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

CATEGORY1REGULARLY INFO!RMATION DISTRIBUTIO SYSTEM(RIDS)kACCESSION NBR:9807070338 DOC.DATE:

98/06/30NOTARIZED:

NODOCKET¹FACIL:50-220 NineMilePointNuclearStation,Unit1,NiagaraPowe0500022050-410NineMilePointNuclearStation,Unit2,NiagaraMoha05000410AUTH.NAMEAUTHORAFFILIATION CONWAY,J.T.

NiagaraMohawkPowerCorp.RECIP.NAME RECIPIENT, AFFILIATION RecordsManagement Branch(Document ControlDesk)

SUBJECT:

Forwards1997annualfinancial reptsofNMP&,co-tenant companies ofRG&E,NYSEG,CHGE

&LILCO,per 10CFR50.71(b).Amend 2toForm10-K/A,encl.W/o NMP&LXLCOannualrepts.DISTRIBUTION CODE:MPP4DCOPIESRECEIVED:LTR 1ENCL)SIZE:TITLE:50.71(b)AnnualFinancial ReportNOTES:C(AE.RECIPIENT IDCODE/NAME PD1-1LAHOOD,DINTERNA.83KCZRNRR/DRPM/PGEB 1'11NRR/DRPMCOPXESRECIPIENT LTTRENCLIDCODE/NAME 11PD1-1PD11'OPIESLTTRENCL1111G;0RYIEXTERNAL:

NRCPDR11CIUM'NOTETOALL"RIDS"RECIPIENTS:

PLEASEHELPUSTOREDUCEWASTE.TOHAVEYOURNAMEORORGANIZATION REMOVEDFROMDISTRIBUTION LISTSORREDUCETHENUMBEROFCOPIESRECEIVEDBYYOUORYOURORGANIZATION, CONTACTTHEDOCUMENTCONTROLDESKtDCD)ONEXTENSION 415-2083TOTALNUMBEROFCOPIESREQUIRED:

LTTR7ENCL7 A~rtL

'NiajaraMohawk T.ConwayresidentearGeneration Office:(315)3494213Fax:(315)349-26(5June30,1998NHPlL1336U.S.NuclearRegulatory Commission Attn:DocumentControlDeskWashington, DC20555RE:NineMilePointUnit1DocketNo.50-220NineMilePointUnit2DocketNo.50-410

Subject:

1997Annual$7nancialReportsofNiagaraMohatvkandtheCo-Tenant Companies ofNineMilePointUnit2Gentlemen:

PursuanttoSection50.71(b)oftheregulations oftheNuclearRegulatory Commission (10CFR)50.71(b)),

enclosedisacopyofthe1997AnnualFinancial ReportofNiagaraMohawkPowerCorporation (NMPC),togetherwithanamended(Amendment No.2)1997AnnualFinancial ReportforNMPC.AlsoenclosedarecopiesoftheAnnualFinancial ReportsofNineMilePointUnit2Co-Tenant companies:

Rochester GasandElectric, NewYorkStateElectric&Gas,CentralHudsonGas&Electric, andLongIslandLightingCompany.Verytrulyyours,J.T.ConwayVicePresident

-NuclearGeneration JTC/LMC/sc Enclosures exc:w/oenclosures Mr.H.J.Miller,RegionalAdministrator, RegionIMr.S.S.Bajwa,Director, ProjectDirectorate I-l,NRRMr.D.S.Hood,SeniorProjectManager,NRRMr.B.S.Norris,SeniorResidentInspector RecordsManagement NineMilePointNuclearStation,P.O.Box63.Lvco1n-N>>~Yci;-<~",<34tf807070338,980b3020 PDR~ADOCK,05000220 www.nimo.corn if tr0~Cl.

SECURITIES ANDEXCHANGECOMMISSION Washington, D.C.20549FORM10-KxANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIES EXCHANGEACTOF1934ForthefiscalyearendedDecember31,1997ORTRANSITION REPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIES EXCHANGEACTOF1934Forthetransition periodfrom.....................

to...................

Commission filenumber1-2987NIAGARAMOHAWKPOWERCORPORATION (Exactnameofregistrant asspecified initscharter)StateofNewYork154265555 (Stateorotherjurisdiction ofincorporation ororganization)

(I.R.S.Employeridentification No.)300ErieBoulevard WestSyracuse, NewYork13202(Addressofprincipal executive offices)(Zipcode)(315)474-1511(Registrant's telephone number.Indudingareacode)Securities registered pursuanttoSection12(b)oftheAct:(Eachclassisregistered ontheNewYorkStockExchange)

TitleofeachclassCommonStock1arvaluePreferred Stock100arvalue-cumulative 3.40%Series4.10%Series6.10%Series3.60%Series4.85%Series7.72%Series3.90%Series5.25%SeriesPreferred Stock25arvalue-cumulative 950%SeriesAdjustable RateSeriesAaSeriesCSecurities registered pursuanttoSection12(g)oftheAct:NoneIndicatebycheckmarkwhethertheregistrant (1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecurities ExchangeActof1934duringthepreceding 12months(orforsuchshorterperiodthattheregistrant wasrequiredtofilesuchreports),

and(2)hasbeensubjecttosuchfilingrequirements forthepast90days.YesIx]No[]Indicatebycheckmarkifdisclosure ofdelinquent filerspursuanttoItem405ofRegulation S-Kisnotcontained herein,andwillnotbecontained, tothebestoftheregistrant's knowledge, indefinitive proxyorinformation statements incorporated byreference inPartIIIofthisForm10-Koranyamendment tothisForm10-K.[x]Statetheaggregate marketvalueofthevotingstockheldbynon-affiliates oftheregistrant.

Approximately

$1,800,000,000 atMarch26,1998.Indicatethenumberofsharesoutstanding ofeachoftheregistrant's classesofcommonstock,asofthelatestpracticable date.Commonstock,$1parvalue,outstanding atMarch26,1998:144,419,351 sharos.~..9807070338

NIAGARAMOHAWKPOWERCORPORATION INFORMATION REQUIREDINFORM10-KPartIItemNumberGlossaryofTermsItem1.Business.

Item2.Properties.

Item3.LegalProceedings.

Item4.Submission ofMatterstoaVoteofSecurityHolders.Executive OfficersoftheRegistrant Pacae3516182223PartIIZtem5.Item6.Item7.Item8.'tem9.MarketfortheRegistrant's CommonEquityandRelatedStockholder Matters.SelectedConsolidated Financial Data.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations.

Financial Statements andSupplementary Data.ChangesinandDisagreements withAccountants onAccounting andFinancial Disclosure.

2426275190Item10.Ztem11.Item12.Item13.PartIIIDirectors andExecutive OfficersoftheRegistrant.

Executive Compensation.

SecurityOwnership ofCertainBeneficial OwnersandManagement.

CertainRelationships andRelatedTransactions.

9093105107PartIVItem14.Exhibits, Financial Statement Schedules, andReportsonForm8-K.Signatures 108126 NIAGARAMOHAWKPOWERCORPORATION GLOSSARYOFTERMSTERMAFCCleanAirActCOPSCTCCWIP'-'DECDthEBZTDAEPAFACFASBFERCGRTZPPIPPPartyZSOMERITMGPMRAregulatory asset,NORDEFINITION Allowance forFundsUsedDuringConstruction BritishThermalUnitsCleanAirActAmendments of1990CNGTransmission Corporation CanadianNiagaraPowerCompany,LimitedCompetitive Opportunities Proceeding Competitive Transition ChargesConstruction WorkinProgressNewYorkStateDepartment ofEnvironmental Conservation U.S.Department ofEnergyDekatherm:

onethousandcubicfeetofgaswithaheatcontentof1,000BritishThermalUnitspercubicfootEarningsbeforeInterestCharges,InterestIncome,IncomeTaxes,Deprecxation andAmortization (anon-GAAPmeasureofcashflow)U.S.Environmental Protection AgencyFuelAdjustment Clause:aclauseinarateschedulethatprovidesforanadjustment tothecustomer's billifthecostoffuelvariesfromaspecified unitcostFinancial Accounting Standards BoardFederalEnergyRegulatory Commission Generally AcceptedAccounting Principles GrossReceiptsTaxGigawatt-hour:

onegigawatt-hour equalsonebillionwatt-hours Independent PowerProducer:

anypersonthatownsoroperates, inwholeorinpart,oneormoreIndependent PowerFacilitxes Independent PowerProducers thatareapartytotheMRAIndependent SystemOperatorKilowatt:

onethousandwattsKilowatt-hour:

aunitofelectrical energyequaltoonekilowattofFowersuppliedortakenfromanelectriccircuitsteadilyforoneourMeasuredEquityReturnIncentive TermManufactured GasPlantMasterRestructuring Agreement

-anagreement toterminate, restateoramendZPPPartypowerpurchaseagreements Recoverable coststoterminate, restateoramendZPPPartycontracts, whicharedeferredandamortized underPowerChoice Megawatt:

onemillionwattsMegawatt-hour:

onethousandkilowatt-hours NitrogenOxide:gasesformedingreatpartfromatmospheric nitrogenandoxygenwhencombustion takesplaceunderconditions ofhightemperature andhighpressure; considered amajorairpollutant 0-3" NPLFederalNationalPriorities ListforUncontrolled Hazardous WasteSitesNYPPNYPPMemberSystemsNYSERDAPowerChoice agreement PPAPRPPSCPURPAQFROE'FASNo.71SFASNo.101SFASNo.106SFASNo.109SFASNo.121SFASNo.130SFASNo.131SFASNo.132SO,strandedcostsUnit1Unit.2SupremeCourtoftheStateofNewYdrk,AlbanyCountyU.S.NuclearRegulatory Commission NewYorkPowerAuthority NewYorkPowerPoolEightMemberSystemsare:thesevenNewYorkStateinvestor-owned electricutilities andNYPANewYorkStateEnergyResearchandDevelopment Authority Company's five-year electricrateagreement, whichincorporates theMRA,approvedinFebruary1998PowerPurchaseAgreement:

long-term contracts underwhichautilityisobligated topurchaseelectricity fromanIPPatspecified ratesPotentially Responsible PartyNewYorkStatePublicServiceCommission PublicUtilityRewxlatory PoliciesActof1978,asamended.OneoffivebillssignedintolawonNovember8,1978,astheNationalEnergyAct.Itsetsforthprocedures andrequirements applicable tostateutilitycommissions, electricandnaturalgasutxlities andcertainfederalregulatory agencies.

Amajoraspectofthislawisthemandatory purchaseob1igation fromqualifying facilities.

Qualifying Facility:

anindividual'(or corporation) thatownsand/oroperatesagenerating facilitybutisnotprimarily engagedinthegeneration orsaleofelectricpower.QFsarecatherpowerproduction orcogeneration facilities thatqualifyunderSection201ofPURPA.ReturnonCommonStockEquityStatement ofFinancial Accounting Standards No.71"Accounting fortheEffectsofCertainTypesofRegulation" Statement ofFinancial Accounting Standards No.101"Regulated Enterprises

-Accounting fortheDiscontinuance ofApplication ofFASBStatement No.71"Statement ofFinancial Accounting Standards No.106"Employers'ccounting forPostretirement BenefitsOtherThanPensions" Statement ofFinancial Accounting Standards No.109"Accounting forIncomeTaxes"Statement ofFinancial Accounting Standards No.121"Accounting fortheImpairment ofLong-Lived AssetsandforLong-Lived AssetstoBeDisposedOf"Statement ofFinancial Accounting Standards No.130"Reporting Comprehensive Income"Statement ofFinancial Accounting Standards No.131"Disclosures aboutSegmentsofanEnterprise andRelatedInformation" Statement ofFinancial Accounting Standards No.132"Employers'isclosure aboutPensionsandOtherPostretirement Benefits" SulfurDioxide:acolorless gasofcompounds ofsulfurandoxygenwhichisproducedprimarily bythecombustion offossilfuelUtilitycoststhatmaybecomeunrecoverable duetoachangeintheregulatory environment NineMilePointNuclearStationUnitNo.1NineMilePoint,NuclearStationUnitNo.24-N1AGARAMOHAWKPOWERCORPORATZON PARTXItem1.Business.

NiagaraMohawkPowerCorporation (the"Company"

),organized in1937underthelawsofNewYorkState,isengagedprincipally inthebusinessofgeneration,

purchase, transmission, distribution andsaleofelectricity andthepurchase, distribution, saleandtransportation ofgasinNewYorkState.SeePartZZ,Item8.Financial Statements andSupplementary Data-"Note12.Information Regarding theElectricandGasBusinesses."

GENERALUntilrecentyears,theelectricandgasutilityindustryoperatedinarelatively stablebusinessenvironment, subjecttotraditional cost-of-service regulation.

Theinvestment community, bothshareholders andcreditors, considered utilitysecurities tobeoflowriskandhighquality.Regulators upheldtheutility's exclusive righttoprovideservice'initsfranchise areasinexchangefortheutilitycompany's obligation toprovideuniversal servicetocustomers initsserviceterritory, subjecttocost-of-service regulation.

Suchregulation oftenencouraged regulators andothergovernmental bodiestouseutilities asvehiclestoadvancesocialprogramsandcollecttaxes.Ingeneral,priceswereestablished basedoncost-of-service, including afairrateofreturnandutilities wereallowedtofullyrecoverallprudently incurredcosts.Cashflowswererelatively predictable, aswastheindustry's abilitytosustaindividendpayoutandinterestcoverageratios.Consequently, theCompany's currentelectricity andgaspricesreflecttraditional utilityregulation.

Assuch,theCompany's electricity priceshaveincludedstate-mandated purchased powercostsfromIPPs,atcostsfarexceeding theCompany's actualavoidedcosts,aswellasthecostsofhightaxesintheStateofNewYork.AvoidedcostsarethecoststheCompanywouldotherwise incurtogeneratepowerifitdidnotpurchaseelectricity fromanothersource.WhiletheCompanywasexperiencing risingcosts,rapidtechnological advanceshavesignificantly reducedthepriceofnewgeneration andsignificantly improvedtheperformance ofsmallerscalegenerating units'naddition, thecurrentexcesssupplyofgenerating capacityhasdrivendownthepricesacompetitive marketwouldsupport.Actionstakenbyotherutilities throughout thecountrytolowertheirprices,including thoseinareaswithalreadyrelatively lowprices,increasethethreatofindustrial relocation andtheneedtoofferdiscounts toindustrial customers.

Zn1997,theCompanyenteredintotworelatedagreements thatitbelieveswillsignificantly improveitsfinancial outlook.PursuanttotheCompany's PowerChoice agreement, enteredintowiththePSC,whichregulates utilities intheStateofNewYork,theCompanyhasagreedtoafiveyearrateplan.andhasagreedtodivestitsfossilandhydrogenerating assets,representing 4,217MWofcapacityandapproximately

$1,100millionofnetbookvalue.PursuanttotheMRA,theCompanyand15IPPshaveagreedtoterminate, restateoramend28PPAsinexchangeforcash,sharesofCompanycommonstockandcertainfinancialcontracts.

Foradiscussion ofeventsthatoccurredduring1997inthecompetitive environment, federalandstateregulatory initiatives andtheCompany's effortstoaddressitscompetitive disadvantages anddeteriorating financial condition, seePartII,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations.

Thefollowing topicsarediscussed underthegeneralheadingof"Business."

Whereapplicable, thediscussions makereference tothevariousotheritemsofthisForm10-K.

~To1cpacaeRegulation andRatesZPPsNewYorkPowerAuthority OtherPurchased PowerFuelforElectricGeneration GasDeliveryGasSupplyFinancial Znformation AboutIndustEnvironmental MattersResearchandDevelopment NuclearOperations Construction ProgramElectricSupplyPlanningElectricDeliveryPlanningInsurance EmployeeRelations Seasonality rySegmentsInaddition, foradiscussion oftheCompany's Properties

-"Electric Service"and"GasService".

Company's treatment ofworkingcapitalitems,seePartDiscussion andAnalysisofFinancial Condition and"Financial

Position, Liquidity andCapitalResources" 677779910101515151515161616properties, seeItem2.Foradiscussion oftheII,Item7~Management's ResultsofOperations REGULATION.

ANDRATESSeveralcriticalinitiatives havebeenundertaken byvariousregulatory bodiesandtheCompanythathavehad,and'relikelytocontinuetohave,asignificant impactonthereshaping oftheCompanyandtheutilityindustry.

SeePartZI,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"PSCCompetitive Opportunities Proceeding

-Electric,"

"FERCRulemaking onOpenAccessandStrandedCostRecovery,"

and"OtherFederalandStateRegulatory Initiatives

-PSCProposalofNewZPPOperating andPPAManagement Procedures,"

"-GenericGasRateProceeding" and"-NRCandNuclearOperating Matters"foradiscussion oftheseotherinitiatives.

PowerChoice Agreement andtheMRA.Foradiscussion ofthePowerChoice agreement andtheMRA,seePartIZ,Ztem7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations' "MasterRestructuring Agreement andthePowerChoice Agreement".

Multi.-Year GasRateSettlement Agreement andGenericGasRateProceeding.

Foradiscussion ofthethree-year gasratesettlement agreement thatwasconditionally approvedbythePSCinDecember1996,seePartII,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-OtherFederalandStateRegulatory Initiatives

-"Multi-Year GasRateSettlement Agreement" and"-'eneric GasRateProceeding."

PriceDi.scounts.

Foradiscussion ofpricediscounts offeredtocustomers andthetermsofdiscountagreements, seePartZZ,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"OtherCompanyEffortstoAddressCompetitive Challenges

-CustomerDiscounts."

PSCAudi.t.ZnSeptember 1996,asaresultoftheCompany's investigation ofacontractwithascrapdealer,JosephBarsuk,Inc.("Barsuk"),

thePSCdirecteditsstafftoinvestigate theprudenceofseverallongtermcontracts involving scrapmetalandthecircumstances surrounding thelettingandadministration ofthosecontracts.

InFebruary1997,thePSCconcluded thatamorecomprehensive investigation wasrequiredtoensurethattheCompany's ethi'csandinternalcontrolprocedures arebeingeffectively implemented.

ThefinalreportontheprudencereviewwasissuedonJanuary21,1998andcontained variousrecommendations tostrengthen theCompany's scraphandlingprocedures, itsethicsprogramanditsinternalcontrolprocesses.

Actionsarecurrently underwaytoaddressrecommendations inthereport.Further,theCompanywillrefundtocustomers between$2.9millionand$3.7millionrelatedtolossesfromactionsbyascrapmetaldealertodefraudtheCompanybetween1970and1990andhasalsocommitted tocontinuetostrengthen itsethicsprogramandinternalcontrols.

TheCompanyisengagedinlitigation againstBarsukandaformer,insidedirectoroftheCompanywhoretiredin1988torecoverdamagesfromsuchdealings, butisunabletodetermine theoutcomeofthismatter.IPPsZn1997,theCompanypurchased 13,520,000 MWhorabout33%ofitstotalpowersupplyfromIPPs.Foradiscussion ofCompanyeffortstoreduceitsIPPcosts,seeItem3.LegalProceedings, PartIZ,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"MasterRestructuring Agreement andthePowerChoice Agreement" and"OtherFederalandStateRegulatory Initiatives

-PSCProposalofNewZPPOperating andPPAManagement Procedures" andPartZZ,Item8.Financial

'Statements andSupplementary Data-"Note9.Commitments andContingencies

-Long-TermContracts forthePurchaseofElectricPower."NEWYORKPOWERAUTHORITY TheCompanypresently hascontractual rightstopurchaseelectricity fromanumberofgenerating facilities ownedbytheNYPA.Zn1997,thesepurchases amountedto7,578,000 MWh,orabout19%oftheCompany's totalpowersupplyrequirements.

TheCompanycreditstoitsresidential customers, pursuanttothetermsoftheagreements withNYPA,aportionof.thelowcostpowerpurchased fromNYPAhydropowersources.RefertoPartZI,Item8.Financial Statements andSupplementary Data-"Note9.Commitments andContingencies

-Long-Term Contracts forthePurchaseofElectricPower"foratablethatsummarizes theNYPAgenerating source,amountsofpower,andthecontractexpiration datesforNYPAelectricity whichtheCompanywasentitledtopurchaseasofJanuary1,1998'nMay23,1997,theCompanysignedanagreement withNYPAandthePSCthat~allowsNYPA'scurrentindustrial customers tocontinuetoreceivetheirpowerallocations fromNYPA'sJamesA.FitzPatrick nuclearplant.Theagreement alsoprotectstheCompany'remaining customers bygenerally requi:ring thereimbursement byNYPAofstrandedcostswhichmayresultfromanyNYPAsalesabovecurrentlevels.Theagreement enablestheStateofNewYorktocontinuetouse,.NYPA's electricity tokeepandcreatejobsandinvestment inNewYorkStatewhileprotecting thefinancial interests oftheCompany.Thisagreement terminated litigation pendingbeforethePSCandtheFERCregarding NYPA'spowersalestoindustrial customers.

OTHERPURCHASED POWERPowerpurchased in1997fromsourcesotherthanZPPsandNYPAamountedto1,844,000 MWh,representing approximately 4%oftheCompany's totalpowersupplyrequirements.

TheCompanypurchases electricity fromtheNYPPandotherneighboring utilities asneededforeconomicoperation.

Thepricepaidforthatpowerisdetermined byspecificcontractual terms,basedonmarketprices.Physicallimitations ofexistingtransmission facilities, aswell.ascompetition withotherutilities andavailability ofenergy,impacttheamountofpowertheCompanyisabletopurchaseorsellandthepricetheCompanypaysorreceivesforthatpower.FUELFORELECTRICGENERATION ThePowerChoice agreement willeliminate theCompany's FAC,whichprovidedforpartialpass-through tocustomers offuelandpurchased powercostfluctuations fromamountsforecast.

Also,theCompanywillauctionitsfossilandhydrogenerating assetsinaccordance withtherestructuring underPowerChoice.

(SeePartII,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"MasterRestructuring Agreement andthePowerChoice Agreement.")

Coal.TheC.R.HuntleyandDunkirkSteamStations, theCompany's onlycoalfiredgenerating

stations, areexpectedtoburnabout,1.8millionand1.4milliontonsofcoal,respectively, in1998.TheCompanypurchased its1997coalrequirements undershort-term contracts andanticipates obtaining itstotal1998coalrequirements undershort-term contracts aswell.Theaveragelevelofcoalsupplywas25days,whichismanagedforsupplyrisk.Theannualaveragecostofcoalburnedin1995,1996and1997was$1.42,$1.39,and$1.41respectively, permillionBTU,or$36.81,$36.00and$36.68,respectively, perton.See"Environmental Matters-Air."NaturalGas.TheAlbanySteamStationhasthecapability tousenaturalgas,aswellasresidualoil,asafuelforelectricgeneration.

Thisdual-fuel capability permitstheuseofthelowercostfueldepending onfuelmarketconditions.

During1995,1996and1997,naturalgaswasthepredominant fuelused.However,generation atthisstationwascurtailed significantly duringthisperiodbecauseoftherequirement topurchaseIPPpowerandexcess,capacityintheregion.Inearly1995,modifications werecompleted attheOswegoSteamStationthatprovidedalimitedcapability forusingnaturalgasforelectricgeneration.

TheOswegoSteamStation's primaryfuelisresidualoil~TheCompanycurrently purchases allnaturalgasfortheAlbanyandOswegoSteamStationsfromthespotmarket.Thisgasispurchased asaninterruptible supply;andtherefoie, colderthannormalweatherandincreased demandforcapacityoninterstate pipelines byotherfirm(non-interruptible) gascustomers couldrestricttheamountofgassuppliedtothestations.

TheCompanyhasa25%ownership interestinRosetonSteamStationUnitsNo.1and2(the"RosetonUnits").BothRosetonUnitshavedualfuelcapability withresidualoilastheprimaryfuelandnaturalgasasthealternate fuel.CentralHudsonGasandElectricCorporation, aco-ownerandtheoperatoroftheRosetonSteamStation,hasonecontractforthesupplyofuptoapproximately 100,000DthsperdayofnaturalgasforuseattheRosetonUnits.The'naturalgassupplyisusedprimarily duringoffpeakmonths(AprilthroughOctoberofeachyear),minimizing theexposuretointerruption.

In1997,approximately 0.7millionDth(theCompany's share)ofgaswereusedattheRosetonUnits.TheannualaveragecostofnaturalgasburnedbytheCompany,including theRosetonSteamStation,from1995through1997was$1.65,$1.96,and$2.50respectively, permillionBTU,or$1.65,$1.96and$2.50,respectively, perDth.Res9.dual 09.1.TheCompany's totalrequirements forresidualoilin1998foritsAlbanyandOswegoSteamStationsareestimated atapproximately 1.0millionbarrels.Fuelsulfurcontentstandards instituted byNewYorkStaterequire1.5%sulfurcontentfueloiltobeburnedattheAlbanySteamStation.OswegoUnitNo.6requireslowsulfurfueloil(0.7%).OswegoUnitNo.5,whichburns1.5%sulfurfueloil,wasplacedonlongtermcoldstandbyeffective March1994.Alloilrequirements aremetonth'espotmarket.AtDecember31,1997,therewereapproximately 386,000barrelsofoil,ormore.thana16-daysupply,attheOswegoSteamStationandapproximately 350,000barrelsofoil,ora30-daysupply,attheAlbanySteamStation,basedonrecentburnprojections.

TheaveragepriceofOswegoUnitNo.6oilatJanuary1,1998wasapproximately

$22.00perbarrelfor0.7%sulfuroil.For1.5%sulfuroil,theaveragepricewasapproximately

$17.50perbarrelattheAlbanySteamStation.Thefueloilpricesquotedincludethe$2'5perbarrelpetroleum businesstaximposedbyNewYorkState.ThesupplyofresidualoilfortheRosetonUnitshasbeenarrangedbyCentralHudsonGasandElectricCorporation.

Arequirements contractiscurrently inplacewithoptionstoextendthecontractperiod.

TheannualaveragecostofresidualoilburnedattheAlbany,OswegoandRosetonSteamStationsfrom1995through1997was$3.41,$3.81and$4.05,respectively, permillionBTU,or$21.66,$24.15and$25F58,respectively, perbarrel.Nuclear.ThesupplyoffuelfortheCompany's NineMilePointnucleargenerating plantsinvolves:

(1)theprocurement ofuraniumconcentrates, (2)theconversion ofuraniumconcentrates touraniumhexafluoride, (3)~theenrichment oftheuraniumhexafluoride, (4)thefabrication offuelassemblies and(5)thedisposalofspentfuelandradioactive wastes.Agreements fornuclearfuelmaterials andservicesforUnit1andUnit2(inwhichtheCompanyhasa41%interest) havebeenmadethroughthefollowing years:UnitNo.1UnitNo.2UraniumConcentrates Conversion Enrichment Fabrication 20022002200320072002200220032006Arrangements havebeenmadeforprocuring aportionoftheuranium,conversion andenrichment requirements throughtheyearslistedabove,leavingtheremaining portionoftherequirements uncommitted.

Enrichment servicesareundercontractwiththeU.S.Enrichment Corporation forupto100%oftherequirements throughtheyear2003.Uptoapproximately 95%and90%oftheuraniumandconversion requirements areundercontractthroughtheyear2002forUnit1andUnit2,respectively.

Theuncommitted requirements fornuclearfuelmaterials andservicesareexpectedtobeobtainedthroughlong-term contracts orsecondary marketpurchases.

ThecostoffuelutilizedatUnit1for1995,1996and1997was$0.61,$0.60and$0.'54permillionBTU,respectively.

ThecostoffuelutilizedatUnit2for1995through1997was$0'1,$0.50'and$0.49permillionBTU,respectively.

Foradiscussion ofnuclearfueldisposalcostsandthedisposalofnuclearwastes,therecoveryofnuclearfuelcoststhroughratesandforfurtherinformation concerning costsrelatingtodecommissioning oftheCompany's nucleargenerating plants,seeItem8-Financial Statements andSupplementary Data-"Note1.SummaryofSignificant Accounting Policies-Depreciation, Amortization andNuclearGenerating PlantDecommissioning Costs"and"Note3~NuclearOperations."

Foradiscussion oftheCompany's planstoformaNewYorkNuclearOperating Company,seeItem7-Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-'"MasterRestructuring Agreement andthePowerChoice Agreement."

GASDELZVERY3TheCompanysells,distributes andtransports naturalgastoageographic territory thatgenerally extendsfromSyracusetoAlbany.ThenorthernreachesofthesystemextendtoWatertown andGlensFalls.NotalloftheCompany's distribution areasarephysically interconnected withoneanotherbyCompany-ownedfacilities.

Presently, nineseparatedistribution areasareconnected directlywithCNG,,aninterstate naturalgaspipelineregulated bytheFERC,viaseventeen deliverystations.

TheCompanyalsohasonedirectconnection withIroquoisGasTransmission andonewithEmpireStatePipeline.

GASSUPPLYThemajorityoftheCompany's gassalesareforresidential andcommercial spaceandwaterheating.Consequently, thedemandfornaturalgasbytheCompany's customers isprimarily seasonalandinfluenced byweatherfactors.Th~Companypurchases itsnaturalgasforsaletoitscustomers underfirmandshort~termspotcontracts, whichistransported onbothfirmandinterruptible transportation contracts.

During1997,about92%and8%oftheCompany's naturalgassupplywaspurchased underfirmcontracts andshort-term spotcontracts, respectively (generally longerthan30days)(SeePartZI.Item8-Financial Statements andSupplementary Data-"Note9.Commitments andContingencies

-GasSupply,StorageandPipelineCommitments"

).Inaddition, theCompanyhasacommitment withCNGtoprovidegasstoragecapability untilMarch2002.Foradiscussion ofthePSCstaff'spzoposalthatnaturalgasutilities exitthebusinessofpurchasing naturalgasforcustomers overthenextfiveyears,SeePartZI.Item7-Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"GenericGasRateProceeding."

FINANCIAL INFORMATION ABOUTINDUSTRYSEGMENTSSeePartZZ,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations andItem8.Financial Statements andSupplementary Data-"Note12.Information Regarding theElectricandGasBusinesses."

ENVIRONMENTAL MATTERSGeneral.TheCompany's operations andfacilities aresubjecttonumerousfederal,stateandlocallawsandregulations

-relating totheenvironment including, amongotherthings,requirements concerning airemissions, waterdischarges, siteremediation, hazardous materials

handling, wastedisposalandemployeehealthandsafety.WhiletheCompanydevotesconsiderable resources toenvironmental compliance andpromoting employeehealthandsafety,theimpactoffutureenvironmental healthandsafetylawsandregulations ontheCompanycannotbepredicted withcertainty.

Incompliance withenvironmental statutesandconsistent withitsstrategic philosophy, theCompanyperformsenvironmental investigations andanalysesandinstalls, asrequired, pollution controlequipment, including, amongotherthings,effluentmonitoring instrumentation andmaterials storage/handling facilities designedtopreventorminimizereleasesofpotentially harmfulsubstances.

Expenditures forenvironmental mattersfor1997totaledapproximately

$37.1million,ofwhichapproximately

$5.6millionwascapitalized aspollution controlequipment orplantenvironmental surveillance andapproximately

$31.5millionwaschargedtooperating expenseforremediation, operation ofenvironmental monitoring andwastedisposalprograms.

