeaffectedbytheoutcomeoftheNRC'sconsiderationofnewrulesforadequatefinancialassuranceofnucleardecommissioningobligations.(SeeItem8.NotestoConsolidatedFinancialStatements-"Note3.NuclearOperations-NRCPolicyStatementandProposal"and"Note13.SubsequentEvent").TheCompanyhasan$804millionseniordebtfacilitywithabankgroup,consistingofa$255milliontermloanfacility,a$125millionrevolvingcreditfacilityand$424millionforlettersofcredit.TheletterofcreditfacilityprovidescreditsupportfortheadjustableratepollutioncontrolrevenuebondsissuedthroughtheNYSERDA.Theinterestrateapplicabletotheseniordebtfacilityisvariablebasedoncertainrateoptionsavailableundertheagreementandcurrentlyapproximates7.7%(butiscappedat15%).AsofDecember31,1997,theamountoutstandingundertheseniordebtfacilitywas$529million,consistingof$105millionunderthetermloanfacilityanda$424millionletterofcredit,leavingtheCompanywith$275millionofborrowing36 capabilityunderthefacility.ThefacilityexpiresonJune30,1999(subjecttoearlierterminationiftheCompanyseparatesitsfossil/hydrogenerationbusinessfromitstransmissionanddistributionbusiness,oranyothersignificantrestructuringplan).TheCompanyiscurrentlynegotiatingwiththelenderstoreplacetheseniordebtfacilitywithalargerfacilitytofinanceaportionoftheMRA.Thisfacilityiscollateralizedbyfirstmortgagebondswhichwereissuedonthebasisofadditionalpropertyundertheearningstestrequiredunderthemortgagetrustindenture("FirstMortgageBonds").AsofDecember31,1997,theCompanycouldissueanadditional$1,396millionaggregateprincipalamountofFirstMortgageBondsundertheCompany'smortgagetrustindenture.Thisamountisbaseduponretiredbondswithoutregardtoaninterestcoveragetest.TheCompanyispresentlyprecludedfromissuingFirstMortgageBondsbasedonadditionalproperty.Althoughnoassurancecanbeprovided,theCompanybelievesthattheclosingoftheMRAandimplementationofPowerChoicewillresultinsubstantiallydepressedearningsduringitsfive-yearterm,butwillsubstantiallyimproveoperatingcashflows.Thereisriskthroughouttheelectricindustrythatcreditratingscoulddeclineiftheissueofstrandedcostrecoveryisnotsatisfactorilyresolved.IntheeventtheMRAisnotclosed,andcomparablesolutionsarenot'available,theCompanywillundertakeotheractionsnecessarytoactinthebestinterestsofstockholdersandotherconstituencies.Ordinarily,constructionrelatedshort-termborrowingsarerefundedwithlong-termsecuritiesonaperiodicbasis.ThisapproachgenerallyresultsintheCompanyshowingaworkingcapitaldeficit.ThishasnotbeenthecaseinthelasttwoyearsastheCompany'scashbalancehasincreased,reflectingsuspensionofthecommonstockdividendin1996.WorkingcapitaldeficitsmayalsobearesultoftheseasonalnatureoftheCompany'soperationsaswellastimingdifferencesbetweenthecollectionofcustomerreceivablesandthepaymentoffuelandpurchasedpowercosts.TheCompanybelievesithassufficientborrowingcapacitytofunddeficitsasnecessaryinthenearterm.However,theCompany'sborrowingcapacitytofundsuchdeficitsmaybeaffectedbythefactorsdiscussedaboverelatingtotheCompany'sexternalfinancialplans.Since1995,past-dueaccountsreceivablehaveincreasedsignificantly.Anumberoffactorshavecontributedtotheincrease,includingrisingprices(particularlytoresidentialcustomers).RisingpriceshavebeendrivenbyincreasedpaymentstoIPPsandhightaxesandhavebeenpassedonincustomers'ills.ThestagnanteconomyintheCompany'sserviceterritorysincetheearly1990'shasadverselyaffectedcollectionofpast-dueaccounts.Also,laws,regulationsandregulatorypoliciesimposemorestringentcollectionlimitationsontheCompanythanthoseimposedonbusinessingeneral;forexample,theCompanyfacesmorestringentrequirementstoterminateserviceduringthewinterheatingseason.Theincreaseintheallowancefordoubtfulaccountswasattributabletothereassessmentofthecollectionriskassociatedwithresidentialaccountsreceivableandarrears.TheCompanyhasimplementedanumberofcollectioninitiativesthatareexpectedtoresultinlowerarrearslevelsandpotentiallylowertheallowancefordoubtfulaccounts.TheCompanyhasandwillcontinuetoimplementavarietyofstrategiestoimproveitscollectionofpastdueaccountsandreduceitsbaddebtexpense.37 Theinformationgatheredindevelopingthesestrategiesenabledmanagementtoupdateitsriskassessmentoftheaccountsreceivableportfolio.Basedonthisassessment,managementdeterminedthatthelevelofriskassociatedprimarilywiththeolderaccountshadincreasedandthehistoricallossexperiencenolongerapplied.Accordingly,theCompanydeterminedthatasignificantportionofthepast-dueaccountsreceivable(principallyofresidentialcustomers)mightbeuncollectible,andhadwritten-offasubstantialnumberoftheseaccountsaswellasincreaseditsallowancefordoubtfulaccountsin1996.In1997and1996,theCompanycharged$46.5millionand$127.6million,respectivelytobaddebtexpense.Theallowancefordoubtfulaccountsisbasedonassumptionsandjudgmentsastotheeffectivenessofcollectionefforts.Futureresultswithrespecttocollectingthepast-duereceivablesmayprovetobedifferentfromthoseanticipated.AlthoughtheCompanyhasexperiencedalevelofimprovementincollectionefforts,futureresultsarenecessarilydependentuponthefollowingfactors,including,amongotherthings,theeffectivenessofthestrategiesdiscussedabove,thesupportofregulatorsandlegislatorstoallowutilitiestomovetowardscommercialcollectionpracticesandimprovementintheconditionoftheeconomyintheCompany'sserviceterritory.TheCompanyhasbeenpursuingPowerChoicetoaddresshighpricesthataretheresultoftraditionalpriceregulation,buttheintroductionofcompetitionrequiresthatpoliciesandpracticesthatwerecentraltotraditionalregulation,includingthoseinvolvingcollections,bechangedsoasnottojeopardizethebenefitsofcompetition.NETCASHPROVIDEDBYOPERATINGACTIVITIESdecreased$162.8millionin1997primarilyduetoadecreaseof$105.9millionintheamountofaccountsreceivablesoldundertheaccountsreceivablesalesprogram(whichtheCompanyhasbudgetedtorestorein1998)partiallyoffsetbyanincreaseindeferredtaxesof$53.9million.NETCASHUSEDININVESTINGACTIVITIESincreased$62.4millionin1997primarilyasaresultofanincreaseinothercashinvestmentsof$116.1millionoffsetbyadecreaseintheacquisitionofutilityplantof$62.9million.NETCASHUSEDINFINANCINGACTIVITIESdecreased$106.1million,primarilyduetoanetreductionof$94.7millioninthepaymentsonlong-termdebt.ITEM8.FINANCIALSTATEMENTSANDSUPPLEMENTARYDATAA.FINANCIALSTATEMENTSReportofManagementReportofIndependentAccountantsConsolidatedStatementsofIncomeandRetainedEarningsforeachofthethreeyearsintheperiodendedDecember31,1997.ConsolidatedBalanceSheetsatDecember31,1997and1996.ConsolidatedStatementsofCashFlowsforeachofthethreeyearsintheperiodendedDecember31,1997.NotestoConsolidatedFinancialStatements.38 REPORTOFMANAGEMENTTheconsolidatedfinancialstatementsoftheCompanyanditssubsidiarieswerepreparedbyandaretheresponsibilityofmanagement.FinancialinformationcontainedelsewhereinthisAnnualReportisconsistentwiththatinthefinancialstatements.Tomeetitsresponsibilitieswithrespecttofinancialinformation,managementmaintainsandenforcesasystemofinternalaccountingcontrols,whichisdesignedtoprovidereasonableassurance,onacosteffectivebasis,astotheintegrity,objectivityandreliabilityofthefinancialrecordsandprotectionofassets.Thissystemincludescommunicationthroughwrittenpoliciesandprocedures,anorganizationalstructurethatprovidesforappropriatedivisionofresponsibilityandthetrainingofpersonnel.Thissystemisalsotestedbyacomprehensiveinternalauditprogram.Inaddition,theCompanyhasaCorporatePolicyRegisterandaCodeofBusinessConduct(the"Code")thatsupplyemployeeswithaframeworkdescribinganddefiningtheCompany'soverallapproachtobusinessandrequireallemployeestomaintainthehighestlevelofethicalstandardsaswellasrequiringall'managementemployeestoformallyaffirmtheircompliancewiththeCode.ThefinancialstatementshavebeenauditedbyPriceWaterhouseLLP,theCompany'sindependentaccountants,inaccordancewithGAAP.Inplanningandperformingitsaudit,PriceWaterhouseLLPconsideredtheCompany'sinternalcontrolstructureinordertodetermineauditingproceduresforthepurposeofexpressinganopiniononthefinancialstatements,andnottoprovideassuranceontheinternalcontrolstructure.Theindependentaccountants'uditdoesnotlimitinanywaymanagement'sresponsibilityforthefairpresentationofthefinancialstatementsandallotherinformation,whetherauditedorunaudited,inthisAnnualReport.TheAuditCommitteeoftheBoardofDirectors,consistingoffiveoutsidedirectorswhoarenotemployees,meetsregularlywithmanagement,internalauditorsandPriceWaterhouseLLPtoreviewanddiscussinternalaccountingcontrols,auditexaminationsandfinancialreportingmatters.PriceWaterhouseLLPandtheCompany'sinternalauditorshavefreeaccesstomeetindividuallywiththeAuditCommitteeatanytime.withoutmanagementbeingpresent./s/WilliamE.DavisWilliamE.DavisChairmanoftheBoardandChiefExecutiveOfficerNiagaraMohawkPowerCorporation39 REPORTOFINDEPENDENTACCOUNTANTSTotheStockholdersandBoardofDirectorsofNiagaraMohawkPowerCorporationInouropinion,theaccompanyingconsolidatedbalancesheetsandtherelatedconsolidatedstatementsofincomeandretainedearningsandofcashflowspresentfairly,inallmaterialrespects,thefinancialpositionofNiagaraMohawkPowerCorporationanditssubsidiariesatDecember31,1997and1996,andtheresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,1997,inconformitywithgenerallyacceptedaccountingprinciples.ThesefinancialstatementsaretheresponsibilityoftheCompany'smanagement;ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.Weconductedourauditsofthesestatementsinaccordancewithgenerallyacceptedauditingstandardswhichrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheam'ountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,andevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisfortheopinionexpressedabove.AsdiscussedinNote15totheaccompanyingfinancialstatements,theCompanyhasrestatedits1997financialstatementstoeliminatethe$190millionchargerelatedtothelimitationontherecoverabilityoftheregulatoryassetdescribedinNote2.AsdiscussedinNote2,theCompanybelievesthatitcontinuestomeettherequirementsforapplicationofStatementofFinancialAccountingStandardsNo.71,AccountingforthesectsofCertainTypesofRegulation(SFASNo.71)foritsnucleargeneration,electrictransmissionanddistributionandgasbusinesses.IntheeventthattheCompanyisunabletocompletethetermination,restatementoramendmentoftheindependentpowerproducercontracts,thisconclusioncouldchangein1998andbeyond,resultinginmaterialadverseeffectsontheCompany'sfinancialconditionandresultsofoperations.AsdiscussedinNote2,theCompanydiscontinuedapplicationofSFASNo.71foritsnon-nucleargenerationbusinessin1996.PRICARHOUSELLPSyracuse,NewYorkMarch26,1998,exceptNote2(thirdparagraph)andNote15,astowhichthedateisMay29,199840

NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESCONSOLIDATEDSTATEMENTSOFINCOMEANDRETAINEDEARNINGSInthousandsofdollarsFortheyearendedDecember31,199719961995Operatingrevenues:Electric$3,309,441$3,308,979$3,335,548Gas656,963681,674581,790Operatingexpenses:3966~40439906533~917'38Fuelforelectricg'enerationElectricitypuzchasedGaspurchasedOtheroperationandmaintenanceexpenses179,4551,236,108345,610835,2821,182,892370,0401,137,937276j232928,224817,897181,486165,929Depreciationandamortization(Note1)Othertaxes339,641471,469329,827475,846317,831517,4783~407~5653468~3153g233'04Operatingincome558,839522,338684,034Otherincome(Note1)24,99735,9433,069Incomebeforeinterestcharges583,836558,281687,103Interestcharges(Note1)273,906278,033279,674IncomebeforefederalandforeignincometaxesFederalandforeignincometaxes(Note7)309,930126,595280,248407,429102,494159,393Incomebeforeextraordinaryitem183,335Extraordinaryitemforthediscontinuanceofregulatoryaccountingprinciples,netofincometaxesof$36,273in1996(Note2)177,754'48,036,(67,364)Netincome(Note15)183,335Dividendsonpreferredstock37,397110,39038,281248,03639,596BalanceavailableforcommonstockDividendsoncommonstock145,938145,93872,10972,109208,440161,65046,79041 Retainedearningsatbeginningofyear657,482585,373538,583RetainedearningsatendofyearS803,420S657,482S585,373sssssaasssassssssssssssssssssssssssssssssaasssasaasssssssaassssssAveragenumberofsharesofcommonstockoutstanding(inthousands)144,404144,35014'4,329BasicanddilutedearningsperaverageshareofcommonstockbeforeextraordinaryitemS1.01S0.97S1.44ExtraordinaryitemSS(0.47)SBasicanddilutedearningsperaverageshareofcommonstockS1.01S0.50S1.44DividendsoncommonstockpaidpershareSS-S1.12ssssssaassssssasasssssssasaaaaaasssssssssssssssssssssssssssaaaasa()DenotesdeductionTheaccompanyingnotesareanintegralpartofthesefinancialstatements42 NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESCONSOLIDATEDBALANCESHEETSZnthousandsofdollarsASSETSAtDecember31,19971996Utilityplant(Note1):Electricplant$NuclearFuelGasplantCommonplantConstructionworkinprogressTotalutilityplantLess:AccumulateddepreciationandamortizationNetutilityplantOtherpropertyandinvestments8,752,865577,4091,131,541319,409294'5011,075,8744,207,8306,868,044371,709$8,611,419573,0411,082,298292,591279,99210,839,3413,881,7266,957,615257,145Currentassets:Cash,includingtemporarycashinvestmentsof$315,708and$223,829,respectively378,232325,398Accountsreceivable(lessallowancefordoubtfulaccountsof$62,500and$52,100,respectively)(Notes1and9)492,244Materialsandsupplies,ataveragecost:373,305CoalandoilforproductionofelectricityGasstorageOtherPrepaidtaxesOther27,64239,447118,30815,51820,3091,091,70020,78843,431120,91411,97625,329921,141Regulatoryassets(Note2)RegulatorytaxassetDeferredfinancechargesDeferredenvironmentalrestorationcosts(Note9)UnamortizeddebtexpensePostretirementbenefitsotherthanpensions399,119239,880220,00057,31256,464416,599239,880225,00065,99360,48243 Other204,049206,352Otherassets1,176,8241,214,30675,86477,428$9~584~141$9427~635sssssaaas%$$8%%sSsSOOseeSSSSSsssWSSSSSSSSSSSSSsSSSSSSssSSTheaccompanyingnotesareanintegralpartofthesefinancialstatements44 NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESCONSOLIDATEDBALANCESHEETSInthousandsofdollarsAtDecember31,CAPITALIZATIONANDLIABILITIESCapitalization(Note5):19971996Commonstockholders'quity:Commonstock,issued144,419,351and144,365,214shares,respectivelyS144,419$144,365CapitalstockpremiumandexpenseRetainedearnings1,779,688803,4201,783,725657,4822,727,527Non-redeemablepreferredstock440,0002,585,572440,000MandatorilyredeemablepreferredstockLong-termdebtTotalcapitaliration76,6103,417,3816,661'1886,7303,477,8796,590,181Currentliabilities:Long-termdebtduewithinoneyear(Note5)Sinkingfundrequirementsonredeemablepreferredstock(Note5)AccountspayablePayableonoutstandingbankchecksCustomers'epositsAccruedtaxesAccruedinterestAccruedvacationpayOther67,09510'20263,09523,72018,3729,00562,64336,53264,75648g0848,870271,83032,00815,5054,21663,25236,43652,455555,338532,656Regulatoryliabilities(Note2):DeferredfinancechargesOtherliabilities:239,880239,880Accumulateddeferredincometaxes(Notes1and7)1,387,0321,357,51845 Employeepensionandotherbeneiits(Note8)240,211238,688DeferredpensionsettlementgainUnbilledrevenues(Note1)Other12,43843,281224,443lg907,40519,26949g881174,5621,839,918Commitmentsandcontingencies(Notes2and9)Liabilityforenvironmentalrestoration220,000225,000$9,584,141$9,427,635sssaasasssssssESSmggaaSSSSSSSSRSSSaaaaaSseSSaaSSSSSWSSSSSTheaccompanyingnotesareanintegralpartofthesefinancialstatements46 NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESCONSOLIDATEDSTATEMENTSOFCASHFLOWSINCREASE(DECREASE)INCASHInthousandsofdollarsFortheyearendedDecember31,199719961995Cashflowsfromoperatingactivities:(11,175)4,18076,204Netincome$183,335$Ad)ustmentstoreconcilenetincometonetcashprovidedbyoperatingactivities:Extraordinaryitemfor~thediscontinuanceofregulatoryaccountingprinciples,netofincometaxesDepreciationandamortiration339,641ElectricmarginrecoverableAmortirationofnuclearfuel25,241Provisionfordeferredincometaxes46,994GainonsaleofsubsidiaryUnbilledrevenues(6,600)Netaccountsreceivable(118,939)Materialsandsupplies(1,306)AccountspayableandaccruedexpensesAccruedinterestandtaxesChangesinotherassetsandliabilities67,364329,82738,077317,83158,58834,295(6,870)(15,025)21,471121,1982,2658,224(11,750)35,231114,917(11,257)(71,258)56,74813,663(47,048)(35,440)20,930110,390$248,036Netcashprovidedbyoperatingactivities537,575700,402700,005Cashflowsfrominvestingactivities:Constructionadditions(286,389)Nuclearfuel(4,368)Less:Allowanceforotherfundsusedduringconstruction5,310(296,689)(332,443)(55,360)(13,361)3,6651,063AcquisitionofutilityplantDecreaseinmaterialsandMaterialsandsuppliesrelatedtonconstructionAccountspayableandaccruedexpensesrelatedtoconstructionOtherinvestmentsProceedsfromsaleofsub-sidiary(netofcashsold)Other1,0428,3623,346(2,794)(115,533)8,7612,05654114,600(8,786)(7,112)(115,818)161,08726,234(285,447)(348,384)(344,741)Netcashusedininvestingactivities(393'71)(331~611)(277~004)Cashflowsfromfinancingactivities:Proceedsfromlong-teandebtRedemptionofpreferredstockReductionsoflong-termdebtNetchangeinshort-termdebtDividendspaidOther(8,870)(44,600)(37,397)97105,000(10,400)(244,341)(38,281)(8,846)346,000(10,950)(73,415)(416,750)(201,246)(7,495)47 Netcashusedinfinancingactivities(90,770)(196,868)(363,856)NetincreaseincashCashatbeginningofyear52,834325,398171,92359,145153~47594i330CashatendofyearS378~232S325i398S153i475SSSEsassssssssssspssaaassssssspsasssasssssssssssssssssssssssssEEESupplementaldisclosuresofcashflowinformation:Cashpaidduringtheyearfor:InterestIncometaxesS279,957S286,497S,290,352S82,331S95,632S47,378EEEsssasssssssssssssassEsssssssssEsssssssssssssssssasssaaasassssaTheaccompanyingnotesareanintegralpartofthesefinancialstatements48 NotestoConsolidatedFinancialStatementsNOTE1.SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIESTheCompanyissubjecttoregulationbythe'PSCandFERCwithrespecttoitsratesforserviceunderamethodologywhichestablishespricesbasedontheCompany'scost.TheCompany'saccountingpoliciesconformtoGAAP,includingtheaccountingprinciplesforrate-regulatedentitieswithrespecttotheCompany'snuclear.transmission,distributionandgasoperations(regulatedbusiness),andareinaccordancewiththeaccountingrequirementsandratemakingpracticesoftheregulatoryauthorities.TheCompanydiscontinuedtheapplicationofregulatoryaccountingprinciplestoitsfossilandhydrogenerationoperationsin1996(seeNote2).InordertobeinconformitywithGAAP,managementisrequiredtouseestimatesinthepreparationoftheCompany'sfinancialstatements.PRINCIPLESOFCONSOLIDATION:TheconsolidatedfinancialstatementsincludetheCompanyanditswholly-ownedsubsidiaries.Intercompanybalancesandtransactionshavebeeneliminated.UTILITYPLANT:Thecostofadditionstoutilityplantandreplacementsofretirementunitsof..propertyarecapitalized.Costincludesdirectmaterial,labor,overheadandAFC.Replacementofminoritemsofutilityplantandthecostofcurrentrepairsandmaintenanceischargedtoexpense.Wheneverutilityplantisretired,itsoriginalcost,togetherwiththecostofremoval,lesssalvage,ischargedtoaccumulateddepreciation.ThediscontinuationofSFASNo.71didnotaffectthecarryingvalueoftheCompany'sutilityplant.ALLOWANCEFORFUNDSUSEDDURINGCONSTRUCTION:TheCompanycapitalizesAFCinamountsequivalenttothecostoffundsdevotedtoplantunderconstructionforitsregulatedbusiness.AFCratesaredeterminedinaccordancewithFERCandPSCregulations.TheAFCrateineffectduring1997was9.28%.AFCissegregatedintoitstwocomponents,borrowedfundsandotherfunds,andisreflectedinthe"Interestcharges"andthe"Otherincome"sections,respectively,oftheConsolidatedStatementsofIncome.TheamountofAFCcreditsrecordedineachofthethreeyearsendedDecember31,inthousandsofdollars,wasasfollows:199719961995OtherincomeInterestcharges$5,3104,396$3,6653,690Sl,0637,987AsaresultofthediscontinuedapplicationofSFASNo.71tothefossilandhydrooperations,theCompanycapitalizesinterestcostassociatedwiththeconstructionoffossil/hydroassets.DEPRECIATION,AMORTIZATIONANDNUCLEARGENERATINGPLANTDECOMMISSIONINGCOSTS:Foraccountingandregulatorypurposes,depreciationiscomputedonthestraight-linebasisusingthelicenselivesfornuclearandhydroclassesofdepreciablepropertyandtheaverageservicelivesforallotherclasses.Thepercentagerelationshipbetweenthetotalprovisionfordepreciationandaveragedepreciablepropertywas49 approximately3%fortheyears1995through1997.TheCompanyperformsdepreciationstudiestodetermineservicelivesofclassesofpropertyandadjuststhedepreciationrateswhennecessary.Estimateddecommissioningcosts(coststoremoveanuclearplantfromserviceinthefuture)for'heCompany'sUnit1anditsshareofUnit2arebeingaccruedovertheservicelivesoftheunits,recoveredinratesthroughanannualallowanceandcurrentlychargedtooperationsthroughdepreciation.TheCompanyexpectstocommencedecommissioningofbothunitsshortlyaftercessationofoperationsatUnit2(currentlyplannedfor2026),usingamethodwhichremovesordecontaminatestheUnitscomponentspromptlyatthattime.SeeNote3-"NuclearPlantDecommissioning."TheFASBissuedanexposuredraftinFebruary1996entitled"AccountingforCertainLiabilitiesRelatedtoClosureorRemovalCostsofLong-LivedAssets."Thescopeoftheprojectincludescertainplantdecommissioningcosts,includingthoseforfossil,hydroandnuclearplants.Ifapproved,aliabilitywouldberecognized,withacorrespondingplantasset,wheneveralegalorconstructiveobligationexiststoperformdismantlementorremovalactivities.TheCompanycurrentlyrecognizestheliabilityfornucleardecommissioningovertheservicelifeoftheplantasanincreasetoaccumulateddepreciationanddoesnot'recognizetheclosureorremovalobligationassociatedwithitsfossilandhydroplants.TheCompany'sPowerChoiceagreementprovidesfortherecoveryofnucleardecommissioningcosts.AsdiscussedinNote2,theCompanyintendstosellitsfossilandhydrogeneratingassetsthroughanauctionprocess.Totheextenttheassetsaresold,theeffectofthisexposuredraftontheCompanyshouldbemitigated.However,theCompanycannotpredicttheresultsoftheauction.Theadoptionoftheproposedstandardisnotexpectedtoimpactthecashflowfromtheseassets.TheFASBcontinuestodiscusstheissuesaddressedintheexposuredraft,aswellasthetimingofitsimplementation.Amortizationofthecostofnuclearfuelisdeterminedonthebasisofthequantityofheatproducedforthegenerationofelectricenergy.Thecostofdisposalofnuclearfuel,whichpresentlyis$.001perKWhofnetgenerationavailableforsale,isbaseduponacontractwiththeDOE.Thesecostsarechargedtooperatingexpenseandrecoveredfromcustomersthroughbaseratesorthroughthefueladjustmentclause.REVENUES:Revenuesarebasedoncyclebillingsrenderedtocertaincustomersmonthlyandothersbi-monthlyforenergyconsumedandnotbilledattheendofthefiscalyear.AtDecember31,1997and1996,approximately$8.6millionand$11.1million,respectively,ofunbilledelectricrevenuesremainedunrecognizedinresultsofoperations,areincludedin"Otherliabilities."UndertheCompany'sPowerChoiceagreement,theamountofunrecognizedelectricunbilledrevenueasofthePowerChoiceimplementationdatewillbenettedagainstcertainotherregulatoryassetsandliabilities.Thereafter,changesinelectricunbilledrevenueswillnolongerbedeferred.In1995,theCompanyused$71.5millionofelectricunbilledrevenuestoreducethe1995revenuerequirement.AtDecember31,1997and1996,$34.7millionand$38.8million,respectively,ofunbilledgasrevenuesremainunrecognizedinresultsofoperationsandmaybeusedtoreducefuturegasrevenuerequirements.TheunbilledrevenuesincludedinaccountsreceivableatDecember31,1997and1996,were$211.9millionand$218.5million,respectively.50 TheCompany'stariffsincludeelectricandgasadjustmentclausesunderwhichenergyandpurchasedgascosts,respectively,aboveorbelowthelevelsallowedinapprovedrateschedules,arebilledorcreditedtocustomers.TheCompany,asauthorizedbythePSC,chargesoperationsforenergyandpurchasedgascostincreasesintheperiodofrecovery.ThePSChasperiodicallyauthorizedtheCompanytomakechangesinthelevelofallowedenergyandpurchasedgascostsincludedinapprovedrateschedules.Asaresultofsuchperiodicchanges,aportionofenergycostsdeferredatthetimeofchangewouldnotberecoveredormaybeoverrecoveredunderthenormaloperationoftheelectricandgasadjustmentclauses.However,theCompanyhastodatebeenpermittedtodeferandbillorcreditsuchportionstocustomers,throughtheelectricandgasadjustmentclauses,overaspecifiedperiodoftimefromtheeffectivedateofeachchange.TheCompany'selectricFACprovidesforpartialpass-throughoffuelandpurchasedpowercostfluctuationsfromamountsforecast,withtheCompanyabsorbingaportionofincreasesorretainingaportionofdecreasesuptoamaximumof$15millionperrateyear.Thereafter,100%ofthefluctuationispassedontoratepayers.TheCompanyalsoshareswithratepayersfluctuationsfromamountsforecastfornetresalemarginandtransmissionbenefits,withtheCompanyretaining/absorbing40%andpassing60%throughtoratepayers.Theamountsretainedorabsorbedin1995through1997werenotmaterial.UnderthePowerChoice.agreement,theFACwillbediscontinued.InDecember1996,theCompany,MultipleIntervenorsandthePSCstaffreachedathreeyeargassettlementthatwasconditionallyapprovedbythePSC.Theagreementeliminatedthegasadjustmentclauseandestablishedagascommoditycostadjustmentclause("CCAC").TheCompany'sgasCCACprovidesforthecollectionorpassbackofcertainincreasesordecreasesfromthebasecommoditycostofgas.ThemaximumannualriskorbenefittotheCompanyis$2.25million.Allsavingsandexcesscostsbeyondthatamountwillflowtoratepayers.Foradiscussionoftheratemakingassociatedwithnon-commoditygascosts,seeItem7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"OtherFederalandStateRegulatoryInitiatives-Multi-YearGasRateSettlementAgreement."FEDERALINCOMETAXES:AsdirectedbythePSC,theCompanydefersanyamountspayablepursuanttothealternativeminimumtaxrules.Deferredinvestmenttaxcreditsareamortizedovertheusefullifeoftheunderlyingproperty.STATEMENTOFCASHFLOWS:TheCompanyconsidersallhighlyliquidinvestments,purchasedwitharemainingmaturityofthreemonthsorless,tobecashequivalents.EARNINGSPERSHARE:Basicearningspershare("EPS")iscomputedbasedontheweightedaveragenumberofcommonsharesoutstandingfortheperiod.ThenumberofoptionsoutstandingatDecember31,1997,1996and1995thatcouldpotentiallydilutebasicEPS,(butareconsideredantidilutiveforeachperiodbecausetheoptionsexercisepricewasgreaterthantheaveragemarketpriceofcommonshares),isimmaterial.Therefore,thecalculationofbothbasicanddilutiveEPSarethesameforeachperiod.51 RECLASSIFICATIONS:Certainamountsfromprioryearshavebeen'reclassifiedontheaccompanyingConsolidatedFinancialStatementstoconformwiththe1997presentation.COMPREHENSIVEINCOME:InJune1997,FASBissuedSFASNo.130.SFASNo.130establishesstandardsforreportingcomprehensiveincome.Comprehensiveincomeisthechangeintheequityofacompany,notincludingthosechangesthatresult&omshareholdertransactions.Allcomponentsofcomprehensiveincomearerequiredtobereportedinanewfinancialstatementthatisdisplayedwithequalprominenceasexistingfinancialstatements.TheCompanywillberequiredtoadoptSFASNo.130onJanuary1,1998.TheCompanydoesnotexpectthatadoptionofSFASNo.130willhaveasignificantimpactonitsreportinganddisclosurerequirements.SEGMENTDISCLOSURES:AlsoinJune1997,FASBissuedSFASNo.131.SFASNo.131establishesstandardsforadditionaldisclosureaboutoperatingsegmentsforinterimandannualfinancialstatements.Morespecifically,itrequiresfinancialinformationtobedisclosedforsegmentswhoseoperatingresultsarereviewedbythechiefoperatingofficerfordecisionsonresourceallocation.Italsorequiresrelateddisclosuresaboutproductandservices,geographicareasandmajorcustomers.TheCompanywillberequiredtoadoptSFASNo.131forthefiscalyearendingDecember31,1998.TheCompanydoesnotexpectthattheadoptionofSFASNo.131willhaveasignificantimpactonitsreportinganddisclosurerequirements.PENSIONANDOTHERPOSTRETIREMENTBENEFITS:InFebruary1998,FASBissuedSFASNo.132.SFASNo.132revisesemployers'isclosuresaboutpensionandotherpostretirementbenefitplans.Itdoesnotchangethemeasurementorrecognitionofthoseplans.Itstandardizesthedisclosurerequirementsforpensionsandotherpostretirementbenefitstotheextentpracticableandrequiresadditionalinformationonchangesinthebenefitobligationsandfairvaluesofplanassets.TheCompanywillberequiredtoadoptSFASNo.132forthefiscalyearendingDecember31,1998.TheCompanydoesnotexpecttheadoptionofSFASNo.132willhaveasignificantimpactonitsreportinganddisclosurerequirements.NOTE2.RATEANDREGULATORYISSUESANDCONTINGENCIESTheCompany'sfinancialstatementsconformtoGAAP,includingtheaccountingprinciplesforrate-regulatedentitieswithrespecttoitsregulatedoperations.Substantively,theseprinciplespermitapublicutility,regulatedonacost-of-servicebasis,todefercertaincostswhichwouldotherwisebechargedtoexpense,whenauthorizedtodosobytheregulator.Thesedeferredcostsareknownasregulatoryassets,whichinthecaseoftheCompanyareapproximately$937million,netofapproximately$240millionofregulatoryliabilitiesatDecember31,1997.Theseregulatoryassetsareprobableofrecovery.Theportionofthe$937millionwhichhasbeenallocatedtothenucleargenerationandelectrictransmissionanddistributionbusinessisapproximately$810million,whichisnetofapproximately$240millionofregulat'oryliabilities.Regulatoryassetsallocatedtotherate-regulatedgasdistributionbusinessare$127million.Generally,regulatoryassetsandliabilitieswereallocatedtotheportionofthebusinessthatincurredtheunderlyingtransactionthatresultedintherecognitionoftheregulatoryassetorliability.Theallocationmethodsusedbetweenelectricandgasareconsistentwiththoseusedinpriorregulatoryproceedings.52 TheCompanyconcludedasofDecember31,1996thatthetermination,restatementoramendmentofIPPcontractsandimplementationofPowerChoicewastheprobableoutcomeofnegotiationsthathadtakenplacesincethePowerChoiceannouncement.UnderPowerChoice,theseparatednon-nucleargener'atio'nbusinesswouldnolongerberate-regulatedonacost-of-servicebasisand,accordingly,regulatoryassetsrelatedtothenon-nuclearpowergenerationbusiness,amountingtoapproximately$103.6million($67.4millionaftertaxor47centspershare)waschargedagainst1996incomeasanextraordinarynon-cashcharge.ThePSCinitswrittenorderissuedMarch20,1998approvingPowerChoice,determinedtolimittheestimatedvalueoftheMRAregulatoryassetthatcanberecoveredfromcustomerstoapproximately$4,000million.TheultimateamountoftheregulatoryassettobeestablishedmayvarybasedoncertaineventsrelatedtotheclosingoftheMRA.TheestimatedvalueoftheMRAregulatoryassetincludestheissuanceof42.9millionsharesofcommonstock,whichthePSCindeterminingtherecoverableamountofsuchasset,valuedat$8pershare.BecausethevalueoftheconsiderationtobepaidtotheIPPPartiescanonlybedeterminedattheMRAclosing,thevalueofthelimitationontherecoverabilityoftheMRAregulatoryassetisexpectedtoberecordedasachargetoexpenseinthesecondquarterof1998upontheclosingoftheMRA.Thechargetoexpensewillbedeterminedasthedifferencebetween$8pershareandtheCompany'sclosingcommonstockpriceonthedatetheMRAcloses,multipliedby42.9millionshares.UsingtheCompany'scommonstockpriceonMarch26,1998of$127/16pershare,thechargetoexpensewouldbeapproximately$190million(85centspershare).UnderPowerChoice,theCompany'sremainingelectricbusiness(nucleargenerationandelectrictransmissionanddistributionbusiness)willcontinuetoberate-regulatedonacost-of-servicebasisand,accordingly,theCompanycontinuestoapplySFASNo.71tothesebusinesses.Also,theCompany'sIPPcontracts,includingthoserestructuredundertheMRAandthosenotsorestructuredwillcontinuetobetheobligationsoftheregulatedbusiness.TheEITFoftheFASBreachedaconsensusonIssueNo.97-4"DeregulationofthePricingofElectricity-IssuesRelatedtotheApplicationofSFASNo.71andSFASNo.101"inJuly1997.Asdiscussedpreviously,theCompanydiscontinuedtheapplicationofSFASNo.71andappliedSFASNo.101withrespecttothefossilandhydrogenerationbusinessatDecember31,1996,inamannerconsistentwiththeEITFconsensus.Inaddition,EITF97-4doesnotrequiretheCompanytoearnareturnonregulatoryassetsthatarisefromaderegulatingtransitionplaninassessingtheapplicabilityofSFASNo.71.IntheeventtheMRAandPowerChoiceareimplemented,theCompanybelievesthattheregulatedcashflowstobederivedfrompricesitwillchargeforelectricse'rviceover10years,includingtheCTC,assumingnounforeseenreductionindemandorbypassoftheCTCorexitfees,willbesufficienttorecovertheMRAregulatoryassetandtoproviderecoveryofandareturnontheremainderofitsassets,asappropriate.IntheeventtheCompanycouldnolongerapplySFASNo.71inthefuture,itwouldberequiredtorecordanafter-taxnon-cashchargeagainstincomeforanyremainingunamortizedregulatoryassetsandliabilities.DependingonwhenSFASNo.71wasrequiredtobediscontinued,suchchargewouldlikelybematerialtotheCompany'sreportedfinancialconditionandresultsofoperationsandtheCompany'sabilitytopaydividends.53 ThePowerChoiceagreement,whilehavingtheeffectofsubstantiallydepressingearningsduringitsfive-yearterm,willsubstantiallyimproveoperatingcashflows.