Expenditures for1998areestimated tototal$41.6million,ofwhich$9.0millionisexpectedtobecapitalized and$32.6millionchargedtooperating expense.Anticipated expenditures for1999areestimated tototal$42.5million,ofwhich$5.1millionisexpectedtobecapitalized and$37.4millionchargedtooperating expense.Theexpenditures for1998and1999includetheestimated costsfortheCompany's expectedproportionate shareofthecostsforsiteinvestigation andremediation ofwastesitesdiscussed under"Solid/Hazardous Waste"below.Costsforsiteinvestigation andremediation areincludedinoperating expensetotheextentactualcostsdonotexceedtheamountprovidedforinrates,inwhichcase,theexcesscostsaredeferredforfuturerecoverythroughcost-of-service basedrates.ZSO14001.During1997,theCompanyhadallofitsfossilandnucleargenerating

.assets(theOswego,Albany,HuntleyandDunkirkSteamStationsandNineMilePoint)certified totheISO14001environmental management systemstandard.

Theregistration auditsofthesefacilities wasconducted byAdvancedWasteManagement Systems.TheCompany's positionhasbeenandcontinues tobethataneffective environmental management systemisnecessary toprudently manageenvironmental issuesandminimizeenvironmental liabilities.

TheCompanybelievesthatitisprobablethatcostsassociated withenvironmental compliance willcontinuetoberecovered throughtheratemaking process.Foradiscussion ofthecircumstances regarding theCompany's continued abilitytorecoverthesetypesofexpenditures inrates,seePartII,Item8.Financial Statements andSupplementary Data-"Note2.RatesandRegulatory IssuesandContingencies."

IAir.TheCompanyisrequiredtocomplywithapplicable federalandstateairqualityrequirements pertaining toemissions intotheatmosphere fromitsfossil-fuel generating stationsandotherairemissionsources.TheCompany's fourfossil-fired generating stations(theAlbany,Huntley,OswegoandDunkirkSteamStations) haveCertificates toOperateissued'bytheDEC.Theprovisions oftheCleanAirActaddressattainment andmaintenance ofambientairqualitystandards, mobilesourcesofairpollution, hazardous airpollutants, ac'idrain,permits,enforcement, cleanairresearchandotheritems.TheCleanAirActwillcontinuetohaveasubstantial andincreasing impactupontheoperation offossil-fired electricpowerplantsinfutureyears.Theacidrainprovisions oftheCleanAirAct(TitleZV)requirethatS4emissions fromutilities andcertainothersourcesbereducednationwide by10milliontonsfromtheir1980levelsandthatNO,emissions bereducedbytwomilliontonsfrom1980levels.Emissionreductions weretobeachievedintwophases-Phase.Iwastobecompleted byJanuary1,1995andPhaseZIwillbecompleted byJanuary1,2000.TheCompanyhastwounits(Dunkirk3and4)affectedinPhase.Z.Beginning in1995,theCompanywasrequiredtoreduceSO<emissions byapproximately 10,00015,000tonsperyearandtheCompanyiscomplying withtheserequirements bysubstituting non-Phase Iunitsandrelyingonreducedutilization oftheseunitstosatisfyitsemissionreduction requirements atDunkirk3and4.WithrespecttoNOTitleIVoftheCleanAirActrequiresemissionreductions atDunkirk3and4.LowNO,burnertechnology hasbeeninstalled tomeetthenewemissionlimitations.

Inaddition, TitleIoftheCleanAirAct(Provisions fortheAttainment andMaintenance ofNationalAmbientAirQualityStandards) requiredtheinstallation ofreasonably available controltechnology

("RACT")onalloftheCompany's coal,oilandgas-fired unitsbyMay31,1995.Compliance withTitleZRACTrequirements attheCompany's unitswasachievedbyinstalling lowNOburnersorothercombustion controltechnology.

PhaseZIrequirements associated withTitleZVoftheCleanAirAct(targeted fortheyear2000andbeyond)willrequiretheCompany,tofurtherreduceitsSO>emissions atallofitsfossilgenerating units.PossibleoptionsforPhaseZZSQcompliance beyondthoseconsidered forPhaseIcompliance includefuelswitching, installation offluegasdesulfurization orcleancoaltechnologies, repowering andtheuseofemissionallowances createdundertheCleanAirAct.rZnSeptember, 1994,thestatescomprising theNortheast OzoneTransport Commission (NewYorkStateincluded) signedaMemorandum ofUnderstanding thatcallsforeachmemberstatetodevelopregulations fortwoadditional phasesofNO,reduction beyondRACT(referred toasPhaseZZandPhaseIZZNO,reductions).

InPhaseZZ,airemissionsourceslocatedinupstateNewYork(whichincludesalloftheCompany's airemissionsources)willhavetoreduceNO,emissions byMay,1999by55percentrelativeto1990levels.ZnPhaseIZI,theseairemissionsourceswillhavetoreduceNO,emissions inMay2003by75percent.relativeto1990levels.TheMemorandum ofUnderstanding providesthatthespecified reductions inPhaseIZZmaybemodifiedifevidenceshowsthatalternative NOreductions, togetherwithotheremissionreductions, willsatisfytheairqualitystandardacrosstheregion.TheDECwillbedeveloping itsPhaseZZNOregulations in1998.Theneedforandextentofanyfurtherreductions neededinPhaseZIIwillnotbedetermined until1999orlater.Untildetailsareavailable onhowthePhaseIIandPhaseZZZNO,reductions willbeimplemented, definitive compliance plansfortheCompany's fossilgenerating stationsandreliablecompliance costestimates cannotbedeveloped, althoughsuchcostscouldbesignificant.

Potential airregulatory developments mayimpacttheCompanyinthefutureincluding:

(1)aproposed"longrangeozonetransport" rulemaking forutilities andotherNO,sourcesintheNortheast andMidwesttosubstantially reducetheirNO,emissions; and(2)arevisedNationalAmbientAirQualityStandardfoParticulate Matterthatincludesfineparticulates.

TheCompanyspentapproximately

$5million,$0.1million,and$0.1millionincapitalexpenditures in1995,1996and1997,,respectively, onprojectsatthefossilgeneration plantsassociated withPhaseIcompliance.

TheCompanyhasincluded$1.0millioninits1998through2000construction forecastforPhaseIIcompliance whichwillbecomeeffective January1,2000'oradiscussion ontheCompany's planstosellitsfossilandhydroassets,seePartII,Item7~Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"MasterRestructuring Agreement andthePowerChoice Agreement."

Foradiscussion oftheCompany's negotiations withDECofaConsentDecreeaddressing pastopacityexcursions andfutureopacitycompliance issues,seeItem3.LegalProceedings.

Water.TheCompanyisrequiredto.complywithapplicable FederalandStatewaterqualityrequirements, including theCleanWaterAct,inconnection withthedischarge ofcondenser coolingwaterandotherwastewaters fromitssteam-electric generating stationsand.otherfacilities.

Wastewater discharge permitshavebeenissuedbyDECforeachofits'team-electric generating stations.

Thesepermitsmustberenewedeveryfiveyears.Inaddition, hydroelectric facilities arerequiredtoobtainCleanWaterActcertifications aspartoftheFERClicensing/relicensing process.Suchcertifications havebeenissuedorarependingforasubstantial portionoftheCompany's hydroelectric facilities.

Conditions ofthepermitstypically requirethatstudiesbe.performed todetermine theeffectsofstationoperation ontheaquaticenvironment inthestationvicinityandtoevaluatevarioustechnologies formitigating lossesofaquaticlife.LowLevelRadioactive Waste.SeePartII,Item8.Financial Statements andSupplementary Data-"Note3.NuclearOperations

-LowLevelRadioactive Waste."SOlid/HaZardOuS WaSte.Thepublicutilityindustrytypically utilizesand/orgenerates initsoperations abroadrangeofhazardous andpotentially hazardous wastesandby-products.

TheCompanybelievesitishandlingidentified wastesandby-products inamannerconsistent withfederal,stateandlocalrequirements andhasimplemented anenvironmental auditprogramtoidentifypotential areasofconcernandaidincompliance withsuchrequirements.

Environmental lawscanimposeliability fortheentirecostofsiteremediation uponeachofthepartiesthathavesentwastetoacontaminated siteregardless offaultorthelawfulness oftheoriginaldisposalactivity.

TheCompanyisalsocurrently investigating andremediating, asnecessary tomeetcurrentenvironmental standards, certainproperties associated withitsformergasmanufacturing operations andotherproperties whichtheCompanyhaslearnedmaybeimpactedbyindustrial waste,aswellasinvestigating identified industrial wastesiteswhereCompanywastematerials mayhavebeensent.TheCompanyhasalsobeenadvisedthatvariousfederal,stateorlocalagenciesbelievecertainproperties requireinvestigation andhasprioritized thesitesbasedonavailable information inordertoenhancethemanagement ofinvestigation andremediation, ifnecessary.

TheCompanyiscurrently awareof124suchsiteswithwhichithasbeenormaybeassociated, including 76whichareCompany-owned.

TheCompany-owned sitesinclude21formerMGPsites,10industrial wastesitesand45operating propertysiteswherecorrective actionsmaybedeemednecessary toprevent,containand/orremediate impactstosoiland/orwaterinthevicinity.

OftheseCompany-owned sites,SaratogaSpringsisontheNPLpublished bytheEPA.Thenumberofownedsiteshasincreased astheCompanyhasestablished aprogramtoactivelyidentifyandmanagepotential areasofconcernatitselectricsubstations.

Thiseffortresultedinidentifying anadditional 32sitesin1997.The48non-owned siteswithwhichtheCompanyhasbeenormaybeassociated aregenerally industrial disposalwastesiteswheresomeofthedisposedwastematerials areallegedtohaveoriginated fromtheCompany's operations.

Pendingtheresultsofinvestigations atthenon-owned sites,theCompanymayberequiredtofundsomeshareoftheremedialcosts.Althoughonepartycan,asamatteroflaw,beheldliableforalloftheremedialcostsatasite,regardless offault,inpracticecostsareusuallyallocated amongPRPs.Investigations ateachoftheCompany-owned sitesaredesignedto(1)determine ifenvironmental contamination problemsexist,(2)ifnecessary, determine theappropriate remedialactionsand(3)whereappropriate, identify Iotherpartieswhoshouldbearsomeorallofthecostofremediation.

Legalactionagainstsuchotherpartieswillbeinitiated whereappropriate.

Aftersiteinvestigations arecompleted, theCompanyexpectstodetermine site-specific remedialactions.and toestimatetheattendant costsforrestoration.

However,sinceinvestigations areongoingatmostsites,theestimated costofanyremedialactionissubjecttochange.Estimates oftheCompany's potential liability forCompany-owned sitesarebaseduponavarietyoffactors,including identified orpotential contaminants,

location, sizeanduseofthesite,proximity tosensitive resources, statusofregulatory investigation andknowledge ofactivities andcostsatsimilarly situatedsites.Additionally, asfurtherdescribed below,theCompany's estimating approachnowincludesaprocessforcertainsiteswherethesefactorsaredeveloped andreviewedusingdirectinputandsupportobtainedfromtheDEC.ActualCompanyexpenditures aredependent uponthetotalcostofinvestigation andremediation andtheultimatedetermination oftheCompany's shareofresponsibility forsuchcosts,aswellasthe.financial viability ofotheridentified responsible partiessinceclean-upobligations arejoint.and several.TheCompanyhasdeniedanyresponsibility atcertainofthesesiteswhereotherPRPsareidentified andiscontesting liability accordingly.

Asaconsequence ofsitecharacterizations andassessments completed todate,theCompanyhasaccruedaliability of$155millionfortheseownedsites,representing itsbestcurrentestimateforitsshareofthecostsforinvestigation andremediation.

Thehighendoftherangeispresently estimated atapproximately

$365million.TheamountaccruedatDecember31,1997,incorporates theadditional electricsubstations, previously mentioned, andachangeinthemethodusedtoestimatetheliability for27ofitslargestsites,torelyuponadecisionanalysisapproach.

Thismethodincludesdeveloping severalremediation approaches foreachofthe27sites,usingthefactorspreviously described, andthenassigning aprobability toeachapproach.

Theprobability represents theCompany's bestestimateofthelikelihood oftheapproachoccurring usinginputreceiveddirectlyfromtheDEC.Theprobablecostsforeachapproacharethencalculated toarriveatanexpectedvalue.Whilethisapproachcalculates arangeofoutcomes, theCompanyhasaccruedthesumoftheexpectedvaluesforthesesites.TheamountaccruedfortheCompany's remaining ownedsitesrepresents eithercostsresulting fromfeasibility studieorengineering estimates, theCompany's shareofaPRPallocation or,wherenobetterestimateisavailable, thelowendofarangeofpossibleoutcomes.

Themajorityofcostestimates forcurrently ownedproperties relatetotheMGPsites,particularly theHarborPointsite(Utica,NewYork),whichincludesfivesurrounding non-owned sites.InOctober1997,theCompanysubmitted adraftfeasibility studytotheDECfortheHarborPointandsurrounding sites.Thestudyindicates arangeofviableremedialapproaches.

However,afinaldetermination hasnotbeenmadeconcerning theremedialapproachtobetaken.Thisrangeconsistsofalowendof$22millionandahighendof$230millionwithanexpectedvaluecalculation of$51million,whichisincludedinthetotalamountsaccruedatDecember31,1997.Therangerepresents thetotalcoststoremediate HarborPointandthesurrounding sitesanddoesnotconsidercontributions fromotherPRPs.TheCompanyanticipates receiving commentsfromtheDEConthedraftfeasibility studybythespringof1999.Atthistime,theCompanycannotdefinitively predictthe.natureoftheDECproposedremedialactionplanortherangeofremediation costsitwillrequire.WhiletheCompanydoesnotexpecttoberesponsible fortheentirecosttoremediate theseproperties, itisnotpossibleatthistimetodetermine itsshareofthecostofremediation.

InMay1995,theCompanyfiledacomplaint, pursuanttoapplicable FederalandNewYorkStatelaw,intheU.S.DistrictCourtfortheNorthernDistrictofNewYorkagainstseveraldefendants seekingrecoveryofpastandfuturecostsassociated withtheinvestigation andremediation oftheHarborPointandsurrounding sites'namotioncurrently pendingbeforetheCourt,theNewYorkStateAttorneyGeneralhasmovedtodismisstheCompany's claimsagainsttheStateofNewYork,theNewYorkStateDepartment ofTransportation, theThruwayAuthority andCanalCorporation.

TheCompanyhasopposedthismotion.Thecasemanagement orderpresently callsforthecloseofdiscovery onDecember31,1998.Asaresult,theCompanycannotpredicttheoutcomeofthependinglitigation againstotherPRPsortheallocation oftheCompany's shareofthcoststoremediate theHarborPointandsurrounding sites.

WithrespecttositesnotownedbytheCompany,but,forwhichtheCompanyhasbeenormaybeassociated asaPRP,theCompanyhasrecordedaliability of$65million,representing itsbestcurrentestimateofitsshareofthetotalcosttoinvestigate andremediate thesesites.Totalcoststoinvestigate andremediate allnon-owned sitesisestimated tobeapproximately

$285millionintheunlikelyeventtheCompanyisrequiredtoassume100%oftheresponsibility forthesesites.TheCompanyhasdeniedanyresponsibility forcertainofthesePRPsitesandiscontesting liability accordingly.

EightofthePRPsitesareincludedontheNPL.TheCompanyestimates itsshareoftheliability fortheseeightsitesisnotmaterialandhasincludedtheamountinthedetermination oftheamountsaccrued.Estimates oftheCompany's potential liability forsitesnotownedbytheCompany,butforwhichtheCompanyhasbeenidentified asanallegedPRP,havebeenderivedbyestimating thetotalcostofsiteclean-upandthenapplyingaCompanycontribution factortothatestimatewhereappropriate.

Estimates ofthetotalclean-upcostsaredetermined byusingallavailable information frominvestigations conducted bytheCompanyandotherparties,negotiations withotherPRPsand,wherenootherbasisisavailable atthetimeofestimate, theEPAfigureforaveragecosttoremediate asitelistedontheNPLasdisclosed intheFederalRegisterofJune23,1993(58Fed.Reg.119).Acontribution factoriscalculated, whenthereisareasonable basisforit,thatuseseitheraproratasharebaseduponthetotalnumberofPRPsnamedorotherwise identified, orthepercentage agreeduponwithotherPRPsthroughsteeringcommittee negotiations orbyothermeans.Insomeinstances, theCompanyhasbeenunabletodetermine acontribution factorandhasincludedintheamountaccruedthetotalestimated coststoremediate the.sites.

ActualCompanyexpenditures forthesesitesaredependent uponthetotalcostofinvestigation andremediation andtheultimatedetermination oftheCompany'shareofresponsibility forsuchcostsaswellasthefinancial viability ofotherPRPssinceclean-upobligations arejointandseveral.WhiletheCompanyhasaccruedanobligation of$220millionforitsownedandnon-owned sites,thehighendoftherangeofremedialobligations iscurrently estimated tobeapproximately

$650million.InMay1997,theDECexecutedanOrderonConsent(the"1997Order")whichservestokeeptheannualcashrequirement forcertainsiteinvestigation andremediation

("SZR")level(atapproximately

$15millionperyear),aswellasprovideforanannualsiteprioritization mechanism.

Asexecuted, the1997Orderexpandsthescopeoftheoriginal1992Order,whichcovered21formerMGPsites,toencompass 52siteswithwhichtheCompanyhasbeenassociated.

Theagreement issupported bythedecisionanalysisapproach, whichtheCompanyandtheDECwillcontinuetoreviseonanannualbasistoaddressSIRprogressandsitepriorities relativetoestablishing theannualcostcap,aswellasdetermining theCompany's liability forthesesites.TheSaratogaSpringsandHarborPointMGPsitesarebeinginvestigated andremediated pursuanttoseparateregulatory ConsentOrderswiththeEPAandtheDEC,respectively.

However,theannualcostsassociated withtheremediation ofthesesitesareincludedinthecashrequirements undertheamended1997Order.PowerChoice andtheCompany's gassettlement providefortherecoveryofSZRcostsoverthesettlement periods.TheCompanybelievesfuturecosts,beyondthesettlement periods,willcontinuetoberecovered inrates.Baseduponthisassessment, aregulatory assethasbeenrecordedintheamountof$220million,representing thefuturerecoveryofremediation obligations accruedtodate.Asaresult,theCompanydoesnotbelieveSIRcostswillhaveamaterialadverseeffectonitsresultsofoperations orfinancial condition.

SeealsoPartIZ,Item8.Financial Statements andSupplementary Data-"Note2~RateandRegulatory IssuesandContingencies."

Whereappropriate, theCompanyhasprovidednoticesofinsurance claimstocarrierswithrespecttotheinvestigation andremediation costsforMGP,industrial wastesitesandsitesforwhichtheCompanyhasbeenidentified asaPRP.Todate,theCompanyhasreachedsettlements withanumberofinsurance

carriers, resulting inpaymentstotheCompanyofapproximately

$36million,netofcostsincurredinpursuingrecoveries.

TheCompanyhasagreed,initsPowerChoice settlement, toamortizetheportionallocated totheelectricbusiness, orapproximately

$32million,overaten-yearperiod.Theremaining portionrelatestothegasbusinessandisbeingamortized overthethree-year settlement period.Foradiscussion ofadditional environmental legalproceedings, seeItem3.LegalProceedings.

RESEARCHANDDEVELOPMENT TheCompanymaintains aresearchanddevelopment

(>>RQ)>>)programaimedatimproving thedeliveryanduseofenergyproductsandfindingpractical applications fornewandexistingtechnologies intheenergybusiness.

Theseeffortsinclude(1)improving efficiency; (2)minimizing

'environmental impacts;(3)improving facilityavailability; (4)minimizing maintenance costs;(5)promoting economicdevelopment and(6)improving thequalityoflifeforourcustomers withnewelectrictechnologies.

RaDexpenditures in1995through1997werenotmaterialtotheCompany's resultsofoperations orfinancial condition.

NUCLEAROPERATIONS SeePartZZ,Item7~Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"OtherFederalandStateRegulatory Initiatives

-NRCandNuclearOperating Matters>>andPartZZ,Item8.Financial Statements andSupplementary Data-"Note3.NuclearOperations."

CONSTRUCTION PROGRAMSeePartII,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"Financial

Position, Liquidity andCapitalResources

-Construction and'therCapitalRequirements" andPartZI,Item8.Financial Statements andSupplementary Data-"Note9.Commitments andContingencies

-Construction Program."

'IELECTRICSUPPLYPLANNINGUnderthePowerChoice agreement, theCompanyhasagreedtoputallofitsfossilandhydrogeneration assetsupforauction.Winningbidswouldbeselectedwithin11months'fPSCapprovaloftheauctionplan,whichwasfiledwiththePSConDecember1,1997separately fromthePowerChoice agreement.

• IftheCompanydoesnotreceiveanacceptable positivebidforanasset,theCompanyagreedtoformasubsidiary toholdanysuchassetsandthentolegallyseparatethissubsidiary fromtheCompanythrougha"spin-'off'to shareholders orotherwise.

Aftertheforegoing processiscomplete, theCompanyagreednottoownanynon-nucleargenerating assetsintheStateofNewYork,subjecttocertainlimitedexceptions providedinthePowerChoice agreement.

ELECTRICDELIVERYPLANNING(SeePartZZ~Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

->>FERCRulemaking onOpenAccessandStrandedCostRecovery.")

AsofJanuary1,1998,theCompanyhadapproximately 130,000milesoftransmission anddistribution linesforelectricdelivery.

Evaluation ofthesefacilities relativetoNYPPandNortheast PowerCoordinating Councilplanningcriteriaandanticipated Companyinternalandexternaldemandsisanongoingprocessintendedtominimizethecapitalrequirements forexpansion ofthesefacilities.

(Foradiscussion ofmajorrestoration oftheCompany's electricdeliveryfacilities innorthernNewYorkasaresultofanicestorminJanuary1998,seePartII,Item8.Financial Statements andSupplementary Data-"Note13.Subsequent Event)."

TheCompanyhasreviewedtheadequacyofitselectricdeliveryfacilities andhasdetermined thatcapitalrequirements tosupportnewloadgrowthwillbebelowpreviousyears'xpenditures.

Transmission planningstudiesarepresently inprogresstoinvestigate thesystemimpactoftwoproposedgeneration

projects, U.S.Generating Company's 1080MWplantlocatedinAthens,NewYorkandtheCompany's 723MWrepowering oftheAlbanySteamStationinBethlehem, NewYork.(SeeItem2.Properties

-"Electric Service").BothoftheseprojectsarefilingforArticleXcertification withaprojected inservicedateof2001.INSURANCE AsofJanuary31,1998,theCompany's directors andofficersliability insurance wasrenewed.Thiscoverageincludesnuclearoperations andinsurestheCompanyagainstobligations incurredasaresultofitsindemnification ofdirectors andofficers.

Thecoveragealsoinsuresthedirectors andofficersagainstliabilities forwhichtheymaynotbeindemnified bytheCompany,exceptforadishonest actorbreachoftrust.Inaddition, foradiscussion ofnuclearinsurance, seePartIZ,Item8.Financial Statements andSupplementary Data-"Note3.NuclearOperations

-NuclearLiability Insurance" and-"NuclearPropertyInsurance."

EMPLOYEERELATIONS TheCompany's workforceatDecember31,1997numberedapproximately 8,500ofwhomapproximately 71%wereunionmembers.Ztisestimated thatapproximately 78%oftheCompany's totallaborcostsareapplicable tooperation andmaintenance andapproximately 22%areapplicable toconstruction andotheraccounts.

AlloftheCompany's non-supervisory production andclericalworkerssubjecttocollective bargaining arerepresented bytheInternational Brotherhood ofElectrical Workers("ZBEW").

ZnApril1996,theCompanyandtheIBEWagreedonafive-year, threemonthlaboragreement, whichprovidesforwageincreases fapproximately 2%to3%ineachofthesubsequent fouryears.SEASONALITY SeeItem2.Properties

-"Electric Service"andPartZZ,Item8.Financial Statements andSupplementary Data-"Note14.Quarterly Financial Data(Unaudited)."

Item2.Property.es.

ELECTRICSERVICEAsofJanuary1,1998,theCompanyownedandoperatedfourfossilfuelsteamplants(aswellashavinga25%interestintheRosetonSteamStationanditsoutput),twonuclearfuelsteamplants,variousdieselgenerating unitsand72hydroelectric plants,andhadamajorityinterestinBeebeeIslandandFeederDamhydroplantsandtheiroutput.TheCompanyalsopurchases substantially alloftheoutputof93otherhydroelectric facilities.

TheCompany's wholly-owned subsidiary; OpinacNorthAmerica,Znc.,ownsOpinacEnergyCorporation andPlumStreetEnterprises, Inc.OpinacEnergyCorporation hasa50percentinterestinCNP(ownerandoperatorofthe76.8MWRankinehydroelectric plant)whichdistributes electricpowerwithintheProvinceofOntarioandownsawindmillgenerator intheProvinceofAlberta.Znaddition, theCompanyhascontracts topurchaseelectricenergyfromNYPAandothersources.SeeItem1.Business-

"IPPs,"-"NewYorkPowerAuthority" and-"OtherPurchased Power"andPartZZ,Item8.Financial Statements andSupplementary Data-"Note9.Commitments andContingencies

-Long-term Contracts forthePurchaseofElectricPower"and"Electric andGasStatistics."

TheCompanyholdstheFERClicensefor65hydroelectric plants.Asignificant numberoftheselicensesaresubjecttorenewaloverthenext4years.'sofDecember31,1997,theCompanyhasrenewed2hydrolicensesandhas7licenserenewalspending.ZntheeventtheCompanyisunabletorenewahydrolicense,itisentitledtocompensation forthe facility.

(SeePartII,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations,

-"MasterRestructuring Agreement andthePowerChoice Agreement

-Powerchoice Agreement" foradiscussion oftheCompany's planstosellitsfossilandhydroassets).Thefollowing isalistoftheCompany's majoroperating generating stationsatFebruary1,1998:Station,LocationandPercentOwnership Huntley,NiagaraRiver(100%)Dunkirk,LakeErie(100%)Albany,HudsonRiver(100%)Oswego,LakeOntario(76%)(Unit6)Roseton,HudsonRiver(25%)EnergySourceCoalCoalOil/Natural GasOil/Natural GasOil/Natural GasCompany's Shareof~NominalNetCapability inMW760600400646300NineMilePoint,LakeOntario(100%)(Unit1)Nuclear613NineMilePoint,LakeOntario(41%)(Unit2)Nuclear469In1994,OswegoUnitNo.5(anoil-fired unitwithanetbookvalue-of$160millionandacapability of850MW)wasputintolong-term coldstandby,butcanbereturnedtoserviceinthreemonths.TheCompanyispursuingthenecessary permitstoinstallstate-of-the-ar technology attheAlbanySteamStationtoredevelop thefacilitytoincreasethecapacityfromthecurrent.400MWto723MWandrenamethestationtheBethlehem EnergyCenter.Thenewfacilitywouldusenaturalgasfueledcombinedcycleunitswhichwouldreduceairemissions andsignificantly improvethefacility's operating efficiency.

Thelicensing effortandpermitting processisexpectedtotakeupto18monthsandbetransferable toanewownerofthefacilityunderthefossilandhydrogenerating facilityauction.TheelectricsystemoftheCompanyandCNPisdirectlyinterconnected withotherelectricutilitysystemsinOntario,Quebec,NewYork,Massachusetts, VermontandPennsylvania, andindirectly interconnected withmostoftheelectricutilitysystemsthroughtheEasternInterconnection oftheUnitedStates.AsofDecember31,1997,theCompany's electrictransmission anddistribution systemswerecomposedof952substations witharatedtransformer capacityofapproximately 28,500,000 kilovoltamperes, approximately 8,000circuitmilesofoverheadtransmission lines,approximately 1,100cablemilesofunderground transmission lines,approximately 113,100conductor milesofoverheaddistribution linesandabout5,800cablemilesofunderground distribution cables,onlyapartofsuchtransmission anddistribution linesb'einglocatedonpropertyownedbytheCompany.Thereisseasonalvariation inelectriccustomerload.In1997,theCompany'maximumhourlydemandoccurredinthesummer.Historically, theCompany's maximumhourlydemandoccurredinthewinter.Themaximumsimultaneous hourlydemand(excluding economyandemergency salestootherutilities) ontheelectricsystemoftheCompanyforthetwelvemonthsendedDecember31,1997occurredonJuly15,1997andwas6,348,000 KWh.ForasummaryoftheCompany's electricsupplycapability atDecember31,1997,seePartII,Item8.Financial tStatements andSupplementary Data-"Electric andGasStatistics."

TheCompanyownsandoperatesseveralelectrictransmission linescrossingtheSenecaNationCattaraugus andAlleganyReservations whichrangefrom230kilovolts to34.5kilovolts.

In1991,the.SenecaNationchallenged thevalidityoftheright-of-way agreements forthesetransmission lines.Whilediscussions betweentheNationandtheCompanyweresuspended inmid-1992, theNationhasrecentlyaskedtheCompanytoreopenthediscussions.

TheCompanyisunabletoestimateanypotential costsassociated withthisissue,ifany.NEWYORKPOWERPOOLTheCompany,sixotherNewYorkutilities andNYPAconstitute theNYPP,throughwhichtheycoordinate theplanningandoperation oftheirinterconnected electricproduction andtransmission facilities inordertoimprovereliability ofserviceandefficiency forthebenefitofcustomers oftheirrespective electricsystems.Foradiscussion onpotential changestoNYPP,seePartZI,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"MasterRestructuring Agreement andthePowerChoice Agreement" and.-"FERCRulemaking onOpenAccessandStrandedCostRecovery."

GASSERVICETheCompanydistributes gaspurchased fromsuppliers andtransports gasownedbyothers.AsofDecember31,1997,theCompany's naturalgassystemwascomprised ofapproximately 8,000milesofpipelines andmains,onlyapartofwhichislocatedonpropertyownedbytheCompany.SUBSIDIARIES OneoftheCompany's wholly-owned subsidiaries, OpinacNorthAmerica,Znc.ownsOpinacEnergyCorporation (aCanadiancorporation) andPlumStreetEnterprises, Inc.OpinacEnergyCorporation hasa50percentinterestinanelectriccompany,CNP,whichhasoperations intheProvinceofOntario,Canada.CNPgenerates electricity atitsRankinehydroplantforthewholesale marketandforitsdistribution systeminFortErie,Ontario.CNPownsa99.99%interestinCanadianNiagaraWindPowerCompany,Znc.andCowleyRidgePartnership, respectively, whichtogetheroperateawindpowerjointventureintheProvinceofAlberta,Canada.PlumStreet,Enterprises, Inc.,incorporated intheStateofDelaware, isanunregulated companythatoffersenergyrelatedservices.

Awholly-owned Texassubsidiary oftheCompany,NMUranium,Inc.hasaninterestinauraniumminingoperation inLiveOakCounty,Texaswhichisnowintheprocessofreclamation andrestoration.

Anotherwholly-owned NewYorkStatesubsidiary oftheCompany,NMHoldings, Znc.,engagesinrealestatedevelopment ofpropertyformerlyownedbytheutilitycompany.-Znaddition, theCompanyhasestablished asingle-purpose wholly-owned subsidiary, NMReceivables Corporation, tofacilitate itssaleofanundivided interestinadesignated poolofcustomerreceivables, including accruedunbilledrevenues.

TheCompanyalsoownsa66.67percentand82.84percentinterestinMoreauManufacturing Corporation andBeebeeIslandCorporation, respectively, whichareNewYorkStatesubsidiaries thatownandoperatehydro-electric generating stations.

MORTGAGELIENSSubstantially alloftheCompany's operating properties aresubjecttoamortgageliensecuringitsmortgagedebt.(SeePartII,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations "MasterRestructuring Agreement andtheRevisedPowerChoice Agreement"

).Item3.LegalProceedings.

Foradetaileddiscussion ofadditional legalproceedings, seePartIZ,Item8.Financial Statements andSupplementary Data-"Note9~Commitments andContingencies

-TaxAssessments" and-"Environmental Contingencies."

SeealsoItem1.Business-"Environmental Matters-Solid/Hazardous Waste,"andPartII,Item7.Management's Discussion andAnalysisofFinancial Condition andResults ofOperations

-"MasterRestructuring Agreement andthePowerChoice Agreement."

TheCompanyisunabletopredicttheultimatedisposition ofthemattersreferredtobelowin{1),{2),{3),{4)and{5).However,theCompanyhaspreviously beenallowedtorecoverthesetypesofexpenditures inrates.Znaddition, consistent withPowerChoice, theCompanybelievesthatitisprobablethat,theCompanywill-continuetorecoverthesetypesofexpenditures in-cost-of-service basedrates.~SeealsoPartZI,Item8.Financial Statements andSupplementary Data-"Note~2.RateandRegulatory IssuesandContingencies."

1.OnJune22,1993,theCompanyandtwentyotherindustrial

entities, aswellastheowner/operator ofthePfohlBrothersLandfillnearBuffalo,NewYork,weresuedinNYSSupremeCourt,ErieCounty,byagroupofresidents livingintheareasurrounding thelandfill.

Theplaintiffs seekcompensation forallegedeconomiclossandpropertydamageclaimedtohaveresultedfromexposuretocontamination associated withthelandfill.

Znaddition, sinceJanuary18,1995,theCompanyhasbeennamedasadefendant orthird-party defendant inaseriesoftoxictortactionsfiledinfederalorstatecourtsintheBuffaloarea.Theseactionsallegeexposureonthepartofplaintiffs orplaintiffs'ecedents totoxicchemicals emanatedfromthelandfill, resulting intheallegedcausation ofcancer.Theplaintiffs seekcompensatory andpunitivedamagessofartotalling approximately

$60million.TheCompanyhasfiledanswersresponding totheclaimsputforthinthesesuits,denyingliability astoanyoftheclaimedconditions ordamages,andintendstocontinuetovigorously defendagainsteachclaim.2.TheCompanyisunabletopredictatthistimetheprobableoutcomeoftheseproceedings, whichatpresentremaininthediscovery stage.TheCompany,throughmembership inthePfohlBrotherslandfillSiteCommittee, isparticipating inthedesignandimplementation ofaremedialprogramforthelandfill.

Znthecontextofliability allocation procedures conducted onbehalfoftheCommittee, ithasbeendetermined thattheCompany's contribution ofindustrial wastestothelandfillwasminor.Further,itistheCompany's positionthatmaterials presentatthelandfillattributable totheCompanyarenotcausallyrelatedtoanycondition allegedbyplaintiffs inthevarioulawsuitsassociated withthelandfill.

TheCompanydoesnotbelievthattheoutcomeoftheseproceedings willhaveamaterialadverseeffectonitsresultsofoperations orfinancial condition.

OnOctober23,1992,theCompanypetitioned thePSCtoorderIPPsto.postlettersofcreditorotherfirmsecuritytoprotectratepayers'nterests inadvancepaymentsmadeinprior.yearstothesegenerators.

ThePSCdismissed theoriginalpetitionwithoutprejudice.

InDecember1995,theCompanyfiledapetitionwiththePSCsimilartotheonethattheCompanyfiledinOctober1992.'heCompanycannotpredicttheoutcomeofthisaction.However,inAugust1996,thePSCproposedtoexaminethecircumstances underwhichautility,including theCompany,shouldbeallowedtodemandsecurityfromZPPstoensuretherepayment ofadvancepaymentsmadeundertheirpurchased powercontracts.

SeePartII,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"OtherFederalandStateRegulatory Initiatives

-PSCProposalofNewIPPOperating andPPAManagement Procedures."

OnFebruary4,1994,theCompanynotifiedtheownersofnineprojectswithcontracts thatprovideforfront-end loadedpaymentsoftheCompany's demandforadequateassurance thattheownerswillperformalloftheirfuturerepayment obligations, including theobligation todeliverelectricity inthefutureatpricesbelowtheCompany's avoidedcostasrequiredbyagreements andtherepayment ofanyadvancepaymentwhichremainsoutstanding attheendofthecontract.

Theprojectsatissuetotal426MW.TheCompany's demandisbasedonitsassessment oftheamountofadvancepaymenttobeaccumulated underthetermsofthecontracts, futureavoidedcostsandfutureoperating costsfortheprojects.

Litigation ensuedwithsixoftheprojectsasaresultthesenotifications, asfollows:-19" OnMarch4,1994,EncogenFourPartners, LEP.("Encogen")

filedacomplaint intheUnitedStatesDistrictCourtfortheSouthernDistrictofNewYork(the"U.S.DistrictCourt")allegingbreachofcontractandprimafacietortbytheCompany.Encogenseekscompensatory damagesofapproximately

$1millionandunspecifiedpunitivedamages.Inaddition, Encogenseeksadeclaratory judgmentthattheCompanyisnotentitledtoassurance offutureperformance fromEncogen.OnApril4,1994,theCompanyfileditsanswerandcounterclaim fordeclaratory judgmentrelating'otheCompany'exercise.ofitsrighttodemandadequateassurance.

Encogenhasamendeditscomplaint, rescinded itsprimafacietortclaim,andfiledamotionofjudgmentonthepleadings.

OnFebruary6,1996,theU.S.DistrictCourtgrantedEncogen's motionforjudgmentonthepleadings andruledthatunderNewYorklaw,theCompanydidnothavetherighttodemandadequateassurances offutureperformance.

Inaddition, theU.S.DistrictCourtdidnotawardanydamages.TheCompanyhasappealedthisdecision.

Amotiontostayfurtherproceedings hasbeenmadesincethiscontractisincludedintheMRA.OnMarch4,1994,SterlingPowerPartners, L.P.("Sterling"

),SenecaPowerPartners, L.P.,PowerCityPartners, L.P.andAG-Energy, L.P.filedacomplaint intheNYSSupremeCourtseekingadeclaratory judgmentthat:(a)theCompanydoesnothaveanylegalrighttodemandassurance ofplaintiffs'uture performance; (b)evenifsucharightexisted,theCompanylacksreasonable insecurity astoplaintiffs'uture performance; (c)thespecificformsofassurances soughtbytheCompanyareunreasonable and(d)iftheCompanyisentitledtoanyformofassurances, plaintiffs haveprovidedadequateassurances.

OnApri3,4,1994,theCompanyfileditsanswerandcounterclaim fordeclaratory judgmentrelatingtotheCompany's exerciseofitsrighttodemandadequateassurance.

OnOctober5,1994,SterlingmovedforsummaryjudgmentandtheCompanyopposedandcrossmovedforsummaryjudgment.

OnFebruary16,1996,Sterlingsupplemented itsmotion,claimingthattheFebruary6,1996rulingintheEncogencaseisdispositive.

OnFebruary29,1996,theNYSSupremeCourtgrantedSterling's motionforsummaryjudgmentandruledthatunderNewYorklaw,theCompanydidnot.havetherighttodemandadequateassurances offutureperformance.

TheCompanyhasappealedthisdecision.

Amotiontostayfurtherproceedings hasbeenmadesincethiscontractisincludedintheMRA.OnMarch7,1994,NorConPowerPartners, L.P.("NorCon")

filedacomplaint intheU.S.DistrictCourtseekingtoenjointheCompanyfromterminating aPPAbetweenthepartiesandseekingadeclaratory judgmentthattheCompanyhasnorighttodemandadditional securityorotherassurances ofNorCon'sfutureperformance underthePPA;NorConsoughtatemporary restraining orderagainsttheCompanytopreventtheCompanyfromtakinganyactiononitsFebruary4,1994letter.OnMarch14,1994,theCourtenteredtheinterimreliefsoughtbyNorCon.OnApril4,1994,theCompanyfileditsanswerandcounterclaim fordeclaratory judgmentrelatingtotheCompany'exerciseofitsrighttodemandadequateassurance.

OnNovember2,1994,NorConfiledforsummaryjudgment.

OnFebruary6,1996,theU.S.DistrictCourtgrantedNorCon'smotionforsummaryjudgment.

andruledthatunderNewYorklaw,theCompanydidnothavetherighttodemandadequateassurances offutureperformance.

OnMarch25,1997,theU.S.CourtofAppealsfortheSecondCircuitorderedthatthequestionofwhetherthereexistsunderNewYorkcommercial lawtherighttodemandfirmsecurityonanelectriccontractshouldbecertified totheN.Y.CourtofAppeals,thehighestNewYorkcourt,forfinalresolution.

TheSecondCircuitordereffectively stayedtheU.S.DistrictCourt'sorderagainsttheCompany,pendingfinaldisposition bytheN.Y.CourtofAppeals.Amotiontostayfurtherproceedings hasbeenmadesincethiscontractisincludedintheMRA.TheCompanycanneitherprovideanyjudgement

.regarding thelikelyoutcomenoranyestimateorrangeofpossiblelossorreduction ofexposureinthecasesabove.Accordingly, noprovision forliability, ifany,thatmayresultfromanyofthesesuits.hasbeenmadeintheCompany's financial statements.

IftheMRAcloseswithrespecttothe ZPPPartiesmentioned above,thentheselitigations wouldbedismissed withrespecttosuchIPPParties(seePartII,Item7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"MasterRestructuring Agreement, andthePowerChoice Agreement"

).3.ZnNovember1993,FourthBranchAssociates Mechanicville

("FourthBranch")filedanactionagainsttheCompanyandseveralofitsofficersandemployees intheNYSSupremeCourt,seekingcompensatory damagesof$50million,punitivedamagesof$100millionandinjunctive andotherrelatedrelief.ThelawsuitgrowsoutoftheCompany's termination ofacontractforFourthBranchtooperateandmaintainahydroelectric planttheCompanyownsintheTownofHalfmoon, NewYork.FourthBranch'scomplaint alsoallegesclaimsbasedontheinability ofFourthBranchandtheCompanytoagreeontermsforthepurchaseofpowerfromanewfacilitythatFourthBranchhopedtoconstruct attheMechanicville site.InJanuary1994,theCompanyfiledamotiontodismissFourthBranch'scomplaint.

ByorderdatedNovember7,1995,theCourtgrantedtheCompany's motiontodismissthecomplaint initsentirety.

FourthBranchfiledanappealfromtheCourt'sorder.OnJanuary30,1997,theAppellate DivisionmodifiedtheNovember7,1995courtdecisionbyreversing thedismissal ofthefourthandfifthcausesofactionsetforthinFourthBranch'scomplaint.

TheCompanyandFourthBranchhadalsoenteredintonegotiations underaFERCmediation process.Asaresultofthesenegotiations, theCompanyhadproposedtosellthehydroelectric planttoFourthBranchforanamountwhichwouldnotbematerial.

Znaddition, theproposalincludedaprovision thatwouldrequirethediscontinuance ofalllitigation betweentheparties.Attemptstoimplement thisproposalhavebeenunsuccessful andtheCompanyhasinformedFERCthatitsparticipation inthemediation effortshasbeenconcluded.

OnJanuary14,1997,theFERCAdministrative LawJudgeissuedareporttoFERCrecommending thatthemediation proceeding beterminated, leavingoutstanding aFourthBranchcomplaint toFERCthatallegesanti-competitive conductbytheCompany.TheCompanyhasmadeamotiontodismissFourthBranch'santitrust complaint beforetheFERC,whichmotionwasopposedbyFourthBranch.AdecisionfromFERConthismatterispending.TheCompanyisunabletopredicttheultimatedisposition ofthelawsuitreferredtoabove.However,theCompanybelievesithasmeritorious defensesandintendstodefendthislawsuitvigorously.

Noprovision forliability, ifany,thatmayresultfromthislawsuithasbeenmadeintheCompany's financial statements.

4~ZnMarch1993,Inter-Power ofNewYork,Znc.("Inter-Power"

)filedacomplaint againsttheCompanyandcertainofitsofficersandemployees intheNYSSupremeCourt.Inter-Power alleged,amongothermatters,fraud,negligent misrepresentation andbreachofcontractinconnection withtheCompany's allegedtermination ofaPPAinJanuary1993.Theplaintiff soughtenforcement oftheoriginalcontractorcompensatory andpunitivedamagesinanaggregate amountthatwouldnotexceed$1billion,excluding pre-judgment interest.

Inearly1994,theNYSSupremeCourtdismissed twooftheplaintiff's claims;thisdismissal wasupheldbytheAppellate

Division, ThirdDepartment oftheNYSSupremeCourt.Subsequently, theNYSSupremeCourtgrantedtheCompany's motionforsummaryjudgmentontheremaining causesofactioninInter-Power's complaint.

InAugust1994,Inter-Power appealedthisdecisionandonJuly27,1995,theAppellate

Division, ThirdDepartment affirmedthegrantingofsummaryjudgmentastoallcounts,exceptforonedealingwithanallegedbreachofthePPArelatingtotheCompany's havingdeclaredtheagreement nullandvoidonthegroundsthatInter-Power hadfailedtoprovideitwithinformation regarding itsfuelsupplyinatimelyfashion.ThisonbreachofcontractclaimwasremandedtotheNYSSupremeCourtfofurtherconsideration.

InJanuary1998,theNYSSupremeCourtgranted theCompany's motionforsummaryjudgmentonallremaining claimsinthislawsuit-anddismissed thislawsuitinitsentirety.

InJanuary1998,Inter-Power filedanoticeofappeal.5.TheDEC,inresponsetoanEPAauditoftheirenforcement

policies, whichfoundenforcement ofairregulation violations tobeinsufficient, hasbegunaninitiative toaddressthisissue.Asaresult,theDECisseekingpenalties fromallNewYorkutilities for'astopacityvariances fortheyears1994,1995and1996.Furthermore, theDECisrequiring variousopacityreduction measuresandstipulated penalties forfutureexcursions afterexecution ofaconsentorder.AllNewYorkStateutilities, including theCompany,whichwasnotifiedinSeptember 1997,areintheprocessofnegotiating thevarioustermsandconditions ofthedraftconsentorderwith.theDEC.Theoutcomeofthismatterisuncertain atthistimeanditisnotpossible, topredictwhatthefinancial impacttotheCompanywillbeintermsofpenaltypaymentandimplementation ofanopacityreduction program.Item4.Submit.ssion ofMatterstoaVoteofSecure.ty Holders.OnOctober23,1997,theBoard'ofDirectors authorized thesolicitation ofconsentsfromitspreferred shareholders, asrequiredbytheCompany's Certificate ofIncorporation, toincreasetheamountofunsecured debttheCompanymayissuefromthelevelpriortotheconsentofapproximately

$700millionbyuptoanadditional

$5billion.OnDecember3,1997,thepreferred shareholders approvedtheproposaltoincrease, thelevelofunsecured debtbyavoteof3,562,645 for,479,124againstand140,107abstentions.

Executive OfficersofReistrantAllexecutive officersoftheCompanyareelectedonanannualbasisattheMaymeetingoftheBoardofDirectors oruponthefillingofavacancy.Therearenofamilyrelationships betweenanyoftheexecutive officers.

Therearenoarrangements orunderstandings betweenanyoftheofficerslistedbelowandanyotherpersonpursuanttowhichheorshewasselectedasanofficer.Executive Ageat~123192CurrentandPriorPositions DateComnenced illlliamE.DavisAlbertJ.Budney,Jr.B.RalphSylviaDavidJ.AfringtonllilliamF.EdwardsDarleneD.KerrGaryJ.LevineJohnH.MuellerJohnM.Powers5550574640464759ChairmanoftheBoardandChiefExecutive OfficerViceChairmanoftheBoardofDirectors President ManagingVicePresident

-UtiliCorp Po~erServicesGroup(aunitofUtilicorpUnited,Inc.)President-Hissouri PublicService(Operating DivisionofUtiliCorpUnited,Inc.)3Executive VicePresident Executive VicePresident

-ElectricGeneration andChiefNuclearOfficerExecutive VicePresident

-NuclearSeniorVicePresident

-M'enResources SeniorVicePresident andChiefFinancial OfficerVicePresident

-Financial PlanningExecutive Assistant totheChiefExecutive OfficerandPresident DirectorofBudgetandFinancial Management SeniorVicePresident

-EnergyDistribution SeniorVicePresident

-ElectricCustomerServiceVicePresident

-ElectricCustomerServiceVicePresident

-GasHarketing andRatesSeniorVicePresident

-Legal8Corporate Relations SeniorVicePresident

-Legal8Corporate Relations andGeneralCounselSeniorVicePresident andChiefNuclearOfficerSiteVicePresident ofCoamonwealth Edison'sZionPlantVicePresident ofNuclearEnergy(fortheNebraskaPublicPowerDistrict, ownerandoperatoroftheCoopernuclearplant)PlantManager-Unit2Operations Hanager-Unit2RetiredSeniorVicePresident SeniorVicePresident andChiefFinancial OfficerSeniorVicePresident

-Finance8Corporate ServicesHay1993November1992April1995PriortoJoiningtheCompanyJanuary1993January1998*December1995November1990December1990September 1997December1995July1993June1989Deceeher1995January1994July1993February1991Hay1993October1992January1998~August1996July1994August1993October1992December1997Septeaher 1997January1996October1990TheresaA.FlaimKapuaA.RiceStevenll.Tasker4840VicePresident

-Corporate Strategic PlanningVicePresident

-Corporate PlanningHanager-GasRates8Integrated ResourcePlanningCorporate Secretary Assistant Secreiary Hanager-Legal8Corporate Relations VicePresident

-Controller Controller Hay1994April1993June1991September 1994October1992July1991December1993Hay1991*OnJanuary13,1998,JohnN.HuellerwaselectedasSeniorVicePresident andChiefNuclearOfficer,whichbecameeffective:January 19,1998.NewillsucceedB.RalphSylvia,whowillremainwiththeCoaTMnyasanExecutive VicePresident untilhisplannedmid-yearretirement.

PARTZIItem5.MarketfortheRegistrant's CommonEquityandRelatedStockholder Matters.TheCompany's commonstockandcertainofitspreferred seriesarelistedontheNewYorkStockExchange("NYSE").

ThecommonstockisalsotradedontheBoston,Cincinnati, Midwest,PacificandPhiladelphia stockexchanges.

CommonstockoptionsaretradedontheAmericanStockExchange.

Thetickersymbolis"NMK."Preferred dividends werepaidonMarch31,June30,September 30andDecember31.TheCompanyestimates thatnoneofthe1997preferred stockdividends willconstitute areturnofcapitalandtherefore allofsuchdividends aresubjecttoFederaltaxasordinaryincome.Thetablebelowshowsquotedmarketprices(NYSE)fortheCompany's commonstock:HighLauHighLou1stQuarter$111/8$81/8$101/8$61/22ndQuarter977/885/861/23rdQuarter101/1681/487/863/44thQuarter-,

109/1691/161075/8~JForadiscussion regarding thecommonstockdividend, seeItem7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations "Accounting Implications ofthePowerChoice Agreement andMasterRestructuring Agreement" and"Financial

Position, Liquidity andCapitalResources

-CommonStockDividend" below.OtherStockholder Matters.TheholdersofcommonstockareentitledtoonevotepershareandmaynotcumulatetheirvotesfortheelectionofDirectors.

Wheneverdividends onpreferred stockareindefaultinanamountequivalent tofourfullquarterly dividends andthereafter untilalldividends thereonarepaidordeclaredandsetasideforpayment,theholdersofsuchpreferred stockcanelectamajorityoftheBoardofDirectors.

Wheneverdividends onanypreference stockareindefaultinanamountequivalent tosixfullquarterly dividends andthereafter untilalldividends thereonarepaidordeclaredandsetasideforpayment,theholdersofsuchstockcanelecttwomemberstotheBoardofDirectors.

Nodividends onpreferred stockarenowinarrearsandnopreference stockisnowoutstanding.

Uponanydissolution, liquidation orwindingupoftheCompany's

business, theholdersofcommonstockareentitledtoreceiveaproratashareofalloftheCompany's assetsremaining andavailable fordistribution afterthefullamountstowhichholdersofpreferred andpreference stockareentitledhavebeensatisfied.

Uponconsummation oftheMRA(seeItem7.Management' Discussion andAnalysisofFinancial Condition andResultsofOperations

-"MasterRestructuring Agreement andthePowerChoice Agreement" foralistingofconditions thatmustbemetinordertoclosetheMRA),whichisexpectedtooccurlaterthisyear,theIPPPartiesareexpectedtoown42.9millionsharesoftheCompany's commonstock,representing 23%oftheCompany's votingsecurities following theissuanceofsuchshares.IntheMRA,thepartiesagreethatanyIPPPartythatreceives2%ormoreoftheoutstanding CommonStockandanydesignees ofIPPPartiesthatreceivesmorethan4.9%oftheoutstanding CommonStockupontheconsummation oftheMRAwill,togetherwithcertainbutnotallaffiliates (collectively, "2%Shareholders"

),enterintocertainshareholder agreements (theaShareholders Agreements"

).PursuanttoeachShareholder Agreement, the2%Shareholders agreethatforfiveyearstheywillnotacquiremorethananadditional 5%oftheoutstanding CommonStock(resulting inownership inallcasesofnomorethan9.9%)ortakeanyactionstoattempttoacquirecontroloftheCompany,otherthancertainpermitted actionsinresponsetounsolicited actionsbythirdparties.The2%shareholders willgenerally votetheirsharesona"pass-through"basis,thatisinthesameproportion asallsharesheldbyothershareholders arevoted,exceptthattheymayvoteintheirdiscretion forextraordinary transactions and,whenthereisapendingproposaltoacquiretheCompany,fordirectors.

Theindenture securingtheCompany's mortgagedebtprovidesthatretainedearningsshallbereservedandheldunavailable forthepaymentofdividends oncommonstocktotheextentthatexpenditures formaintenance andrepairsplusprovisions fordepreciation donotexceed2.25%ofdepreciable propertyasdefinedtherein.Suchprovisions haveneverresultedinarestriction oftheCompany'retainedearnings.

AsofMarch26,1998,therewereapproximately 663300holdersofrecordofcommonstockoftheCompanyandabout4,700holdersofrecordofpreferred stock.Thechartbelowsummarizes commonstockholder ownership bysizeofholding:SizeofHolding(Shares)TotalStockholders TotalSharesHeld1to99100to9991,000ormore3'1,05631,930~3325~66311812,6527,775,973 135830724144419351 Item6.SelectedConsolidated Financial DataThefollowing tablesetsforthselectedfinancial information oftheConpanyforeachofthefiveyearsduringtheperiodendedDecember3'I,1997,whichhasbeenderivedfromtheauditedfinancial statements oftheCompany,andshouldbereadinconnection therewith.

Asdiscussed inItem7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations andItem8.Financial Statements andS~Lementary Data-uHotestoConsolidated Financial Statements,u thefollowing selectedfinanciaL dataisnotlikely.to beindicative oftheCompany's futurefinancial condition orresultsofoperations.

19971996>>19951993Operations:

(000's)Operating revenues$3,966,404

$3,990,653

$3,917,338

$4,152,178

$3,933,431 CosmonstockdatatBookvaluepershareatyearend.~.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$1.7110.2XDividends paidperconsnonshare..........

$1.12$1.09$.95Capitalization:

(000's)Cannonequity...Mon-redeemable preferred stock........~.Mandatorily redeemable preferred stock......

440,00076,610440,00086,?30$2,604,027

$2,585,5?2

$2,513,952 440,00096,850$2,462,398

$2,456,465 440,000290,000106,000123,200Totale~~~~~~~~~~6,538,018 6,590,181 6,633,216 6,306,272 6,128,277 Capitalization ratios:(including long-term debtmaturingwithinoneyear):Comnonstockequity.Preferred stock......39AX7.839.0X7.937.5X8.038.6X8.538.7X6.5Financial ratios:Ratioofearningstofixedcharges........Ratioofearningstofixedchargesandpreferred stockdivldendso

~~,~~~~~~~~~~~~~~~Otherratios-Xofoperating revenues:

Fuel,electricity purchased andgaspurchased

.Otheroperation andmaintenance expenses.

...Depreciation andamortization

.........Federalandforeignincometaxes,andothertaxes~~Operating income.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)Grossadditions toutilityplant....~Totalutilityplant...Aclateddepreciation andamortization.

$290,75711,0?5,874 4,207,830 958414S352,04910,839,341 3,881,726 427635$345,80410,649,301 3,641,448 9477869S490,124S519,61210,485,339 10,108,529 3,449,696 3,231,237 964981647137ountsmcuccxtrao>naryitem,secore.teaneguatoryssuesanonungcnmcs.

NZAGARAMOHAWKPOWERCORPORATION Certainstatements includedinthisAnnualReportonForm10-Kareforward-lookingstatements asdefinedinSection21EoftheSecurities ExchangeActof1934,including thehedgeagainstupwardmovementinmarketpricesprovidedbytherestructured andamendedPPAs,theimprovement inoperating cashflowsasaresultoftheMRAandPowerChoice, therecoverability oftheMRAregulatory assetthroughthepriceschargedforelectricservice,theeffectofaPSCnaturalgasproposalontheCompany's.results ofoperations, expectedearningsoverthefive-yeartermofthePowerChoice agreement, theeffectoftheelimination oftheFACunderPowerChoice ontheCompany's financial condition, thereduction innetincomeresulting fromthenon-cashamortization oftheMRAregulatory asset,theeffectoftheJanuary1998icestormdamagerestoration costsontheCompany's capitalrequirements, recoverability ofenvironmental compliance costsandnucleardecommissioning coststhroughrates,andtheimprovement intheCompany's financial condition expectedasaresultoftheMRAandtheimplementation ofPowerChoice.

TheCompany's actualresultsanddevelopments maydiffermaterially fromtheresultsdiscussed inorimpliedbysuchforward-looking statements, duetorisksanduncertainties thatexistintheCompany's operations andbusinessenvironment, including, butnotlimitedto,mattersdescribed inthecontextofsuchforward-looking statements, aswellassuchotherfactorsassetforthintheNotestoConsolidated Financial Statements contained herein.Item7.Management's Discussion andAnalysisof'inancial Condition andResultsofOperations EVENTSAFFECTING 1997ANDTHEFUTUREOnJuly9,1997,theCompanyannounced theMRAtoterminate, restateoramendIPPpowerpurchasecontracts inexchangeforcash,sharesoftheCompany's commonstockandcertainfinancial contracts.

ThetermsoftheMRAhavebeenandmaycontinuetobemodified.

InFebruary1998,thePSCapprovedthePowerChoice settlement agreement, whichincorporates thetermsoftheMRA:UnderPowerChoice, aregulatory assetwillbeestablished forthecostsoftheMRAanditwillbeamortized overaperiodnottoexceedtenyears.TheCompany's ratesunderPowerChoice aredesignedtopermitrecoveryoftheMRAregulatory asset.Inapproving PowerChoice, thePSClimitedtheestimated valueoftheMRAregulatory assetthatcanberecovered toapproximately

$4,000million,resulting inachargeto1997earningsof$190.0millionor85centspershare.ThePowerChoice agreement,

'whilehavingtheeffectofsubstantially depressing earningsduringitsfive-year term,willsubstantially improveoperating cashflows.InDecember1997,thepreferred shareholders gavetheCompanyapprovaltoincreasetheamountofunsecured debtthattheCompanymayissueby$5billion.Thisauthorization enablestheissuanceofunsecur'ed debttoconsummate theMRA.~ThePowerChoice agreement callsfortheCompanytoconductanauctiontosellallofitsfossilandhydrogeneration assets.~InearlyJanuary1998,amajoricestormcausedextensive andcostlydamagetotheCompany's facilities innorthernNewYork.MASTERRESTRUCTURING AGREEMENT ANDTHEPOWERCHOICE AGREEMENT TheCompanyenteredintothePPAsthataresubjecttotheMRAbecauseitwasrequiredtodosounderPURPA,whichwasintendedtoprovideincentives forbusinesses tocreatealternative energysources.UnderPURPA,theCompanywasrequiredtopurchaseelectricity generated byqualifying facilities ofIPPsatpricesthatwerenotexpectedtoexceedthecostthatotherwise wouldhavebeenincurredbytheCompanyingenerating itsownelectricity, orinpurchasing itfromothersources(knownas"avoidedcosts").WhilePURPAwasafederainitiative, eachstateretainedcertaindelegated authority overhowPURPAwoulbeimplemented withinitsborders.Initsimplementation ofPURPA,theStateof, NewYorkpassedthe"Six-Cent Law,"establishing 6CperKWhastheflooronavoidedcostsforprojectslessthan80MWinsize.TheSix-CentLawremainedinplaceuntilitwasamendedin1992todenythebenefitofthestatutetoanyfuturePPAs.Theavoidedcostdeterminations underPURPAwereperiodically increased bythePSCduringthisperiod.PURPAandtheSix-CentLaw,incombination withotherfactors,attracted largenumbersofZPPstoNewYorkState,and,inparticular, totheCompany's serviceterritory, duetothearea'sexistingenergyinfrastructure andavailability ofcogeneration hosts.Thepricingtermsofsubstantially allofthePPAsthattheCompanyenteredintoincompliance withPURPAandtheSix-CentLaworotherNewYorklawswerebased,attheoptionoftheIPP,eitheronadministratively determined avoidedcostsorminimumprices,bothofwhichhaveconsistently beenmaterially higherthanthewholesale marketpricesforelectricity.

SincePURPAandtheSix-CentLawwerepassed,theCompanyhasbeenrequiredtopurchaseelectricity fromZPPsinquantities inexcessofitsowndemandandatpricesinexcessofthatavailable totheCompanybyinternalgeneration orforpurchaseinthewholesale-market.

Infact,by1991,theCompanywasfacingapotential obligation topurchasepowerfromZPPssubstantially inexcessofitspeakdemandof6,093MW.Asaresult,the.Company's competitive positionandfinancial performance havedeteriorated andthepriceofelectricity paidperKWhbyitscustomers hasrisensignificantly abovethenationalaverage.Accordingly, in1991'theCompanyinitiated aparallelstrategyofnegotiating individual PPAbuyouts,cancellations andrenegotiations, andofpursuingregulatory andlegislative supportandlitigation tomitigatetheCompany's obligation underthePPAs.Bymid-1996, thisstrategyhadresultedinreducingthecapacityoftheCompany's obligations topurchasepowerunderitsPPAportfolio toapproximately 2,700MW.Notwithstanding thisreduction incapacity, overthesameperiodthepaymentsmadetotheZPPsundertheirPPAsrosefromapproximately

$200millionin1990toapproximately

$1.1billionin1997asindependent powerfacilities fromwhichtheCompanywasobligated topurchaseelectricity commenced operations.