-WiththeimplementationofPowerChoice,specificallytheseparationofnon-nucleargeneration'sanentitythatwouldnolongerbecost-of-serviceregulated,theCompanyisrequiredtoassessthecarryingamountsofitslong-livedassetsinaccordancewithSFASNo.121.SFASNo.121requireslong-livedassetsandcertainidentifiableintangiblesheldandusedbyanentitytobereviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofanassetmaynotberecoverableorwhenassetsaretobedisposedof.Inperformingthereviewforrecoverability,theCompanyisrequiredtoestimatefutureundiscountedcashflowsexpectedtoresultfromtheuseoftheassetand/oritsdisposition.TheCompanyhasdeterminedthatthereisnoimpairmentofitsfossilandhydrogeneratingassets.Totheextenttheproceedsresultingfromthesaleofthefossilandhydroassetsarenotsufficienttoavoidaloss,theCompanywouldbeabletorecoversuchlossthroughtheCTC.ThePowerChoiceagreementprovidesfordeferralandfuturerecoveryoflosses,ifany,resultingfromthesaleofthenon-nucleargeneratingassets.TheCompanybelievesthatitwillbepermittedtorecordaregulatoryassetforanysuchlossinaccordancewithEITF97-4.TheCompany'sfossilandhydrogenerationplantassetshadanetbookvalueofapproximately$1.1billionatDecember31,1997.AsdescribedinItem7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"MasterRestructuringAgreementandthePowerChoiceAgreement,"theconclusionofthetermination,restatementoramendmentofIPPcontracts,andclosingofthefinancingnecessarytoimplementsuchtermination,restatementoramendment,aswellasimplementationofPowerChoice,issubjecttoanumberofcontingencies.IntheeventtheCompanyisunabletosuccessfullybringtheseeventstoconclusion,itislikelythatapplicationofSFASNo.71wouldbediscontinued.Theresultingnon-cashafter-taxchargesagainstincome,basedonregulatoryassetsandliabilitiesassociatedwiththenucleargenerationandelectrictransmissionanddistributionbusinessesasofDecember31,1997,wouldbeapproximately$526.5millionor$3.65pershare.Variousrequirementsunderapplicablelawandregulationsandundercorporateinstruments,includingthosewithrespecttoissuanceofdebtandequitysecurities,paymentofcommonandpreferreddividendsandcertaintypesoftransfersofassetscouldbeadverselyimpactedbyanysuchwrite-downs.TheCompanyhasrecordedthefollowingregulatoryassetsonitsConsolidatedBalanceSheetsreflectingtherateactionsofitsregulators:REGULATORYTAXASSETrepresentstheexpectedfuturerecoveryfromratepayersofthetaxconsequencesoftemporarydifferencesbetweentherecordedbookbasesandthetaxbasesofassetsandliabilities.Thisamountisprimarilytimingdifferencesrelatedtodepreciation.Theseamountsareamortizedandrecoveredastherelatedtemporarydifferencesreverse.InJanuary1993,thePSCissuedaStatementofInterimPolicyonAccountingandRatemakingProceduresthatrequiredadoptionofSFASNo.109onarevenue-neutralbasis.DEFERREDFINANCECHARGESrepresentthedeferralofthediscontinuedportionofAFCrelatedtoCWIPatUnit2whichwasincludedinratebase.In1985,pursuanttoPSCauthorization,theCompanydiscontinuedaccruingAFConCWIPforwhichacashreturnwas54 beingallowed.Thisamount,whichwasaccumulatedindeferreddebitandcreditaccountsuptothecommercialoperationdateofUnit2,awaitsfuturedispositionbythePSC.AportionofthedeferredcreditcouldbeutilizedtoreducefuturerevenuerequirementsoveraperiodshorterthanthelifeofUnit2,withalikeamountofdeferreddebitamortizedandrecoveredinratesovertheremaininglifeofUnit2.Power'Choiceprovidesfornetting,andtherebyeliminationofthedebitandcreditbalancesofdeferredfinancecharges.DEFERREDENVIRONMENTALRESTORATIONCOSTSrepresenttheCompany'sshareoftheestimatedcoststoinvestigateandperformcertainremediationactivitiesatbothCompany-ownedsitesandnon-ownedsiteswithwhichitmaybeassociated.TheCompanyhasrecordedaregulatoryassetrepresentingtheremediationobligationstoberecoveredfromratepayers.PowerChoiceandtheCompany'sgassettlementprovidefortherecoveryofthesecostsoverthesettlementperiods.TheCompanybelievesfuturecosts,beyondthesettlementperiods,willcontinuetoberecoveredinrates.SeeNote9-"EnvironmentalContingencies."UNAMORTIZEDDEBTEXPENSErepresentsthecoststoissueandredeemcertainlong-termdebtsecuritieswhichwereretiredpriortomaturity.TheseamountsareamortizedasinterestexpenseratablyoverthelivesoftherelatedissuesinaccordancewithPSCdirectives.POSTRETIREMENTBENEFITSOTHERTHANPENSIONSrepresenttheexcessofsuchcostsrecognizedinaccordancewithSFASNo.106overtheamountreceivedinrates.InaccordancewiththePSCpolicystatement,postretirementbenefitcostsotherthanpensionsarebeingphased-intoratesoverafive-yearperiodandamountsdeferredwillbeamortizedandrecoveredoveraperiodnottoexceed20years.SubstantiallyalloftheCompany'sregulatoryassetsdescribedabovearebeingamortizedtoexpenseandrecoveredinratesoverperiodsapprovedintheCompany'selectricandgasratecases,respectively.NOTE3~NUCLEAROPERATIONSNUCLEARPLANTDECOMMISSIONING:TheCompany'ssitespecificcostestimatesfordecommissioningUnit1anditsownershipinterestinUnit2atDecember31,1997areasfollows:SiteStudy(year)EndofPlantLite(year)RadioactiveDismantlementtoBegin(year)MethodofDecommissioningUnit1199520092026DelayedDismantlementUnit219952026,2028ImmediateDismantlementCostofDecommissioning(inJanuary1998dollars)InmillionsofdollarsRadioactiveComponentsNon-radioactiveComponentsFuelDryStorage/ContinuingCare$48111778$676$20148$29255 TheCompanyestimatesthatbythetimedecommissioningiscompleted,theabovecostswillultimatelyamountto$1.7billionand$.9billionforUnit1andUnit2,respectively,usingapproximately3.5%asanannualinflationfactor.Inadditiontothecostsmentionedabove,theCompanyexpectstoincurpost-shutdowncostsforplantrampdown,insuranceandpropertytaxes.In1998dollars,thesecostsareexpectedtoamountto$119millionand$63millionforUnit1andtheCompany'sshareofUnit2,respectively.Theamountswillescalateto$210millionand$190millionforUnit1andtheCompany'sshareofUnit2,respectively,bythetimedecommissioningiscompleted.In1997,theCompanymadeadjustmentstothecashflowassumptionsatUnit1forfueldrystorage,radioactivecostcomponents,propertytaxandinsurance,tomoreaccuratelyreflecttheestimatedcostofeachcostcomponent.Therevisionsreducedthetotalcostestimatebyapproximately$10million(in1998dollars).NRCregulationsrequireownersofnuclearpowerplantstoplacefundsintoanexternaltrusttoprovideforthecostofdecommissioningradioactiveportionsofnuclearfacilitiesandestablishminimumamountsthatmustbeavailableinsuchatrustatthetimeofdecommissioning.TheannualallowanceforUnit1andtheCompany'sshareofUnit2wasapproximately$23.7million,..foreachofthethreeyearsendedDecember31,1997.Theamountwasbaseduponthe1993NRCminimumdecommissioningcostrequirementsof$437millionand$198million(in1998dollars)forUnit1andtheCompany'sshareofUnit2,respectively.InOpinionNo.95-21,theCompanywasauthorized,untilthePSCordersotherwise,tocontinuetofundtotheNRCminimumrequirements.PowerChoicepermitsraterecoveryforallradioactiveandnon-radioactivecostcomponentsforbothunits,includingpost-shutdowncosts,basedupontheamountsestimatedinthe1995sitespecificstudiesdescribedabove,whicharehigherthantheNRCminimum.Thereisnoassurancethatthedecommissioningallowancerecoveredinrateswillultimatelyaggregateasufficientamounttodecommissiontheunits.TheCompanybelievesthatifdecommissioningcostsarehigherthancurrentlyestimated,thecostswouldultimatelybeincludedintherateprocess.Decommissioningcostsrecoveredinratesarereflectedin"Accumulateddepreciationand.amortization"onthebalancesheetandamountto$266.8millionand$217.7millionatDecember31,1997and1996,respectivelyforbothunits.AdditionallyatDecember31,1997,thefairvalueoffundsaccumulatedintheCompany'sexternaltrustswere$164.7millionforUnit1and$51.0millionforitsshareofUnit2.Thetrustsareincludedin"Otherpropertyandinvestments."Earningsontheexternaltrustaggregated$40.3millionthroughDecember31,1997and,becausetheearningsareavailabletofunddecommissioning,havealsobeenincludedin"Accumulateddepreciationandamortization."Amountsrecoveredfornon-radioactivedismantlementareaccumulatedinaninternalreservefundwhichhasanaccumulatedbalanceof$45.2millionatDecember31,1997.NRCPOLICYSTATEMENTANDPROPOSAL.TheNRCissuedapolicystatementontheRestructuringandEconomicDeregulationoftheElectricUtilityIndustry(the"PolicyStatement")in1997.ThePolicyStatementaddressestheNRC'sconcernsabouttheadequacyofdecommissioningfundsandaboutthepotentialimpactonoperationalsafety.CurrentNRC56 regulationsallowautilitytosetasidedecommissioningfundsannuallyovertheestimatedlifeofaplant.ThePolicyStatementdeclarestheNRCwill:Continuetoconductreviewsoffinancialqualifications,decommissioningfundingandantitrustrequirementsofnuclearpowerplants;Establishandmaintainworkingrelationshipswithstateandfederalrateregulators;Identifyallnuclearpowerplantowners,indirectaswellasdirect;andRe-evaluatetheadequacyofcurrentregulationsinlightofeconomicandotherchangesresultingfromratederegulation.InadditiontotheabovePolicyStatement,theNRCisproposingtoamenditsregulationsondecommissioningfundingtoreflectconditionsexpectedfromderegulationoftheelectricpowerindustry.Theamendedrulewould:Revisethedefinitionofan"electricutility"toreflectchangescausedbyrestructuringwithintheindustry.Definea"Federallicensee"asanylicenseewhichhasthefullfaithandcreditbackingoftheUnitedStatesgovernment.Onlysuchlicenseescouldusestatementsofintenttomeetdecommissioningfinancialassurancerequirementsforpowerreactors.RequirenuclearpowerplantlicenseestoreporttotheNRConthestatusoftheirdecommissioningfundsatleastonceeverythreeyearsandannuallywithinfiveyearsoftheplannedendofoperation.NRC'spresentrulecontainsnosuchrequirementbecauseStateandFederalrate-regulatingbodiesactivelymonitorthesefunds.Aderegulatednuclearutilitywouldhavenosuchmonitoring.Permitnuclearlicenseestotakecreditonearningsforprepaiddecommissioningtrustfundsandexternalsinkingfundsfromthetimethefundsaresetasidethroughtheendofthedecommissioningperiod.Thepresentruledoesnotpermitsuchcreditbecauseitassumedthatinflationandtaxeswoulderodeanyinvestmentreturn.NRChasdecided,however,thatthispositionisnotborneoutbyhistoricalperformanceofinflation-adjustedfundsinvestedinU.STreasuryinstruments.TheCompanyisunabletopredicttheoutcomeofthismatter.PSCSTAFF'STENTATIVECONCLUSIONSONTHEFUTUREOFNUCLEARGENERATION:OnAugust27,1997,thePSCrequestedcommentsonitsstaffstentativeconclusionsabouthownucleargenerationandfossilgenerationshouldbetreatedafterdecisions57 aremadeontheindividualelectricrestructuringagreementscurrentlypendingbeforethePSC.ThePSCstaffconcludedthatbeyondthetransitionperiod(theperiodcoveredbythevariousNewYorkutilityrestructuringagreements,includingPowerChoice),nucleargenerationshouldoperateonacompetitivebasis.Inaddition,thePSCstaffconcludedthatasaleofgenerationplantstothirdpartiesisthepreferredmeansofdeterminingthefairmarket-valueofgenerationplantsandoffersthegreatestpotentialforthemitigationofstrandedcosts.ThePSCstaffalsoconcludedthatrecoveryofsunkcosts,includingpostshutdowncosts,wouldbesubjecttoreviewbythePSCandthisprocessshouldtakeintoaccountmitigationmeasurestakenbytheutility,includingthestepsithastakentoencouragecompetitioninitsservicearea.InOctober1997,themajorityofutilitieswithinterestsinnuclearpowerplants,includingtheCompany,requestedthatthePSCreconsideritsstaffsnuclearproposal.Inaddition,theutilitiesraisedthefollowingissues:impedimentstonuclearplantsoperatinginacompetitivemode;impedimentstothesaleofplants;responsibilityfordecommissioninganddisposalofspentfuel;safetyandhealthconcerns;andenvironmentalandfueldiversitybenefits.Inlightofalloftheseissues,theutilitiesrecommendedthatamoreformalprocessbedevelopedtoaddressthoseissues.Thethreeinvestor-ownedutilities,RochesterGasandElectricCorporation,ConsolidatedEdison'ompanyofNewYork,Inc.andtheCompany,whicharecurrentlypursuingformationofanuclearoperatingcompanyinNewYorkState,alsofiledaresponsewiththePSCinOctober1997.Theresponsestatedthataforceddivestitureofthenuclearplantswouldadduncertaintytodevelopingastatewideapproachtooperatingtheplantsandrequestedthatsuchaforceddivestitureproposalberescinded.Theresponsealsostatedthatimplementationofaconsolidatedsix-unitoperationwouldcontributetothemitigationofunrecoverednuclearcosts.NYPA,whichisalsopursuingformationofthenuclearoperatingcompany,submitteditsowncommentswhichweresimilartothecommentsofthethreeutilities.PowerChoicecontemplatesthattheCompany'snuclearplantswillremainpartoftheCompany'sregulatedbusinessandthattheCompanywillcontinueeffortstopursueastatewidesolutionsuchastheNewYorkNuclearOperatingCompany.Thesettlementstipulatesthatabsentastatewidesolution,theCompanywillfileadetailedplanforanalyzingproposedsolutionsforitsnuclearassets,includingthefeasibilityofanauction,transferand/ordivestiturewithin24monthsofPowerChoiceapproval.AtDecember31,1997,thenetbookvalueoftheCompany'snuclearassetswasapproximately$1.5billion,excludingthereservefordecommissioning.NUCLEARLIABILITYINSURANCE:TheAtomicEnergyActof1954,asamended,requiresthepurchaseofnuclearliabilityinsurancefromtheNuclearInsurancePoolsinamountsasdeterminedbytheNRC.Atthepresenttime,theCompanymaintainstherequired$200millionofnuclearliabilityinsurance.Withrespecttoanuclearincidentatalicensedreactor,thestatutorylimitfortheprotectionofthepublicunderthePrice-AndersonAmendmentsActof1988whichisinexcessofthe$200millionofnuclearliabilityinsurance,iscurrently$8.2billionwithoutthe5%surchargediscussedbelow.Thislimitwouldbefundedbyassessmentsofupto$75.5millionforeachofthe110presentlylicensednuclearreactorsintheUnitedStates,payableataratenottoexceed58