TheCompanyestimates thatabsenttheMRA,paymentsmadetotheIPPspursuanttoPPAswouldcontinuetoescalatebyapproximately

$50millionperyearuntil2002.Recognizing thecompetitive trendsintheelectricutilityindustryandtheimpracticability ofremedying thesituation throughaseriesofcustomerrateincreases, inmid-1996theCompanybegancomprehensive negotiations toterminate, amendorrestateasubstantial portionofabove-market PPAsinanefforttomitigatetheescalating costofthesePPAsaswellastopreparetheCompanyforamorecompetitive environment.

Thesenegotiations ledtotheMRAandthePowerChoice agreement.

MasterRestructuring Agreement.

OnJuly9,1997,theCompanyenteredintotheMRAwith16IPPPartieswhosellelectricity totheCompanyunder29PPAs.TheMRAspecifically contemplated thattwoZPPs,OxbowPowerofNorthTonawanda, NewYork,Inc.("Oxbow")andNorConwouldenterintofurthernegotiations co'ncerning theirtreatment undertheMRA.Following suchnegotiations, Oxbowhaswithdrawn fromtheMRA,but,basedonthevalueofitsallocation undertheMRAandthetermsofitsexistingPPA,Oxbow'swithdrawal doesnotmaterially impactthecostreductions associated withtheMRA.TheCompanyandNorConhaveagreedtoreplaceNorCon'sinitialallocation undertheMRAwithanallcashallocation whichhas,intheCompany's estimation, avalueapproximately

$60millionhigherthanNorCon'sinitialallocation.

AthirdIPPPartyhasagreedtotakecashinexchangeforthesharesofcommonstockallocated toitintheMRA.Asaresultofthesecashallocations, thereare3,054,000 fewersharesofcommonstockallocated totheZPPsundertheMRA.TheMRAhasbeenamendedtoexpireonJuly15(1998.TheMRAcurrently providesforthetermination, restatement oramendment of28PPAswith15IPPs,whichrepresent approximately 80%oftheCompany's over-marketpurchased powerobligations, inexchangeforanaggregate of$3,616millionincashand42.9millionsharesoftheCompany's commonstockandcertainfinancial contracts.

TheclosingoftheMRAissubjecttoanumberofconditions, including theCompanyandtheIPPPartiesnegotiating individual restatedandamendedcontracts, thereceiptofallregulatory approvals, thereceiptofallconsentsbythirdpartiesnecessary forthetransactions contemplated bytheMRA(including thetermination oftheexistingPPAsandthetermination oramendment ofallrelatedthirdpartyagreements),

theIPPParties enteringintonewthirdpartyarrangements whichwillenableeachIPPPartytorestructure itsprojectsonareasonably satisfactory economicbasis,theCompanyhavingcompleted allnecessary financing arrangements andtheCompanyandtheIPPPartieshavingreceivedallnecessary approvals fromtheirrespective boardsofdirectors, shareholders andpartners.

WhileoneormoreoftheIPPPartiesmayundercertaincircumstances terminate theMRAwithrespecttoitself,theCompany's obligation toclosetheMRAissubjecttoitsdetermination thatasaresultofanysuchterminations" thebenefitsanticipated tobereceivedbytheCompanypursuanttotheMRAhavenotbeenmaterially andadversely affected.

TheCompanyexpectsthatpriortotheconsummation oftheMRA,themixofconsideration tobereceived'bytheZPPPartiesmayberenegotiated.

Theforegoing isqualified initsentiretybythetextoftheMRA(seeExhibit10-11).AstheConditions Determination Date(thedatebywhichallIPPPartiesmustsatisfyorwaivetheirthirdpartyconditions orwithddraw fromtheMRA)hasnotoccurred, theCompanycannotpredictwhethersuchconditions willbesatisfied, whethersomeIPPPartiesmaywithdraw, whetherthetermsoftheMRAmightberenegotiated, orwhethertheMRAwillbeconsummated.

ZntheeventtheCompanyisunabletosuccessfully completetheMRAandtherefore implement PowerChoice, itwouldpursueallalternatives including atraditional raterequest.Theprincipal effectsoftheMRAaretoreducesignificantly theCompany's existingpaymentobligations underthePPAs,whichcurrently consistofapproximately 2,700MWofcapacityatDecember31,1997.Whileearningswillbedepressed duringthefive-year term,thesavingsinannualenergypayments, coupledwiththeratesestablished inPowerChoice, willyieldfreecashflowthatcanbededicated tothenewdebtserviceobligations associated withthepaymentofcashtotheZPPParties.UnderthetermsoftheMRA,theCompany's significant longtermandescalating ZPPpaymentobligations willberestructured intoadefinedandmoremanageable obligation andaportfolio ofrestatedandamendedPPAswithpriceanddurationtermsthattheCompanybelievesaremorefavorable thantheexistingPPAs.UndertheMRA,19PPAsrepresenting approximately 1,180MWofcapacitywillbeterminated completely thusallowingthiscapacitytobereplacedthroughthecompetitive marketatmarketbasedprices.TheCompanyhasnocontinuing obligation topurchaseenergyfromtheterminating ZPPParties.AlsoundertheMRA,8PPAsrepresenting approximately 541MWofcapacitywillberestatedoneconomictermsandconditions thataremorefavorable totheCompanythantheexistingPPAs.Therestatedcontracts haveatermof10yearsandarestructured asfinancial swapcontracts wheretheCompanyreceivesormakespaymentstotheZPPPartiesbaseduponthedifferential betweenthecontractpriceandamarketreference priceforelectricity.

Thecontractpricesarefixedforthefirsttwoyearschangingtoanindexedpricingformulathereafter.

Contractquantities arefixedforthefull10yeartermofthecontracts.

Theindexedpricingstructure ensuresthatthepricepaidforenergyandcapacitywillfluctuate relativetotheunderlying marketcostofgasandgeneralindicesofinflation.

Untilsuchtimeasacompetitive energymarketstructure becomesoperational intheStateofNewYork,therestatedcontracts providetheZPPPartieswithaputoptionforthephysicaldeliveryofenergy.Additionally, onePPArepresenting 42MWofcapacitywillbeamendedtoreflectashortened termandalowerstreamoffixedunitprices.Finally,theMRArequirestheCompanytoprovidetheZPPPartieswithanumberoffixedpriceswapcontracts withatermofsevenyearsbeginning in2003.Thefixedpriceswapcontracts willbecashsettledmonthlybaseduponastreamofdefinedquantities andprices.AlthoughagainsttheCompany's forecastofmarketenergypricestherestructured andamendedPPAsrepresent anexpectedabove-market.

paymentobligation, theCompany's portfolio ofthesePPAsprovidesitanditscustomers withahedgeagainstsignificant upwardmovementinmarketpricesthatmaybecausedbyachangeinenergysupplyordemand.Thisportfolio andmarketpurchases containtermsthatarebelievedtobemoreresponsive tocompetitive marketpricechanges.(SeeItem8.Financial Statements andSupplementary Data"Note9.Commitments andContingencies

-Long-term Contracts forthePurchaseofElectricPower").

PowerChoice Agreement.

Thepowerchoice agreement establishes afive-year rateplanthatwillreduceaverageresidential andcommercial ratesbyanaggregate of3.2%overthefirstthreeyears.Thisreduction willincludecertainsavingsthatwillresultfrompartialreductions oftheNewYorkStateGRT.Industrial customers willseeaveragereductions of25%relativeto1995pricelevels;thesedecreases willincludediscounts currently offeredtosomeindustrial customers throughoptionalandflexiblerateprograms.

Thecumulative ratereductions, netofGRTsavings,areestimated tobeapproximately

$112million,tobeexperienced onagenerally ratablebasisoverthefirstthreeyearsoftheagreement.

DuringthetermofthePowerChoice agreement, theCompanywillbepermitted todefercertaincosts,associated primarily withenvironmental remediation, nucleardecommissioning andrelatedcosts,andchangesinlaws,regulations, rulesandorders.Inyearsfourandfiveofitsrateplan,theCompanycanrequestanannualincreaseinpricessubjecttoacapof1%oftheall-inprice,excluding commodity costs(e.g.,transmission, distribution, nuclear,andforecasted CTC).Inadditiontothepricecap,thePowerChoice agreement providesfortherecoveryofdeferrals established inyearsonethroughfourand'costvariations intheMRAfinancial contracts resulting fromindexingprovisions ofthesecontracts.

Theaggregate ofthepricecapincreaseandrecoveryofdeferrals issubjecttoanoveralllimitation ofinflation.

UnderthetermsofthePowerChoice agreement, alloftheCompany's customers willbeable*tochoosetheirelectricity supplier.inacompetitive market.byDecember1999.TheCompanywillcontinuetodistribute electricity throughitsdistribution andtransmission facilities andwouldbeobligated tobetheso-called provideroflastresortforthosecustomers whodonotexercisetheirrighttochooseanewelectricity supplier.

ThePowerChoice agreement providesthattheMRAandthecontracts executedpursuanttheretoshallbefoundtobeprudent.ThePowerChoice agreement furtherprovidesthattheCompanyshallhaveareasonable opportunity torecoveritsstrandedcosts,including

.thoseassociated withtheMRAandthecontracts executedthereto,throughaCTCand,undercertaincircumstances, throughexitfeesorinratesforbackupservice.\UnderthePowerChoice agreement, anMRAregulatory asset,aggregating approximately

$4,000million,willbeestablished.

Inthisway,thecostsoftheMRAwouldbedeferredandamortized overaperiodnottoexceedtenyears.TheCompany's ratesunderPowerChoice aredesignedtopermitrecoveryoftheMRAregulatory assetandtopermitrecoveryof,andareturnon,theremainder ofitsassets,asappropriate.

ThePowerChoice agreement, whilehavingtheeffectofsubstantially depressing earningsduringitsfive-year term,willsubstantially improveoperating cashflows.ThePowerChoice agreement callsfortheCompanytodivestallofitsfossilandhydrogeneration assets.Divestiture isintendedtobeaccomplished throughanauction.Winningbidswouldbeselectedwithin11monthsofPSCapprovaloftheauctionplan,whichwasfiledwiththePSCseparately fromthePowerChoice agreement.

TheCompanywillreceiveaportionoftheauctionsaleproceedsasanincentive toobtainmaximumvalueinthesale.Thisincentive wouldberecovered fromsaleproceeds.

TheCompanyagreedthatifitdoesnotreceiveanacceptable bidforanasset,theCompanywillformasubsidiary toholdanysuchassetsandthenlegallyseparatethissubsidiary fromtheCompanythroughaspin-offtoshareholders orotherwise.

Ifabidofzeroorbelowisreceivedforanasset,theCompanymaykeeptheassetaspartofitsregulated business.

Theauctionprocesswillservetoquantifyanystrandedcostsassociated withtheCompany's fossilandhydrogenerating assets.TheCompanywillhaveareasonable'pportunity torecoverthesecoststhroughtheCTCandotherwise asdescribed above.Aftertheauctionprocessiscomplete, theCompanyhasagreednottoownanynon-nuclear generating assetsintheStateofNewYork,subjecttocertainexceptions providedinthePowerChoice agreement.

Underthetermsofthenoteindenture preparedinconnection withthefinancing oftheMRA,theCompanywillberequiredtouseamajorityofthecashportionofnetproceedsfromthesaleofitsfossilandhydrogenerating assetstoreduceindebtedness.

Suchrestrictions wouldnotapplyintheeventthattheCompanywasunabletosuccessfully concludetheconsummation oftheMRAandtherefore ofPowerchoice butnonetheless soldsuchassets.

ThePowerChoice agreement contemplates thattheCompany's nuclearplantswillremainpartoftheCompany's regulated business.

TheCompanyhasbeensupportive ofthecreationofastatewide NewYorkNuclearOperating Companythatitexpectswould.improvetheefficiency ofnuclearunitsthroughout thestate.ThePowerChoice agreement stipulates thatabsentsuchastatewide

solution, theCompanywillfileadetailedplanforanalyzing otherproposals regarding itsnuclearassets,including thefeasibility ofanauction,transferand/ordivestiture ofsuchfacilities, within24monthsofPowerChoice approval.

ThePowerChoice agreement alsoallowstheCompanytoformaholdingcompanyatitselection.

TheCompanyplanstoseekitsshareholders'pproval atits1998annualmeetingtotheformation ofaholdingcompany,theimplementation ofwhichwouldonlyoccurfollowing variousregulatory approvals.

AtitspublicsessiononFebruary24,1998,thePSCvotedtoapprovethePowerChoice agreement, whichincorporates thetermsoftheMRA.Subjecttothesatisfaction oftheconditions totheMRA,thePSC'sapprovalofPowerChoice shouldallowtheCompany.to consummate theMRAinthefirsthalfof1998.ThePowerChoice agreement willonlybecomeeffective upontheclosingoftheMRA.Inapproving PowerChoice, thePSCmadethefollowing changes,amongothers,totheagreement:

-i)customers whohadmadeasubstantial investment inon-sitegeneration asofOctober10,1997willbegrandfathered andnothavetopaytheCTC;ii)savingsfromanyreduction intheinterestrateassociated.

withthedebtissuedinconnection withtheMRAfinancing ascomparedtoassumptions underlying theCompany's PowerChoice filingwillbedeferredforfuturedisposition; andiii)changethegeneration auctionincentive to15%ofproceedsinexcessofnetbookvaluefornon-Oswego assetsand5%ofproceedsinexcessof$100millionforOswegoassets.InitswrittenorderdatedMarch20,1998,thePSCmadeseveralotherchangestothePowerChoice agreement, inadditiontothosediscussed attheFebruary24session.ThePSCdetermined tolimittheestimated valueoftheMRAregulatory assetthatcanberecovered fromcustomers, toapproximately

$4,000million.Theestimated valueoftheMRAregulatory assetincludestheissuanceof42.9millionsharesofcommonstock,whichthePSC,indetermining therecoverable amountofsuchassetvaluedat$8pershare.TheCompany's commonstockclosedat$127/16pershareonMarch26,1998.Theaccountin implications ofthelimitation invaluearediscussed under."Accounting Implications ofthePowerChoice Agreement andMasterRestructuring Agreement."

ThePSCalsomodifiedthereduction inaverageresidential andcommercial rates.ThePowerChoice agreement measuredthe3.2%reduction against1995prices.ThePSCdetermined thatthepercentage reduction shouldbeappliedagainstthelowerof1995pricesorthemostcurrenttwelve-month period.Totheextentpricesforthemostcurrenttwelve-month periodarelowerthan1995prices,theamountofcumulative ratereductions described belowwillincrease.

Lastly,thePSCorderedtheCompanynottoproceedtoconsummate theMRAwithrespecttoonecontractheldbyonedeveloper untilasatisfactory resolution of=acogeneration steamhostcontractisreached.NewYorklawprovidespartiestherighttoappealtheCommission's decisionapproving thePowerChoice agreement withinfourmonthsofthedateofthatdecision.

Inaddition, partieshavetherighttopetitiontheCommission forrehearing ofthedecisionwithin30daysofthedateofthedecision.

Ifapetitionforrehearing isfiledandtheCommission issuesadecisiononrehearing, partiesmayappealthedecisiononrehearing withinfourmonthsofthedateofthedecisiononrehearing.

Suchanappealorpetitionforrehearing maybebasedonthefailureoftherecordtoshowareasonable basisforthetermsofthePowerChoice agreement andmayresultinanamendment oftherecordtocorrectsuchfailure,inrenegotiation ofsuchtermsorinrenegotiation ofthePowerChoice agreement asawhole.Therecanbenoassurance that,onappealoronrehearing, theapprovalofthePowerChoice agreement willbeupheldorthatsuchappealorrehearing willnotresultintermssubstantially lessfavorable totheCompanythanthosedescribed herein.Alloftheforegoing discussion ofthePowerChoice agreement is'ualified initsentiretybythetextoftheagreement andPSCOrder(seeExhibits10-12and10-13).

ACCOUNTING IMPLICATIONS OFTHEPOWERCHOICE AGREEMENT ANDMASTERRESTRUCTURING AGREEMENT TheCompanyconcluded asofDecember31,1996,thatthetermination, restatement oramendment ofIPPcontracts andimplementation ofPowerChoice wastheprobableoutcomeofnegotiations thathadtakenplacesincethePowerchoice announcement.

UnderPowezChoice, theseparated non-nuclear generation businesswouldnolongerberate-regulated onacost-of-service basisand,accordingly,'egulatory assetsrelatedtothenon-nuclear powergeneration

business, amounting toapproximately

$103.6million($67.4millionaftertaxor47centspershare)werechargedagainst1996income'as anextraordinary non-cashcharge.Asdescribed under"MasterRestructuring Agreement andthePowerChoice Agreement,"

thePSCinitswrittenoiderissuedMarch20,1998limitedtheestimated valueoftheMRAregulatory assetthatcanberecovered fromcustomers toapproximately

$4,000million.Theultimateamountoftheregulatory assettobeestablished mayvarybasedoncertaineventsrelatedtotheclosingoftheMRA.'Theestimated valueoftheMRAregulatory assetincludestheissuanceof42.9millionsharesofcommon,stock,whichthePSC,indetermining therecoverable amountofsuchassetvaluedat$8pershare.Becausethevalueoftheconsideration tobepaidtotheIPPPartiescanonlybedetermined attheMRAclosing,thevalueofthelimitation ontherecoverability oftheMRAregulatory assethasbeenestimated at$190million(85centspershare)whichhasbeenchargedto1997earnings.

Thechargetoexpensewasdetermined asthedifference between$8pershareandtheCompany's closingcommonstockpriceonMarch26,1998of$127/16pershare,multiplied by42.9millionshares.Anyvariancefromtheestimateusedindetermining thechargetoexpensein1997,including changesinthecommonstockpriceatclosing,willbereflected inresultsofoperations in1998.UnderPowerChoice, theCompany's remaining electricbusiness(nucleargeneration andelectrictransmission anddistribution business) willcontinuetoberate-regulated onacost-of-service basisand,accordingly, theCompanycontinues toapplySFASNo.71tothesebusinesses.

Also,theCompany's IPPContracts, including thoserestructured undertheMRAandthosenotsorestructured willcontinuetobetheobligations oftheregulated business.

Asdescribed under"MasterRestructuring Agreement andthePowerChoice Agreement,"

theconsummation oftheMRA,aswellasimplementation ofPowerChoice, issubjecttoanumberofcontingencies.

IntheeventtheCompanyisunabletosuccessfully completetheMRAandtherefore implement PowerChoice, itwouldpursueallalternatives including atraditional raterequest.However,notwithstanding sucharaterequest,itislikelythatapplication ofSFASNo.71wouldbediscontinued fortheremaining electricbusiness, sincetheCompany'.s currentratestructure wouldnolongerbesufficient torecoveritscosts.Theresulting non-cashafter-tax chargesagainstincome,basedonregulatory assetsandliabilities associated withthenucleargeneration andelectrictransmission anddistribution businesses asofDecember31,1997,wouldbeapproximately

$526.5millionor$3.65pershare.Inaddition, theCompanywouldberequiredtoreassessthecarryingamountsofitslong-lived assetsinaccordance withSFASNo.121.SFASNo.121requireslong-livedassetsandcertainidentifiable intangibles heldandusedbyanentitybe.reviewedforimpairment whenevereventsorchangesincircumstances indicatethatthecarryingamountofanassetmaynotberecoverable orwhenassetsaretobedisposedof.Inperforming thereviewforrecoverability, theCompanyisrequiredtoestimatefutureundiscounted cashflowsexpectedtoresultfromtheuseoftheassetand/oritsdisposition.

TheCompanywouldalsoberequiredtodetermine theextenttowhichadversepurchasecommitments, ifany,arerequiredtoberecordedasobligations.

Variousrequirements underapplicable lawandregulations andundercorporate instruments, including thosewithrespecttoissuanceofdebtandequitysecurities, paymentofcommonandpreferred dividends, andcertaintypesoftransfers ofassetscouldbeadversely impactedbyanysuchwrite-downs.

SFASNo.71doesnotrequiretheCompanytoearnareturnonthe"regulatory assetsinassessing itsapplicability.

IntheeventtheMRAandPowerChoice areimplemented, theCompanybelievesthatthepricesit,wouldchargeforelectricserviceover10years,including theCTC,assumingnounforeseen z'eduction indemandorbypassoftheCTCor.exitfees,willbesufficient torecovertheMRA regulatory assetandproviderecoveryofandareturnontheremainder ofitsassets,asappropriate.

ZntheeventtheCompanycouldnolongerapplySFASNo.71inthefuture,itwouldberequiredtorecordanafter-tax non-'cash chargeagainstincomeforanyremaining unamortized regulatory assetsandliabilities.

Depending onwhenSFASNo.71wasrequiredtobediscontinued, suchchargewouldlikelybematerialtotheCompany's reportedfinancial condition andresultsofoperations andtheCompany's abilitytopaycommonandpreferred dividends.

TheEmergingIssuesTaskForce("EITF")oftheFASBreachedaconsensus onIssueNo.97-4"Deregulation ofthePricingofElectricity

-IssuesRelatedtotheApplication ofSFASNo.71andSFASNo.101"inJuly1997.TheCompanydiscontinued theapplication ofSFASNo.71'andappliedSFASNo.101withrespecttothefossilandhydrogeneration businessatDecember31,1996,inamannerconsistent withtheEITFconsensus.

Withtheimplementation ofPowerChoice, specifically theseparation ofnon-nucleargeneration asanentitythatwouldnolongerbecost-of-service regulated, theCompanyis-requiredtoassessthecarryingamountsofitslong-livedassetsinaccordance withSFASNo.121.TheCompanyhasdetermined thatthereisnoimpairment ofitsfossilandhydrogenerating assets.Totheextenttheproceedsresulting fromthesaleofthefossilandhydroassetsarenotsufficient toavoidaloss,theCompanywouldbeabletorecoversuchlossthroughtheCTC.ThePowerChoice agreement providesfordeferralandfuturerecoveryoflosses,ifany,resulting fromthesaleofthenon-nuclear generating assets.TheCompany's fossilandhydrogeneration plantassetshadanetbookvalueofapproximately

$1.1billionatDecember31,1997.PSCCOMPETITIVE OPPORTUNITIES PROCEEDING

-ELECTRICOnMay16,1996,thePSCissueditsOrderintheCOPScase,whichcalledforamajorrestructuring ofNewYorkState'selectricindustry.

TheCOPSordercalledforacompetitive wholesale powermarketandtheintroduction ofretailaccessforallelectriccustomers.

Thegoalscitedinitsdecisionincludedloweringconsumerrates,increasing choice,continuing reliability ofservice,continuing environmental andpublicpolicyprograms, mitigating concernsaboutmarketpowerandcontinuing customerprotection andtheobligation toserve.ThePSCdecisionintheCOPSproceeding statesthatrecoveryofutilitystrandedcostsmaybeaccomplished byanon-bypassable "wirescharge"tobeimposedbydistribution companies..

ThePSCdecisionalsostatesthatacarefulbalancing ofcustomerandutilityinterests andexpectations isnecessary, andthatthelevelofstrandedcostrecoverywillultimately dependupontheparticular circumstances ofeachutility.OnJune10,1997,thePSCorderedamulti-utility, retailaccesspilotprogramthatwouldallowqualified farmersandfoodprocessors toshopfore'lectricity andotherenergyservices.

ThePSCrequiredutilities toadjustthecurrentdeliveryratesforfarmersandfoodprocessors, whichresultedinratereductions ofabout10percentforfarmersand3percentto6percentforfoodprocessors.

Deliveryunderthisprogrambeganinlate1997.TheCompanydoesnotbelievethatthisorderwillhaveamaterialadverseeffectonitsfinancial positionorresultsofoperations.

OnAugust27,1997,thePSCrequested commentsonitsstaff'stentative conclusions abouthownucleargeneration andfossilgeneration shouldbetreatedafterdecisions aremadeontheindividual electricrestructuring agreements currently pendingbeforethePS'hePSCstaffconcluded thatbeyondthetransition period(theperiodcoveredbytheindividual restructuring agreements including PowerChoice),

nucleargeneration shouldoperateonacompetitive basis.Inaddition, thePSCstaffconcluded thatasaleofgeneration plantstothirdpartiesisthepreferred meansofdetermining thefairmarketvalueofgeneration plantsandoffersthegreatestpotential forthemitigation ofstrandedcosts.ThePSCstaffalsoconcluded thatrecoveryofsunkcosts,including postshutdowncosts,wouldbesubjecttoreviewbythePSCandthisprocessshouldtakeintoaccountmitigation measurestakenbytheutility,including thestepsithastakentoencourage competition initsservicearea.TheCompany'nuclegeneration assetshadanetbook'value of$1.5billion(excluding thereservefdecommissioning) atDecember31,1997.

InOctober1997,themajorityofutilities withinterests innuclearpowerplants,including theCompany,requested thatthe'PSCreconsider itsstaff'snuclearproposal.

Znaddition, theutilities raisedthefollowing issues:impediments tonuclearplantsoperating inacompetitive mode;impediments tothesaleofplants;responsibility fordecommissioning anddisposalofspentfuel;safetyandhealthconcerns; andenvironmental andfueldiversity benefits.

Znlightofalloftheseissues,theutilities recommended thatamoreformalprocessbedeveloped toaddress'those issues.Thethreeinvestor-owned utilities, Rochester GasandElectricCorporation, Consolidated EdisonCompanyofNewYork,'nc.

andtheCompany,whicharecurrently pursuingformation ofanuclearoperating companyinNewYorkState,alsofiledaresponsewiththePSCinOctober1997.Theresponsestatedthataforceddivestiture ofthenuclearplantswouldadduncertainty todeveloping astatewide approachtooperating-theplantsandrequested thatsuchaforceddivestiture proposalberescinded.

Theresponsealsostatedthatimplementation ofaconsolidated six-unitoperation wouldcontribute tothemitigation ofunrecovered nuclearcosts.TheNYPA,whichisalsopursuingformation ofthenuclearoperating company,submitted itsowncommentswhichweresimilartothecommentsofthethreeutilities.

InFebruary1998,thePSCestablished aformalproceeding tofurtherexamineissuesrelatedtonuclearplantsandthefeasibility ofapplyingmarket-basedpricingtothesefacilities.

See"MasterRestructuring Agreement andPowerChoice Agreement" aboveforadiscussion ofthetreatment ofnuclearoperations duringthetermofPowerchoice.

FERCRVLEMAKZNG ONOPENACCESSANDSTRANDEDCOSTRECOVBRYZnApril1996,theFERCissuedFERCOrder888.Order888promotescompetition byrequiring thatpublicutilities owning,operating, orcontrolling interstate transmission facilities filetariffswhichofferothersthesametransmission servicestheyprovideforthemselves, undercomparable termsandconditions.

TheCompanyhascompliedwiththisrequirement byfilingitsopenaccesstransmission tariffwithFERConJuly7,1996.Baseduponsettlement discussions withvariousparties,aproposedsettlement wassubmitted totheFERCinthefirstquarterof1997.Thesettlement hasnotbeenapprovedbytheFERCatthistime.Hearingswereconducted inSeptember 1997withnon-settling parties.AMarch1998Administrative LawJudge'srecommended decisioninthisproceeding recommended lowertariffsthanthosefiledbytheCompany.TheCompanyisunabletodetermine theultimateresolution ofthisissueorwhenadecisionwillbeissuedbyFERC.UnderFERCOrder888,theNYPPwasrequiredtofilereformedpowerpoolingagreements thatestablish open,non-discriminatory membership provisions andmodifyanyprovisions thatareundulydiscriminatory orpreferential.

OnJanuary31,1997,theNYPPMemberSystems(the"MemberSystems")submitted acomprehensive proposaltoestablish anZSO,aNewYorkStateReliability Council("NYSRC")

andaNewYorkPowerExchange("NYPE")thatwillfosterafullycompetitive wholesale electricity marketinNewYorkState.TheISOwouldprovideforthereliableoperation ofthetransmission systeminNewYorkStateandprovidenondiscriminatory openaccesstotransmission servicesunderasingleISOtariff.ThroughtheISO,thetransmission owners,including theCompany,wouldbecompensated fortheuseoftheirtransmission systemsonacost-of-servicebasis.TheNYSRCwouldestablish thereliability rulesandstandards bywhichtheISOoperatesthebulkpowersystem.TheISOwouldalsoadminister thedailyelectricenergymarketandtheNYPEwouldfacilitate theelectricenergymarketonaday-ahead basis.OnMay2,1997,theMemberSystemsmadeasupplemental filingrelatedtotheproposedNYSRCandonAugust15,1997,sixoftheMemberSystemsfiledanapplication formarket-based rateauthority inthenewwholesale marketstructure.

OnDecember19,1997,theMemberSystemssubmitted arevisedfilingwhichreflected thefundamental components oftheinitialJanuary31,1997filing.However,theDecember19,1997filingprovidesforadditional explanatory materials, incorporates FERC'sguidancesetforthinFERCordersinvolving otherpowerpoolsandZSOs,andsetsfortharevisedgovernance structure oftheISO.TheCompanyisunabletopredictwhenFERCwillactonthesesubmittals, orwhetheritwillapprovethefilingswithorwithout modifications.

However,theCompany's PowerChoice agreement doesnotcondition retailaccessonthepresenceofanISO.InOrder888,theFERCalsostatedthatitwouldprovidefortherecoveryofprudentandverifi'able wholesale strandedcostswherethewholesale customer,wasabletoobtainalternative powersuppliesasaresultofOrder888'sopenaccessmandate.Order888lefttothestatestheissueofretailstrandedcostrecovery.

Wherenewlycreatedmunicipal electricutilities requiredtransmission servicefromthedisplaced utility,theFERCstatedthatitwouldentertain requestsforstrandedcostrecoverysincesuchmunicipalization ismadepossiblebyopenaccess.TheFERCalsoreservedtherighttoconsiderstrandedcostsonacase-by-case basisifitappearedthatopenaccesswasbeingusedtocircumvent strandedcostreviewbyanyregulatory agency.Numerousparties,including theCompany,filedrequestsforrehearing ofOrder888.ZnMarch1997,theFERCissuedOrder888-A,whichgenerally affirmedOrder888andgrantedrehearing ononlyahandfulofissues.OneofthoseissueswaswhethertheFERCwouldreviewstrandedcostsinannexation casesasitcommitted todoinmunicipalization cases.ZnOrder888-AtheFERCstatedthatitwouldreviewstrandedcostsresulting fromterritorial annexation byanexistingmunicipal electricsystem,providedthatsystemreliedontransmission fromthedisplaced utility.TheFERCdeniedtheCompany's requestforrehearing onhowstrandedcostswouldbecalculated andotherissues.InNovember1997,FERCissuedOrder888-B.ThisOrderlargelyaffirmedthepositions setforthinOrder888-Awhileclarifying thattheFERCrecognizes theexistence ofconcurrent statejurisdiction overstrandedcostsarisingfrommunicipalization.

TheFERCacknowledged inOrder888-Bthatthestatesmaybefirsttoaddresstheissueofretail-turned-wholesale strandedcosts,andstatedthatitwillgivethestatessubstantial deference wheretheyhavedoneso.ZnlateJanuary1997,theCompanyprovided26communities inSt.LawrenceandFranklincountieswithestimates theyrequested ofthestrandedcoststheymightbeexpectedtopayiftheywithdrawfromtheCompany's systemtocreategovernment-controlled utilities.

Thepreliminary estimateofthecombinedpotential strandedcostliability forthecommunities rangesfromalowof$225milliontoahighof$452million,depending upontheforecastofelectricity marketpricesthatisused.Theseamountsdonotincludethecostsofcreatingandoperating amunicipal utility.Atthistime,21of.theoriginal26communities arestillpursuingthematter.Ifthese21communities withdrewfromtheCompany's system,theCompanywouldexperience apotential revenuelossofapproximately

$60millionto$65millionperyear.Inaddition, theCompanyisawareofothercommunities thatareconsidering municipalization.

However,theCompanyisunabletopredictwhetherthosecommunities wouldpursuemunicipalization.

Thestrandedcostcalculations werebasedonamethodology prescribed bytheFERC.Becausenomunicipality hasmovedforwardwithcondemnation, thevalueoftheCompany's facilities hasnotbeendeductedfromthestrandedcostestimates.

Thestrandedcostsincludedintheseestimates arethecommunities'hare ofobligations thatwereincurredonbehalfofallcustomers tofulfilltheCompany's legalobligations toensureadequate, reliableelectricity service.Suchlegitimate andprudentcostsarecurrently includedinelectricity rates.Government-mandated paymentstoZPPsrepresent thelargestsinglecomponent ofthesecosts.These21communities seekingtowithdrawfromtheCompany's systemalsoproposetodisconnect entirelyfromtheCompany'systemandtotaketransmission servicefromanotherutility.Theybelievethat,giventheprovisions ofOrder888,FERCwouldnotapprovetheCompany's requestforstrandedcostrecoveryunderthesecircumstances.

TheCompanyhasresponded that,regardless oftheresultattheFERC,opportunities forstrandedcostrecoveryinthismattercouldalsobepursuedbeforethePSCandinastatecondemnation proceeding.

(See"MasterRestructuring Agreement andthePowerChoice Agreement.")

TheCompanyisunabletopredicttheoutcomeofthismatter.OTHERFEDERALANDSTATEREGULATORY INITIATIVES PSCProposalofNewZPPOperating andPPAManagement Procedures.

InAugus1996,thePSCproposedtoexaminethecircumstances underwhichautilitincluding theCompany,maylegallycurtailpurchases fromIPPs;whetherutilitie shouldbepermitted tocollectdatathatwillassistinmonitoring IPPs'ompliance withfederalQFrequirements, uponwhichthemandatedpurchases arepredicated; andifutilities shouldbeallowedtodemandsecurityfromIPPstoensuretherepayment ofamountsaccumulated intrackingaccountsmadeundertheirpurchased powercontracts.

ThePSCnotedthatsomeofthecurrentIPPcontracts arefarabovemarketpricesandarecausingutilities toseekrateincreases.

Inaddition, thePSCstatedthatitsproposalwasinitiated toprotectratepayers, sinceitwouldensurejustandreasonable ratesintheeventongoingnegotiations betweenutilities andIPPsfail.Monitoring.

1nDecember1996,thePSCgavetheNewYorkStateutilities, including theCompany,theauthority tocollectdatatoassisttheminmonitoring IPPs'ompliance withbothfederalQFstandards andstaterequirements.

ThePSCstatedthatifQFsarenotmeetingrequirements, theobligation topaythefullcontractrate,whichisfundedbyutilityratepayers, isgenerally excusedormitigated.

Furthermore, ifthedatacollected throughaQFmonitoring programindicates afacilityisnotmeetingfederalstandards, theutilitycouldpetitiontheFERCtodecertify theQF,whichcouldresultinpenalties that,couldincludecancellation ofthecontract.

Asimilarpenaltycouldbeimposedifitisdetermined aQFhasfailedtomaintaincompliance withstatelaw.Underthemonitoring program,QFs,arerequiredtosubmitdataasofMarch1eachyearforthepreviouscalendaryear.Inaccordance withthetermsoftheMRA,theCompanywillnotimplement anyQFmonitoring programfortheIPPParties.However,theCompanycontinues tomonitorthoseIPPsthatarenotIPPPartiesforcontinued QFcompliance underPSCregulation.

Curtailment.

OnMay20,1997,thePSCaddressed theprocedures underwhichautility,including theCompany,maylegallycurtailpurchases fromZPPsthatareQFs,unlesscurtailment isspecifically prohibited bycontract.

Curtailment isallowedbyaFERCrule,undercertainoperational circumstances whenpurchases fromtheQFswillexceedthecoststheutilitywouldincurifitgenerated thepoweritself.AdvancenoticemustbeprovidedtotheQFalongwiththereasonsforsuchcurtailment, whicharesubjecttoverification bythePSCeitherbeforeoraftercurtailment.

ThePSCstatedthatPURPA,whichencouraged generation byIPPs,wassupposedtoberevenue-neutrals However,theynotedthatthishasnotbeenthesituation inNewYorkStateandratepayers havebeenundulyburdenedbecauseoftheirlackofspecificcurtailment procedures.

Thedecisiontopermitcurtailment isnotlikelytoaffectthePPAscoveredbytheMRA,whichrepresents approximately 80%.oftheCompany's over-market purchased powerobligations, asdescribed previously.

However,thedecisioncouldaffectmostoftheremaining ZPPcontracts.

TheCompanyisunabletodetermine-the effectofthesestatements untilsuchatimeasthereisafinalorder.TheCompanycannotpredictwhetherthePSCwilltakeanyactiononthefirmsecurityissue.However,thefirmsecurityissuewithrespecttotheZPPPartiescoveredundertheMRAwouldbesettledupontheclosingoftheMRA.Multi-Year GasRateSettlement Agreement.

TheCompany,MultipleZntervenors (anunincorporated association ofapproximately 60largecommercial andindustrial energyuserswithmanufacturing andotherfacilities locatedthroughout NewYorkState)andPSCstaffreachedathree-year settlement thatwasconditionally approvedbythePSConDecember19,1996.ThePSCorderedconditional approvalonthethree-year settlement agreement untilafinal,redrafted agreement, whichreflectstheCommission's order,issubmitted forfinalapproval.

Thesettlement resultsina$10millionannualreduction inbaseratesora$30milliontotalreduction overthethree-year termofthesettlement.

Thisreflectsa$19millionreduction intheamountoffixednon-commodity coststoberecoverable inbaserates,offsetbya$9millionincreaseinannualbaserates.TheCompanyestimates thatthecombination ofin-handsupplierrefundsandfurtherreductions inupstreampipelinecostswillbesufficient tofundthe$19millionannualreduction innon-commodity costrecovery.

Zfthenon-commodity costreductions exceed$57million($19millionannually) duringthethree-year settlement period,theexcess,upto$40millionwillbecreditedtoaContingency ReserveAccount("CRA")tobeutilizedforratepayer benefitintherateyearendingOctober31,2000orbeyond.Totheextenttheactualnon-commodity costreductions exceed$57millionbymorethan$40million,theCompanymayretainanyexcesssubjecttoareturnonequitysharingprovision.

Zntheeventthenon-commodity reductions fallshortofthe$57millionestimate, theCompanywillbeartheriskofanyshortfall.

Zntheeventthatthetermination orrestructuring ofZPPcontracts resultsinmargin(revenues lessfuelcosts)orpeakshavinglosses,themarginlosseswouldbecollected currently subjectto80%/20%(ratepayer/shareholder) sharingandthepeakshavinglosseswillbedeferredtotheCRA,subjecttolimitsspecified inthesettlement.

Inreturnfortakingonthis.risk,theCompanyhasachievedaportionoftherevisedratestructure thathadbeenproposedtoreduceitsthroughput risk.TheCompanyobtainedanROEcapof13.5%with50/50sharingbetweenratepayers andshareholders-in-excess of'thecap.TheCompanyalsohasanopportunity toearnupto$2.25millionannuallyifitsgascommodity costsarelowerthanamarketbasedtargetwithoutbeingsubjecttotheROEcap.TheCompanyhasanequal$2~25millionriskifgascommodity costsexceedthetarget.Anadditional majorbenefitoftherevisedratedesignisthatthemarginmadeoneachadditional newcustomerwillsignificantly increasetotheextentadditional throughput doesnotrequireadditional upstreampipelinecapacityforservice.This,alongwiththeapprovaloftheCompany's ProgressFund,whichallowstheCompanytouseutilityrevenuesinanamountnottoexceed$11millionintotalforthepurposeofproviding financing forlargecustomers toconvertorincreasetheirgasuse,willprovidenewopportunities forgrowth.GenericGasRateProceeding.

Asaresultofthegenericrateproceeding, inwhichthePSCorderedallNewYorkutilities toimplement aserviceunbundling beginning inMay1996,nearly3,000customers havechosentobuynaturalgasfromothersources,withtheCompanycontinuing toprovidetransportation serviceforaseparatefee.ThesechangeshavenothadamaterialimpactontheCompany's marginssincethemarginistraditionally derivedfromthedeliveryserviceandnotfromthecommodity sale.Themarginfordeliveryforresidential andcommercial aggregation servicesequalsthemarginonthetraditional salesserviceclasses.Todatethismigration hasnotresultedinanystrandedcostssincethePSChasallowedtheutilities toassignthepipelinecapacitytothecustomers converting fromsalestotransportation.

Thisassignment isallowedduringathree-year periodendingMarch1999,atwhichtimethePSCwilldecideonmethodsfordealingwiththeremaining unassigned orexcesscapacity.

Asapartofthegenericrateproceeding, allutilities arerequiredtofileareportwiththePSCinApril1998,describing actionsthathavebeentakentomitigatepotential strandedcostsascustomers migratetotransportation service.Znaclarifying orderinthisproceeding, issuedSeptember 4,1997,thePSChasindicated thatitisunlikelythatutilities.

willbeallowedtocontinuetoassignpipelinecapacitytodeparting customers afterMarch1999.Onaseparatebutparallelpath,inSeptember 1997,thePSCissuedforcommentitsstaff'spositionpaperonthefutureofthenaturalgasindustry, including recommendations forincreasing competition andexpanding customer.choiceinthenaturalgasmarketplace.

Thestaffproposed, amongotherthings,thatallregulated naturalgasutilities exitthebusinessofpurchasing naturalgasforcustomers overthenextfiveyears.Thiswouldcompletethetransition ofcustomers fromsalestotransportation serviceonly.Theregulated utilities wouldonlydelivernaturalgaspurchased bycustomers fromcompetitive suppliers.

ZfthisproposalisadoptedbythePSC,thenitwouldeliminate theneedtoregulatenaturalgaspurchasing practices sincemarketforceswouldestablish naturalgasprices.Thepositionpaperidentified anumberofissuesthatwouldneedtoberesolvedinorderforthisproposaltobesuccessful.

Theprimaryissuesarethepipelin'e capacityandgassupplycontracts thatthelocalutilities havewithinterstate pipelines thatextendbeyondtheproposedfive-year transition period,theobligation oftheutilitytoserveassupplieroflastresort,andtheissueofsystemreliability.

TheCompanyandotherpartiessubmitted commentsandreplycommentstothePSCinlateNovemberandDecemberof1997,respectively.

Withtheexception oftheissuestoberesolvedbythePSC,asmentioned above,theCompanydoesnotbelievethatthisproposalwillhaveamaterialadverseeffectonitsresultsofoperations orfinancial condition, sincetheCompany's naturalgasmarginisderivedfromthedeliveryserviceandnotfromthecommodity sale.Theresolution oftheissuesidentified bythePSCcouldresultinunrecovered strandedcostsfortheCompany.TheCompanyisunabletopredicthowthePSCwillresolvethoseissues.Foradiscussion oftheCompany's gassupply,storageandpipelinecommitments, seeItem8.Financial Statements andSupplementary Data"Note9.Commitments andContingencies

-GasSupply,StorageandPipelineCommitments.")

NRCandNuclearOperating Matters.InOctober1996,theNRCrequiredcompanies withnuclearplantstoprovidetheNRCwithaddedconfidenceandassurance thattheirplantsareoperatedandmaintained withinthedesignbasis,andanydeviations arereconciled inatimelymanner.Suchinformation, whichwasfiledwithintherequired120days,will'eusedbytheNRCtoverifythatcompanies areincompliance withthetermsandconditions oftheirlicense(s) andNRCregulations.

Inaddition, itwillallowtheNRCtodetermine ifotherinspection activities orenforcement actionsshouldbetakenonaparticular company.Inthelettertransmitting therequested information totheNRC,theCompanyconcluded thatithasreasonable assur'ance that(i)designbasisrequirements arebeingtranslated intooperating, maintenance, andtestingprocedures; and(ii)system,structure andcomponent configuration andperformance areconsistent withthedesignbasis.Also,theCompanyhasaneffective administrative toolfortheidentification, documentation, notification, evaluation, correction, andreporting ofconditions, events,activities, andconcernsthathavethepotential foradversely affecting thesafeandreliableoperation ofUnit1andUnit2.InApril1997andDecember1997,theCompanyreceivednoticesfromtheNRCofa$200,000fineand$50,000fine,respectively, forviolations atUnit1andUnit2.Thepenalties wereforviolations relatedtocorrective actionsanddesigncontrol.TheCompanypaidthefinesandisimplementing corrective action.OnJanuary23,1998,theCompanyreceivednoticeofaproposed$55,000finefromtheNRCforviolations ofNRCrequirements relatedtoradioactive wasteissues.TheCompanydoesnotplantocontesttheproposedNRCfine.InJanuary1998,theNRCissueditsSystematic Assessment ofLicenseePerformance (the"SALP")reportonUnit1andUnit2,whichcoverstheperiodJune1996toNovember1997.TheSALPreport,whichisanextensive assessment oftheplants'erformance intheareasofoperations, maintenance, engineering andsupport,statedthattheperformance ofUnit1andUnit2wasgenerally good,althoughratingswerelowerthanthepreviousassessment.

TheCompanyagreeswiththeNRC'sdetermination thatthereareareasofitsperformance thatneedimprovement andistakingseveralactionstomakethoseneededimprovements.

TheCompanybelievesthatNRCsafetyenforcement, isbecomingmorestringent asindicated bytheNRC'srequestforinformation, finesthattheCompanyhasbeenassessedandlowerSALPratingsandthattheremaybeadirectcostimpactoncompanies withnuclearplantsasaresult.TheCompanyisunabletopredicthowsuchachangedoperating environment mayaffectitsresultsofoperations orfinancial condition.

SomeownersofolderGeneralElectricCompanyboilingwaterreactors, including theCompany,haveexperienced crackinginhorizontal weldsintheplants'ore shrouds.Inresponsetoindustryfindings, theCompanyinstalled pre-emptive modifications totheUnit1coreshroudduringa1995refueling andmaintenance outage.Thecoreshroud,astainless steelcylinderinsidethereactorvessel,surrounds thefuelanddirectstheflowofreactorwaterthroughthefuelassemblies.

Inspections conducted aspartoftheMarch1997refueling andmaintenance outagedetectedcrackinginverticalweldsnotreinforced bythe1995repairs.OnApril8,1997,theCompanyfiledacomprehensive inspection andanalysis reportwiththeNRCthatconcluded thatthecondition oftheUnit1coreshroudsupportsthesafeoperation oftheplant.OnMay8,1997,theNRCapprovedtheCompany's requesttooperateUnit1untilthenextscheduled mid-cycle outage,late1998.TheCompanyagreedtoproposeaninspection planfortheoutageandsubmittheplantotheNRCatleastthreemonthsbeforetheoutageisscheduled.

tobegin.TheCompanybelievesithasastrongtechnical basistooperateUnit1without,a mid-cycle outageandisseekingthenecessary approvalfromtheNRCtopostpone.

theinspections untiltheunit'srefueling andmaintenance outageinspring1999,buttherecanbenoassurance thatsuchapprovalwillbegranted.'he Unit1refueling andmaintenance outage,originally plannedtobecompleted inearlyApril1997,wascompleted onMay10,1997duetothecozeshroudissue.OnSeptember 15,1997,Unit"1wastakenoutofserviceduetoleakinginoneoffourback-upcondensers.,

Thestandbyconderisers serveasaback-upsystemfortheremovalofreactorsteam.Thecondensers aremaintained inareadystate-duringnormalplantoperations.

Testsandinspections wereconducted ontheremaining condensers andsimilarconditions werefound.OnDecember10,1997,Unit1wasreturnedtoserviceafterthereplacement ofallfourcondensers, whichcostapproximately

$6.7million.OTHERCOMPANYEFFORTSTOADDRESSCOMPETITIVE CHALLENGES TaxInitiatives.

TheCompanyisworkingwithutility,customerandstaterepresentatives toexplainthenegativeimpactthatall..utility taxes,including theGRT,arehavingonratesandthestateoftheeconomy.Atthesametime,theCompanyisalsocontesting thehighrealestatetaxesitisassessedbymanytaxingauthorities, particularly thoseimposedupongenerating facilities.

TheNewYorkStateLegislature passedastatebudgetinAugust1997whichincludesareduction oftheGRToverthreeyears.Forgasandelectricutilities, thetaximposedongrossincomewillbereducedfrom3.5%to3.25%onOctober1,1998,andfrom3.25%to2.5%onJanuary1,2000.Thestatetaximposedongrossearningswillremainunchanged at.75%,bringingthetotalGRTto3.25%--afullpercentage pointlowerthantoday'slevelof4.25%.Thesavingsfromthereduction oftheGRTwillbepassedontotheCompany's customers.

TheCompanybelievesthatfurther,tax reliefisneededtorelievetheCompany's customers ofhighenergycostsandtoimproveNewYorkState'competitive positionastheindustrymovestowardacompetitive marketplace.

Thefollowing tablesetsforthasummaryofthecomponents ofothertaxes(exclusive ofincometaxes)incurredbytheCompanyintheyears1995through1997:Inmillions'ofdollars199719961995PropertytaxexpenseSalestaxPayrolltaxGrossReceiptsTaxOthertaxesTotaltaxexpense.$250.713.434.1184'0.1482.9$249.414~136.4184.10.5484.5$264.813.937.3190.25.2511.4Chargedtoconstruction, subsidiaries andrelatoreconitionTotalothertaxes$471.5(8.7)6.1$475.8$517.5 CustomerDiscounts.

lnrecentyears,someindustrial customers havefoundalternative suppliers oraregenerating their.own power.Inaddition, aweakenedeconomyorattractive energypriceselsewhere havecontributed tootherindustrial customerdecisions torelocateoiclose.Inaddressing thethreatoffurtherlossofindustrial load,thePSCestablished guidelines togovernflexibleelectricratesofferedbyutilities toretainqualified industrial customers.

Undertheseguidelines, theCompanyfiledforanewservicetariffinAugust1994(SC-11),underwhichallnewcontractratesareadministered basedondemonstrated industrial andcommercial competitive pricingalternatives including, butnotlimitedto,on-sitegeneration, fuelswitching, facilityrelocation andpartialplantproduction shifting.

Contracts arefortermsnottoexceedsevenyearswithoutPSCapproval.

Inaddition, theCompanyhaseconomicdevelopment programswhichprovidetariffbasedincentives toretainandgrowload.AsofJanuary1998,theCompanyhas152executedcontracts underitsflexibletariffofferings.

Thesecontracts havebeensignedtomitigatethelostmarginimpactsassociated withcustomers executing thecompetitive alternatives mentioned above.Inaddition, manyofthesecontracts includeanincrease'n production levelsand/orattractnewcustomers totheCompany's serviceterritory.

In1997and1996,thetotalamountofcustomerdiscounts (economic development programsandflexiblepricing)was$90.6millionand$75~5million,respectively.

TheCompanyrecovered

$46.6millionand$56.7millioninrates,respectively.

Pendingimplementation ofPowerChoice, theCompanybudgeteditsdiscounts toincreasetoapproximately

$95.4millionin1998assomediscounts grantedin1997areineffect,foranentireyearandfurtherdiscounts aregranted.TheCompanyisaggressively usingSC-11toincreasesalestoexistingcustomers andtoattractnewcustomers toitsserviceterritory.

Withthereduction inindustrial pricesprovidedinPowerChoice, thelevelofdiscounts thathavebeennecessary shoulddeclineinthefuture.REGULATORY AGREEHENTS/PROPOSALS (See"MasterRestructuring Agreement andthePowerChoice Agreement.")

1995RateOrder.OnApril21,1995,theCompanyreceivedaratedecision(1995rateorder)fromthePSCwhichapprovedanapproximately

$47millionincreaseinelectricrevenuesanda$4.9millionincreaseingas.revenues.

YEAR2000COMPUTERISSUEAstheyear2000approaches, theCompany,alongwithmanyothercompanies, couldexperience potentially seriousoperational

problems, sincemanycomputerprogramsthatweredeveloped willnotproperlyrecognize calendardatesbeginning withtheyear2000.Further,thereareembeddedchipscontained withingeneration, transmission, distribution andgasequipment thatmaybedate-sensitive.

Inthesecircumstances whereanembeddedchipfailstorecognize thecorrectdate,electricorgasoperations couldbeadversely affected.

TheCompanyisaddressing theseissuessothatitscomputersystemsand,wherenecessary, itsembeddedchipswillprocessdatesgreaterthan1999,therebypreventing anyadverseoperational orfinancial impacts.TheCompanyhasbeenaddressing theyear2000information technology issuethroughtheremediation andreplacement ofexistingbusinessapplications andpartsofitstechnical infrastructure.

Inlate1997,theservicesofaleadingcomputerservicesandconsulting firmwereretainedtoconductanassessment oftheCompany's entireyear2000program.Asaresultoftheassessment, aCompany-wide year2000projectmanagement officehasbeenformedandyear2000projectmanagershavebeenappointed withineachbusinessgroupandeffortsareunderwaytoevaluatethescopeoftheproblemforembeddedtechnologies/process controlsystemsinallbusinessgroupswithintheCompany.ACompany-wide programdirectorandan executive levelsteeringcommittee havebeenputinplacetooverseeallaspectsoftheprogram.TheCompanyisalsoevaluating theexposuretoyear2000problemsofthirdpartieswithwhomtheCompanyconductsbusiness.

TheCompanyexpectstocompleteaninventory ofexposures, including anassessment ofpriorities, costsandresources, bythethirdquarterof1998.FailuresoftheCompanyand/orthirdpartycomputersystemsandembeddedchipscouldhaveamaterialimpactontheCompany's abilitytoconductitsbusiness.

Untilfurtherprogressismadeontheseefforts,management isunabletoestimatethetotalyear2000compliance expense,butitisintheprocessofassessing thisexpense.RESULTSOFOPERATIONS Earningsfor1997were$22.4million,or16centspershare,ascomparedto$72.1million,or50centspershare,in1996and$208.4million,or$1.44pershare,in1995.1997earningswerenegatively impactedbyawrite-off of$190.0millionor85centspershareassociated withtheportionoftheMRAregulatory assetdisallowed inratesbythePSC,whichwasincludedinotherincomeanddeductions intheincomestatement (see"MasterRestructuring Agreement andthePowerChoice Agreement" and"Accounting Implications ofthePowerChoice Agreement andMasterRestructuring Agreement.")

Inaddition, anincrease-in industrial customerdiscounts of$25.2millionnotrecovered inrates(seeOtherCompanyEffortstoAddressCompetitive Challenges

-"Customer Discounts"

),andadeclineinhigher-margin residential salesalsoadversely impacted1997earnings.

Thelower-margin industrial-special sales(salesbytheCompanyonbehalfofNYPA)andindustrial salesincreased.

Asaresult,totalpublicsaleswereessentially thesameassalesin1996.Thiswaspartially offsetbyadeclineinbaddebtexpenseof$81.1millionin1997ascomparedto1996butis$15.3millionover1995.Earningsfor1996includethediscontinued application ofregulatory accounting principles totheCompany's fossilandhydrogeneration business.

TheCompanyreachedthisconclusion becausetheMarch10,1997agreement-in-principle toterminate orrestructure powercontracts withcertainIPPsmadeprobabletheimplementation ofPowerChoice inwhichtheCompanyproposedtohaveitsnon-nucleargeneration sellpoweratcompetitive pricesinthewholesale market.Thediscontinuance resultedinthewrite-off of$103.6millionofregulatory assetsassociated withthefossilandhydrobusinesswhichwasincludedintheincomestatement asanextraordinary lossaftertaxof$67.4million,or47centspershare.Earningsbeforetheextraordinary losswere$139.5millionor97centspershare.Excluding theextraordinary loss,earningsfor1996werelowerbecauseofanincreaseinbaddebtexpenseof$96.4millionor43centspershare(see"Financial

Position, Liquidity andCapitalResources

-Liquidity andCapitalResources"

).Thiswaspartially offsetbya$15.0milliongainonthesaleofa50%interestinCNPthatcontributed 10centspershareto1996earnings.

TheCompany's requestforatemporary rateincreasein1996wasdeniedbythePSC;Earningsfor1995werehurtbylowersalesquantities ofelectricity andnaturalgas,.ascomparedwithamountsusedtoestablish 1995prices.Saleswereprimarily affectedbythe'ontinuing weakeconomicconditions inupstateNewYork,lossofindustrial customers'oad toNYPAanddiscounts granted.Thesefactorssimilarly impacted1996and1997results.Inaddition, 1995earningsincludedthe'recording ofaone-time, non-cashadjustment ofprioryears'emand-sidemanagement

("DSM")incentive

revenues, revenuesearnedundertheUnit1operating incentive sharingmechanism andagainonthesaleofHYDRA-COthatcollectively increased 1995earningsby17centspershare.TheCompany's 1997earnedROEwas0.9%ascomparedto2.8%(5.4%beforeextraordinary loss)in1996and8.4%in1995.TheCompany's ROEauthorized inthe1995orlastratesettingprocessis11.0%fortheelectricbusinessand11.4%forthegasbusiness.

Factorscontributing toearningsbelowauthorized levelsin1997included, amongotherthings,thePowerChoice chargedescribed above,.salesbelowthoseforecasted indetermining rates,contractual increases incapacitypaymentstoIPPsandincreasing discounts tocustomers.

Asdiscussed under"MasterRestructuring Agreement andthePowerChoice Agreement" an>>Accounting Implications ofthePowerChoice Agreement andMasterRestructurin Agreement,"

theCompanyforecasts thatearningsforthefive-year termofthePowerChoice agreement willbesubstantially depressed.

Thelevelofearningsfor1998willalsobeimpacted, inpart,bythedateofimplementation ofPowerChoice andmayalsobenegatively impactedbythefinancial effectsoftheJanuary1998icestorm(seeItem8.Financial Statements andSupplementary Data-"Note13.Subsequent Event").Thefollowing discussion andanalysishighlights itemsthatsignificantly affectedoperations duringthethree-year periodendedDecember31,1997.Thisdiscussion andanalysisisnotlikelytobeindicative offutureoperations orearnings, particularly inviewoftheprobabletermination, restatement oramendment ofIPPcontracts andimplementation ofPowerChoice.

Italsoshouldbereadinconjunction withItem8.Financial Statements andSupplementary Dataandotherfinancial andstatistical information appearing elsewhere inthisreport.Electricrevenueswere$3,309.millioninboth1997and1996,adecreaseof$26.1million,or0.8%from1995.Asshowninthefollowing table,FACrevenuesincreased

$42.8millionin1997,primarily asaresultoftheCompany's abilityin1997torecoverincreased paymentstotheIPPsthroughtheFAC.However,thisincreasewasoffsetbyadecreaseinrevenuesfromsalestootherelectricsystemsandlowerelectricsalesduetowarmerweather.UnderPowerChoice, revenuesmaydeclineascustomers choosealternative suppliers.

However,theCompanywillrecoverstrandedcoststhroughtheCTC.See"MasterRestructuring Agreement andthePowerChoice Agreement."

Electricoperating revenuesdecreased in1996,primarily duetoadecreaseinmiscellaneous electricrevenues.

Miscellaneous electricrevenueswerelower'n1996primarily'because 1995electricrevenuesincludedtherecording of$71.5millionofunbilled, non-cashrevenuesinaccordance withthe1995rateorder,$13'millionofrevenuesearnedunderMERIT(anincentive mechanism relatedtoimprovement inkeyperformance areaswhichendedin1996)andaone-time, non-cashadjustment ofprioryear'sDSMincentive revenuesandareduction intheDSMrebatecostprogram.However,higherelectricsalesduetocolderweather,anincreaseinsalestootherelectricsystems,anincreaseinFACrevenuesandhigherelectricrates(effective April26,1995)partlyoffsetthosefactorsthatcontributed tolowerelectricrevenues.

FACrevenuesincreased

$28.3millionin1996,whichprimarily reflectstheCompany's increased paymentstotheIPPsrecovered throughtheFAC.ElectricreverwesAmortization ofunbiliedrevenues......Baserates~~~~~~~~~~~~S(77.1)65.3$(77.'i)65.3Increase(decrease) franprioryear(Inmillionsofdollars)19971996TotalFueladjustment clauserevenues.......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."ITheFACiseliminated underthePowerChoice agreement.

ChangesinFACrevenuesaregenerally margin-neutral (subjecttoanincentive mechanism discussed inItem8.Financial Statements andSupplementary Data-"Note1.SummaryofSignificant Accounting Policies"

),whilesalestootherutilities, becauseofregulatory sharingmechanisms andrelatively lowprices,generally resultinlowmargincontributions totheCompany.Thus,fluctuations intheserevenuecomponents donotgenerally haveasignificant impactonnetoperating income.ElectricrevenuesreflectthebillingofaseparatefactorforDSMprograms, whichprovidedfortherecoveryofprogramrelatedrebatecosts.

Electrickilowatt-hour saleswere37.1billionin1997,39.1billionin1996and3'7.7billionin1995.The1997decreaseof2.0billionKWh,or5.1%ascomparedto1996,isrelatedprimarily toa31.0%decreaseinsalestootherelectricsystems.(SeeItem8.Financial Statements andSupplementary Data-"Electric andGasStatistics

-ElectricStatistics"

).The1996increaseof1.4billionKWh,or3.8%ascomparedto1995,reflectsa26.2%increaseinsalestootherelectricsystemsanda1.2%increaseinsalestoultimatecustomers duetothecolderweather.Salestootherelectricsystemswerelowerprimarily duetoareduction intheavailability ofnucleargeneration asaresultoftheoutagesatUnit.1.TheCompanyisanticipating littleornogrowthin1998insalestoultimateconsumers, whichwillbesensitive tothebusinessclimateinitsserviceterritory.

DetailsofthechangesinelectricrevenuesandKWhsalesbycustomergrouparehighlighted inthetablebelow:XofElectric1996Residential Comnercial Industrial Industrial-Special 37.1X37.316.11.9(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)X3.8XAsindicated inthetablebelow,internalgeneration decreased 10.1%in1997,principally duetotheoutageatUnit1andareduction inhydroelectric powerasaresultoflowerthannormalprecipitation inthesummermonths.In1997,Unit1wasoutofservicefor153days,duetoaplannedrefueling andmaintenance outage(whichtook68days)andfortheemergency condenser replacement (whichtookapproximately 85days)whilein1996,Unit2wasoutofservicefora36dayplannedrefueling andmaintenance outage.(See"OtherFederalandStateRegulatory Initiatives

-NRCandNuclearOperating Matters.")