$10millionperreactorperyear.Suchassessmentsaresubjecttoperiodicinflationindexingandtoa5%surchargeiffundsproveinsufficienttopayclaims.Withthe5%surchargeincluded,thestatutorylimitis$8.6billion.TheCompany'sinterestinUnits1and2couldexposeittoamaximumpotentialloss,foreachaccident,of$111.8million(with5%assessment)throughassessmentsof$14.1millionperyearintheeventofaseriousnuclearaccidentatitsownoranotherlicensedU.S.commercialnuclearreactor.Theamendmentsalsoprovide,amongotherthings,thatinsuranceandindemnitywillcoverprecautionaryevacuations,whetherornotanuclearincidentactuallyoccurs.NUCLEARPROPERTYINSURANCE:TheNineMilePointNuclearSitehas$500millionprimarynuclearpropertyinsurancewiththeNuclearInsurancePools(ANI/MRP).Inaddition,thereis$2.25billioninexcessofthe$500millionprimarynuclearinsurancewithNuclearElectricInsuranceLimited("NEIL").Thetotalnuclearpropertyinsuranceis$2.75billion.NEILalsoprovidesinsurancecoverageagainsttheextraexpenseincurredinpurchasingreplacementpowerduringprolongedaccidentaloutages.Theinsuranceprovidescoverageforoutagesfor156weeks,aftera21-weekwaitingperiod.NEILinsuranceissubjecttoretrospectivepremiumadjustmentunderwhichtheCompanycouldbeassesseduptoapproximately$11.3millionperloss.LOWLEVELRADIOACTIVEWASTE:TheCompanycurrentlyusestheBarnwell,SouthCarolinawastedisposalfacilityforlowlevelradioactivewaste;however,continuedaccesstoBarnwellisnotassuredandtheCompanyhasimplementedalowlevelradioactivewastemanagementprogramsothatUnit1andUnit2arepreparedtoproperlyhandleinterimon-sitestorageoflowlevelradioactivewasteforatleasta10yearperiod.UndertheFederalLowLevelWastePolicyAmendmentActof1985,NewYorkStatewasrequiredbyJanuary1,1993tohavearrangedforthedisposalofalllowlevelradioactivewastewithinthestateorinthealternative,contractedforthedisposalatafacilityoutsidethestate.Todate,NewYorkStatehasmadenofundingavailabletosupportsitingforadisposalfacility.NUCLEARFUELDISPOSALCOST:InJanuary1983,theNuclearWastePolicyActof1982(the"NuclearWasteAct")establishedacostof$.001perKWhofnetgenerationforcurrentdisposalofnuclearfuelandprovidesforadeterminationoftheCompany'sliabilitytotheDOEforthedisposalofnuclearfuelirradiatedpriorto1983.TheNuclearWasteActalsoprovidesthreepaymentoptionsforliquidatingsuchliabilityandtheCompanyhaselectedtodelaypayment,withinterest,untiltheyearinwhichtheCompanyinitiallyplanstoshipirradiatedfueltoanapprovedDOEdisposalfacility.AsofDecember31,1997,theCompanyhasrecordedaliabilityof$114.3millionforthedisposalofnuclearfuelirradiatedpriorto1983.ProgressindevelopingtheDOEfacilityhasbeenslowanditisanticipatedthattheDOEfacilitywillnotbereadytoacceptdeliveriesuntilatleast2010.However,inJuly1996,theUnitedStatesCircuitCourtofAppealsfortheDistrictofColumbiaruledthattheDOEmustbeginacceptingspentfuelfromthenuclearindustrybyJanuary31,1998eventhoughapermanentstoragesitewillnotbereadybythen.TheDOEdidnotappealthisdecision.OnJanuary31,1997,theCompanyjoinedanumberofotherutilities,states,stateagenciesandregulatorycommissionsinfilingasuitintheU.S.CourtofAppealsfortheDistrictofColumbiaagainsttheDOE.Thesuit59 requestedthecourttosuspendtheutilitiespaymentsintotheNuclearWasteFundandtoplacefuturepaymentsintoanescrowaccountuntiltheDOEfulfillsitsobligationtoacceptspentfuel.OnJune3,1997,theDOEnotifiedutilitiesthatitlikelywillnotmeetitsJanuary-1,1998deadlineandthatthedelaywasunavoidablepursuanttothetermsofthestandardontractwithDOEforfueldisposal.DOEalsoindicateditwasnotobligatedtoprovideafina..cialremedyforsuchunavoidabledelay.OnNovember14,1997theUnitedStatesCourtofAp~..visfortheDistrictofColumbiaCircuitissuedawritofmandamusprecludingDOEfrom:,<cusingitsowndelayonthegroundsthatithasnotyetpreparedapermanentrepositoryorinterimstoragefacility.OnDecember11,1997,27utilities,includingtheCompany,petitionedtheDOEtosuspendtheirfuturepaymentstotheNuclearWasteFunduntiltheDOEbeginsmovingfuelfromtheirplantsites.ThepetitionfurthersoughtpermissiontoescrowpaymentstothewastefundbeginninginFebruary1998.OnJanuary12,1998,theDOEdeniedthepetition.TheCompanyisunabletodeterminethefinaloutcomeofthismatter.PTheCompanyhasseveralalternativesunderconsiderationtoprovideadditionalstoragefacilities,asnecessary.EachalternativewilllikelyrequireNRCapproval,mayrequireotherregulatoryapprovalsandwouldlikelyrequireincurringadditionalcosts,whichtheCompanyhasincludedinitsdecommissioningestimatesforbothUnit1anditsshareofUnit2.TheCompanydoesnotbelievethatthepossibleunavailabilityoftheDOEdisposalfacilityuntil2010willinhibitoperationofeitherUnit..0NOTE4.JOINTLY-OWNEDGENERATINGFACILITIESThefollowingtablereflectstheCompany'sshareofjointly-ownedgeneratingfacilitiesat,December31,1997.TheCompanyisrequiredtoprovideitsrespectiveshareoffinancingforanyadditionstothefacilities.Poweroutputandrelatedexpensesaresharedbasedonproportionateownership.TheCompany'sshareofexpensesassociatedwith-thesefacilitiesisincludedintheappropriateoperatingexpensesintheConsolidatedStatementsofIncome.UnderPowerChoice,theCompanywilldivestallofitsfossilandhydrogenerationassetswithanetbookvalueof$1.1billion,includingitsinterestsinjointly-ownedfacilities.InthousandsoEdollarsPercentOwnershipUtilityPlantAccumulatedConstructionDepreciationWorkinProgressRosetonSteamStationUnitsNo.1and2(a)OswegoSteamStationUnitNo.6(b)NineNilePointNuclearStationUnitNo.2(c)257641$96,110$270,316$1,507,721$54,130$125,089$327,006$432$39$6,748(a)TheremainingownershipinterestsareCentralHudsonGasandElectricCorporation("CentralHudson"),theoperatoroftheplant(35%),andConsolidatedEdisonCompanyofNewYork,Inc.(40%).OutputofRosetonUnitsNo.1and2,whichhaveacapabilityof1,200,000KW,issharedinthesameproportionsasthecotenants'espectiveownershipinterests.60 (b)TheCompanyistheoperator.TheremainingownershipinterestisRochesterGasandElectric("RGkE")(24%).OutputofOswegoUnitNo.6,whichhasa'capabilityof850,000KW,issharedinthesameproportionsasthecotenants'espectiveownershipinterests.(c)TheCompanyistheoperator.TheremainingownershipinterestsareLongIslandLightingCompany("LILCO")(18%),NewYorkStateElectricEcGasCorporation("NYSEG")(18%),RG&E(14%),andCentralHudson(9%).OutputofUnit2,whichhasacapabilityof1,143,000KW,issharedinthesameproportionsasthecotenants'espectiveownershipinterests.InJune1997,LILCOandLongIslandPowerAuthority("LIPA")enteredintoanagreement,whereby,uponcompletionofcertaintransactions,LILCO'sstockwouldbesoldtoLIPA.ItisanticipatedthatLIPAwouldownLILCO's18%ownershipinterestinUnit2.InJuly1997,theNewYorkStatePublicAuthoritiesControlBoardunanimouslyapprovedtheagreementsrelatedtotheLIPAtransaction,subjecttocertainconditions,andLILCO'sstockholderssubsequentlyapprovedthistransaction.61 NOTE5.CAPITALIZATIONCAPITALSTOCKTheCompanyisauthorizedtoissue185,000,000sharesofcommonstock,$1parvalue;3,400,000sharesofpreferredstock,$100parvalue;19,600,000sharesofpreferredstock,$25parvalue;and8,000,000sharesofpreferencestock,$25parvalue.Thetablebelowsummarizeschangesinthecapitalstockissuedandoutstandingandtherelatedcapitalaccountsfor1995,1996and1997:CC)0(ONSTOCKSlPARVAUJEPRE)KRREDSTOCKS)00PARVALUESHARCSAHOUNT'HARESNONREDEEHASLE~REDEEHABLEPREFERREDSTOCKCAPITALSTOCK$25PARVAU)EPREHIUHANDEXPENSES)(ARESNON-RCDCEHASLC'EDECHASL'NET)'eceaber31,1994:Issued144,3)Ig46620,657Slie,3112,376,000$210,000$27,600(a)12,774,005S230,000$89,350(a)$1,779,504283Redeaptions(18,000)(1~800)l366,000)(9,150)1,319Foreigncurrencytranslationad)ustaentDeceaber31,1995)IssuedRedeaptionsFore1gncurrencytranslationadjustaent)44,332,12333.091144,3322,358,00033(18,000)$210,000(1,800)(344F000)(8,600)$25,800(a)12,408,005S230,000$80,200Is)3,141$1.784,247214(28)1708)Deceaber31,1996:IssuedRedeaptionsForeigncurrencytranslationadiustaent144,365'1454,137144g3652,340,00054(18,000)$210,000ll,800)(282,801)$24,000(a),12,064,005$230,000$71,600(a)(7,070)$1,783,725426104(4,567)Deceaber31,1997:144,419,351$144,~192,322,000W$210,000$22,200(a)1178120'230,000$64,530(a)$1,779,688'nthousandsofdollars{a)Includessinkingfundrequirementsduewithinoneyear.ThecumulativeamountofforeigncurrencytranslationadjustmentatDecember31,1997was$(15,448).

NON-REDEEMABLEPREFERREDSTOCK(OptionallyRedeemable)TheCompanyhadcertainissuesofpreferredstockwhichprovideforoptionalredemptionat'December31,asfollows:SeriesSharesInthousandsRedemptionpriceperofdollarsshare(Beforeadding19971996accumulateddividends)Preferred$100parvalue:3.40%3.60%3.90%4.10%4.85%5.25%6.10%7.72%200,000350,000240,000210,000250,000200,000250,000400,000$20,00035,00024,00021,00025,00020,00025,00040,000$20,00035,00024,00021,00025,00020,00025,00040,000$103.50104.85106.00102.00102.00102.00101.00102.36Preferred$25parvalue:9.50%6,000,000150,000150,000AdjustableRate-25.00(a)SeriesA1,200,000SeriesC2,000,00030,00050,00030,00050,00025.0025.00$440,000$440,000(a)Notredeemableuntil1999.MANDATORILYREDEEMABLEPREFERREDSTOCKAtDecember31,theCompanyhadcertainissuesofpreferredstock,asdetailedbelow,whichprovideformandatoryandoptionalredemption.TheseseriesrequiremandatorysinkingfundsforannualredemptionandprovideoptionalsinkingfundsthroughwhichtheCompanymayredeem,atpar,alikeamountofadditionalshares(limitedto120,000sharesofthe7.45%series).Theoptiontoredeemadditionalamountsisnotcumulative.TheCompany'sfiveyearmandatorysinkingfundredemptionrequirementsforpreferredstock,inthousands,for1998through2002areasfollows:$10,120;$7,620;$7,620;$7,620and$3,050,respectively.TheaggregatepreferenceofpreferredsharesuponinvoluntaryliquidationoftheCompanyistheaggregateparvalueofsuchshares,plusanamountequaltothedividendsaccumulatedandunpaidonsuchsharestothedateofpaymentwhetherornotearnedordeclared./63 SharesRedemptionpricepershare{BeforeaddingInthousandsofdollarsaccumulateddividends)Series19971996199719961997EventualMinimumPreferred$100parvalue:7.45%222,000240,000Pzeferred$25parvalue:$22,200$24,000$101.69$100.007.85%8.375%731,204914,005100<<000200~00018,2802,50022,85025.285,00025.0025.0025.00AdjustableRate-SeriesB1,750,0001,750,000Lesssinkingfundrequirements43,75086,73010,12043,75025.0095,6008,87025.00$76,610$86,730LONG-TERMDEBTLong-termdebtatDecember31consistedofthefollowing:InthousandsofdollarsSERIESFirstmortgage61/4%61/2%91/2%67/8%91/4%57/8%67/8%73/8%8%65/8%93/4%73/4'%65/8%91/2%83/4%81/2%77/8%<<87/8%7.2%DUEbonds:19971998200020012001200220032003200420052005200620132021202220232024202520291997$60,000150,000210,000100,000230,00085,000220,000300,000110,000150,000275,00045,600150,000150,000165,000210,00075,000115,7051996$40,00060,000150,000210,000100,000230,00085,000220,000300,000110,000150,000275,00045,600150,000150,000165,000210,00075,000115,705TotalFizstMortgageBonds2,801,3052,841,30564 Promissorynotes:*AdjustableRateSeriesdueJuly1,2015December1,2023December1,2025December1,2026March1,2027July1,2027TermLoanAgreementUnsecurednotespayable:MediumTermNotes,Variousrates,due2000-2004OtherUnamortizedpremium(discount)TOTALLONG-TERMDEBTLesslong-termdebtduewithinoneyear100,00069,80075,00050,00025,76093,200105,00020,000154,295{9,884)3,484,47667,095100,00069,80075,00050,00025,76093,200105,00020,000156,606t10,708)3,525,96348,084$3I417'8183i477879SSSPSSSSSSSSSSSSSSSSSSSSSSSPSPSSSSSSSSSSSSSSUSSSSSSSSSSSSSSSPS*Tax-exemptpollutioncontrolrelatedissuesSeveralseriesofFirstMortgageBondsandPromissoryNoteswereissuedtosecurealikeamountoftax-exemptrevenuebondsissuedbyNYSERDA.Approximately$414millionofsuchsecuritiesbearinterestatadailyadjustableinterestrate(withaCompanyoptiontoconverttootherrates,includingafixedinterestratewhichwouldrequiretheCompanytoissueFirstMortgageBondstosecurethedebt)whichaveraged3.63%for1997and3.46%for1996andaresupportedbybankdirectpaylettersofcredit.PursuanttoagreementsbetweenNYSERDAandtheCompany,proceedsfromsuchissueswereusedforthepurposeoffinancingtheconstructionofcertainpollutioncontrolfacilitiesattheCompany'sgeneratingfacilitiesortorefundoutstandingtax-exemptbondsandnotes(seeNote6).Otherlong-termdebtin1997consistsofobligationsundercapitalleasesofapproximately$29.7million,aliabilitytotheDOEfornuclearfueldisposalofapproximately$114.3millionandaliabilityforIPPcontractterminationsofapproximately$10.3million.Theaggregatematuritiesoflong-termdebtforthefiveyearssubsequenttoDecember31,1997,excludingcapitalleases,inmillions,areapproximately$64,$108,$158,$310and$230respectively.TheCompany'saggregatematuritieswillincreasesignificantlyuponclosingoftheMRA.SeeItem7.Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-"MasterRestructuringAgreementandthePowerChoiceAgreement."NOTE6.BANKCREDITARRANGEMENTSTheCompanyhasan$804millionseniordebtfacilitywithabankgroupconsistingofa$255milliontermloanfacility,a$125millionrevolvingcreditfacilityand$424millionforlettersofcredit.TheletterofcreditfacilityprovidescreditsupportfortheadjustableratepollutioncontrolrevenuebondsissuedthroughtheNYSERDAdiscussedinNote5.AsofDecember31,1997,65 theamountoutstandingundertheseniordebtfacilitywas$529million,consistingof$105millionunderthetermloanfacilityanda$424millionletterofcredit,leavingtheCompanywith$275millionofborrowingcapabilityunderthefacility.ThefacilityexpiresonJune30,1999(subjecttoearlierterminationiftheCompanyseparatesitsfossil/hydrogenerationbusinessfromitstransmissionanddistributionbusiness,oranyothersignificantrestructuringplan).Theinterestrateapplicabletothefacilityisvariablebasedoncertainrateoptionsavailableundertheagreementandcurrentlyapproximates7.7%(butcappedat15%).TheCompanyiscurrentlynegotiatingwiththelenderstoreplacetheseniordebtfacilitywithalargerfacilitytofinancepartoftheMRA.TheCompanydidnothaveanyshort-termdebtoutstandingatDecember31,1997and1996.NOTE7.FEDERALANDFOREIGNINCOMETAXESSeeNote9-"TaxAssessments."ComponentsofUnitedStatesandforeignincomebeforeincometaxes:InthousandsofdollarsUnitedStatesForeignConsolidatingeliminations1997$315,027(1,621)(3,476)1996$269,12828,522(17,402)1995$400,08717,609(10,267)Incomebeforeextraordinaryitemandincometaxes$309,930$280,248$407,429~FollowingisasummaryofthecomponentsofFederalandforeignincometaxandareconciliationbetweentheamountofFederalincometaxexpensereportedintheConsolidatedStatementsofIncomeandthecomputedamountatthestatutorytaxrate:Inthousandsofdollars19971996~1995ComponentsofFederalandforeignincometaxes:Currenttaxexpense:FederalForeign$77,565$96,0113,708$67,3663,90077,56599,71971,266Deferredtaxexpense:FederalForeign47,8361,1943822,393~84,0024,125Total49,030~$126,5952,77588,127$102,494$159,393ReconciliationbetweenFederalandforeignincometaxesandthetaxcomputedatprevailingU.S.statutoryrateonincomebeforeincometaxes:66 Computedtax$108,475$98,087$142,601Increase(reduction)attributabletoflow-throughofcertaintaxadjustments:DepreciationCostofremovalDeferredinvestmenttaxcreditamortirationOther36,411(8,168)(7,454)(2,669)28,103(8,849)(8,018)(6,829)31,033(9,247)(8,589)3,59518,1204g40716~792Federalandforeignincometaxes$126,595$102,494$159,393*Doesnotincludethedeferredtaxbenefitof$36,273in1996associatedwiththeextraordinaryitemforthediscontinuanceofregulatoryaccountingprinciples.AtDecember31,thedeferredtaxliabilities(assets)werecomprisedofthefollowing:InthosandsofdollarsAlternativeminimumtax()nbilledrevenueOtherTotaldeferredtaxassetsDepreciationrelatedInvestmenttaxcreditrelatedOtherTotaldeferredtaxliabilities1997(17,448)(88,859)(247,438)(353,745)1,358,82779,858302,0921,740,7771996(64,313)(83,577)(237,850)(385,740)1,421,55084,294237,4141,743,258Accumulateddeferredincometaxes$1,387,032$1,357,518NOTE8.PENSIONANDOTHERRETIREMENTPLANSTheCompanyandcertainofitssubsidiarieshavenon-contributory,defined-benefitpensionplanscoveringsubstantiallyalltheiremployees.Benefitsarebasedontheemployee'syearsofserviceandcompensationlevel.TheCompany'sgeneralpolicyistofundthepensioncostsaccruedwithconsiderationgiventothemaximumamountthatcanbedeductedforFederalincometaxpurposes.67 Netpensioncostfor1997,1996and1995includedthefollowingcomponents:Inthousandsofdollars199719961995Servicecost-benefitsearnedduringtheperiodInterestcostonpro3ectedbenefitobligationActualreturnonplanassetsNetamortizationanddeferralTotalpensioncost(1)$27,100$25,000$22,50075~200'lg700(188,200)(134,100)100,40055,70073,000(215,600)140,300$14~500$18~300$20'00(1)$3.2millionfor1997,$3.8millionfor1996,and$4.1millionfor1995wasrelatedtoconstructionlaborand,accordingly,waschargedtoconstructionprojects.Thefollowingtablesetsforththeplan'sfundedstatusandamountsrecognizedintheCompany'sConsolidatedBalanceSheets:InthousandsofdollarsAtDecember31,Actuarialpresentvalueofaccumulatedbenefitobligations:VestedbeneiitsNon-vestedbenefits1997$990,41573,4301996$803,20283,107AccumulatedbenefitobligationsAdditionalamountsrelatedtopro)ectedpayincreasesPro)ectedbenefitsobligationforservicerenderedtodatePlanassetsatfairvalue,consistingprimarilyoflistedstocks,bonds,otherfixedincomeobligationsandinsurancecontractsPlanassetsinexcessofpro)ectedbenefitobligationsUnrecognizednetobligationatJanuary1,1987beingrecognizedoverapproximately19yearsUnrecognizednetgainfromactualreturnonplanassetsdifferentfromthatassumedUnrecognizednetgainfrompastexperiencedifferentfromthatassumedandeffectsofchangesinassumptionsamortizedover10yearsPriorservicecostnotyetrecognizedinnetperiodicpensioncost1,063,845886,309108,583141,4721,172,4281,027,781(131,910)(132,041)(19,446)(22,005)265,100219,68019,920(50,473)66,129(49,651)(1,304,338)(1,159,822)Pensionliabilityincludedintheconsolidatedbalancesheets$83,191$82,11268 PrincipleActuarialAssumptions('1)DiscountRateRateofincreaseinfuturecompensationlevels(plusmeritincreases)Long-teanrateofreturnonplanassets7.002.509.257.502.509.25Inadditiontoprovidingpensionbenefits,theCompanyanditssubsidiariesprovidecertainhealthcareandlifeinsurancebenefitsforactiveandretiredemployeesanddependents.Undercurrentpolicies,substantiallyalloftheCompany'semployeesmaybeeligibleforcontinuationofsomeofthesebenefitsuponnormalorearlyretirement.TheCompanyaccountsforthecostofthesebenefitsinaccordancewithPSCpolicyrequirementswhichcomplywithSFASNo.106.TheCompanyhasestablishedvarioustruststofunditsfuturepostretirementbenefitobligation.In1997,1996and1995,theCompanymadecontributionstosuchtrustsofapproximately$13.5million,$28.5millionand$53.1million,respectively,whichrepresenttheamountreceivedinratesandfromcotenants.Netpostretirementbenefitcostfor1997,1996and1995includedthefollowingcomponents:Servicecost-benefitsattributedtoserviceduringtheperiodInthousandsof,dollars1997,,19961995$12,300$12,900$12,600Interestcostonaccumulatedbenefitobligation34,80037~50045'00Actualreturnonplanassets(24,500)(12,900)(11,200)Amortizationofthetransitionobligationover20yearsNetamortization10,9009,50013,5006,00018,80014,600Totalpostretirementbenefitcost$43,000$57,000$80,200SSSSSSSSSSSSSSSWRSSSSSSaaSaaaSssaeSSaaaSSsssSsSSSsSSSSSRSSSSSSSSRThefollowingtablesetsforththeplan'sfundedstatusandamountsrecognizedintheCompany'sConsolidatedBalanceSheets:InthousandsofdollarsAtDecember31,19971996Actuarialpresentvalueofaccumulatedbenefitobligations:RetiredandsurvivingspousesActiveeligibleActiveineligible$392,83243,29983,720$370,25931,03069,44169 AccumulatedbenefitobligationPlanassetsatfairvalue,consistingprimarilyoflistedstocks,bondsandotherfixedobligationsAccumulatedpostretirementbenefitobligationinexcessofplanassetsUnrecognizednetlossfrompastexperiencedifferentfromthatassumedandeffectsofchangesinassumptionsPriorservicecostnotyetrecognizedinpostretirementbenefitcost519,851(181,101)338,750(48,466)30,086470,730(143,071)327,659(36,048)39,205Unrecognizedtransitionobligationbeingamortizedover20years(163,350)(174,240)Accruedpostretireqentbenefitliabilityincludedintheconsolidatedbalancesheet$157,020$156,576sasssssssssassasaessEssssssaaaaspsssspsaaaasEaaaassssasaaaaPrincipalactuarialassumptions(%):Discountrate7.007.50Long-termrateofreturnonplanassetsHealthcarecosttrendrate:Pre-65Post-659.258.006.006.507.00-8.00During1996,theCompanychangedtheeligibilityrequirementsforplanbenefitsforemployeeswhoretireafterMay1,1996.Generally,planbenefitsarenowaccruedforeligibleparticipantsbeginningafterage45.Previoustothischange,theCompanyaccruedthesebenefitsovertheemployees'ervicelife.Theeffectofthischangeresultedinadecreaseintheaccumulatedbenefitobligationforactiveineligibleemployees.'tDecember31,1997,theassumedhealthcosttrendratesgraduallydeclineto5.0%in2001.Ifthehealthcarecost'trendratewasincreasedbyonepercent,theaccumulatedpostretirementbenefitobligationasofDecember31,1997wouldincreasebyapproximately6.7%andtheaggregateoftheserviceandinterestcostcomponentofnetperiodicpostretirementbenefitcostfortheyearwouldincreasebyapproximately5.8%.TheCompanyrecognizestheobligationtoprovidepostemploymentbenefitsiftheobligationisattributabletoemployees'astservices,rightstothosebenefitsarevested,paymentisprobableandtheamountofthebenefitscanbereasonablyestimated.AtDecember31,1997and1996,theCompany'spostemploymentbenefitobligationisapproximately$13.3millionand$13million,respectively.70 NOTE9.COMMITMENTSANDCONTINGENCIESSeeNote2.LONG-TERMCONTRACTSFORTHEPURCHASEOFELECTRICPOWER:AtJanuary1,1998,theCompanyhadlong-termcontractstopurchaseelectricpowerfromthefollowinggeneratingfacilitiesownedbyNYPA:facilityExpirationdateoi,contractPurchasedEstimatedcapacityannualinMWcapacitycostNiagara-hydroelectricprojectSt.Lawrence-hydroelectricproject20072007951104$27,369,0001,300,000Blenheim-Gilboa-pumpedstoragegeneratingstation20022701,3257,500,000S36,169,000Thepurchasecapacitiesshownabovearebasedonthecontractscurrentlyineffect.Theestimatedannualcapacitycostsaresubjecttopriceescalationandareexclusiveofapplicableenergycharges.ThetotalcostofpurchasesunderthesecontractsandtherecentlycancelledcontractwithFitzpatricknuclearplantwasapproximately,inmillions,$91.0,$93.3and$92.5fortheyears1997,1996and1995,respectively.InMay1997,theCompanycancelleditscommitmenttopurchase110MWofcapacityfromtheFitzpatrickfacility.TheCompanycontinuestohaveacontractwithFitzpatricktopurchaseforresaleupto46MWofpowerforNYPA'seconomicdevelopmentcustomers.UndertherequirementsofPURPA,theCompanyisrequiredtopurchasepowergeneratedbyIPPs,asdefinedtherein.TheCompanyhas141PPAswith148facilities,ofwhich143areonline,amountingtoapproximately2,695MWofcapacityatDecember31,1997.Ofthisamount2,382MWisconsideredfirm.Thefollowingtableshowsthepaymentsforfixedandothercapacitycosts,andenergyandrelatedtaxestheCompanyestimatesitwillbeobligatedtomakeunderthesecontractswithoutgivingeffecttotheMRA.Thepaymentsaresubjecttothetestedcapacityandavailabilityofthefacilities,schedulingandpriceescalation.71

{Inthousandsofdollars)SCHEDULABLEFIXEDCOSTSVARIABLECOSTSYEARCAPACITYOTHERENERGYANDTAXESTOTAL199819992000200120028247,740252,130242,030244,620248,940841,42042,45044,08045,65047,330S906,590943,720974,0801,042,3801,063,83081,195,7501,238,3001,260,1901,332,6501,360,100Thecapacityandotherfixedcostsrelatetocontractswith11facilities,wheretheCompanyisrequiredtomakecapacityandotherfixedpayments,includingpaymentswhenafacilityisnotoperatingbutavailableforservice.These11facilitiesaccountforapproximately774MWofcapacity,withcontractlengthsrangingfrom20to35years.ThetermsoftheseexistingcontractsallowtheCompanytoscheduleenergydeliveriesfromthefacilitiesandthenpayfortheenergydelivered.TheCompanyestimatesthefixedpaymentsunderthesecontractswillaggregatetoapproximately$8billionovertheirterms,usingescalatedcontractrates.Contracts.relatingtotheremainingfacilitiesinserviceatDecember31,1997,requiretheCompanytopayonlywhenenergyisdelivered,exceptwhentheCompanydecidesthatitwouldbebettertopayaparticularprojectareducedenergypaymenttohavetheprojectreduceitshighpricedenergydeliveriesasdescribedbelow.TheCompanycurrentlyrecoversschedulablecapacitythroughbaseratesandenergypayments,taxesandotherschedulablefixedcoststhroughtheFAC.TheCompanypaidapproximately$1,106million,$1,088millionand$980millionin1997,1996and1995for13,500,000MWh,13,800,000MWhand14,000,000MWh,respectively,ofelectricpowerunderallIPPcontracts.OnJuly9,1997,theCompanyannouncedtheMRAtoterminate,restateoramendcertainIPPpowerpurchasecontracts.Asaresultofnegotiations,theMRAcurrentlyprovidesforthetermination,restatementoramendmentof28PPAswith15IPPs,inexchangeforanaggregateofapproximately$3,616millionincashand42.9millionsharesoftheCompany'scommonstockandcertainfixedpriceswapcontracts.UnderthetermsoftheMRA,theCompanywouldterminatePPAsrepresentingapproximately1,180MWofcapacityandrestatecontractsrepresenting583MWofcapacity.Therestatedcontractsarestructuredtobeintheformoffinancialswapswithfixedpricesforthefirsttwoyearschangingtoanindexedpricingformulathereafter.Thecontractquantitiesarefixedforthefulltenyeartermofthecontracts.TheMRAalsorequirestheCompanytoprovidetheIPPPartieswithanumberoffixedpriceswapcontractswithatermofsevenyearsbeginningin2003.ThetermsoftheLIRAhavebeenandcontinuetobemodified.Since1996,theCompanyhasnegotiated2longtermandseverallimitedtermcontractamendmentswherebytheCompanycanreducetheenergydeliveriesfromthefacilities.ThesereducedenergyagreementsresultedinareductionofIPPdeliveriesofapproximately1,010,000MWhand984,000MWhduring1997and1996,respectively.72 SALEOFCUSTOMERRECEIVABLES:TheCompanyhasestablishedasingle-purpose,wholly-ownedfinancingsubsidiary,NMReceivablesCorp.,whosebusinessconsistsofthepurchaseandresaleofanundividedinterestinadesignatedpoolofcustomerreceivables,includingaccruedunbilledrevenues.Forreceivablessold,theCompanyhasretainedcollectionandadministrativeresponsibilitiesasagentforthepurchaser.Ascollectionsreducepreviouslysoldundividedinterests,newreceivablesarecustomarilysold.NMReceivablesCorp.hasitsownseparatecreditorswhich,uponliquidationofNMReceivablesCorp.,willbeentitledtobesatisfiedoutofitsassetspriortoanyvaluebecomingavailabletotheCompany.Thesaleofreceivablesareinfeesimpleforareasonablyequivalentvalueandarenotsecuredloans.SomereceivableshavebeencontributedintheformofacapitalcontributiontoNMReceivablesCorp.infeesimpleforreasonablyequivalentvalue,andallreceivablestransferredtoNMReceivablesCorp.areassetsownedbyNMReceivablesCorp.infeesimpleandarenotavailabletopaytheparentCompany'screditors.AtDecember31,1997and1996,$144.1and$250million,respectively,ofreceivableshadbeensoldbyNMReceivables,Corp.toathirdparty.Theundividedinterestinthedesignatedpoolofreceivableswassoldwithlimitedrecourse.Theagreementprovidesforaformulabasedlossreservepursuanttowhichadditionalcustomerreceivablesareassignedtothepurchasertoprotectagainstbaddebts.At'December31,1997,theamountofadditionalreceivablesassignedtothepurchaser,asalossreserve,wasapproximately$64.4million.Althoughthisrepresentstheformula-basedamountofcreditexposureatDecember31,1997undertheagreement,historicallosseshavebeensubstantiallyless.Totheextentactuallossexperienceofthepoolreceivablesexceedsthelossreserve,thepurchaserabsorbstheexcess.ConcentrationsofcreditrisktothepurchaserwithrespecttoaccountsreceivablearelimitedduetotheCompany'slarge,diversecustomerbasewithinitsserviceterritory.TheCompanygenerallydoesnotrequirecollateral,i.e.,customerdeposits.TAXASSESSMENTS:TheInternalRevenueService("IRS")hasconductedanexaminationoftheCompany'sfederalincometaxreturnsfortheyears1989and1990andissuedaRevenueAgents'eport.TheIRShasraisedanissueconcerningthedeductibilityofpaymentsmadetoIPPsinaccordancewithcertaincontractsthatincludeaprovisionforatrackingaccount.AtrackingaccountrepresentsamountsthatthesemandatedcontractsrequiredtheCompanytopayIPPsinexcessoftheCompany'savoidedcosts,includingacarryingcharge.TheIRSproposestodisallowacurrentdeductionforamountspaidinexcessoftheavoidedcostsoftheCompany.AlthoughtheCompanybelievesthatanysuchdisallowancesfortheyears19S9and1990willnothaveamaterialimpactonitsfinancialpositionorresultsofoperations,itbelievesthatadisallowancefortheseabove-marketpaymentsfortheyearssubsequentto1990couldhaveamaterialadverseaffectonitscashflows.TotheextentthatcontractsinvolvingtrackingaccountsareterminatedorrestatedoramendedundertheMRAwithIPPPartiesasdescribedinNote2,theeffectsofanyproposeddisallowancewouldbemitigatedwithrespecttotheIPPPartiescoveredundertheMRA.TheCompanyisvigorouslydefendingitspositiononthisissue.TheIRSiscurrentlyconductingitsexaminationoftheCompany'sfederalincometaxreturnsfortheyears1991through1993.73 ENVIRONMENTALCONTINGENCIES:Thepublicutilityindustrytypicallyutilizesand/orgeneratesinitsoperationsabroadrangeofhazardousandpotentiallyhazardouswastesandby-products.TheCompanybelievesitishandlingidentifiedwastesandby-productsinamannerconsistentwithfederal,stateandlocalrequirementsandhasimplementedanenvironmentalauditprogramtoidentifyanypotentialareasofconcernandaidincompliancewithsuchrequirements.TheCompanyisalsocurrentlyconductingaprog'ramtoinvestigateandrestore,asnecessarytomeetcurrentenvironmentalstandards,certainpropertiesassociatedwithitsformergasmanufacturingprocessandotherpropertieswhichtheCompanyhaslearnedmaybecontaminatedwithindustrialwaste,aswellasinvestigatingidentifiedindustrialwastesitesastowhichitmaybedeterminedthattheCompanycontributed.TheCompanyhasalsobeenadvisedthatvariousfederal,stateorlocalagenciesbelievecertainpropertiesrequireinvestigationandhasprioritizedthesitesbasedonavailableinformationinordertoenhancethemanagementofinvestigationandremediation,ifnecessary.TheCompanyiscurrentlyawareof124siteswithwhichithasbeenormaybeassociated,including76whichareCompany-owned.ThenumberofownedsitesincreasedastheCompanyhasestablishedaprogramtoidentifyandactivelymanagepotentialareasofconcernatitselectricsubstations.Thiseffortresultedinidentifyinganadditional32sites.Withrespecttonon-ownedsites,theCompanymayberequiredtocontributesomeproportionateshareofremedialcosts.Althoughonepartycan,asamatteroflaw,beheldliableforalloftheremedialcostsatasite,regardlessoffault,inpracticecostsareusuallyallocatedamongPRPs.InvestigationsateachoftheCompany-ownedsitesaredesignedto(1)determineifenvironmentalcontaminationproblemsexist,(2)ifnecessary,determinetheappropriateremedialactionsand(3)whereappropriate,identifyotherpartieswhoshouldbearsomeorallofthecostofremediation.Legalactionagainstsuchotherpartieswillbeinitiatedwhereappropriate.Aftersiteinvestigationsarecompleted,theCompanyexpectstodeterminesite-specificremedialactionsandtoestimatetheattendantcostsforrestoration.However,sinceinvestigationsareongoingformostsites,theestimatedcostofremedialactionissubjecttochange.Estimatesofthecostofremediationandpost-remedialmonitoringarebaseduponavarietyoffactors,includingidentifiedorpotentialcontaminants;location,sizeanduseofthesite;proximitytosensitiveresources;statusofregulatoryinvestigationandknowledgeofactivitiesandcostsatsimilarlysituatedsites.Additionally,theCompany'sestimatingprocessincludesaninitiativewherethesefactorsaredevelopedandreviewedusingdirectinputandsupportobtainedfromtheDEC.ActualCompanyexpendituresaredependentuponthetotalcos<ofinvestigationandremediationandtheultimatedeterminationoftheCompany.'sshareofrespcisibility>orsuchcosts,aswellasthefinancialviabilityofotheridentifiedresponsiblepartiessineclean-upobligationsarejointandseveral.TheCompanyhasdeniedanyresponsibilityatceitainofthesePRPsitesandiscontestingliabilityaccordingly.AsaconsequenceofsitecharacterizationsandassessmentscompletedtodateandnegotiauonswithPRPs,theCompanyhasaccruedaliabilityintheamountof$220million,whichisrcilectedintheCompany'sConsolidatedBalanceSheetsatDecember31,1997.Thepotentialhighendoftherangeispresentlyestimatedatapproximately$650million,includingapproximately$28574 