Theamountofelectricity delivered totheCompanybytheIPPsdecreased byapproximately 277GWhor2.0%.However,totalIPPcostsincreased byapproximately

$18.0millionor1.7%,asdiscussed below.(See"MasterRestructuring Agreement andthePowerChoice Agreement"

).

illionsofdollars)Fuelforelectricgeneration:

1997GuhCostGNhCostGMh1995XChanefromriorear1997to19961996to1995CostGIACostGMhCostCoalOilNaturalgasNuclearHydroElectricity purchased:

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~9421130.2~9569130.6~9463126.5~1.5~0.31.13.2Totalgenerated andpurchased 229C11236.7233661219.1234061106.C~1.840,7391,416.943,1641,397.742,1031,289.1(5.6)1.41.42.58.4Fueladjustment clause(1.3)(33.3)14.8(96.1)-(325.0)Losses/Company use3603-C037~10.0-~0.63~7136$1415.63~9127$136C.43~7684$1303.9~5.133.833.834.6XTheabovetablepresentsthetotalcostsforpurchased electricity, whilereflecting onlyfuelcostsforCompanygeneration.

Othercostsofgeneration, suchastaxes,otheroperating expensesanddepreciation areincludedwithinotherincomestatement lineitems.TheCompany's management ofitsZPPpowersupplygenerally dividestheprojectsintothreecategories:

hydroelectric, "mustrun"cogeneration andschedulable cogeneration projects.

Following ahigherthannormalspringrunoff,theprecipitation inthesummermonthswaslowerthanusual.Asaresult,hydroelectric ZPPprojectsdelivered 242GWhor13.7%lessunderPPAsthantheydidforthesameperiodlastyear,representing decreased paymentstothoseZPPsof$15.7million.Asubstantial portionoftheCompany's portfolio ofZPPprojectsoperateona"mustrun00basis.Thismeansthattheytendtorunatmaximumproduction levelsregardless oftheneedfororeconomicvalueoftheelectricity produced.

Outputfrom"mustrun"cogeneration IPPswas230GWhor2.6%lowerthanproducedlastyear,inpartduetolowerenergypurchases fromtheSitheIndependence plant.However,paymentstothoseZPPswere$12.8millionhigher.Thiswasduetoacombination ofoutputturndownarrangements withindividual projectsandescalating contractrates.Aturndownarrangement isanagreement wheretheCompanycompensates anIPPtoreducetheoutputfromtheirfacility.

Althoughoutputisreduced,theneteconomicimpactisfavorable totheCompanyanditscustomers sincetheelectricity isreplacedfromthemarketorotherlowercostsources.44 Quantities purchased fromschedulable cogeneration IPPsincreased 195GWhor6.3%andpaymentsincreased

$20.9million..

Theincreased paymentsarelargelyduetoescalating contractratesforcapacity(fixed)andincreased volumesofenergy.ThetermsofthesePPAsallowtheCompanytoschedule(withcertainconstraints) energydeliveries andpayfortheenergysupplied.

Inaddition, theCompanyisrequiredtomakefixedpaymentsiftheZPPplantsremainavailable for-service.(SeeItem8.Financial Statements andSupplementary Data-"Note9.Commitments andContingencies

-Long-term Contracts forthePurchaseofElectricPower").Gasrevenuesdecreased by$24.7million,or3.6%in1997,andincreased by$99.9million,or17.2%,in1996.Asshowninthetablebelow,gasrevenuesdecreased in1997primaiily due.todecreased salesto'ultimate customers asaresultofthemigration ofcommercial salescustomers tothetransportation class,decreased spotmarketsalesand'decreaseinbaseratesof$5.9millioninaccordance withthe1996rateorder.Thiswaspartially offsetbyhighergasadjustment clauserecoveries andanincreaseinrevenuesfromthetransportation ofcustomer-owned gas(see"OtherFederalandStateRegulatory Initiatives GenericGasRateProceeding"

).Gasrevenuesincreased in1996primarily duetoincreased salestoultimatecustomers duetocolderweather,increased spotmarketsales,highergasadjustment clauserecoveries, anincreaseinrevenuesfromthetransportation ofcustomer-owned gasandanincreaseinbaseratesof$3.1millioninaccordance withthe1995rateorder.Ratesfortransported gas(excluding aggregation services) yieldlowermarginsthangassolddirectlybytheCompany.Therefore, increases inthevolumeofgastransportation serviceshavenothadaproportionate impactonearnings, particularly ininstances wherecustomers thattookdirectservicefromtheCompanymovetoatransportation-only class.Znaddition, changesinpurchased gasadjustment clauserevenuesaregenerally margin-neutral.

Increase(decrease) franprioryear(Inmillionsofdollars)19971996TotalBaserates..$(5.9)S3.1S(2.8)Transportation ofcustomer-oMned gas.....5.32.17.4Purchased gasadjustment clauserevenues..

~45.330.876.1Spotmarketsales..Changesinvoluneandmixofsalestoultimateconsuners (30.8)~38.634.03.3~$24.7$99.9$7$.2Gassales,excluding transportation ofcustomer-owned gasandspotmarketsales,were78.7millionDthin1997,a7.3%decreasefrom1996,anda0.3%increasefrom1995.(SeeItem8.Financial Statements andSupplementary Data-"Electric andGasStatistics

-GasStatistics"

).Thedecreasein1997wasinallultimateconsumerclasses,inpartduetothewarmerweather.Inaddition, spotmarketsales(salesforresale),whicharegenerally fromthehigherpricedgasavailable totheCompanyandtherefore yieldmarginsthataresubstantially lowerthantraditional salestoultimatecustomers, decreased 8.0millionDth.Thiswaspartially offsetbyanincreaseintransportation volumesof18.1millionDthor13.5%tocustomers purchasing gasdirectlyfromproducers.

TheCompanyhasexperienced anincreaseincustomers ofapproximately 17,800since1995,primarily intheresidential class,anincreaseof3.5%.-45-0 ChangesingasrevenuesandDthsalesbycustomergrouparedetailedinthetablebelow:Xof1996Residential Ccemercial 66AX22.64.5X(2.7)X(8.7)(13.0)13.3X9.4X13.06.4TotaltoUltimateconsuners 90.0(0-3)(7.3)13.38.3OthergassystemsTransportation ofcustomer-owned gas8.5(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)X1.7X17.2X2.3XThetotalcostofgaspurchased decreased 6.6%in1997andincreased 34.0%in1996.Thecostfluctuations generally correspond to"salesvolumechanges,asspotmarketsalesactivitydecreased, aswellaschangesingasprices.TheCompanysold2.5,10.5and1.7millionDthonthespotmarketin1997,1996and1995,respectively.

Thetotalcostofgasdecreased

$24.4millionin1997.Thiswastheresultofa5.3milliondecreaseinDthpurchased andwithdrawn fromstorageforultimateconsumersales($18.8million)anda$22.5milliondecreaseinDthpurchased forspotmarketsales,partially offsetbya3.3%increaseintheaveragecostperDthpurchased

($10'million)anda$6.3millionincreaseinpurchased gascostsandcertainotheritemsrecognized andrecovered throughthepurchased gasadjustment clause.Thetotalcostofgaspurchased increased

$93.8millionin1996.Thiswastheresultofa9.3millionincreaseinDthpurchased andwithdrawn fromstorageforultimateconsumersales($29'million),

a$25.6millionincreaseinDthpurchased forspotmarketsalesanda12.9%increaseintheaveragecostperDthpurchased

($38.7million).

Gaspurchased forspotmarketsalesdecreased

$22.5millionin1997andincreased

$25.6millionin1996.TheCompany's netcostperDthsold,aschargedtoexpenseandexcluding, spotmarketpurchases, increased to$3.82in1997from$3.62in1996andwas$3.17in1995.Throughtheelectricandpurchased gasadjustment clauses,costsoffuel,purchased powerandgaspurchased, aboveorbelowthelevelsallowedinapprovedrateschedules, arebilledorcreditedtocustomers.

TheCompany's electricFACprovidesforapartialpass-through offuelandpurchased powercostfluctuations fromthoseforecastinrateproceedings, withtheCompanyabsorbing aportionofincreases orretaining aportionofdecreases toamaximumof$15millionperrateyear.TheCompanyabsorbedlossesofapproximately

$11.8million,$1.4millionand$13.1millionin1995,1996and1997,respectively.

UnderPowerChoice, theFACwillbeterminated.

TheCompanydoesnotbelievethattheelimination oftheFACwillhaveamaterialadverseeffectonitsfinancial condition, asaresultofitsmanagement of(1)pow'ersuppliesprovidedthrough:(i)theoperation ofitsownpowerplants,andfuturepowerpurchasearrangements aspartoftheplannedauctionofitsfossilandhydroassets,(ii)fixedpowerpurchases fromNYPAandremaining IPPsand(iii)fixedandindexedswaparrangements withIPPPartiesand(2)thetransferoftheriskassociated withelectricity commodity pricestothecustomerthroughimplementation ofretailaccessincludedinthePowerChoice agreement.

Otheroperation andmaintenance expensedecreased in1997by$92.9million,or10.0%,ascomparedtoanincreaseof$110.3millionor13.5%in1996.Thesechangesin1996and1997eachresultprimarily fromachangein1996inthe Company's assessment ofuncollectible customeraccounts, whichgivesgreaterrecognition totheincreased riskofcollecting pastduecustomerbills,resulting inincreases intheCompany's allowance fordoubtfulaccountsandasignificantly higherexpenserecognition in1996.Baddebtexpensewas$31.2million,$127.6millionand$46.5millionin1995,1996and1997,respectively.

Zn1997,write-offs were$39.0millionandtheCompanyincurreda$10.5millionincreaseinallowance fordoubtfulaccounts.

Theincreaseintheallowance fordoubtfulaccountswasattributable toincreases inthecollection riskassociated withresidential accountsreceivable andarrears.TheCompanyhasimplemented anumberofcollection initiatives thatareexpectedtoresultinlowerarrearslevelsandpotentially lowertheallowance fordoubtfulaccounts.

Otheroperation andmaintenance expensealsodecreased in1997asaresultofareduction inadministrative andgeneralexpensesof$15.8million,primarily duetoareduction inlegalcosts.Otherincomeanddeductions decreased by$200.9millionin1997andincreased by$32.9millionin1996.Despitehigherinterestincome($12.0million)relatedtoincreasing cashbalances, "otherincomeanddeductions" decreased in1997duetothewrite-off of$190.0millionassociated withtheestimated portionoftheMRAregulatory assetdisallowed in.ratesandlowersubsidiary earnings.

Znaddition, "otherincomeanddeductions"'as lowerin1997,since1996reflected againonthesaleofa50%interestinCNP($15.0million).The1996increasealsoreflected higherinterestincome($10.9million)asaresultofanincreaseintemporary cashinvestments.

Inaddition, "otherincomeanddeductions" washigherin1996sincetherewerecustomerservicepenalties andcertainotheritemswrittenoffbecausetheyweredisallowed inratesin1995.Federalandforeignincometaxesdecreased by$42.4millionin1997and$56.9millionin1996primarily duetoadecreaseinpre-taxincome.Othertaxesdecreased by$4.4millionin1997anddecreased by$41.6millionin1996.The1997decreasewasprimarily duetolowerpayrolltaxes($2.3million)andlowersalestaxes($0.7million).

The1996decreasewasprimarily asaresultoflowerrealestatetaxes($15.4million),

lowerGRTs($6.1million)primarily duetoareduction intheGRTsurcharge during1996,lowerNewYorkStateexcessdividendtaxaccrualduetoasuspension ofthecommonstockdividend($4.6million)andyear-to-year differences intheaccounting forregulatory deferrals

($15.2million)associated primarily withasettlement oftaxissueswithrespecttotheCompany's Dunkirkfacility.

Interestchargesremainedfairlyconstantfortheyears1995through1997.However,dividends onpreferred stockdecreased by$0.9millionand$1~3millionin1997and1996,respectively.

Dividends onpreferred stockdecreased in1997primarily duetoareduction inpreferred stockoutstanding throughsinkingfundred'emptions anddecreased in1996primarily duetoadecreaseinthecostofvariablerateissues.Theweightedaveragelong-term debtinterestrateandpreferred dividendratepaid,reflecting theactualcostofvariablerateissues,changedto7.81%and7.04%,respectively, in1997from7.71%and7.09%,respectively, in1996andfrom7.77%and7.19%,respectively, in1995.EFFECTSOPCHARGINGPRICESTheCompanyisespecially sensitive toinflation becauseoftheamountofcapitalittypically needsandbecauseitspricesareregulated usingaratebasemethodology thatreflectsthehistorical costofutilityplant.TheCompany's consolidated financial statements arebasedonhistorical eventsandtransactions whenthepurchasing powerofthedollarwassubstantially different thannow..Theeffectsofinflation onmostutilities, including theCompany,aremostsignificant intheareasofdepreciation andutilityplant.TheCompanycouldnotreplaceitsnon-nuclear utilityplantandequipment forthehistorical costvalueatwhichtheyarerecordedontheCompany's books.Znaddition, theCompanywouldnotreplacethesewithidentical assetsduetotechnological advancesandcompetitive andregulatory changesthathaveoccurredZnlightoftheseconsiderations, thedepreciation chargesinoperating expense donotreflectthecostofproviding serviceifnewgenerating facilities wereinstalled.

TheCompanywillseekadditional revenueorreallocate resources, ifpossible, tocoverthecostsofmaintaining serviceasassetsarereplacedorretired.FINANCIAL POSITIONS LZ{}UZDZTY ANDCAPZTALRESOURCES Financial Position.

TheCompany's.capital structure atDecember31,1997was52.8%long-tenn debt,7.8%preferred stockand39.4%commonequity,ascomparedto53.1%,7.9%and39.0%respectively, atDecember31,1996.Theculmination ofthetermination, restatement oramendment ofIPPcontracts willsignificantly increasetheleverageoftheCompanytonearly65%atthetimeofclosing.Throughtheanticipated increased operating cashflowresulting fromtheMRAandPowerChoice agreement, theplannedrapidrepayment ofdebtshoulddeleverage theCompanyovertime.Bookvalueofthecommonstockwas$18.03pershareatDecember31,1997,ascomparedto$17.91pershareatDecember31,1996.WiththeissuanceofequityatbelowbookvaluetotheZPPPartiesaspartoftheMRA,bookvaluepersharewillbediluted.Inaddition, earningspersharewillbedilutedbytheeffectoftheissuancetotheIPPPartiesofapproximately 42.9millionsharesoftheCompany's commonstock.TheCompany's EBITDAfor1997wasapproximately

$897million,anduponimplementation oftheMRAandPowerChoice isexpectedtoincreasetoapproximately

$1,300millionto$1,500millionperyear..EBITDArepresents earningsbeforeinterestcharges,interestincome,incometaxes,depreciation andamortization, andextraordinary items.EBITDAisanon-GAAPmeasureofcashflowsandispresented toprovideadditional information abouttheCompany's abilitytomeetitsfuturerequirements fordebtservicewhichwouldincreasesignificantly uponconsummation oftheMRA.EBITDAshouldnotbeconsidered analternative tonetincomeasanindicator ofoperating performance orasanalternative tocashflows,aspresented ontheConsolidated Statement ofCashFlows,asameasureofliquidity.

The1997ratioofearningstofixedchargeswas1.39times.Theratiosofearningstofixedchargesfor1996and1995were1.57timesand2.29times,respectively.

Thechangeintheratiowasprimarily duetochangesinearningsduringtheperiod.AssumingtheMRAisimplemented, theratioofearningstofixedchargeswillsubstantially decreaseinthefuture,sincetheMRAandPowerChoice agreement willhavetheeffectofsubstantially depressing earningsduringitsfive-yearterm,whileatthesametimesubstantially improving.

operating cashflows.Theprimaryobjective oftheMRAistoconvertalargeandgrowingoff-balance sheetpaymentobligation thatthreatens thefinancial viability oftheCompanyintoafixedandmanageable capitalobligation.

CommonStockDividend.

TheBoardofDirectors omittedthecommonstockdividendbeginning thefirstquarterof1996.Thisactionwastakentohelpstabilize theCompany's financial condition andprovideflexibility astheCompanyaddresses growingpressurefrommandatedpowerpurchases andweakersalesandistheprimaryreasonfortheincreaseinthecashbalance.Znmakingfuturedividenddecisions, theBoardofDirectors willevaluate, alongwithstandardbusinessconsiderations, thefinancial condition oftheCompany,theclosingoftheMRAandimplementation ofPowerChoice, orthefailuretoimplement suchactions,contractual restrictions thatmightbeenteredintoinconjunction withfinancing theMRA,thedegreeofcompetitive pressureonitsprices,thelevelofavailable cashflowandretainedearningsandotherstrategic considerations.

TheCompanyexpectstodedicateasubstantial portionofitsfutureexpectedpositivecashflowtoreducetheleveragecreatedinconnection withtheimplementation oftheMRA.ThePowerChoice agreement establishes limitstotheannualamountofcommonandpreferred stockdividends thatcanbepaidbytheregulated business..The limitisbasedupontheamountofnetincomeeachyear,plusaspecified amountrangingfrom$50millionin1998to$100millionin2000.Thedividendlimitation issubjecttoreviewafterthetermofthePowerChoice agreement.

Furthermore, theCompanyforecasts thatearningsforthefive-year termofthePowerChoice agreement willbesubstantially depressed, asnon-cashamortization oftheMRAregulatory assetisoccurring andtheinterestcostson theZPPdebtisthegreatest.

See"Accounting Implications ofthePowerChoice Agreement'and MasterRestructuring Agreement."

Construction andOtherCapitalRequirements.

TheCompany's totalcapital~requirements consistofamountsfortheCompany's construction program(seeItem~8.Financial Statements andSupplementary Data-"Note9.Commitments andContingencies

-Construction Program,").TheJanuary1998icestormdamagerestoration costsmayfurtheraddtotheserequirements (seeItem8.Financial Statements andSupplementary Data-"Note13.Subsequent Event"),nucleardecommissioning fundingrequirements (SeeItem8.Financial Statements andSupplementary Data-"Note3.NuclearOperations

-NuclearPlantDecommissioning" and-"NRCPolicyStatement andProposal"

),workingcapitalneeds,maturingdebtissuesandsinkingfundprovisions onpreferred stock,aswellasrequirements tocompletetheMRAandaccomplish therestructuring contemplated bythePowerChoice agreement.

Annualexpenditures fortheyears1995to1997-forconstruction andnuclearfuel,including relatedAFCandoverheads capitalized, were$345.8million,$352.1millionand$290.8million,respectively, andarebudgetedtobeapproximately

$358millionfor1998andtorangefrom$279-$352millionforeachofthesubsequent fouryears.Theseestimates includeconstruction expenditures fornon-nuclear generation of$20millionto$38millionperyear.ZnadditiontotheassumedcostoftheMRArequirements, asdescribed below,mandatory debtandpreferred stockretirements areexpectedtoaddapproximately another$77milliontothe1998estimate.of capitalrequirements.

Theestimateofconstruction additions includedincapitalrequirements fortheperiod1998to2002willbereviewedbymanagement togiveeffecttothestormrestoration costsandtheoverallobjective offurtherreducingconstruction spendingwherepossible.

Seediscussion in"Liquidity andCapitalResources" sectionbelow,whichdescribes howmanagement intendstomeetitsfinancing needsforthisfive-year period.UndertheMRA,theCompanywillpayanaggregate of$3,616millionincash.TheCompanyexpectstoissueseniorunsecured debttofundthisrequirement, whichisexpectedtoconsistofbothdebtissuedthroughapublicmarketofferinganddebtissuestobankswhichwouldservetoreplaceitsexisting$804millionseniordebtfacility, discussed below.TheCompany's preferred shareholders gavetheCompanyapprovaltoincreasetheamountofunsecuied debttheCompanymayissueby$5billion.Previously, theCompanywasabletoissue$700millionundertherestrictions ofitsamendedCertificate ofIncorporation.

Thisauthorization willenabletheissuanceofunsecured debttoconsummate theMRA.Znaddition, theCompanybelievesthattheabilitytouseunsecured indebtedness willincreaseitsflexibility inplanningandfinancing itsbusinessactivities.

Liquidity andCapitalResources.

Externalfinancing plansaresubjecttoperiodicrevisionasunderlying assumptions arechangedtoreflectdevelopments, marketconditions and,mostimportantly, conclusion oftheMRAandimplementation ofPowerChoice.

Theultimateleveloffinancing duringtheperiod1998through2002willbeaffectedby,amongotherthings:thetimingandoutcomeoftheMRAandthecashtaxbenefitsanticipated becausetheMRAisexpectedtoresultinanetoperating lossfor1998incometaxpurposes; theimplementation ofthePowerchoice agreement, levelsofcommondividendpayments, ifany,andpreferred dividendpayments; theresultsoftheauctionoftheCompany's fossilandhydroassets;the.Company's competitive positionandtheextenttowhichcompetition penetrates theCompany's markets;uncertain energydemandduetotheweatherandeconomicconditions; andtheeffectsoftheicestormthatstruckaportionoftheCompany's serviceterritory inearly1998.TheproceedsofthesaleofthefossilandhydroassetswillbesubjecttothetermsoftheCompany's mortgageindentur'e andthenoteindenture thatwillbeenteredintoinconnection withtheMRAdebtfinancing.

TheCompanycouldalsobeaffectedbytheoutcomeoftheNRC'sconsideration ofnewrulesforadequatefinancial assurance ofnucleardecommissioning obligations.

(SeeItem8.NotestoConsolidated Financial Statements

-"Note3.NuclearOperations

-NRCPolicyStatement andProposal" and"Note13.Subsequent Event").

TheCompanyhasan$804millionseniordebtfacilitywithabankgroup,consisting ofa$255milliontermloanfacility, a$125millionrevolving creditfacilityand$424millionforlettersofcredit.Theletterofcreditfacilityprovidescreditsupportfortheadjustable ratepollution controlrevenuebondsissuedthroughtheNYSERDA.Theinterestrateapplicable totheseniordebtfacilityisvariablebas'edoncertainrateoptionsavailable undertheagreement andcurrently approximates 7.7%(butiscappedat15%).AsofDecember31,1997,theamountoutstanding undertheseniordebtfacilitywas$529million,consisting of$105millionunderthetermloanfacilityanda$424millionletterofcredit,leavingtheCompanywith$275millionofborrowing capability underthefacility.

ThefacilityexpiresonJune30,1999(subjecttoearliertermination iftheCompanyseparates itsfossil/hydro generation businessfromitstransmission anddistribution

business, oranyothersignificant restructuring plan).TheCompanyiscurrently negotiating withthelenderstoreplacetheseniordebtfacilitywithalargerfacilitytofinanceaportionoftheMRA.Thisfacilityiscollateralized byfirstmortgagebondswhichwereissuedonthebasisofadditional propertyundertheearningstestrequiredunderthemortgagetrustindenture

("FirstMortgageBonds").AsofDecember31,1997,theCompanycouldissueanadditional

$1,396millionaggregate principal amount-ofFirstMortgageBondsundertheCompany's mortgagetrustindenture.

Thisamountisbaseduponretiredbondswithoutregardtoaninterestcoveragetest.TheCompanyispresently precluded fromissuingFirstMortgageBondsbasedonadditional property.

Althoughnoassurance canbeprovided, theCompanybelievesthattheclosingoftheMRAandimplementation ofPowerChoice willresultinsubstantially depressed earningsduringitsfive-year term,butwillsubstantially improveoperating cashflows.Thereisriskthroughout theelectricindustrythatcreditratingscoulddeclineiftheissueofstrandedcostrecoveryisnotsatisfactorily resolved.

ZntheeventtheMRAisnotclosed,andcomparable solutions arenotavailable, theCompanywillundertake otheractionsnecessary toactinthebestinterests ofstockholders andotherconstituencies.

Ordinarily, construction relatedshort-term borrowings arerefundedwithlong-term securities onaperiodicbasis.Thisapproachgenerally resultsintheCompanyshowingaworkingcapitaldeficit.ThishasnotbeenthecaseinthelasttwoyearsastheCompany's cashbalancehasincreased, reflecting suspension ofthecommonstockdividendin1996.WorkingcapitaldeficitsmayalsobearesultoftheseasonalnatureoftheCompany's operations aswellastimingdifferences betweenthecollection ofcustomerreceivables andthepaymentoffuelandpurchased powercosts.TheCompanybelievesithassufficient borrowing capacitytofunddeficitsasnecessary inthenearterm.However,theCompany's borrowing capacitytofundsuchdeficitsmaybeaffectedbythefactorsdiscussed aboverelatingtotheCompany's externalfinancial plans.Since1995,past-dueaccountsreceivable haveincreased significantly.

Anumberoffactorshavecontributed totheincrease, including risingprices(particularly toresidential customers)

.Risingpriceshavebeendrivenbyincreased paymentstoIPPsandhightaxesandhavebeenpassedonincustomers'ills.

ThestagnanteconomyintheCompany's serviceterritory sincetheearly1990'shasadversely affectedcollection ofpast-dueaccounts.

Also,laws,regulations andregulatory policiesimposemorestringent collection limitations ontheCompanythanthoseimposedonbusinessingeneral;forexample,theCompanyfacesmorestringent requirements toterminate serviceduringthewinterheatingseason.Theincreaseintheallowance fordoubtfulaccountswasattributable tothereassessment ofthecollection riskassociated withresidential accountsreceivable andarrears.TheCompanyhasimplemented anumberofcollection initiatives thatareexpectedtoresultinlowerarrearslevelsandpotentially lowertheallowance fordoubtfulaccounts.

TheCompanyhasandwillcontinuetoimplement avarietyofstrategies toimproveitscollection ofpastdueaccountsandreduceitsbaddebtexpense.

Theinformation gatheredindeveloping thesestrategies enabledmanagement toupdateitsriskassessment oftheaccountsreceivable portfolio.

Basedonthisassessment, management determined thatthelevelofriskassociated primarily withtheolderaccountshadincreased andthehistorical lossexperience nolongerapplied.Accordingly, theCompanydetermined thatasignificant portion,ofthepast-dueaccountsreceivable (principally ofresidential customers) mightbeuncollectible, andhadwritten-off asubstantial number'oftheseaccountsaswellasincreased itsallowance fordoubtfulaccountsin1996.In1997and1996,theCompanycharged$46.5millionand$127.6million,respectively tobaddebtexpense.Theallowance fordoubtfulaccountsisbasedonassumptions andjudgments astotheeffectiveness ofcollection efforts.Futureresultswithrespecttocollecting thepast-duereceivables mayprovetobedifferent fromthoseanticipated.

AlthoughtheCompanyhasexperienced alevelofimprovement incollection efforts,futureresultsarenecessarily dependent uponthefollowing factors,including, amongotherthings,theeffectiveness ofthestrategies discussed above,thesupportofregulators andlegislators toallowutilities tomovetowardscommercial collection practices andimprovement inthecondition oftheeconomyintheCompany'serviceterritory.

TheCompanyhasbeenpursuingPowerChoice toaddresshighpricesthataretheresultoftraditional priceregulation, buttheintroduction ofcompetition requiresthatpoliciesandpractices thatwere:central totraditional regulation, including thoseinvolving collections, bechangedsoasnottojeopardize thebenefitsofcompetition.

Netcashprovidedbyoperating activities decreased

$162.8millionin1997primarily duetoadecreaseof$105.9millionintheamountofaccountsreceivable soldundertheaccountsreceivable salesprogram(whichtheCompanyhasbudgetedtorestorein1998)partially offsetbyanincreaseindeferredtaxesof$53.9million.Netcashusedininvesting activities increased

$62.4millionin1997primarily asaresultofanincreaseinothercashinvestments of$116.1millionoffsetbyadecreaseintheacquisition ofutilityplantof$62.9million.Netcashusedinfinancing activities decreased

$106.1million,primarily~

duetoanetreduction of$94.7millioninthepaymentsonlong-term debt.Item8.Financial Statements andSupplementary DataFinancial Statements ReportofManagement ReportofIndependent Accountants Consolidated Statements of.IncomeandRetainedEarningsforeachofthethreeyears-intheperiodendedDecember31,1997.Consolidated BalanceSheetsatDecember31,1997and1996.Consolidated Statements ofCashFlowsforeachofthethreeyearsintheperiodendedDecember31,1997.NotestoConsolidated Financial Statements.

REPORTOFMANAGEMENT Theconsolidated financial statements oftheCompanyanditssubsidiaries werepreparedbyandaretheresponsibility ofmanagement.

Financial information contained elsewhere inthisAnnualReportisconsistent withthatinthefinancial statements.

Tomeetitsresponsibilities withrespecttofinancial information, management maintains andenforcesasystemofinternalaccounting

controls, whichisdesignedtoprovidereasonable assurance, onacosteffective basis,astotheintegrity, objectivity andreliability ofthefinancial recordsandprotection ofassets.Thissystemincludescommunication throughwrittenpoliciesandprocedures, anorganizational structure thatprovidesforappropriate divisionofresponsibility andthetrainingofpersonnel.

Thissystemisalsotestedbyacomprehensive internalauditprogram.Inaddition, theCompanyhasaCorporate PolicyRegisterandaCodeofBusinessConduct(the"Code")thatsupplyemployees withaframeworkdescribing anddefiningtheCompany'overallapproachtobusinessandrequireallemployees tomaintainthehighestlevelofethicalstandards aswellasrequiring allmanagement employees toformallyaffirmtheircompliance withtheCode.Thefinancial statements havebeenauditedbyPriceWaterhouse LLP,theCompany's independent accountants; inaccordance withGAAP.Inplanningandperforming itsaudit,PriceWaterhouse LLPconsidered theCompany's internalcontrolstructure inordertodetermine auditingprocedures forthepurposeofexpressing anopiniononthefinancial statements, andnottoprovideassurance ontheinternalcontrolstructure.

Theindependent accountants'udit doesnotlimitinanywaymanagement's responsibility forthefairpresentation ofthefinancial statements andallotherinformation, whetherauditedorunaudited, inthisAnnualReport.TheAuditCommittee oftheBoardofDirectors, consisting offiveoutsidedirectors whoarenotemployees, meetsregularly withmanagement, internalauditorsandPriceWaterhouse LLPtoreviewanddiscussinternalaccounting

controls, auditexaminations andfinancial reporting matters.PriceWaterhouse LLPandtheCompany's internalauditorshavefreeaccesstomeetindividually withtheAuditCommittee atanytime,withoutmanagement beingpresent.WilliamE.DavisChairmanoftheBoardandChiefExecutive OfficerNiagaraMohawkPowerCorporation REPORTOFINDEPENDENT ACCOUNTANTS TotheStockholders andBoardofDirectors ofNiagaraMohawkPowerCorporation Inouropinion,theaccompanying consolidated balancesheetsandtherelatedconsolidated statements ofincomeandretainedearningsandofcashflowspresentfairly,inallmaterialrespects, thefinancial positionofNiagaraMohawkPowerCorporation anditssubsidiaries atDecember31,1997and1996,andtheresultsoftheiroperations andtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,1997;inconformity withgenerally acceptedaccounting principles.

Thesefinancial statements aretheresponsibility oftheCompany's management; ourresponsibility istoexpressanopiniononthesefinancial statements basedonouraudits.Weconducted ourauditsofthesestatements inaccordance withgenerally acceptedauditingstandards whichrequirethatweplanandperformtheaudittoobtainreasonable assurance aboutwhetherthefinancial statements areBeeofmaterialmisstatement.

Anauditincludesexamining, onatestbasis,evidencesupporting theamountsanddisclosures inthefinancial statements, assessing theaccounting principles usedandsignificant estimates madebymanagement, andevaluating theoverallfinancial statement presentation.