millionintheunlikelyeventtheCompanyisrequiredtoassume100%responsibilityatnon-ownedsites.TheamountaccruedatDecember31.1997,incorporatestheadditionalelectricsubstations,previouslymentioned,andachangeinthemethodusedtoestimatetheliabilityfor27oftheCompany'slargestsitestorelyuponadecisionanalysisapproach.Thismethodincludesdevelopingseveralremediationapproachesforeachofthe27sites,usingthefactorspreviouslydescribed,andthenassigningaprobabilitytoeachapproach.TheprobabilityrepresentstheCompany'sbestestimateofthelikelihoodoftheapproachoccurringusinginputreceiveddirectlyfromtheDEC.Theprobablecostsforeachapproacharethencalculatedtoarriveatanexpectedvalue.Whilethisapproachcalculatesarangeofoutcomesforeachsite,theCompanyhasaccruedthesumoftheexpectedvaluesforthesesites.TheamountaccruedfortheCompany'sremainingsitesisdeterminedthroughfeasibilitystudiesorengineeringestimates,theCompany'sestimatedshareofaPRPallocationorwherenobetterestimateisavailable,thelowendofarangeofpossibleoutcomes.Inaddition,theCompanyhasrecordedaregulatoryassetrepresentingtheremediationobligationstoberecoveredfromratepayers.PowerChoiceprovidesforthecontinuedapplicationofdeferralaccountingforcostdifferencesresultingfromthiseffort.InOctober1997,theCompanysubmittedadraftfeasibilitystudytotheDEC,whichincludedtheCompany'sHarborPointsiteandfivesurroundingnon-ownedsites.Thestudyindicatesarangeofviableremedialapproaches,however,afinaldeterminationhasnotbeenmadeconcerningtheremedialapproachtobetaken.Thisrangeconsistsofalowendof$22millionandahighendof$230million,withanexpectedvaluecalculationof$51million,whichisincludedintheamountsaccruedatDecember31,1997.TherangerepresentsthetotalcoststoremediatethepropertiesanddoesnotconsidercontributionsfromotherPRPs.TheCompanyanticipatesreceivingcommentsfromtheDEConthedraftfeasibilitystudybythespringof1999.Atthistime,theCompanycannotdefinitivelypredictthenatureoftheDECproposedremedialactionplanortherangeofremediationcostsitwillrequire.WhiletheCompanydoesnotexpecttoberesponsiblefortheentirecosttoremediatetheseproperties,itisnotpossibleatthistimetodetermineitsshareofthecostofremediation.InMay1995,theCompanyfiledacomplaintpursuanttoapplicableFederalandNewYorkStatelaw,intheU.S.DistrictCourtfortheNorthernDistrictofNewYorkagainstseveraldefendantsseekingrecoveryofpastandfuturecostsassociatedwiththeinvestigationandremediationoftheHarborPointandsurroundingsites.Inamotioncurrentlypendingbeforethecourt.theNewYorkStateAttorneyGeneralhasmovedtodismisstheCompany'sclaimsagainsttheStateofNewYork,theNewYorkStateDepartmentofTransportation,theThruwayAuthorityandCanalCorporation.TheCompanyhasopposedthismotion.ThecasemanagementorderpresentlycallsforthecloseofdiscoveryonDecember31,1998.Asaresult,theCompanycannotpredicttheoutcomeofthependinglitigationagainstotherPRPsortheallocationoftheCompany'sshareofthecoststoremediatetheHarborPointandsurroundingsites.Whereappropriate,theCompanyhasprovidednoticesofinsuranceclaimstocarrierswithrespecttotheinvestigationandremediationcostsformanufacturedgasplant,industrialwastesitesandsitesforwhichtheCompanyhasbeenidentifiedasaPRP.Todate,theCompanyhasreachedsettlementswithanumberofinsurancecarriers,resultinginpaymentstotheCompanyofapproximately$36million,netofcostsincurredinpursuingrecoveries.UnderPowerChoicetheelectricportionorapproximately$32millionwillbeamortizedover10years.The75 remainingportionrelatestothegasbusinessandisbeingamortizedoverthethreeyearsettlementperiod.CONSTRUCTIONPROGRAM:TheCompanyiscommittedtoanongoingconstructionprogramtoassuredeliveryofitselectricandgasservices.TheCompanypresentlyestimatesthattheconstructionprogramfortheyears1998through2002willrequireapproximately$1.4billion,excludingAFCandnuclearfuel.Fortheyears199Sthrough2002,theestimates.inmillions,are$328,$269,$264,$275and$300,respectively,whichincludes$26,$25,$22,$20and$3S,respectively,relatedtonon-nucleargeneration.Theimpactoftheicestorm(seeNote13)ontheconstructionprogramwillnotbeknownuntilrestorationeffortshavebeencompleted.Theseamountsarereviewedbymanagementascircumstancesdictate.UnderPowerChoice,theCompanywillseparate,throughsaleorspin-off,theCompany'snon-nuclearpowergenerationbusinessfromtheremainderofthebusiness.GASSUPPLY,STORAGEANDPIPELINECOMMITMENTS:Inconnectionwithitsgasbusiness,theCompanyhaslong-termcommitmentswithavarietyofsuppliersandpipelinestopurchasegascommodity,providegasstoragecapabilityandtransportgascommodityoninterstategaspipelines.Thetablebelow.setsforththeCompany'sestimatedcommitmentsat'ecember31,1997,forthenextfiveyears,andthereafter.(Inthousandsofdollars)YEARGASSUPPLYGASSTORAGE/PIPELINE19981999200020012002Thereafter8103,99078,38056,11053,14039'60155,560895,72099,49081,55060,17026,61071,130Withrespecttofirmgassupplycommitments,theamountsarebaseduponvolumesspecifiedinthecontractsgivingconsiderationfortheminimumtakeprovisions.CommoditypricesarebasedonNewYorkMercantileExchangequotesandreservationcharges,whenapplicable.Forstorageandpipelinecapacitycommitments,amountsarebaseduponvolumesspecifiedinthecontracts,andrepresentdemandchargespricedatcurrentfiledtariffs.AtDecember31,1997,theCompany'sfirmgassupplycommitmentsextendthroughOctober2006,whilethegasstorageandtransportationcommitmentsextendthroughOctober2012.BeginninginMay1996,asaresultofagenericrateproceeding,theCompanywasrequiredtoimplementserviceunbundling,wherecustomerscouldchoosetobuynaturalgasfromsourcesotherthantheCompany.TodatethemigrationhasnotresultedinanystrandedcostssincethePSChasallowedutilitiestoassignthepipelinecapacitytothecustomerschoosinganothersupplier.Thisassignmentisallowedduringathree-yearperiodendingMarch1999,atwhichtimethePSCwilldecideonmethodsfordealingwiththeremainingunassignedorexcess76 capacity.InSeptember1997,thePSCindicatedthatitisunlikelyutilitieswillbeallowedtocontinuetoassignpipelinecapacitytodepartingcustomersafterMarch1999.TheCompanyisunabletopredicthowthePSCwillresolvetheseissues.NOTE10.FAIRVALUEOFFINANCIALANDDERIVATIVEFINANCIALINSTRUMENTSThefollowingmethodsandassumptionswereusedtoestimatethefairvalueofeachclassoffinancialinstruments:CASHANDSHORT-TERMINVESTMENTS:Thecarryingamountapproximatesfairvaluebecauseoftheshortmaturityofthefinancialinstruments.LONG-TERMDEBTANDMANDATORILYREDEEMABLEPREFERREDSTOCK:Thefairvalueoffixedratelong-termdebtandredeemablepreferredstockisestimatedusingquotedmarketpriceswhereavailableordiscountingremainingcashflowsattheCompany'sincrementalborrowingrate.ThecarryingvalueofNYSERDAbondsandotherlong-termdebtreconsideredtoapproximatefairvalue..DERIVATIVEFINANCIALINSTRUMENTS:Thefairvalueoffuturesandforwardcontractsaredeterminedusingquotedmarketpricesandbrokerquotes.ThefinancialinstrumentsheldorissuedbytheCompanyareforpurposesotherthantrading.TheestimatedfairvaluesoftheCompany'sfinancialinstrumentsareasfollows:AtDecember31,1997Inthousandsofdollars1996CarryingAmountFairValueCarryingAmountFairValueCashandshort-terminvestments8378,2328378,2326325,3988325,398Mandatorilyredeemablepreferredstock86,73087,32895,60086,516Long-termdebt:FirstMortgagebonds2,801,3052,878,368Medium-termnotes20'0022~944Promissorynotes413,760413,760Other229,634229,6342,841,30520,000413,760228,4612,690,70721,994413,760228,461In1997,theCompany'senergymarketingsubsidiarybegantoeri'gageinbothtradingandnon-tradingactivitiesgenerallyusinggasfuturesandelectricandgasforwardcontracts.AtDecember31,1997,forbothtradingandnon-tradingactivities,thefairvalueoflongandshortpositionswasapproximately$59.9millionand$57.6million,respectively.ThesefairvaluesexceedtheweightedaveragefairvalueofopenpositionsfortheperiodendingDecember31,1997.Thepositionsaboveextendforaperiodoflessthanoneyear.WithrespecttotheseactivitiestheCompanydoesnothaveanymaterialcounterpartycreditriskatDecember31,1997.77 Transactionsenteredintofortradingpurposesareaccountedforonamark-to-marketbasiswithchangesinfairvaluerecognizedasagainorlossintheperiodofthechange.AtDecember31,1997,theopentradingpositionsconsistedofoff-balancesheetelectricandgasforwardcontracts.Thesepositionsconsistedoflongandshortelectricforwardcontractswithfairvaluesof$45.3million(1,878,000MWh)and$44.3million(1,778,000MWh),respectively,andlongandshortgasforwardcontractswithfairvaluesof$9.4million(7.1millionDth)and$10.2million(7.3millionDth),respectively.Thequantitiesaboverepresentnotionalcontractquantities.TheeffectsoftradingactivitiesontheCompany's1997resultsofoperationswerenotmaterial.Activitiesfornon-tradingpurposesgenerallyconsistoftransactionsenteredintotohedgethemarketfluctuationsofcontractualandanticipatedcommitments.Gasfuturescontractsareprimarilyusedforhedgingpurposes.Thechangeinfairvalueofthesetransactionsaredeferreduntilthegainorlossonthehedgeditemisrecognized.Thefairvalueofopenpositionsfornon-tradingpurposesatDecember31,1997,aswellastheeffectoftheseactivitiesontheCompany'sresultsofoperationsforthesameperiodending,wasnotmaterial.TheCompany'sinvestmentsindebtandequitysecuritiesconsistoftrustfundsforthepurposeof'undingthenucleardecommissioningofUnit1anditsshareofUnit2(seeNote3-"NuclearPlantDecommissioning"),short-terminvestmentsheldbyOpinacEnergyCorporation(asubsidiary)andatrustfundforcertainpensionbenefits.TheCompanyhasclassifiedallinvestmentsindebtandequitysecuritiesasavailableforsaleandhasrecordedallsuchinvestmentsattheirfairmarketvalueatDecember31,1997.Theproceedsfromthesaleofinvestmentswere$159.7million,$99.4millionand$70.3millionin1997,1996and1995,respectively.Netrealizedandunrealizedgainsandlossesrelatedtothenuclear,decommissioningtrustarereflectedin"Accumulateddepreciationandamortization"ontheConsolidatedBalanceSheets,whichisconsistentwiththemethodusedbytheCompanytoaccountforthedecommissioningcostsrecoveredinrates.TheunrealizedgainsandlossesrelatedtotheinvestmentsheldbyOpinacEnergyCorporationandthepensiontrustareincluded,netoftax,in"Commonstockholders'quity"ontheConsolidatedBalanceSheets,whiletherealizedgainsandlossesareincludedin"Otherincomeanddeductions"ontheConsolidatedIncomeStatements.TherecordedfairvaluesandcostbasisoftheCompany'sinvestmentsindebtandequitysecuritiesisasfollows:78 AtDecember31,1997Inthousandsofdollars,1996SecurityTypeGrossUnrealizedFairCostGain(Loss)ValueCostGrossUnreali,zedGain(Loss)FairValueU.S.GovernmentObligationsCommercialPaper106,0351,542-107'77S14,136S1,864S(4)S15,996S24,782$1,530S(33)$26,27990,495739-91,234TaxExemptObli.gations80'155,884(55)85,94475~5903g209(147)78'52CorporateObligationsOther3,0253,02592~94917~368(830)109~48762'238~524(422)2,58670,8252,586$296~260$26~658S(889)$322'29$256~176$14~002S(602)$269'76Usingthespecificidentificationmethodtodeterminecost,thegrossrealizedgainsandgrossrealizedlosseswere:InthousandsofdollarsYearEndedDecember31,RealizedgainsRealizedlosses1997$3,4876861996$2,1218061995$2,523328ThecontractualmaturitiesoftheCompany'sinvestmentsindebtsecuritiesisasfollows:InthousandsofdollarsAtDecember31,1997Lessthan1year1yearto5years5yearsto10yearsDueafter10yearsFairValue$106,67710,84552,526113,946Cost$105,13510,65450,351104,353NOTE11.STOCKBASEDCOMPENSATIONUndertheCompany'sstockcompensationplans,stockunitsandstockappreciation'rights("SARs")maybegrantedtoofficers,keyemployeesanddirectors.Inaddition,theCompany'splansallowforthegrantofstockoptionstoofficers.In1997,1996and1995theCompanygranted209,918unitsand296,300SARs,291,228unitsand376,600SARsand169,500units79 and414,000SARs,respectively.Also,in1995theCompanygranted85,375stockoptions.AtDecember31,1997,therewere668,132units,1,086,900SARsand298,583optionsoutstanding.Stockunitsarepayableincashattheendofadefinedvestingperiod,determinedatthedateofthegrant,basedupontheCompany'sstockpriceforadefinedperiod.SARsbecomeexercisable,asdeterminedatthegrantdate,andarepayableincashbasedupontheincreaseintheCompany'sstockpricefromaspecifiedlevel.Assuch,fortheseawards,compensationexpenseisrecognizedoverthevestingperiodoftheawardbaseduponchangesintheCompany'sstockpriceforthatperiod.Optionsweregrantedovertheperiod1992to1995andbecomeexercisablethreeyearsandexpiretenyearsfromthegrantdate.TheseoptionsareallconsideredtobeantidilutiveforEPScalculations.Includedintheresultsofoperationsfortheyearsending1997and1996,isapproximately$3.2and$2.6million,respectively,relatedtotheseplans.AspermittedbySFASNo.123-"AccountingforStock-BasedCompensation"("SFASNo.123")theCompanyhaselectedtofollowAccountingPrinciplesBoardOpinionNo.25-"AccountingforStockIssuedtoEmployees"(APBNo.25)andrelatedinterpretationsinaccountingforitsemployeestockoptions.UnderAPBNo.25,nocompensationexpenseisrecognizedforstockoptionsbecausetheexercisepriceoftheCompany'semployeestockoptionsequalsthemarketpriceoftheunderlyingstockonthegrantdate.SincestockunitsandSARsarepayableincash,theaccountingunderAPBNo.25andSFASNo.123isthesame..'herefore,thepro-formadisclosureofinformationregardingnetincome,asrequiredbySFASNo.123,relatesonlytotheCompany'soutstandingstockoptions,theeffectofwhichisimmaterialtothefinancialstatementsfortheyearsended1997,1996and1995.Thereisnoeffectonearningspersharefortheseyearsresultingfromthepro-formaadjustmentstonetincome.NOTE12.INFORMATIONREGARDINGTHEELECTRICANDGASBUSINESSESTheCompanyisengagedprincipallyinthebusinessofproduction,purchase,transmission,distributionandsaleofelectricityandthepurchase,distribution,saleandtransportationofgasinNewYorkState.TheCompanyprovideselectricservicetothepublicinanareaofNewYorkStatehavingatotalpopulationofabout3,500,000,includingamongothers,thecitiesofBuffalo,Syracuse,Albany,Utica,Schenectady,NiagaraFalls,WatertownandTroy.TheCompanydistributesortransportsnaturalgasinareasofcentral,northernandeasternNewYorkhavingatotalpopulationofabout1,700,000nearlyallwithintheCompany'selectricservicearea.CertaininformationregardingtheCompany'selectricandnaturalgassegmentsissetforthinthefollowingtable.Generalcorporateexpenses,propertycommontobothsegmentsanddepreciationofsuchcommonpropertyhavebeenallocatedtothesegmentsinaccordancewiththepracticeestablishedforregulatorypurposes.Identifiableassetsincludenetutilityplant,materialsandsupplies,deferredfinancecharges,deferredrecoverableenergycostsandcertainotherregulatoryandotherassets.Corporateassetsconsistofotherpropertyandinvestments,cash,accountsreceivable,prepayments,unamortizeddebtexpenseandcertainotherregulatoryandotherassets.AtDecember31,1997,totalplantassetsconsistedofapproximately24%Nuclear,20%Fossil/Hydro,42%TransmissionandDistribution,11%Gasand3%Common.80 1997Inthousandsofdollars19961995Operatingrevenues:ElectricGas$3,309,441$3,308,979$3,335,548656963681~674581~790Total'3,966,404$3,990,653$3,917,338aasaaaaaaaasssaaaaasaaasaasaaassssaaasaraaaaaaaaaasaaaraaaaaaaaaaOperating,income:ElectricGasS462,240S438,590S587,28296,59983,74896,752TotalS558,839$522,338S684,034aaassaaraaaasraaasaasaaaaasaaarsaaaaaaaaaaraaaaraaasasaaaasaasaasFederalandforeignincometaxes:Electric96,590Gas30,005133,24626,147TotalS339,641S329,827S317,831aasasarsasssaaaasssaasassssssssaasssassaasaaasssassssaaassaassaaaConstructionexpenditures<includingnuclearfuel):Electric$221,915$277,505$285,722Gas68,84274,54460,082Total126,595102,494159,393aaaaaaaasaaaaaaaaaaaaaaaaaaaaaaaaasapasaaraaaaaaaaasaaasssaaasass-Incomebeforeextraordinaryitem$183,335$177,754$248,036sssaasaaasssaaarsasaaraarassraasaasararrrssrassaaaaassssssssssssaDepreciationandamortization:ElectricS311,683S302,825$292,995Gas27,95827,00224,836Total$290,757$352,049$345,804Identifiableassets:ElectricGas$7,257,163$7,372,3701,185,0011,203,184$7,592,2871,123,045TotalCorporateassetsTotalassets8~442~1648I575i5548g715i332li141~977852i081762i537$9i584~141$9~427i635$9i477i869NOTE13.SUBSEQUENTEVENTInearlyJanuary1998,amajoricestormandfloodingcausedextensivedamageinalargeareaofnorthernNewYork.TheCompany'selectrictransmissionanddistributionfacilitiesinanareaofapproximately7,000squaremilesweredamaged,interruptingservicetoapproximately120,000oftheCompany'scustomers,orapproximately300,000people.TheCompanyhadtorebuildmuchofitstransmissionanddistributionsystemtorestorepowerinthisarea.BytheendofJanuary1998,servicetoallcustomerswasrestored;however,thefinalcostsofthestormwillnotbeknownascrewscontinuetomakefinalrepairstotemporarymeasurestorestoreserviceandsalvageoperationscannotbecompleteduntilspring.Thepreliminaryestimateofthetotalcostoftherestorationandrebuildeffortscouldexceed$125million.Aportionofthecostwillbecapitalized;however,atthistime,theCompanyisunabletodeterminethecapitalportionuntilrebuildeffortshavebeencompletedandalllabor,material81 andothercosts,includingchargesfromotherutilitiesandcontractors,havebeenreceivedandanalyzed.TheCompanyispursuingfederaldisasterreliefassistanceandisworkingwithitsinsurancecarrierstoassesswhatportionoftherebuildcostsarecoveredbyinsurance.policies.TheCompanyisalsoanalyzingpotentialavailableoptionsforstatefinancialaid.TheCompanyisunabletodeterminewhatrecoveries,ifany,itmayreceivefromthesesources.Absentrecovery,theCompanywouldfaceachargetoearningsinthefirstquarterof1998toreflectitsestimateofunrecoverable,non-capitalizedcosts.NOTE14.QUARTERLYFINANCIALDATA(UNAUDITEDOperatingrevenues,operatingincome,netincome(loss)andearnings(loss)percommonsharebyquartersfrom1997,1996and1995,respectively,areshowninthefollowingtable.TheCompany,initsopinion,hasincludedalladjustmentsnecessaryforafairpresentationoftheresultsofoperationsforthequarters.Duetotheseasonalnatureoftheutilitybusiness,theannualamountsarenotgeneratedevenlybyquarterduringtheyear.TheCompany'squarterlyresultsofoperationsreflecttheseasonalnatureofitsbusiness,withpeakelectricloadsin'summerandwinterperiods.Gassalespeakinthewinter.ZnthousandsodollarsOPERATINGQUARTERENDEDREVENUESBASICANDDZLUTEDOPERATZNGINCOMEBASICANDDILUTEDNETEARNINGSINCOME(LOSS)PER(LOSS)COMMONSHAREDecember31,1997$960,304$86,024$7,881$(.01)1996971~106117832(25~808)(24)1995966,478132,22827,874.13September30,1997$896,570$110,174$31,683$.151996895,713'7,119(12,916)(.16)1995887,231142,73246,941.26June30,1997$945,698$130,04$40,749$.221996960,771142,75552,992.301995938,816152,29754,485.31March31,1997$1,163,832$231,937$103,022$.6519961163'63214'3296~1226019951,124,813256,777118,736.75Inthefourthquarterof1996theCompanyrecordedanextraordinaryitemforthediscontinuanceofregulatoryaccountingprinciplesof$103.6million(47centspercommonshare).Inthethirdquarterof1996theCompanyincreasedtheallowancefordoubtfulaccountsby$68.5million(31centspercommonshare).Inthefourthquarterof1995,theCompanyrecorded$16.9million(8centspercommonshare)forMERITearnedinaccordancewiththe1991Agreement.NOTE15.ADJUSTMENTOF1997FINANCIALSTATEMENTSOnMay29,1998,afterdiscussionwiththeStaffoftheSecuritiesandExchangeCommission,theCompanydeterminedthatthe$190millionlimitationontherecoverabilityoftheMRA82 regulatoryasset,asdiscussedinNote2-"RateandRegulatoryIssuesandContingencies,"shouldbechargedtoexpenseinthequarterinwhichtheMRAcloses.Accordingly,the1997financialstatements,aspresentedherein,havebeenrestatedtoeliminatethe$190millioncharge(85centspershare)andtheCompanyexpectsthatthesecondquarter1998financialstatementswillreflectsuch$190millioncharge.ELECTRICANDGASSTATISTICSELECTRICCAPABILITYOwned:December31,1997ThousandsofKW19961995Coal0114DualFuelNuclearHydro-Oil/Gas1,3606467001,0826614,44916.77.98.6'3.38.154.61,3336367001,0826174,3681,3166367001,0826654,399Purchased:NewYorkPowerAuthorityIPPsHydroNuclear1,3252,3823,70716.229.245.41,3101102,4063,8261,3251102,3903,825Totalcapability~~8,156RSHRR100.08,194RSQaa8,224SSSSEElectricpeakload6,348SSSSP6,0216,211In1994,OswegoUnitNo.5(anoil-f'redunitwithacapabilityof850,000KW)wasputintolong-termcoldstandby,butcouldbereturnedtosezviceinthreemonths.Availablecapabilitycanbeincreasedduringheavyloadperiodsbypurchasesfromneighboringinterconnectedsystems.HydrostationcapabilityisbasedonaverageDecemberstream-flowconditions.83 ELECTRICSTATISTICSElectricsales(MillionsofKWh):ResidentialCommercialIndustrialIndustrial-SpecialMunicipalserviceOtherelectricsystemsSubsidiary19979,90511,5527,1914,5072353,746199610,10911,5647,1484,3262465,431303199510,05511,6137,0614,0532294,30536837,136Electricrevenues(Thousandsofdollars):39'2737~684ResidentialCommercialIndustrialIndustrial-SpecialMunicipalserviceOtherelectricsystemsMiscellaneousSubsidiary$1,227,2451,233,417531,16461,82054,54583,794117,456S1,252,1651,237,385524,85858,44453,795113,39153,69815,243$1,214,8481,237,502523,99656,25050,86088,936143,62519,531Electriccustomers(Average)$3,309,441$3,308,979$3,335,548ResidentialCommercialIndustrialIndustrial-SpecialOtherSubsidiarylp404,345146,0391,970851,5191,405,083145,1492,045991,30213,5571,399,725144,7312,122831,48813,5081,553,9581,567,2351,561,657Residential(Average):AnnualKWhusepercustomerCosttocustomerperKWh(incents)Annualrevenuepercustomer7,05312.39$873.897,19512.39$891.177,18412.08$867.9284 GASSTATISTICS199719961995GasSales(ThousandsofDth):ResidentialCommercialIndustrialOthergassystems55,20322,0691,3812856,72825,3532,7703051,84223,8182,660,161TotalsalesSpotmarket,Transportationofcustomer-ownedgas78,68184,88178,4812,45110,4591,723152,813134,671144,613Totalgasdelivered233,945230,011224,817GasRevenues(Thousandsofdollars):ResidentialCommercialIndustrialOthergassystemsSpotmarketTransportationofcustomer-ownedgasMiscellaneous$436,136148,2136,5491306,34655,6573,932$417,348162,27513,32513837,12450,3811,083$368,391143,64311,5307623,09648,2906,078GasCustomers(Average)$656~963$681~674$581~790ResidentialCommercialIndustrialOtherTransportation484,86240,9551866843477,78641,2662066713471,94840,9452251652Residential(Average)526,852519,977513,771AnnualdekathermusepercustomerCosttocustomerperDthAnnualrevenuepercustomerMaximumdaygassendout(Dth)113.9118.7$7.90$7.36$899.51$873.501~133~370lg152'96109.8$7.11$780.581,211,25285 ITEM14.EXHIBITS,FINANCIALSTATEMENTSCHEDULES,ANDREPORTSONFORM8-K.(a)CertaindocumentsfiledaspartoftheForm10-K.(1)INDEXOFFINANCIALSTATEMENTSReportofIndependentAccountantsConsolidatedStatementsofIncomeandRetainedEarningsforeachofthethreeyearsintheperiodendedDecember31,1997ConsolidatedBalanceSheetsatDecember31,1997and1996ConsolidatedStatementsofCashFlowsforeachofthethreeyearsintheperiodendedDecember31,1997NotestoConsolidatedFinancialStatementsSeparatefinancialstatementsoftheCompanyhavebeenomittedsinceitisprimarilyanoperatingcompanyandallconsolidatedsubsidiariesarewholly-owneddirectlyorbysubsidiaries.(2)ThefollowingfinancialstatementschedulesoftheCompanyfortheyearsendedDecember31,1997,1996and1995areincluded:ReportofIndependentAccountantsonFinancialStatementScheduleConsolidatedFinancialStatementSchedule:II-ValuationandQualifyingAccountsandReservesTheFinancialStatementScheduleaboveshouldbereadinconjunctionwiththeConsolidatedFinancialStatementsinPartII,Item8(FinancialStatementsandSupplementaryData).Schedulesotherthanthosementionedaboveareomittedbecausetheconditionsrequiringtheirfilingdonotexistorbecausetherequiredinformationisgiveninthefinancialstatements,includingthenotesthereto.(3)ListofExhibits:SeeExhibitIndex.86 (b)ReportsonForm8-K:Form8-KReportingDate-October10,1997Itemreported-Item5.OtherEvents.RegistrantfiledinformationconcerningthePowerChoicesettlement.Form8-KReportingDate-February11,1998Itemreported-Item5.OtherEvents.RegistrantfiledinformationconcerningtheJanuary1998icestorm.(c)Exhibits.SeeExhibitIndex.(d)FinancialStatementSchedule.See(a)(2)above.87 REPORTOFINDEPENDENTACCOUNTANTSONFINANCIALSTATEMENTSCHEDULETotheBoardofDirectorsofNiagaraMohawkPowerCorporationOurauditsoftheconsolidatedfinancialstatementsofNiagaraMohawkPowerCorporationreferredtoinourreportdatedMarch26,1998appearinginthisForm10-KalsoincludedanauditoftheFinancialStatementSchedulelistedinItem14(a)ofthisForm10-K.Inouropinion,thisFinancialStatementSchedulepresentsfairly,inallmaterialrespects,theinformationsetforththereinwhenreadinconjunctionwiththerelatedconsolidatedfinancialstatements./s/PRICEWATERHOUSELLP'yracuse,NewYorkMarch26,199838 NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESSCHEDULEII-VALUATIONANDUALIFYINGACCOUNTSANDRESERVES(ZnThousandsofDollars)ColumnAColumnBColumnCColumnDColumnEAdditionsDescriptionAllowanceforDoubtfulAccounts-deductedfromAccountsReceivableintheConsolidatedBalanceSheetsBalanceatBeginningofPeriodChargedtoCostsandExpensesChargedtoOtherAccountsDeductions(a)BalanceatEndofPeriod199719961995$52i096$46'49$3'00(b)$39i09'f$62~54820'00127'48800(b)96i352520963,60031,28416,400(b)31,28420,000(a)(b)Uncollectibleaccountswrittenoffnetofrecoveriesof$14,416,$12,842,and$10,830in1997,1996and1995,respectively.TheCompanyincreaseditsallowancefordoubtfulaccountsin1995andrecordedaregulatoryassetof$16,400,whichreflectstheamountthattheCompanyexpectstorecoverinrates.In1996,regulatoryassetincreasedby$800to$17,200andin1997,regulatoryassetincreased$3,000to$20,200.NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESSCHEDULEII-VALUATIONANDUALIFYINGACCOUNTSANDRESERVES(ZnThousandsofDollars)ColumnAColumnBColumnCColumnDColumnEAdditionsDescription)(iscellaneousValuationReservesBalanceatBeginningofPeriodChargedtoChargedtoCostsandOtherExpensesAccountsBalanceatEndDeductionsofPeriod(c)199719961995$37,74039,42629,197$2,207$10,26118,719$4,04911,9478,490$35,89837,74039,426(c)Thereservesrelateprimarilytocertaininventoryandnon-ratebaseproperties.89

.NIAGARAMOHAWKPOWERCORPORATIONEXHIBITINDEXInthefollowingexhibitlist,NMPCreferstotheCompanyandCNYPreferstoCentra!ewYorkPowerCorporation,apredecessorcompany.Eachdocumentreferredtobelowi:incorporatedbyreferencetothefilesoftheCommission,unlessthereferencetothed'.'umentinthelistisprecededbyanasterisk.PreviousfilingswiththeCommissionareindicate:asfollows:A--NHPCC--NHPCF-CNYPG--CNYPV--NMPCX--NMPCZ--NHPCCC--NHPCDD--NHPCGG--NMPCHH--NMPC11--NMPCJJ-"NHPCKK""NHPCOO--NMPCQQ--NHPCSS--NMPCTT--NHPCVV--NMPCCCC--NMPCIII--NMPCOOO--NMPCPPP--NMPCQQQ""NHPCRRR-"NMPCRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationRegistrationStatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.StatementNo.2-8214$2-8634$2-3414/2-5490$2-10501$2-12443/2-13285$2-16193$2-18995$2-25526$2-26918$2-29575$2-35112$2-38083$2-49570$2-51934$2-52852$2-54017$2-59500$2-70860$2-90568$33-32475$33-38093/33-47241$33-59594$b--NMPCc--NMPCd--NMPCe--NMPCi--NMPCg--NMPCh--NMPCi,--NMPC$--NMPCk-NMPC1--NMPCm--NMPCn--NHPCo--NMPCAnnualReportonForm10-KforyearendedDecember31,1990;andAnnualReportonForm10-KforyearendedDecember31,1992$andAnnualReportonForm10-KtoryearendedDecember31,1993$andAnnualReportonForm10-KforyearendedDecember31,1994$andAnnualReportonForm10-KforyearendedDecember31,1995$andAnnualReportonForm10-KforyearendedDecember31,1996.QuarterlyReportonForm10-QforquarterendedMarch31,1993$andQuarterlyReportonForm10-QforquarterendedSeptember30,1993$andQuarterlyReportonForm10-QforquarterendedJune30,1995$andQuarterlyReportonForm10-QforquarterendedSeptember30,1996$QuarterlyReportonForm10-QforquarterendedJune30,1997$andQuarterlyReportonForm10-QforquarterendedSeptember30,1997.ReportonForm8-KdatedJuly9,1997$andReportonForm8-KdatedOctober10,1997.InaccordancewithParagraph4(iii)ofItem601(b)ofRegulationS-K,theCompanyagreestofurnishtotheSecuritiesandExchangeCommission,uponrequest,acopyoftheagreementscomprisingthe$804millionseniordebtfacilitythattheCompanycompletedwithabankgroupduringMarch1996.Thetotalamountoflong-termdebtauthorizedundersuchagreementdoesnotexceed10percentofthetotalconsolidatedassetsoftheCompanyanditssubsidiaries.90 INCORPORATIONBYREFERENCEEXHIBITNO~DESCRIPTIONOFINSTRUMENTPREVIOUSFILINGPREVIOUSEXHIBITDESIGNATION3(a)(1)--CertificateofConsolidationofNewYorkPowerandLightCorporation,BuffaloNiagaraElectricCorporationandCentralNewYorkPowerCorporation,filedintheofficeoftheNewYorkSecretaryofState,January5,1950.3(a)(1)3(a)(2)--Certi,ficateofAmendmentofCertificateofIncorporationofNMPC,filedintheofficeoftheNewYorkSecretaryofState,January5,1950.3(a)(2)3(a)(3)--CertificateofAmendmentofCertificateofIncorporationofNMPC,pursuanttoSection36oftheStockCorporationLawofNewYork,filedAugust22,1952,intheofficeoftheNewYorkSecretaryof'State.3(a)(4)--CertificateofNMPCpursuanttoSection11oftheStockCorporationLawofNewYorkfiledMay5,1954intheofficeoftheNewYorkSecretaryofState.3(a)(5)--CertificateofAmendmentofCertificateofIncorporationofNMPC,pursuanttoSection36oftheStockCorporationLawofNewYork,filedJanuary9,1957intheofficeoftheNewYorkSecretaryofState.3(a)(6)--CertificateofNMPCpursuanttoSection11oftheStockCorporationLawofNewYork,filedMay22,1957intheofficeoftheNewYorkSecretaryofState.3(a)(7)--CertificateofNMPCpursuanttoSection11oftheStockCorporationLawofNewYork,filedFebruary18,1958intheofficeoftheNewYorkSecretaryofState.3(a)(8)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYork,filedMay5,1965intheofficeoftheNewYorkSecretaryofState.3(a)(9)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYork,filedAugust24,1967intheofficeoftheNewYorkSecretaryofState.3(a)()0)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYork,filedAugust19,1968intheofficeoftheNewYorkSecretaryofState.3(a)(3)"3(a)(4)3(a)(5)3(a)(6)3(a)(7)3(a)(8)3(a)(9)3(a)(10)3(a)(11)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYork,filedSeptember22,1969intheofficeoftheNewYorkSecretaryofState.3(a)(11)3(a)(12)--CertificateofAmendmentofCertificate91 q~~ofIncorporationofNMPCunderSection805oftheBusinessCorpozationLawofNewYork,filedMay12,1971intheofficeoftheNewYorkSecretaryofState.3(a)(13)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYork,filedAugust18,1972intheofficeoftheNewYorkSecretaryofState.3(a)(12)3(a)(13)3(a)(14)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYork,filedJune26,1973intheofficeoftheNewYorkSecretaryofState.3(a)(14)3(a)(15)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYork,filedMay9,1974intheofficeoftheNewYorkSecretaryofState.3(a)(15)3(a)(16)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYork,filedMarch12,1975intheofficeoftheNewYorkSecretaryofState.3(a)(16)3(a)(17)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSecti.on805oftheBusinessCorporationLawofNewYork,filedMay7,1975intheofficeoftheNewYorkSecretaryofState.3(a)(1I)3(a)(18)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationl,awofNewYork,filedAugust27,1975intheofficeoftheNewYorkSecretaryofState.3(a)(18)3(a)(19)--CertificateofAmendmentofCeztificateof"IncorporationofNMPCunderSectS.on805oftheBusinessCorporationLawofNewYork,filedMay7,1976intheofficeoftheNewYorkSecretaryofState.3(a)(19)3(a)(20)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledSeptember28,1976intheofficeoftheNewYorkSecretaryofState.3(a)(20)3(a)(21)CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledJanuary27,1978intheofficeoftheNewYorkSecretaryofState.e3(a)(21)3(a)(22)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporatio'nLawofNewYorkfiledMay8,1978intheofficeoftheNewYorkSecretaryofState.3(a)(22)3(a)(23)-CertificateofCorrectionoftheCertificateofAmendmentfiledMay7,1976oftheCertificateofIncorporationunderSection105oftheBusinessCorporationLawofNewYorkfiledJuly13,1978intheofficeofthe92 NewYorkSecretaryofState.3(a)(24)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledJuly17,1978intheofficeoftheNewYorkSeczetaryofState.3(a)(23)3(a)(24)3(a)(25)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCozporationLawofNewYorkfiledMarch3,1980intheofficeoftheNewYorkSecretaryofState.3(a)(25)3(a)(26)3(a)(27)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledMarch31,1981intheofficeoftheNewYorkSecretaryofState.--CertificateofAmendmentofCertiiicateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledMarch31,1981intheofficeoftheNewYorkSecretaryofState.3(a)(26)3(a)(27)3(a)(28)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledApril22,19S1intheofficeoftheNewYorkSecretaryofState.3(a)(28)3(a)(29)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledMay8,1981intheofficeoftheNewYorkSecretaryofState.3(a)(29)3(a)(30)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledApril26,1982intheofficeoftheNewYorkSecretaryofState.3(a)(30)3(a)(31)--CertificateofAmendmentoiCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledJanuary24,1983intheofficeoftheNewYorkSecretaryofState.3(a)(32)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledAugust3,1983intheofficeoftheNewYorkSecretaryofState.3(a)(31)3(a)(32)3(a)(33)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledDecember27,1983intheofficeoftheNewYorkSecretaryofState.3(a)(33)3(a)(34)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledDecember27,1983intheofficeoftheNewYorkSecretaryofState.3(a)(34)3(a)(35)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawof93 p~~NewYorkfiledJune4,1984intheofficeoftheNewYorkSecretaryofState.3(a)(35)3(a)(36)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledAugust29,1984intheofficeoftheNewYorkSecretaryofState.3(a)(36)3(a)(37)3(a)(38)--CertificateofAmendmentofCertificateofZncozpozationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledApril17,1985,intheofficeoftheNewYorkSecretaryofState.