Webelievethatourauditsprovideareasonable basisfortheopinionexpressed above.Asdiscussed inNote2,theCompanybelievesthatitcontinues tomeettherequirements forapplication ofStatement ofFinancial Accounting Standards No.71,Accounting fortheEffectsofCertain+pcsofRegulation (SFASNo.71)foritsnucleargeneration, electrictransmission anddistribution andgasbusinesses.

IntheeventthattheCompanyisunabletocompletethetermination, restatement oramendment oftheindependent powerproducercontracts, thisconclusion couldchangein1998andbeyond,resulting inmaterialadverseeffectsontheCompany's financial condition andresultsofoperations.

Asdiscussed inNote2,theCompanydiscontinued application ofSFASNo.71foritsnon-nucleargeneration businessin1996.~j~y~gag8zPSyracuse, NewYorkMarch26,1998 NIAGARANORAHPONERCORPORATION ANDSUBSIDIARY COKPANIES Consolidated Statements ofIncaacandRetainedEarningsInthousands ofdollarsFortheyearendedDecember31,199719961995Operating reveres:tElectric$3,309,441 S3,308,979

'$3,335,548 Operating expenses:

Fuelforelectricgeneration.

Electricity purchased Gaspurchased

~Otheroperation andmaintenance expenses.

..Depreciation andamortization (Note'i)179,4551,236,108 345,610835,282339,641181,486'1,182,892 370,040928,224329,827165,9291,137,937 276,232817,897317,831OtherIncaacand(Dcductiaa)

PoucrChoice charge(Note2)(190,000)

Incaacbcforcinterestcharges...........

393,836558,281687,103Incaaebeforefederalandforeignincmataxes...119,930280,248407,429Incomebeforeextraordinary item..........Extraordinary itemforthediscontinuance ofregulator accountin rinciples netofincome59,835177,754248,036NctInde..59,835110,390248,036Balanceavailable forcaaanstock.........

Dividends oncctmonstock.............72,109208,440161,65072,10946,790Averagennherqfsharesofcammnstockoutstanding

(>nthousands).

BasicanddilutedearningsncCaverageshareofcoamonstockbeforeextraord>nary stem......

144,404S0.16144,350S0.97144,329S1.44BasicanddilutedearningsperaveragesharcofcccmonstockS0.16S0.50S1.44()Denotesdeduction Theaccccpanying notesareanintegralpartofthesefinancial'tatements NIAGARAHOHAllKPSJERCORPORATION ANDSUBSIDIARY CQIPANIES Consolidated BalanceSheetsInthousands ofdollars19971996ASSETSUtilityplant(Note1):ElectricplantNuclearfuelGasplantCcemonplant$8,752,865 577,4091~131,541319,409$8,611,419 573,0411,082,298 292,591Totalutilityplant11,075,874 10,839,341 Currentassets:Cashincluding temporary cashinvestments of$3)5,708and$223,829,respectively Accountsreceivable (lessallowance fordoubtfulof$62,500and$52,100,respectively)

(Notes1Haterials andsupplies, ataveragecost:Coalandoitforproduction ofelectricity GasstorageOther..Prepaidtaxes.accountsand9).~378.232492,24427,64239,447118,30815,518325,398373,30520,7SS43,431120,914'11,976Regulatory assets(Note2):Regulatory taxassetDeferredfinancecharges.Deferredenvirowental restoration costs.(Note9)..Unamortized debtexpense.Postretirement benefitsotherthanpensions.

....~~~399,119239,880220,00057,31256,464416,599239,880225,00065,99360,4821176824214306$9584141$9427635Theacccaponying notesareanintegralpartofthesefinancial statements NIAGARAHOHAlJKRNERCORPORATION ANDSUBSIDIARY C(NPANIES Consolidated BalanceSheetsInthousands ofdollars1996Retainedearnins.679920CAPITALIZATION ANDLIABILITIES Capitalization (Note5):Cotatenstockholders'quity:

Cocmonstock,issued144,419,351 and144,365,214 shares,respectively.

....~....S144,419Capitalstockpremiunandexpense..........

1,779,688 S144,3651,783,725 657482Non-redeemable preferred stock.Handatorily redeemable preferred stock.........

Lon-termdebtTotalitalization Currentliabilities:

Long-term debtduewithinoneyear(Note5)....~..Sinkingfundrequirements onredeemable preferred stock(Note5).AccountspayablePayableonoutstanding bankchecks~.~...~..~.Custcmers'eposits AccruedtaxesAccruedinterestAccruedvacationpay.OtherRegulatory liabilities (Note2):Deferredfinancechares..Otherliabilities:

Accumulated deferredincometaxes(Notes1and7).~..Employeepensionandotherbenefits(Note8)......Deferredpensionsettlement gain............

Unbilledrevenues(Note1).OtherComaitmcnts andcontingencies (Notes2and9):Liabilitforenvirormentai restoration.

2,604,027 440,00076,6103417381653801867,09510,120263,09523.72018,3729,00562,64336,532647565553381,320,532 240,21112,43843,281414443220000$95841412,585,572 440,00086,7303477879659018148,0848,870271,83032,00815,5054,21663,25236,436524555326561,357,518 238,68819,26949,8811745621839918225000$9427635Theaccompanying notesareanintegralpartofthesefinancial statcaents NIAGARAHOHAlCPONERCORPORATION ANDSUBSIDIART C(N(PANIES Consolidated Statements ofCashFloMsIncrease(Decrease) inCashForthcarendedDeceaher311997Inthousands ofdollars19961995CashfloMsfromopernting activities:

NetincomeAdjustments toreconcile netincometonetcashprovidedbyoperating activities:

Extraordinary itemforthediscontinuance ofregulatory accounting principles, netofincometaxes.PcwerCholcc charge.~~~~~~~~~~~Depreciation andamortization.

Electricmarginrecoverable.

.Amortization ofnuclearfuel..Provision fordeferredincometaxes.........~~Gainonsaleofsubsidiary Unbiliedrevenues.

Netaccountsreceivable.

................Materials andsupplies.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)20930S59,835S110,390S248,036Netcashrovidedoratinnctiviies537575700402700005CashfloMsfraninvesting activities:

Construction additions

.Nuclearfuel.....

Less:Allogance forotherfundsusedduringconstruction

.~~~~~~~~~(286,389)

(4,368)5310(296,689)

(55,360)3665(332,443)

(13,361)1063Acquisition ofutilityplant~.~~~~......Haterials andsuppliesrelatedtoconstruction....

Accountspayableandaccruedexpensesrelatedtoconstruction.

~Otherinvestments Proceedsfromsaleofsubsidiary (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

.........393971331611277004Cashfleamfryfinancing activities:

Proceedsfromlong-term debt...Redemption ofpreferred stock..Reductions oflong-term debt..Netchangeinshort-term debt...Dividends paid..~.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.Cashatbeginning ofyear~.~....52,834171,92359,145325,398153,47594,330Cashatendofar............S378232S325398S153475Supplemental disclosures ofcashflmtinformation:

Cashpaidduringtheyearfor:Interest.

...........Incometaxes.~~S279,957S82331S286,497S290,352S95632S47378Theaccompanying notesnrcnnintegralpartofthcscfinnncial statements NotestoConsolidated Financial Statements NOTE1.SummaofSiificantAccountin PoliciesTheCompanyissubjecttoregulation bythePSCandFERCwithrespecttoitsratesforserviceunderamethodology whichestablishes pricesbasedontheCompany's cost.TheCompany's accounting policiesconformtoGAAP,including theaccounting principles forrate-regulated entitieswithrespecttotheCompany's nuclear,transmission, distribution andgasoperations (regulated business),

andareinaccordance withtheaccounting requirements andratemaking practices oftheregulatory authorities.

TheCompanydiscontinued theapplication ofregulatory accounting principles toitsfossilandhydrogeneration operations in1996(seeNote2).Inordertobeinconformity withGAAP,management isrequiredtouseestimates inthepreparation oftheCompany's financial statements.

Principles ofConsolidation:

Theconsolidated financial statements includetheCompanyanditswholly-owned subsidiaries.

Intercompany balancesandtransactions havebeeneliminated.

UtilityPlant:Thecostofadditions toutilityplantandreplacements ofretirement unitsofpropertyarecapitalized.

Costincludesdirectmaterial, labor,overheadandAFC.Replacement ofminoritemsofutilityplantandthecostofcurrentrepairsandmaintenance ischargedtoexpense.Wheneverutilityplantisretired,itsoriginalcost,togetherwiththecostofremoval,lesssalvage,ischargedtoaccumulated depreciation.

Thediscontinuation ofSFASNo.71didnotaffectthecarryingvalueoftheCompany's utilityplant.Allowance forFundsUsedDuringConstruction:

TheCompanycapitalizes AFCinamountsequivalent tothecostoffundsdevotedtoplantunderconstruction foritsregulated business.

AFCratesaredetermined inaccordance withFERCandPSCregulations.

TheAFCrateineffectduring1997was9.28%.AFCissegregated intoitstwocomponents, borrowedfundsandother,funds,andisreflected inthe"Interest charges"andthe"Otherincome"sections, respectively, oftheConsolidated Statements ofIncome.TheamountofAFCcreditsrecordedineachofthethreeyearsendedDecember31,inthousands ofdollars,wasasfollows:OtherincomeInterestcharges1997$5,3104,3961996$3,6653,6901995$1,0637,987Asaresultofthediscontinued application ofSFASNo.71tothefossilandhydrooperations, theCompanycapitalizes interestcostassociated withtheconstruction offossil/hydro assets.Depreciation, Amortization andNuclearGenerating PlantDecommissioning Costs:Foraccounting andregulatory

purposes, depreciation iscomputedonthestraight-line basisusingthelicenselivesfornuclearandhydroclassesofdepreciable propertyandtheaverageservicelivesforallotherclasses.Thepercentage relationship betweenthetotalprovision fordepreciation andaveragedepreciable propertywasapproximately 3%.fortheyears1995through1997.TheCompanyperformsdepreciation studiestodetermine servicelivesofclassesofpropertyandadjuststhedepreciation rateswhennecessary.

Estimated decommissioning costs(coststoremoveanuclearplantfromserviceinthefuture)fortheCompany's Unit1anditsshareofUnit2arebeingaccruedovertheservicelivesoftheunits,recovered inratesthroughanannualallowance andcurrently chargedtooperations throughdepreciation.

TheCompanyexpectstocommencedecommissioning ofbothunitsshortlyaftercessation ofoperations atUnit2(currently plannedfor2026),usingamethodwhichremovesordecontaminates theUnitscomponents promptlyatthattime.SeeNote3"NuclearPlantDecommissioning.

"TheFASBissuedanexposuredraftinFebruary1996entitled"Accounting forCertainLiabilities RelatedtoClosureorRemovalCostsofLong-Lived Assets."Thescopeoftheprojectincludescertainplantdecommissioning costs,including thoseforfossil,hydroandnuclearplants.Ifapproved,.

aliability wouldbe recognized, withacorresponding plantasset,wheneveralegalorconstructive obligation existstoperformdismantlement orremovalactivities.

TheCompanycurrently recognizes theliability fornucleardecommissioning overtheservicelifeoftheplantasanincreasetoaccumulated depreciation anddoesnotrecognize theclosureorremovalobligation associated withitsfossilandhydroplants.TheCompany's PowerChoice agreement providesfortherecoveryofnuclear~decommissioning costs.Asdiscussed inNote2,theCompanyintendstosellits~fossilandhydrogenerating assetsthroughanauctionprocess.Totheextenttheassetsaresold,theeffectofthisexposuredraftontheCompanyshouldbemitigated.

However,theCompanycannotpredicttheresultsoftheauction.Theadoptionoftheproposedstandardisnotexpectedtoimpactthecashflowfromtheseassets.TheFASBcontinues todiscusstheissuesaddressed intheexposuredraft,aswellasthetimingofitsimplementation.

Amortization ofthecostofnuclearfuelisdetermined onthebasisofthequantityofheatproducedforthegeneration ofelectricenergy.Thecostofdisposalofnuclearfuel,whichpresently is$.001perKWhofnetgeneration available forsale,isbased-uponacontract=

withtheDOE.Thesecostsarechargedtooperating expenseandrecovered fromcustomers throughbaseratesorthroughthefueladjustment clause.Revenues:

Revenuesarebasedoncyclebillingsrenderedtocertaincustomers monthlyandothersbi-monthly forenergyconsumedandnotbilledattheendofthefiscalyear.AtDecember31,1997and1996,approximately

$8.6millionand$11.1million,respectively, ofunbilledelectricrevenuesremainedunrecognized inresultsofoperations, areincludedin"Otherliabilities."

UndertheCompany's PowerChoice agreement, theamount,ofunrecognized electricunbilledrevenueasofthePowerChoice implementation datewillbenettedagainstcertainotherregulatory assetsandliabilities.

Thereafter, changesinelectricunbilledrevenueswillnolongerbedeferred.

In1995,theCompanyused$71.5millionofelectricunbilledrevenuestoreducethe1995revenuerequirement.

AtDecember31,1997and1996,$34.7millionand$38.8million,respectively, ofunbilledgasrevenuesremainunrecognized inresultsofoperations andmaybeusedtoreducefuturegasrevenuerequirements.

Theunbilledrevenuesincludedinaccountsreceivable atDecember31,1997and1996,were$211.9millionand$218.5million,respectively.

TheCompany's tariffsincludeelectricandgasadjustment clausesunderwhichenergyandpurchased gascosts,respectively, aboveorbelowthelevelsallowedinapprovedrateschedules, arebilledorcreditedtocustomers.

TheCompany,asauthorized bythePSC,chargesoperations forenergyandpurchased gascostincreases intheperiodofrecovery.

ThePSChasperiodically authorized theCompanytomakechangesinthelevelofallowedenergyandpurchased gascostsincludedinapprovedrateschedules.

Asaresultofsuchperiodicchanges,aportionofenergycostsdeferredatthetimeofchangewouldnotberecovered ormaybeoverrecovered underthenormaloperation oftheelectricandgasadjustment clauses.However,theCompanyhastodatebeenpermitted todeferandbillorcreditsuchportionstocustomers, throughtheelectricandgasadjustment clauses,overaspecified periodoftimefromtheeffective dateofeachchange.TheCompany's electricFACprovidesforpartialpass-through offuelandpurchased powercostfluctuations fromamountsforecast, withtheCompanyabsorbing aportionofincreases orretaining aportionofdecreases uptoamaximumof$15millionperrateyear.Thereafter, 100%ofthefluctuation ispassedontoratepayers.

TheCompanyalsoshareswithratepayeis fluctuations fromamountsforecastfornetresalemarginandtransmission

benefits, withtheCompanyretaining/absorbing 40%andpassing60%throughtoratepayers.

Theamountsretainedorabsorbedin1995through1997werenotmaterial.

UnderthePowerChoice agreement, theFACwillbediscontinued.

InDecember1996,theCompany,MultipleIntervenors andthePSCstaffreachedathreeyeargassettlement thatwasconditionally approvedbythePSC.Theagreement eliminated thegasadjustment clauseandestablished agascommodity costadjustment clause("CCAC").

TheCompany's gasCCACprovidesforthecollection orpassbackofcertainincreases ordecreases fromthebasecommodity costofgas.ThemaximumannualriskorbenefittotheCompanyi$2.25million.Allsavingsandexcesscostsbeyondthatamountwillflowratepayers.

Foradiscussion oftheratemaking associated withnon-commodity ga costs,seeItem7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"OtherFederalandStateRegulatory Initiatives Multi-Year GasRateSettlement Agreement."

FederalIncomeTaxes:AsdirectedbythePSC,theCompanydefersanyamountspayablepursuanttothealternative minimumtaxrules.Deferredinvestment taxcreditsareamortized overtheusefullifeoftheunderlying property.

Statement ofCashFlows'heCompanyconsiders allhighlyliquidinvestments, purchased witharemaining maturityofthreemonthsorless,tobecashequivalents.

EarningsPerShare:Basicearningspershare("EPS")iscomputedbasedontheweightedaveragenumberofcommonsharesoutstanding fortheperiod.Thenumberofoptionsoutstanding atDecember31,1997,1996and1995thatcouldpotentially dilutebasicEPS,(butareconsidered antidilutive foreachperiodbecausetheoptionsexercisepricewasgreaterthantheaveragemarketpriceofcommonshares),isimmaterial.

Therefore, thecalculation ofbothbasicanddilutiveEPSarethesameforeachperiod.Reclassifications:

Certainamountsfromprioryearshavebeenreclassified ontheaccompanying Consolidated Financial Statements toconformwiththe1997presentation.

Comprehensive 1ncome:InJune1997,FASBissuedSFASNo.130.SFASNo.130.establishes-standards forreporting comprehensive income.Comprehensive incomeisthechangeintheequityofacompany,notincluding thosechangesthatresultfromshareholder transactions.

Allcomponents ofcomprehensive incomearerequiredtobereportedinanewfinancial statement thatisdisplayed withequalprominence asexistingfinancial statements.

TheCompanywillberequiredtoadoptSFASNo.130onJanuary1,1998.TheCompanydoesnotexpectthatadoptionofSFASNo.130willhaveasignificant impactonitsreporting anddisclosure requirements.

SegmentDisclosures:

AlsoinJune1997,FASBissuedSFASNo.131.SFASNo.131establishes standards foradditional disclosure aboutoperating segmentsforinterimandannualfinancial statements.

Morespecifically, itrequiresfinancial information tobedisclosed forsegmentswhoseoperating resultsarereviewedbythechiefoperating officerfordecisions onresourceallocation.

Italsorequiresrelateddisclosures aboutproductandservices, geographic areasandmajorcustomers.

TheCompanywillberequiredtoadoptSFASNo.131forthefiscalyearendingDecember31,1998.TheCompanydoesnotexpectthattheadoptionofSFASNo.131willhaveasignificant impactonitsreporting anddisclosure requirements.

PensionandOtherPostretirement Benefits:

InFebruary1998,FASBissuedSFASNo.132.SFASNo.132revisesemployers'isclosures aboutpensionandotherpostretirement benefitplans.Itdoesnotchangethemeasurement orrecognition ofthoseplans.Itstandardizes thedisclosure requirements forpensionsandotherpostretirement benefitstotheextentpracticable andrequiresadditional information onchangesinthebenefitobligations andfairvaluesofplanassets.TheCompanywillberequiredtoadoptSFASNo.132forthefiscalyearendingDecember31,1998.TheCompanydoesnotexpecttheadoptionofSFASNo.132willhaveasignificantimpactonitsreporting anddisclosure requirements.

NOTS2.RateandRelatoIssuesandContinenciesTheCompany's financial statements conformtoGAAP,including theaccounting principles forrate-regulated entitieswithrespecttoitsregulated operations.

Substantively, theseprinciples permitapublicutility,regulated onacost-of-service basis,todefercertaincostswhichwouldotherwise bechargedtoexpense,whenauthorized todosobytheregulator.

Thesedeferredcostsareknownasregulatory assets,whichinthecaseoftheCompanyareapproximately

$937million,netofapproximately

$240millionofregulatory liabilities atDecember31,1997.Theseregulatory assetsareprobableofrecovery.

Theportionofthe$937millionwhichhasbeenallocated tothenucleargeneration andelectrictransmission anddistribution businessis approximately

$810million,whichisnetofapproximately

$240millionofregulatory liabilities:

Regulatory assetsallocated totherate-regulated gasdistribution businessare$127million.Generally, regulatory assetsandliabilities wereallocated totheportionofthebusinessthatincurredtheunderlying transaction thatresultedintherecognition oftheregulatory asset.orliability.

Theallocation methodsusedbetweenelectricandgasareconsistent withthoseusedinpriorregulatory proceedings.

TheCompanyconcluded asofDecember31,1996.thatthetermination, restatement oramendment ofIPPcontracts andimplementation ofPowerChoice wastheprobableoutcomeofnegotiations thathadtakenplacesincethePowerChoice announcement.

UnderPowerChoice, theseparated non-nuclear generation businesswouldnolongerberate-regulated onacost-of-service basisand,accordingly, regulatory assetsrelatedtothenon-nuclear powergeneration

business, amounting toapproximately

$103.6million($67.4millionaftertaxor47centspershare)waschargedagainst1996incomeasanextraordinary non-cashcharge.ThePSCinitswrittenorderissuedMarch20,1998approving PowerChoice, determined tolimittheestimated valueoftheMRAregulatory assetthatcanberecovered fromcustomers toapproximately

$4,000million.Theultimateamountoftheregulatory assettobeestablished mayvarybasedoncertaineventsrelatedtotheclosingoftheMRA.Theestimated value,oftheMRAregulatory assetincludestheissuanceof42.9millionsharesofcommonstock,whichthePSCindetermining therecoverable amountofsuchasset,valuedat$8pershare.Becausethevalueoftheconsideration tobepaidtotheIPPPartiescanonlybedetermined attheMRAclosing,thevalueofthelimitation ontherecoverability oftheMRAregulatory assethasbeenestimated at$190million(85centspershare)whichhasbeenchargedto1997earnings.

Thechargetoexpensewasdetermined asthedifference between$8pershareandtheCompany's closingcommonstockpriceonMarch26,1998of$127/16pershare,multiplied by42.9millionshares.Anyvariancefromtheestimateusedindetermining thechargetoexpensein1997,including changestothecommonstockpriceatclosing,will.bereflected inresultsofoperations in1998.UnderPowerChoice, theCompany's remaining electricbusiness(nucleargeneration andelectrictransmission anddistribution business) willcontinuetoberate-regulated onacost-of-service basisand,accordingly, theCompancontinues toapplySFASNo.71tothesebusinesses.

Also,theCompany's IPPcontracts, including thoserestructured undertheMRAandthosenotsorestructured willcontinuetobetheobligations oftheregulated business.

SFASNo.71doesnotrequiretheCompanytoearnareturnontheregulatory assetsinassessing itsapplicability.

TheCompanybelievesthatthepricesitwillchargeforelectricserviceover10years,including theCTC,assumingnoreduction indemandorbypassoftheCTCorexitfees,willbesufficient torecovertheMRAregulatory assetandtoproviderecoveryofandareturnontheremainder ofitsassets,asappropriate.

IntheeventtheCompanycouldnolo'ngerapplySFASNo.71inthefuture,itwouldberequiredtorecordanafter-taxnon-cashchargeagainstincomeforanyremaining unamortized regulatory assetsandliabilities.

Depending onwhenSFASNo.71wasrequiredtobediscontinued, suchchargewouldlikelybematerialtotheCompany's reportedfinancial condition andresultsofoperations andtheCompany's abilitytopaydividends.

ThePowerChoice agreement, whilehavingtheeffectofsubstantially depressing earningsduringitsfive-year term,willsubstantially improveoperating cashflows.TheEITFoftheFASBreachedaconsensus onIssueNo.97-4"Deregulation ofthePricingofElectricity

-IssuesRelatedtotheApplication ofSFASNo.71andSFASNo.101"inJuly1997.Asdiscussed previously, theCompanydiscontinued theapplication ofSFASNo.71andappliedSFASNo.101withrespecttothefossilandhydrogeneration businessatDecember31,1996,inamannerconsistent withtheEITFconsensus.

Withtheimplementation ofPowerChoice, specifically theseparation ofnon-'uclear generation asanentitythatwouldnolongerbecost-of-service regulated, theCompanyisrequiredtoassessthecarryingamountsofitslong-livedassetsinaccordance withSFASNo.121.SFASNo.121requireslong-live assetsandcertainidentifiable intangibles heldandusedbyanentitytobreviewedforimpairment whenevereventsorchangesincircumstances indicatethat thecarryingamountofanassetmaynotberecoverable orwhenassetsaretobedisposedof.Inperforming thereviewforrecoverability, theCompanyisrequiredtoestimatefutureundiscounted cashflowsexpectedtoresultfromtheuseoftheassetand/oritsdisposition.

TheCompanyhasdetermined thatthereisnoimpairment ofitsfossilandhydrogenerating assets.Totheextenttheproceedsresulting fromthesaleofthefossilandhydroassetsarenotsufficient toavoidaloss,theCompanywouldbeabletorecoversuchlossthroughtheCTC.ThePowerChoice agreement providesfordeferralandfuturerecoveryoflosses,ifany,resulting fromthesaleofthenon-nuclear generating assets.TheCompany's fossilandhydrogeneration plantassetshadanetbookvalueofapproximately

$1.1billionatDecember31,1997.Asdescribed inItem7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"MasterRestructuring Agreement andthePowerChoice Agreement,"

theconclusion ofthetermination, restatement oramendment ofIPPcontracts, andclosingof,thefinancing necessary toimplement suchtermination, restatement oramendment, aswellasimplementation ofPowerChoice, issubjecttoanumberofcontingencies.

ZntheeventtheCompanyisunabletosuccessfully bringtheseeventstoconclusion, itislikelythatapplication ofSFASNo.71wouldbediscontinued.

Theresulting non-cashafter-taxchargesagainstincome,basedonregulatory assetsandliabilities associated withthenucleargeneration andelectrictransmission anddistribution businesses asofDecember31,1997,wouldbeapproximately

$526.5millionor$3.65pershare.Variousrequirements underapplicable lawandregulations andundercorporate instruments, including thosewithrespecttoissuanceofdebtandequitysecurities, paymentofcommonandpreferred dividends andcertaintypesoftransfers ofassetscouldbeadversely impactedbyanysuchwrite-downs.

TheCompanyhasrecordedthefollowing regulatory assetsonitsConsolidated BalanceSheetsreflecting therateactionsofitsregulators:

Regulatory taxassetrepresents theexpectedfuturerecoveryfromratepayers ofthetaxconsequences oftemporary differences betweentherecordedbookbasesandthetaxbasesofassetsandliabilities.

Thisamountisprimarily timingdifferences relatedtodepreciation.

Theseamountsareamortized andrecovered astherelatedtemporary differences reverse.InJanuary1993,thePSCissuedaStatement ofInterimPolicyonAccounting andRatemaking Procedures thatrequiredadoptionofSFASNo.109onarevenue-neutral basis.Deferredfinancechargesrepresent thedeferralofthediscontinued portionofAFCrelatedtoCWZPatUnit2whichwasincludedinratebase.Zn1985,'ursuanttoPSCauthorization, theCompanydiscontinued accruingAFConCWIPforwhicha,cashreturnwasbeingallowed.Thisamount,whichwasaccumulated indeferreddebitandcreditaccountsuptothecommercial operation dateofUnit2,awaitsfuturedisposition bythePSC.Aportionofthedeferredcreditcouldbeutilizedtoreducefuturerevenuerequirements overaperiodshorterthanthelifeofUnit2,withalikeamountofdeferreddebitamortized andrecovered inratesovertheremaining lifeofUnit2.PowerChoice providesfornetting,andtherebyelimination ofthedebitand,credit balancesofdeferredfinancecharges.Deferredenvironmental restoration costsrepresent theCompany's shareoftheestimated coststoinvestigate andperformcertainremediation activities atbothCompany-owned sitesandnon-owned siteswithwhichitmaybeassociated.

TheCompanyhasrecordedaregulatory assetrepresenting theremediation obligations toberecovered fromratepayers.

PowerChoice andtheCompany's gassettlement providefortherecoveryofthesecostsoverthesettlement periods.TheCompanybelievesfuturecosts,beyondthesettlement periods,willcontinuetoberecovered inrates.SeeNote9-"Environmental Contingencies."

Unamortized debtexpenserepresents thecoststoissueandredeemcertainlong-term debtsecurities whichwereretiredpriortomaturity.

Theseamountsareamortized asinterestexpenseratablyoverthelivesoftherelatedissuesinaccordance withPSCdirectives.

Postretirement benefitsotherthanpensionsrepresent theexcessofsuchcostsrecognized inaccordance withSFASNo.106overtheamountreceivedinrates.Inaccordance withtheP'SCpolicystatement, postretirement benefitcostsotherthanpensionsarebeingphased-in toratesoverafive-year periodand amountsdeferredwillbeamortized andrecovered overaperiodnottoexceed20years.Substantially alloftheCompany's regulatory assetsdescribed abovearebeingamortized toexpenseandrecovered inratesoverperiodsapprovedintheCompany's electricandgasratecases,respectively.

NOTE3.NuclearerationsNuclearPlantDecommissioning:

TheCompany's sitespecificcostestimates fordecommissioning Unit1anditsownership interestinUnit2atDecember31,1997areasfollows:SiteStudy(year)EndofPlantLife(year)Radioactive Dismantlement toBegin(year)20262028Unit1Unit21995199520092026MethodofDecommissioning DelayedDIsmantlamentImnediate Dismantlement CostofDecamnissioning (inJanuary1998dollars)InmillionsofdoLLarsRadioactive Components Non-radioactive Components FuelDryStorage/Continuing Care$481117$676$2014843$292TheCompanyestimates thatbythetimedecommissioning iscompleted, theabovecostswillultimately amountto$1.7billionand$.9billionforUnit1andUnit2,respectively, usingapproximately 3.5%asanannualinflation factor.Inadditiontothecostsmentioned above,theCompanyexpectstoincurpost-shutdown costsforplantrampdown, insurance andpropertytaxes.In1998dollars,thesecostsareexpectedtoamountto$119millionand$63millionforUnit1andtheCompany's shareofUnit2,respectively.

Theamountswillescalateto$210millionand$190millionforUnit1andtheCompany's shareofUnit2,respectively, bythetimedecommissioning iscompleted.

In1997,theCompanymadeadjustments tothecashflowassumptions atUnit1forfueldrystorage,radioactive costcomponents, propertytaxandinsurance, tomoreaccurately reflecttheestimated costofeachcostcomponent.

Therevisions reducedthetotalcostestimatebyapproximately

$10million(in1998dollars).NRCregulations requireownersofnuclearpowerplantstoplacefundsintoanexternaltrusttoprovideforthecostofdecommissioning radioactive portionsofnuclearfacilities andestablish minimumamountsthatmustbeavailable insuchatrustatthetimeofdecommissioning.

Theannualallowance forUnit1andtheCompany's shareofUnit2wasapproximately

$23.7million,foreachofthethreeyearsendedDecember31,1997.Theamountwasbaseduponthe1993NRCminimumdecommissioning costrequirements of$437millionand$198million(in1998dollars)forUnit1andtheCompany's shareofUnit2,respectively.

InOpinionNo.95-21,theCompanywasauthorized, untilthePSCordersotherwise, tocontinuetofundtotheNRCminimumrequirements.

PowerChoice permitsraterecoveryforallradioactive andnon-radioactive costcomponents forbothunits,including post-shutdown costs,basedupontheamountsestimated inthe1995sitespecificstudiesdescribed above,whicharehigherthantheNRCminimum.Thereisnoassurance thatthedecommissioning allowance recovered inrateswillultimately aggregate asufficient amounttodecommission theunits.TheCompanybelievesthatifdecommissioning costsarehigherthancurrently estimated, thecostswouldultimately beincludedintherateprocess'ecommissioning costsrecovered inratesarereflected in"Accumulated depreciation andamortization"

'onthebalancesheetandamountto$266.8millionand$217~7millionatDecember31,1997and1996,respectively forbothunitsAdditionally atDecember31,1997,thefairvalueoffundsaccumulated inthCompany's externaltrustswere$164.7millionforUnit1and$51.0millionfo itsshareofUnit2.Thetrustsareincludedin"Otherpropertyandinvestments."

Earningsontheexternaltrustaggregated

$40.3millionthroughDecember31,1997and,becausetheearningsareavailable tofunddecommissioning, havealsobeenincludedin"Accumulated depreciation andamortization.