--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledMay3,1985,intheofficeoftheNewYorkSecretaryofState.3(a)(37)3(a)(38)3(a)(39)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledDecember24,1986intheofficeoftheNewYorkSecretaryofState.3(a)(39)3(a)(40)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledJune1,1987intheofficeoftheNewYorkSecretaryofState.3(a)(40)3(a)(41)3(a)(42)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledJuly16,1987intheofficeoftheNewYorkSecretaryofState.--CertificateofAmendmentofCertificateofZncozporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledMay27,1988intheofficeoftheNewYorkSecretaryofState.3(a)(41)3(a)(42)3(a)(43)"-CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledSeptember27,1990intheofficeoftheNewYorkSecretaryofState.3(a)(4313(a)(44)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYozkfiledOctober18,1991intheofficeoftheNewYorkSecretaryofState.3(a)(44)3(a)(45)--CertificateofAmendmentofCertificateofZncozporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledMay5,1994intheofficeoftheNewYorkSeczetazyofState.3(a)(45)3(a)(46)--CertificateofAmendmentofCertificateofIncorporationofNMPCunderSection805oftheBusinessCorporationLawofNewYorkfiledAugust5,1994intheofficeoftheNewYorkSecretaryofState.3(a)(46)'3(b)-By-LawsofNMPC,asamendedFebruary26,1998.94 4(a)--Agreementtofurnishcertaindebtinstruments.4(b)4(b)(l)--MortgageTrustIndenturedatedasofOctober1,1937betweenNMPC(formerlyCNYP)andMarineMidlandBank,N.A.(formerlynamedTheMarineMidlandTrustCompanyofNewYork),asTrustee.FiledOctober15,1937aftereffectivedateofRegistrationStatementNo.2-3414.4(b)(2)--SupplementalIndenturedatedasofDecember1,1938,supplementaltoExhibit4(1).VV2-34(b)(3)4(b)(4)--SupplementalIndenturedatedasofApril15,1939,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofJuly1,1940,supplementaltoExhibit4(1).VVVV2-54(b)(5)--SupplementalIndenturedatedasofOctober1,1944,supplementaltoExhibit4(1).7-64(b)(6)--SupplementalIndenturedatedasofJune1,1945,supplementaltoExhibit4(1).VV2-84(b)(7)--SupplementalZndenturedatedasofAugust17,1948,supplementaltoExhibit4(1).2-94(b)(8)--SupplementalIndenturedatedasofDecember31,1949,supplementaltoExhibit4(1).7-94(b)(9)--SupplementalIndenturedatedasofJanuary1,1950,supplementaltoExhibit4(1).7-104(b)(10)4(bl(11)4(b)(12)--SupplementalIndenturedatedasofOctober1,1950,supplementaltoExhibit4(1)i--SupplementalIndenturedatedasofOctober19,1950,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofFebruary20,1953,supplementaltoExhibit4(1).7-117-124-164(b)(13)--SupplementalIndenturedatedasofApril25,1956,supplementaltoExhibit4(1).4-194(b)(14)--SupplementalIndenturedatedasofMarch15,1960,supplementaltoExhibit4(1).CC2-234(b)(15)4(b)(16)--SupplementalIndenturedatedasofOctober1,1966,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofJuly15,1967,supplementaltoExhibit4(1).GGHH2-274-2995 g~~4(b)(17)--SupplementalIndenturedatedasofAugust1,1967,supplementaltoExhibit4(1).HH4-304(b)(18)4(b)(19)--SupplementalIndenturedatedasofAugust1,1968,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofMarch15,1977,supplementaltoExhibit4(1).ZZVV2-302-394(b)(20)--SupplementalIndenturedatedasofAugust1,1977,supplementaltoExhibit4(1).CCC4(b)(40)4(b)(21)--SupplementalIndenturedatedasofMarch1,1978,supplementaltoExhibit4(1).CCC4(b)(42)4(b)(22)4(b)(23)--SupplementalZndenturedatedasofJune15,1980,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofNovember1,1985,supplementalto,Exhibit4<1).CCCIZZ4(b)(46)4(b)(64)4(bl(24)--SupplementalIndenturedatedasofOctober1,1989,supplementaltoExhibit4(1).4(b)(73)4<b)(25)4(b)(26)--SupplementalIndenturedatedasofJune1,1990,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofNovember1,1990,supplementaltoExhibit4(1).PPPPPP4(b)(74)4(b)(75)4(b)(27)--SupplementalIndenturedatedasofMarch1,1991,supplementaltoExhibit4(1).4(b)(76)4<b)(28)--SupplementalIndenturedatedasofOctober1,1991,supplementaltoExhibit4(1)~4(b)(77)4(b)(29)4(b)<30)4<b)(31)--SupplementalIndenturedatedasoiApril1,1992,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofJune1,1992,supplementaltoExhibit4(1).--SupplementalZndenturedatedasofJuly1,1992,supplementaltoExhibit4(1).4(b)(78)4(b)(I9)4(b)(80)4(b)(32)4(b)(33)4(b)(34)--SupplementalIndenturedatedasofAugust1,1992,supplementaltoExhibit4(1).--SupplementalIndenturedatedasofApril1,1993,supplementaltoExhibit4(1)~--SupplementalIndenturedatedasofJuly1,1993,supplementalto4<b)(81)4(b)(82)96

(~I~Exhibit4(1).4(b)(83)4(b)(35)--SupplementalIndenturedatedasofSeptember1,1993,supplementaltoExhibit4(1).4(b)(84)4(b)(36)--SupplementalIndenturedatedasofMarch1,1994,'upplementaltoExhibit4(1).4(b)(85)4(b)(37)--SupplementalIndenturedatedasofJuly1,1994,supplementaltoExhibit4(1).4(86)4(b)(38)--SupplementalIndenturedatedasofHay1,1995,supplementaltoExhibit4(l).4(87)4(b)(39)--AgreementdatedasofAugust16,1940,betweenCNYP,TheChaseNationalBankoftheCityofNewYork,asSuccessorTrustee,andTheMarineMidlandTrustCompanyofNewYork,asTrustee.7-2310-1--AgreementdatedMarch1,1957betweenthePowerAuthorityoftheStateofNewYorkandNMPCastosale,transmi.ssionanddispositionofSt.Lawrencepower.13-1110-210-3--AgreementdatedFebruary10,1961betweenthePowerAuthorityoftheStateofNewYorkandNMPCastosale,transmissionanddispositionofNiagararedevelopmentpower.--AgreementdatedJuly26,1961betweenthePowerAuthorityoftheStateofNewYorkandNMPCsupplementaltoExhibit10-2.DDDD13-613-710-4--AgreementdatedasofHarch23,1973betweenthePowerAuthorityoftheStateofNewYorkandNMPCastothesale,transmissionanddispositionofBlenheim-Gilboapower.5-810-5--AgreementdatedJanuary23,1970betweenConsolidatedGasSupplyCorporation(formerlynamedNewYorkStateNaturalGasCorporation)andNMPC.5-810-6a--NewYorkPowerPoolAgreementdatedasofFebruary1,1974betweenNHPCandsixotherNewYorkutilitiesandthePowerAuthorityoftheStateotNewYork.5-10e10-6b--NewYorkPowerPoolAgreementdatedasofApril27,1975betweenNMPCandsixotherNewYorkelectricutilitiesandthePowerAuthorityoftheStateofNewYork(thepartiestotheAgreementhavepetitionedtheFederalPowerCommissionforanorderpermittingsuchAgreement,whichincreasesthereservetactorofallpartiesfrom.14to.18,tosupersedetheNewYorkPowerPoolAgreementdatedasofFebruary1,1974).5-10b97 10-7--AgreementdatedasofOctober31,1968betweenNMPC,CentralHudsonGas&ElectricCorporationandConsolidatedEdisonCompanyofNewYork,Inc.astoJointElectricGeneratingPlant(theRosetonStation).10-Ba10-Bb--MemorandumofUndezstandingdatedasoiMay30,1975betweenNMPCandRochesterGas&ElectricCorporationwithrespecttoOswegoUnitNo.6.--MemorandumofUnderstandingdatedasofMay30,1975betweenNMPCandRochesterGasandElectricCorporationwithrespecttoOswegoUnitNo.6.SSSS10-Sc--BasicAgreementdatedasofSeptember22,1975betweenNMPCandRochesterGasandElectricCorporationwithrespecttoOswegoUnitNo.6.VV10-9a--MemozandumofUnderstandingdatedasofMay30,1975betweenNHPCandfourotherNewYorkelectricutilitieswithrespecttoNineMilePointNuclearStationUnitNo.2.SS10-9b--BasicAgreementdatedasofSeptember22,1975betweenNMPCandfourotherNewYorkelectricutilitieswithrespecttoNineMilePointNuclearStationUnitNo.2.VV10-9c--NineMilePointNuclearStationUnitNo.2OperatingAgreement.10-10a--MemorandumofUnderstandingdatedasofMay16,1974,asamendedHay30,1975,betweenNMPCandthreeotherNewYorkelectricutilitieswithrespecttotheSterlingNuclearStation.SS10"lob--BasicAgreementdatedasofSeptember22,1975betweenNMPCandthreeotherNewYorkelectricutilitieswithrespecttotheSterlingNuclearStations.VV10-11--MasterRestructuringAgreement,datedasofJuly9,1997,betweentheCompanyandthesixteenindependentpowerproducerssignatorythereto.10-12--PowerChoicesettlementfiledwiththePSConOctober10,1997~10"13--PSCOpinionandOrderregardingapprovalofthePowerChoicesettlementagreementwithPSC,issuedandeffectiveHarch20,1998."10-14(A)10-15--PreferredConsent,December,)997--NMPCOfiicers'ncentiveCompensationPlan-PlanDocument.(A)10-16--NMPCLongTermIncentivePlan-PlanDocument.(A)10-17--NMPCManagementIncentiveCompensationPlan-98 PlanDocument10-)7(A)10-18--CEOSpecialAwardPlan.10-2(A)10-19--NHPCDeferredCompensationPlan.*(A)10-20--AmendmenttoNMPCDeferredCompensationPlan(A)10-21--NMPCPerformanceShareUnitPlan.(A)10-22--NMPC1992StockOptionPlan.<PAGE>(A)10-23--NMPC1995StockIncentivePlan"(A)10-24--EmploymentAgreementbetweenNMPCandDavidJ.Arrington,Sr.VicePresident,HumanResources,datedDecember20,1996.10-17(A)10-25--EmploymentAgreementbetweenNHPCandAlbertJ.Budney,Jr.,PresidentandChiefOperatingOfficer,December20,1996.g(A)10-26--EmploymentAgreementbetweenNHPCandWilliamE.Davis,ChairmanoftheBoardandChiefExecutiveOfficer,dated'ecember20,1996.g(A)10-27--EmploymentAgreementbetweenNHPCandDarleneD.Kerr,Sr.VicePresident,EnergyDistribution,datedDecember20,1996.(A)10-28--EmploymentAgreementbetweenNMPCandGaryJ.Lavine,Sr.VicePresident,LegalandCorporateRelations,datedDecember20,1996.(A)10-29--EmploymentAgreementbetweenNMPCandJohnW.Powers,Sr.VicePresident,andChiefExecutiveOfficer,datedDecember20,1996.(A)10-30--EmploymentAgreementbetweenNMPCandB.RalphSylvia,ExecutiveVicePresident,ElectricGenerationandChiefNuclearOfficer,datedDecember20,1996.10-23(A)10-31--EmploymentAgreementbetweenNMPCandTheresaA.Flaim,VicePresident-CorporateStrategicPlanning,datedDecember20,1996."10-24(A)10-32--EmploymentAgreementbetweenNHPCandStevenW.Tasker,VicePresident-Controller,datedDecember20,1996.(A)10-33-EmploymentAgreementbetweenNMPCandKapuaA.Rice,CorporateSecretary,datedDecember20,1996.(A)10-34--AmendmenttoEmploymentAgreementbetweenNMPCandDavidJ.Arrington,AlbertJ.Budney,Jr.,WilliamE.Davis,DarleneD.Kerr,GaryJ.Lavine,JohnW.PowersandB.RalphSylvia,datedJune9,1997.10-3(A)10-35--EmploymentAgreementbetweenNMPCandWilliamF.Edwards,datedSeptember25,1997.m~(A)10-36--EmploymentAgreementbetweenNMPCand10-499 JohnH.Mueller,datedJanuary19,1998.(A)10-37--DeferredStockUnitPlanforOutsideDirectorsg10-27--StatementsettingforththecomputationofaveragenuWerofsharesofcommonstockoutstanding.12--StatementsShowingComputationsofCertainFinancialRatios.'21--SubsidiariesoftheRegistrant.23--ConsentofPriceWaterhouseLLP,independentaccountants.~27--FinancialDataSchedule.{A)ManagementcontractorcompensatoryplanorarrangementrequiredtobefiledasanexhibitpursuanttoItem601ofRegulationS-K.100 CgEXHIBIT11NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARIESCOMPUTATIONOFAVERAGENUMBEROFSHARESOFCOMMONSTOCKOUTSTANDINGYearEndedDecember31,1997(1)SharesofCommonStock(2)NumberofDaysOutstanding(3)ShareDays(2x1)AverageNumberofSharesOut-standingasShown'nConsolidatedStatementsofIn-come(3DividedbyNumberofDaysinYear)Sharesissuedatvarioustimesduringtheperiod-Acquisition-SyracuseSuburbanGasCompany,Inc.54,1371996144,419,351sssssasssssJanuary1-December31144,365,21436552,693,303,11014,260,09652,707,563,206sRsssssassssss.144,404i283asaassassssJanuary1-December31144,332,123Sharesissuedatvarioustimesduringtheyear-36652i825'57'18Acquisition-SyracuseSuburbanGasCompany,Inc.199533,091144,365,214SSSSRRSRRSS6,397,65352,831,954,671assssassssssss144,349,603ssssssssassJanuary1-December31144,311,466Sharesissued-36552'73'85'90DividendReinvestmentPlan-January31Acquisition-SyracuseSuburbanGasCompany,Inc.-October419,0161,641335896,370,360146,049144,332,123Saaaaaaaaaa52,680,201,499assssssssassaa144,329,3)9aassaaaaaaa*Numberofdaysoutstandingnotshownassharesrepresentanaccumulationofweekly,monthlyandquarterlyissuesthroughouttheyear.Sharedaysforsharesissuedarebasedonthetotalnumberofdayseachsharewasoutstandingduringtheyear.Note:Earningspersharecalculatedonbothabasicanddilutedbasisarethesameduetotheeffectsofrounding.

EXHIBIT12NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESSTATEMENTSHOWINGCOMPUTATIONSOFRATIOOFEARNINGSTOFIXEDCHARGES,RATIOOFEARNINGSTOFIXEDCHARGESWITHOUTAFCANDRATIOOFEARNINGSTOFIXEDCHARGESANDPREFERREDSTOCKDIVIDENDSYearEndedDecember31,19971996199519941993A.NetIncomeperStatementsofIncome$183,335$110,390$248,036$176'84$271'31B.TaxesBasedonIncomeorProfitsC.Earnings,BeforeIncomeTaxesD.FixedCharges(a)E.EarningsBeforeIncomeTaxesandFixedCharges126,595309,930304,451614,38166,221176,611308,323484,934159,393407,429314,973722,402288,453418,906315,274319,197603,727738,103111,469147,075F.AllowanceforFundsUsedDuringConstruction9,7067,3559,0509,07916,232G.EarningsBeforeZncomeTaxesandFixedChargeswithoutAFCPreferredDividendFactor:$604,675QQPSaaQR$477,579SHSEaSOS$713,352$594,648$721,871H.PreferredDividendRequirementsZ.RatioofPre-TaxIncometoNetIncome(C/A)$37,3971.69$38,2811.60S39,5961.64S33,673S31,8571.631.54J.PreferredDividendFactor(HxI)K.FixedChargesasabove(D)L.FixedChargesandPreferredDividendsCombined$63,201304,451$367,652RSRHRWHRS61,250308,323$369,573aRQSSQ%%S64,937314,973$379,910RQRRRRR%S54,887$49,060315i274319,197$370,16168,257M.RatioofEarningstoFixedCharges(E/D)2.021.572.291.91..31N.RatioofEarningstoFixedChargeswithoutAFC(G/D)0.RatioofEarningstoFixedChargesandPreferredDividendsCombined(E/L)1.991.671.551.312.261.901.89261.63(a)Includesaportionofrentalsdeemedrepresentativeoftheinterestfactor:$26,:for1997,$26,600for1996,$27,312for1995,$29,396for1994and$27,821for1993.102 c,EXHIBIT21NIAGARAMOHAWKPOWERCORPORATIONANDSUBSIDIARYCOMPANIESSUBSIDIARIESOFTHEREGISTRANTNameofCompanyStateofOrganizationOpinacNorthAmerica,Inc.(Note1)NMUranium,Inc.EMCO-TECH,Inc.(Note2)NMHoldings,Inc.(Note3)MoreauManufacturingCorporationBeebeeIslandCorporationNMReceivablesCorp.DelawareTexasNewYorkNewYorkNewYorkNewYorkNewYorkNOTE1:AtDecember31,1997,OpinacNorthAmerica,Inc.ownsOpinacEnergyCorporationandPlumStreetEnterprises,Inc.OpinacEnergyCorporationhasa50percentinterestinCNP,whichisincorporatedintheProvinceofOntario,Canada.CNPownsCowleyRidgePartnership(anAlberta,Canadageneralpartnership)andCanadianNiagaraWindPowerCompany,Inc.(incorporatedintheProvinceofAlberta,Canada).PlumStreetEnterprises,Inc.,("PlumStreet")anunregulatedcompany,isincorporatedintheStateofDelaware.PlumStreetownsPlumStreetEnergyMarketing,Inc.(incorporatedintheStateofDelaware),GlobalEnergyEnterprisesIndiaPrivateLimited,90%ofDolphinInvestmentsInternational,Inc.(acorporationorganizedandexistingunderthelawsofNevis,WestIndies,whichowns45%ofAtlantisEnergieSystemsAG(acorporationorganizedandexistingunderthelawsoftheFederalRepublicofGermany)),25%ofTelergyJointVentureand26%ofDirectGlobalPower,Inc.NOTE2:EMCO-TECH,Inc.isinactiveatDecember31,1997.NOTE3:AtDecember31,1997,NMHoldings,Inc.ownsSalmonShores,Inc.,MoreauPark,Inc.,Riverview,Inc.,HudsonPointe,Inc.,UpperHudsonDevelopment,Inc.,LandManagement&Development,Inc.,OPropco,Inc.andLandWest,Inc.103 T

EXHIBIT23CONSENTOFINDEPENDENTACCOUNTANTSWeherebyconsenttotheincorporationbyreferenceintheRegistrationStatementonFormS-8(Nos.33-36189,33-42771and333-13781)andtotheincorporationbyreferenceintheProspectusconstitutingpartoftheRegistrationStatementonFormS-3(Nos.33-50703,33-51073,33-54827,33-55546and33349541)andintheProspectus/ProxyStatementconstitutingpartoftheRegistrationStatementonFormSQ(No.333-49769)ofNiagaraMohawkPowerCorporationofourreportdatedMarch26,1998,exceptNote2(thirdparagraph)andNote15,astowhichthedateisMay.29,1998appearingintheCompany'sForm10-K/A,AmendmentNo.2,datedMay29,1998.WealsoconsenttotheincorporationbyreferenceofourreportontheFinancialStatementSchedule,whichappearsintheForm10-K.PRICEWATERHOUSELLPSyracuse,NewYorkMay29,1998104

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SIGNATUREPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theRegistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.NIAGARAMOHAWKPOWERCORPORATION(Registrant)Date:May29,1998StevenW.TaskerVicePresident-ControllerandPrincipalAccountingOfficer105