>>Amountsrecovered fornon-radioactive dismantlement areaccumulated inaninternalreservefundwhichhasanaccumulated balanceof$45.2millionatDecember31,1997.NRCPolicyStatement andProposal.

TheNRCissuedapolicystatement ontheRestructuring andEconomicDeregulation oftheElectricUtilityIndustry(the"PolicyStatement"

)in1997.ThePolicyStatement addresses theNRC'sconcernsabouttheadequacyofdecommissioning fundsandaboutthepotential impactonoperational safety.CurrentNRCregulations allowautilitytosetasidedecommissioning fundsannuallyovertheestimated lifeofaplant.ThePolicyStatement declarestheNRCwill:Continuetoconductreviewsoffinancial qualifications, decommissioning fundingandantitrust requirements ofnuclearpowerplants;Establish andmaintainworkingrelationships withstateandfederalrateregulators; Identifyallnuclearpowerplantowners,indirectaswellasdirect;andRe-evaluate theadequacyofcurrentregulations inlightofeconomicandotherchangesresulting fromratederegulation.

InadditiontotheabovePolicyStatement, theNRCisproposing toamenditsregulations ondecommissioning fundingtoreflectconditions expectedfromderegulation oftheelectricpowerindustry.

Theamendedrulewould:Revisethedefinition ofan"electric utility"toreflectchangescausedbyrestructuring withintheindustry.

Definea"Federallicensee" asanylicenseewhichhasthefullfaithandcreditbackingoftheUnitedStatesgovernment.

Onlysuchlicensees couldusestatements ofintenttomeetdecommissioning financialassurance requirements forpowerreactors.

Requirenuclear.powerplantlicensees toreportto.theNRConthestatusoftheirdecommissioning fundsatleastonceeverythreeyearsandannuallywithinfiveyearsoftheplannedendofoperation.

NRC'spresentrulecontainsnosuchrequirement becauseStateandFederalrate-regulating bodiesactivelymonitorthesefunds.Aderegulated nuclearutilitywouldhavenosuchmonitoring.

Permitnuclearlicensees totake~creditonearningsforprepaiddecommissioning trustfundsandexternalsinkingfundsfromthetimethefundsaresetasidethroughtheendofthedecommissioning period.Thepresentruledoesnotpermitsuchcreditbecauseitassumedthatinflation andtaxeswoulderodeanyinvestment return.NRChasdecided,however,thatthispositionisnotborneoutbyhistorical performance ofinflation-adjusted fundsinvestedinU.S.Treasuryinstruments.

TheCompanyisunabletopredicttheoutcomeofthismatter.PSCStaff'sTentative Conclusions ontheFutureofNuclearGeneration:

OnAugust27,'997,thePSCrequested commentsonitsstaff'stentative conclusions abouthownucleargeneration andfossilgeneration shouldbetreatedafterdecisions aremadeontheindividual electricrestructuring agreements currently pendingbeforethePSC.ThePSCstaffconcluded thatbeyondthetransition period(theperiodcoveredbythevariousNewYorkutility'estructuring agreements, including PowerChoice),

nucleargeneration shouldoperateonacompetitive basis.Inaddition, thePSCstaffconcluded thatasaleofgeneration plantstothirdpartiesisthepreferred meansofdetermining thefairmarketvalueofgeneration plantsandoffersthegreatestpotential forthemitigation ofstrandedcosts.ThePSCstaffalsoconcluded thatrecoveryofsunkcosts,including postshutdowncosts,wouldbesubjecttoreviewbythePSCandthisprocessshouldtakeintoaccountmitigation measurestakenbytheutility,including thestepsithastakentoencourage competition initsservicearea.InOctober1997,themajorityofutilities withinterests innuclearpowerplants,including theCompany,requested thatthePSCreconsider itsstaff'snuclearproposal.

Inaddition, theutilities raisedthefollowing issues:impediments tonuclearplantsoperating inacompetitive mode;impediments tothe saleofplants;responsibility fordecommissioning anddisposalofspentfuel;safetyandhealthconcerns; andenvironmental andfueldiversity benefits.

Inlightofalloftheseissues,theutilities recommended thatamoreformalprocessbedeveloped to.addressthoseissues.Thethreeinvestor-owned utilities, Rochester GasandElectricCorporation, Consolidated EdisonCompanyofNewYork,Inc.andtheCompany,whicharecurrently pursuingformation ofanuclearoperating companyinNewYorkState,alsofiledaresponsewiththePSCinOctober1997.Theresponsestatedthataforceddivestiture ofthenuclearplantswouldadduncertainty todeveloping astatewide approachtooperating theplantsandrequested thatsuchaforceddivestiture proposalberescinded.

Theresponsealsostatedthatimplementation ofaconsolidated six-unitoperation wouldcontribute tothemitigation ofunrecovered nuclearcosts.NYPA,whichisalsopursuingformation ofthenuclearoperating company,submitted itsowncommentswhichweresimilartothecommentsofthethreeutilities.

PowerChoice contemplates thattheCompany's nuclearplantswillremainpartoftheCompany's regulated businessandthattheCompanywillcontinueeffortstopursueastatewide solutionsuchastheNewYorkNuclearOperating Company.Thesettlement stipulates thatabsentastatewide

solution, theCompanywillfileadetailedplanforanalyzing proposedsolutions foritsnuclearassets,including thefeasibility ofanauction,transferand/ordivestiture within24monthsofPowerChoice approval.

AtDecember31,1997,thenetbookvalueoftheCompany's nuclearassetswasapproximately

$1.5billion,excluding thereservefordecommissioning.

NuclearLiability Insurance:

TheAtomicEnergyActof1954,asamended,requiresthepurchaseofnuclearliability insurance fromtheNuclearInsurance Poolsinamountsasdetermined bytheNRC.Atthepresenttime,theCompanymaintains therequired$200millionofnuclearliability insurance.

Withrespecttoanuclearincidentatalicensedreactor,thestatutory limitfortheprotection ofthepublicunderthePrice-Anderson Amendments Actof1988whichisinexcessofthe$200millionofnuclearliability insurance, iscurrently

$8.2billionwithoutthe5%surcharge discussed below.Thislimitwouldbefundedbyassessments ofupto$75.5millionforeachofthe110presently licensednuclearreactorsintheUnitedStates,payableataratenottoexceed$10millionperreactorperyear.Suchassessments aresubjecttoperiodicinflation indexingandtoa5%surcharge iffundsproveinsufficient topayclaims.Withthe5%surcharge

included, thestatutory limitis$8.6billion.TheCompany's interestinUnits1and2couldexposeittoamaximumpotential loss,foreachaccident, of$111.8million(with5%assessment) throughassessments of$14.1millionperyearintheeventofaseriousnuclearaccidentatitsownoranotherlicensedU.S.commercial nuclearreactor.Theamendments alsoprovide,amongotherthings,thatinsurance andindemnity willcoverprecautionary evacuations, whetherornotanuclearincidentactuallyoccurs.NuclearPropertyInsurance:

TheNineMilePointNuclearSitehas$500millionprimarynuclearpropertyinsurance withtheNuclearInsurance Pools(ANI/MRP).

Znaddition, thereis$2.25billioninexcessofthe$500millionprimarynuclearinsurance withNuclearElectricInsurance Limited("NEIL").Thetotalnuclearpropertyinsurance is$2.75billion.NEILalsoprovidesinsurance coverageagainsttheextraexpenseincurredinpurchasing replacement powerduringprolonged accidental outages.Theinsurance providescoverageforoutagesfor156weeks,aftera21-weekwaitingperiod.NEILinsurance issubjecttoretrospective premiumadjustment underwhichtheCompanycouldbeassesseduptoapproximately

$11.3millionperloss.LowLevelRadioactive Waste:TheCompanycurrently usestheBarnwell, SouthCarolinawastedisposalfacilityforlowlevelradioactive waste;however,continued accesstoBarnwellisnotassuredandtheCompanyhasimplemented alowlevelradioactive wastemanagement programsothatUnit1andUnit2arepreparedtoproperlyhandleinterimon-sitestorageoflowlevelradioactive wasteforatleasta10yearperiod.

UndertheFederalLowLevelWastepolicyAmendment Actof1985,NewYorkStatewasrequiredbyJanuary1,1993tohavearrangedforthedisposalofalllowlevelradioactive wastewithinthestateorinthealternative, contracted forthedisposalatafacilityoutsidethestate.Todate,NewYorkStatehasmadenofundingavailable tosupportsitingforadisposalfacility.

NuclearFuelDisposalCost:ZnJanuary1983,theNuclearWastePolicyActof1982(the"NuclearWasteAct")established acostof$.001,perKWhofnetgeneration forcurrentdisposalofnuclearfuelandprovidesforadetermination oftheCompany's liability totheDOEforthedisposalofnuclearfuelirradiated priorto1983.TheNuclearWasteActalsoprovidesthreepaymentoptionsforliquidating suchliability andtheCompanyhaselectedtodelaypayment,withinterest, untiltheyearinwhichtheCompanyinitially planstoshipirradiated fueltoanapprovedDOEdisposalfacility.

AsofDecember31,1997,theCompanyhasrecordedaliability of$114.3millionforthedisposalofnuclearfuelirradiated priorto1983.Progressindeveloping theDOEfacilityhasbeenslowanditisanticipated thattheDOEfacilitywillnotbereadytoacceptdeliveries untilatleast2010.However,inJuly1996,theUnitedStatesCircuitCourtofAppealsfortheDistrictofColumbiaruledthattheDOEmustbeginaccepting spentfuelfromthenuclearindustrybyJanuary31,1998eventhoughapermanent storagesitewillnotbereadybythen.TheDOEdidnotappealthisdecision.

OnJanuary31,1997,theCompanyjoinedanumberofotherutilities, states,stateagenciesandregulatory commissions infilingasuitintheU.S.CourtofAppealsfortheDistrictofColumbiaagainsttheDOE.Thesuitrequested thecourttosuspendtheutilities paymentsintotheNuclearWasteFundandtoplacefuturepaymentsintoanescrowaccountuntiltheDOEfulfillsitsobligation toacceptspent.fuel.OnJune3,1997,theDOEnotifiedutilities that.itlikelywillnotmeetitsJanuary31,1998deadlineandthatthedelaywasunavoidable pursuanttothetermsofthestandardcontractwithDOEforfueldisposal.

DOEalsoindicated itwasnotobligated toprovideafinancial remedyforsuchunavoidable delay.OnNovember14;1997theUnitedStatesCourtofAppealsfortheDistrictofColumbiaCircuitissuedawritofmandamusprecluding DOEfromexcusingitsowndelayonthegroundsthatithasnotyetpreparedapermanent repository orinterimstoragefacility.

OnDecember11,1997,27utilities, including theCompany,petitioned theDOEtosuspendtheirfuturepaymentstotheNuclearWasteFunduntiltheDOEbeginsmovingfuelfromtheirplantsites.Thepetitionfurthersoughtpermission toescrowpaymentstothewastefundbeginning inFebruary1998.OnJanuary12,1998,theDOEdeniedthepetition.

TheCompanyisunabletodetermine thefinaloutcomeofthismatter.~TheCompanyhasseveralalternatives

.underconsideration toprovideadditional storagefacilities, asnecessary.

Eachalternative willlikelyrequireNRCapproval, mayrequireotherregulatory approvals andwouldlikelyrequireincurring additional costs,whichtheCompanyhasincludedin'itsdecommissioning estimates forbothUnit1anditsshareofUnit2.TheCompanydoesnotbelievethatthepossibleunavailability oftheDOEdisposalfacilityuntil2010willinhibitoperation ofeitherUnit.

NOTE4.Jointl-OwnedGeneratin Facilities Thefollowing tablereflectstheCompany's shareofjointly-owned generating facilities atDecember31,1997.TheCompanyisrecgxired toprovideitsrespective shareoffinancing foranyadditions tothefacilities.

Poweroutputandrelatedexpensesaresharedbasedonproportionate ownership.

TheCompany's shareofexpensesassociated with.thesefacilities isincludedintheappropriate operating expensesintheConsolidated Statements of.Zncome.UnderPowerChoice, theCompanywilldivestallofitsfossilandhydrogeneration assetswithanet.bookvalueof$1.1billion,'ncluding itsinterests injointly-ownedfacilities.

Inthousands ofdollarsRosetonSteamStationUnits.Ho;

~1and2(a)..~~.Percentage Ownership UtilitPlant$96,110AcctlatedDerecintion

$54,130Construction MorkinProgress$432OswegoSteamStationUnitHo.6(b>......~.NineNilePointNuclearStationUnitNo.2(c>76$270,316$1,507,721

$125,089$327,006$39$6,748,(a)Theremaining ownership interests areCentralHudsonGasandElectricCorporation

(>>Central Hudson>>),

theoperatoroftheplant(35X),andConsolidated EdisonCompanyofNewYork,Inc.(40X)~OutputofRosetonUnitsNo.1and2,whichhaveacapability of1,200,000 Ol,issharedinthesameproportions asthecotenants'espective ownership interests.

(b)TheCospanyistheoperator.

Theremaining ownership interestisRochester GasandElectric(>>RGB>>)(24X).OutputofOswegoUnitNo.6,whichhasacapability of850,000Ol,issharedinthesameproportions asthecotennnts'espective ownership interests.

(c)TheCompanyistheoperator.

Theremaining ownership interests areLongIslandLightingCcmpnny(>>LILCO>>)

(18X),NewYorkStateElectric8GnsCorporation

(>>NYSEG>>)

(18X),RGSE(14X),andCentralHudson(9X).OutputofUnit2,whichhasacapability of1,143,000 Gl,issharedinthesameproportions asthecotennnts'espective ownership interests.

InJune1997,LILCOandLongIslandPowerAuthority

(>>LIPA>>)enteredintoanagreement, whereby,uponcompletion ofcertaintransactions, LILCO'sstockwouldbesoldtoLIPA.Itisanticipated thatLIPAwouldownLILCO's18Xownership interestinUnit2.InJuly1997,theHewYorkStatePublicAuthorities ControlBoardunanimously approvedtheagreements relatedtotheLIPAtransaction, subJecttocertainconditions, andLILCO'sstockholders subsequently approvedthistransaction.

italization ALSTOCKTheCompanyisauthorized toissue185,000,000 sharesofctxtmonstock,$1parvalue;3,400,000 sharesofpreferred stock,$100parvalue;19,600,000 sharesofpreferred stock,$25parvalue;and8,000,000 sharesofpreference stock,$25parvalue.Thetablehelotsmmarizes changesinthecapitalstockissuedandoutstanding andtherelatedcapitalaccountsfor1995,1996and1997:CotnnonStock$1rvalueSharesAmount*$100rvalueSharesNon-Redeemabl e~Preferred StockRedeemable~

Shares$25rvalueNon-Redeemable" Redeemable~

CapitalStockPremiunandExpense(Net)*Deccaher31~1994:IssuedRedeaptionsForeigncurrencytranslation adjustment 20,65721(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)$1,779,504 Oeceaher31,1995:Issued.144,332,123

$144,3322,358,000

$210,00033,09133$25,800(a)12,408,005

$230,000$80,200(a)$1,784,247 214RedemptionsForeigncurrencytranslation adjustment (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)$1,783,725 426RedemptionsForeigncurrencytranslation adjustment (18,000)(1,800)(282,801)

(7,070)104(4,567)Deceaher31~1997144,419,351

$144,4192,322,000

$210,000~Inthousands ofdollars(a)Includessinkingfundrequirements dueMithinoneyear.$22,200(a)11,781,204

'230,000$64,530(a)$1,779,6MThecunuiative amountofforeigncurrencytranslation adjustment atDecetther 31,1997Mas$(15,448)~

NON-REDEEMABLE PREFERRED STOCK(Optionally Redeemable)

TheCompanyhadcertainissuesofpreferred stockwhichprovideforoptionalredemption atDecember31,asfollows:Inthousands ofdollarsRedemption pricepershare(Beforeaddingace+minted dividends)

SeriesPreferred 3.40K3.60K3.90K4.'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:9.50K6,000,000 Adjustable Rate-150,000150,00025.00(a)SeriesASeriesC1,200,000 2,000,000 30,00050,000$440,00030,00050,000$44000025.0025.00(a)Notredeemable until1999.

MANDATORILY REDEKHABLE PREFERRED STOCKAtDecember31,.theCompanyhadcertainissuesofpreferred stock,asdetailedbelow,whichprovideformandatory andoptionalredemption.

Theseseriesrequiremandatory sinkingfundsforannualredemption andprovideoptionalsinkingfundsthroughwhichtheCompanymayredeem,atpar,alikeamountofadditional shares(limitedto120,000sharesofthe7.45%series).Theoptiontoredeemadditional amountsisnotcumulative.

TheCompany'fiveyearmandatory sinkingfundredemption requirements forpreferred stock,inthousands, for1998through2002areasfollows:$10,120;$7,620;$7,620;$7,620and$3,050,respectively.

Theaggregate preference ofpreferred sharesuponinvoluntary liquidation oftheCompanyistheaggregate parvalueofsuchshares,plusanamountequaltothedividends accumulated andunpaidonsuchsharestothedateofpaymentwhetherornotearnedordeclared.

SeriesPreferred

$100parvalue:1996Inthousands ofdollars1996Redemption pricepershare(Beforeaddingaccumlated dividends)

Eventualminiaun7.45KPreferred

$25parvalue:240,000$24,000$101.69$100.007.85K8.375KAdjustable Rate-SeriesB731,204100,000914,005200,0001,750,000 1,750,000 ssinkingfundrirements18,2802,50043,75086,73010,120$76,61022,8505,00043,75095,6008,870$86,73025.2825.0025.0025.0025.00 LONG-TERM DEBTLong-term debtatDecember31consisted ofthefollowing:

Series'ue inthousands ofdollars1996Firstsertgagebonds: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,00085,000220,000300,0DD110,000150,000275,00045,600150,000150,000165,000210,00075,000115,705S40,00060,000150,000210,000100,000230,00085,000220,000300,000110,000150,000275,00045,600150,000150,000165,000210,00075,000115,705TotalFirstHortgageBondsPrasissory notes:~Adjustable RateSeriesdueJuly1,2015December1,2023December1,2025"December1,2026Harch1,2027July1,2027TermLoanAgreement Unsecured notespayable:HediumTermNotes,Variousrates,due2000-2004 OtherUnamortized remiua(discount)

TOTALLMG-TERHDEBTLesslong-term debtduewithinoneear*Tax-exempt pollution controlrelatedissues2,801,305 100,00069,80075,00050,00025,76093,200105,00020,000154,'295(9884)3,484,476 67095$34173812,841,305 100,00069,80075,00050,00025,76093,200105,00020,000156,606(10708)3,525,963 48084$3477'879 SeveralseriesofFirstMortgageBondsandPromissory Noteswereissuedtosecurealikeamountoftax-exempt revenuebondsissuedbyNYSERDA.Approximately

$414millionofsuchsecurities bearinterestatadailyadjustable interestr'ate(withaCompanyoptiontoconverttootherrates,including afixedinterestratewhichwouldrequiretheCompanytoissueFirstMortgageBondstosecurethedebt)whichaveraged3.63%for1997and3.46%for1996andaresupported bybankdirectpaylettersofcredit.Pursuanttoagreements betweenNYSERDAandtheCompany,proceedsfromsuchissueswereusedfor.thepurposeoffinancing theconstruction ofcertainpollution controlfacilities attheCompany's generating facilities ortorefundoutstanding tax-exempt bondsandnotes(seeNote6).Otherlong-term debtin1997consistsofobligations undercapitalleasesofapproximately

$29.7million,aliability totheDOEfornuclearfueldisposalofapproximately

$114.3millionandaliability forZPPcontractterminations ofapproximately

$10.3million.Theaggregate maturities oflong-term debtforthefiveyearssubsequent toDecember31,1997,excluding capitalleases,inmillions, areapproximately

$64,$108,$158,$310and$230xespectively.

TheCompany's aggregate maturities willincreasesignificantly uponclosingoftheMRA.SeeZtem7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"MasterRestructuring Agreement andthePowerChoice Agreement."

NOTS6.BankCreditArranementsTheCompanyhasan$804millionseniordebtfacilitywithabankgroupconsisting ofa$255milliontermloanfacility, a$125,million revolving creditfacilityand$424millionforlettersofcredit.Theletterofcreditfacilityprovidescreditsupportfortheadjustable ratepollution controlrevenuebondsissuedthroughtheNYSERDAdiscussed inNote5.AsofDecember31,1997,theamountoutstanding undertheseniordebtfacilitywas$529million,consisting of$105millionunderthetermloanfacilityanda$424millionletterofcredit,leavingtheCompanywith$275millionofborrowing capability underthefacility.

ThefacilityexpiresonJune30,1999(subjecttoearliertermination iftheCompanyseparates itsfossil/hydro generation businessfromitstransmission and~~distribution

business, oranyothersignificant restructuring plan).Theinterestrateapplicable tothefacilityisvariablebasedoncertainrateoptionsavailable undertheagreement andcurrently approximates 7.7%(butcappedat15%).TheCompanyiscurrently negotiating withthelenderstoreplacetheseniordebtfacilitywithalargerfacilitytofinancepartoftheMRA.TheCompanydidnothaveanyshort-term debtoutstanding atDecember31,1997and1996.

NOTB7.PederalandPoreiIncomeTaxesSeeNote9-"TaxAssessments."

Components ofUnitedStatesandforeignincomebeforeincometaxes:Inthousands ofdollars,199719961995UnitedStates.$125,027Foreign.(1,621)Consolidatin eliminations

................"

3476$269,12828,52217402$400,08717,60910267Incomebeforeextraordinar itemandincometaxes....

$119930$280248$407429Following isasummaryof-thecomponents ofFederalandforeignincometaxandareconciliation betweentheamountofFederalincometaxexpensereportedintheConsolidated Statements ofIncomeandthecomputedamountatthestatutory taxrate:Coaponents ofFederalandforeignincmataxes:Inthousands ofdollars1996~1995Currenttaxexpense:Federal~......~~...S77,56577565S96,011370899719$67,366390071266Deferredtaxexpense:Federal............

(18,664).,382Forefn............119423931747084,002412588127Total.......................

S60095$102494$159393Reconciliation betweenFederalandforeignindetaxesandthetaxcoastedatprevailing U.S.statutory rateoninccsebeforeincmetaxes:Ctedtax....................

S41975S98087$142601Increase(reduction) attributable tofloM-through ofcertaintaxadjustments:

Depreciation CostofremovalDeferredinvestment taxcreditamortization ther036,411(8,168)(7,454)26691812028,103(8,849)(8,018)6829440731,033~(90247)~(8,589)359516792Federalandforeinincometaxes..........

S60095$102494$159393AtDecember31,thedeferredtaxliabilities (assets)werecomprised ofthefollowing:

'Inthousands ofdollars19971996I3ouerChoice charge.........

S(66,500)Alternative miniatetax......

(17,448)Unbilledrevenue.........

(88,859)other...............

~2CT438Totaldeterredtaxassets..~4202C5Depreciation related.......1,358,827 Investment taxcreditrelated...79,858Other.302072Totaldeicrredtcxliabilities 1740777Accmrmlatcd deierrcdincometaxes.01320532*Doesnotincludethedeferredtaxbenefitof$36,theextraordinary itemforthediscontinuance principles.

s(64,313)(83,577)~237850>~38574071,421,550 84,294237CIC17C325881357518273in1996associated withofregulatory accounting NOTB8.PensionandOtherRetirement PlansTheCompanyandcertainofitssubsidiaries havenon-contributory, defined-benefitpensionplanscoveringsubstantially alltheiremployees.

Benefitsarebasedontheemployee's yearsofserviceandcompensation level.TheCompany's generalpolicyistofundthepensioncostsaccruedwithconsideration giventothemaximumamountthatcanbedeductedforFederalincometaxpurposes.

Netpensioncostfor1997,1996and1995includedthefollowing components:

Inthousands ofdollarsServicecost-benefitsearnedduringtheperiod....Interestcostonprojected benefitobligation

~....Actualreturnonplanassets.~...~Netamortization anddeferral.............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$4.1millionfor1995wasrelatedtoconstruction laborand,accordingly, Maschargedtoconstruction projects.

Thefollowincr tablesetsforththeplan'sfundedstatusandamountsrecognized intheCompany's Consolidated BalanceSheets:AtDecerher31Actuarial presentvalueofaccumjlated benefitobligations:

VestedbenefitsNon-vested benefits.

.Inthousands ofdollars1996S990,415$803,20283,107Accumulated benefitobligations

.1,063,845 Additional amountsrelatedtoprojected payincreases......

~....108,M3886,309141,472Projected benefitsobligation forservicerenderedtodate.......

~.1,172,428 1,027,781 Planassetsatfairvalue,consisting primarily oflistedstocks,bonds,otherfixedincomeobligations andinsurance contracts.....

(1,304,338)

(1,159,822)

Planassetsinexcessofprojected benefitobligations...........

Unrecognized netobligation atJanuary1,1987beingrecognized overapproximately 19years.......~~~~~~~~~~~\~Unrecognized netgainfromactualreturnonplanassetsdifferent fromthat,assumed.~~~~~~~~~~~~~~~~Unrecognized netgainfrompastexperience different fromthatassunedandeffectsofchangesinassurptions amortized over10years.....Priorservicecostnotyetrecognized innetperiodicpensioncost:....(131,910)

(19,446)2&5,10019,920(50,473)(132,041)

(22,005)219,68066,129(49,651)Pensionliabilitincludedintheconsolidated balancesheets.......S83191$82112Principle Actuarial Assumptions (X):DiscountRate.Rateofincreaseinfuturecompensation levels(plusmeritincreases)

.~Lon-termrateofreturnonlanassets.7.002.509.257.502.509.25 Inadditiontoproviding pensionbenefits, theCompanyanditssubsidiaries providecertainhealthcareandlifeinsurance benefitsforactiveandretiredemployees anddependents.

Undercurrentpolicies, substantially alloftheCompany's employees may,beeligibleforcontinuation ofsomeofthesebenefitsuponnormalorearlyretirement.

TheCompanyaccountsforthecostofthesebenefitsinaccordance withPSCpolicyrequirements whichcomplywithSFASNo.106.TheCompanyhasestablished varioustruststofunditsfuturepostretirement benefitobligation.

In1997,1996and1995,theCompanymadecontributions tosuchtrustsofapproximately

$13.5million,$28.5millionand$53.1million,respectively, whichrepresent theamountreceivedinratesandfromcotenants.

Netpostretirement benefitcostfor1997,1996and1995includedthefollowing components:

Servicecost-benefitsattributed toserviceduringtheperiod....Interestcostonaccmalated benefitobligation Inthousands ofdollars199719961995$12,300$12,900$12,60037,50045,400Actualreturnonplanassets..~~~~~(24,500)(12,900)(11,200)Amortization ofthetransition'obligation over20years......

~.Hetamortization.

10,9009,50013,50018,800600014,600Totalpostretirement benefitcost$43,000$57,000$80,200.Thefollowing tablesetsforththeplan'sfundedstatusandamountsrecognized intheCompany's Consolidated BalanceSheets:Actuarial presentvalueofaccumlated benefitobligations:

Retiredandsurviving spouses.........Activeeligible~.Activeineligible

.Accumlated benefitobligation

.AtDecember31Inthousands ofdollars19971W6~$392,832$370,25931,03069441519,851470,730Planassetsatfairvalue,consisting primarily oflistedstocks,bondsandotherfixedobligations Accumulated postretirement benefitobligation inexcessofplanassets..Unrecognized netlossfrompastexperience different fromthatassignedandeffectsofchangesinassumptions...

~...~..........

Priorservicecostnotyetrecognized inpostretirement benefitcost...Unrecognized transition obligation beingamortized over20years.....Accruedpostretirement benefitliability includedintheconsolidated balancesheet~~~~~~~~0~~~~~~~~~(181101)(143071)338,750327,659(48,466)(36,048)30,M639,205(163,350)

(174,240)

$157,020$156,576Principal actuarial assumptions

()l):DiscountrateLong-term rateofreturnonplanassets..Healthcarecosttrendrate:Pre65'~~Post-65..7.009.257.006.007.508.008.00 During1996,theCompanychangedtheeligibility requirements forplanbenefitsforemployees whoretireafterMay1,1996.Generally, planbenefitsarenowaccruedforeligibleparticipants beginning afterage45.Previoustothischange,theCompanyaccruedthesebenefitsovertheemployees'ervice life.Theeffectofthischangeresultedinadecreaseintheaccumulated benefitobligation foractiveineligible employees.

AtDecember31,1997,theassumedhealthcosttrendratesgradually declineto5.0%in2001.Ifthehealthcarecosttrendratewasincreased byonepercent,theaccumulated postretirement benefitobligation asofDecember31,1997wouldincreasebyapproximately 6.7%andtheaggregate oftheserviceandinterestcostcomponent ofnetperiodicpostretirement benefitcostfortheyearwouldincreasebyapproximately 5.8%.TheCompanyrecognizes theobligation toprovidepostemployment benefitsiftheobligation isattributable toemployees'ast

services, rightstothosebenefitsarevested,paymentisprobableandtheamountofthebenefitscanbereasonably estimated.

AtDecember31,1997and1996,theCompany's postemployment benefitobligation isapproximately

$13~3millionand$13million,respectively.

NOTE9.Commitments andContinenciesSeeNote2.Long-term Contracts forthePurchaseofElectricPower:AtJanuary1,1998,theCompanyhadlong-term contracts topurchase, electricpowerfromthefollowing generating facilities ownedbyNYPA:FacilityNiagara-hydroelectric project.....St.LaMrence-hydroelectric project...Blenheim-Gi lboa-pumpedstoragegenerating station...........Expiration dateofcontract200720072002Purchased capacityinN951270Estimated annualcacitcost$27,369,000 1,300,000 7,500,000 1,325$36,169,000 Thepurchasecapacities shownabovearebasedonthecontracts currently ineffect.Theestimated annualcapacitycostsaresubjecttopriceescalation andareexclusive ofapplicable energycharges.Thetotalcostofpurchases underthesecontracts andtherecentlycancelled contractwithFitzpatrick nuclearplantwasapproximately, inmillions,

$91.0,$93.3and$92.5fortheyears1997,1996and1995,respectively.

InMay1997,theCompanycancelled itscommitment topurchase110MWofcapacityfromtheFitzpatrick facility.

TheCompanycontinues tohaveacontractwithFitzpatrick topurchaseforresaleupto46MWofpowerforNYPA'seconomicdevelopment customers.

Undertherequirements ofPURPA,theCompanyisrequiredtopurchasepowergenerated byIPPs,asdefinedtherein.TheCompanyhas141'PAswith148facilities, ofwhich143areonline,amounting toapproximately 2,695MWofcapacityatDecember31,1997.Ofthisamount2,382MWisconsidered firm.Thefollowing tableshowsthepaymentsforfixedandothercapacitycosts,andenergyandrelatedtaxestheCompanyestimates itwillbeobligated tomakeunderthesecontracts withoutgivingeffecttotheMRA.Thepaymentsaresubjecttothetestedcapacityandavailability ofthefacilities, scheduling andpriceescalation.

(Znthousands ofdollars)Schedulable FixedCostsVariableCostsYearCapacityOtherEnergyandTaxesTotal1998$247,7401999252,1302000242,0302001244,6202002248,940$41,42042,45044,08045,65047,330$906,590943,720974,0801,042,380 1,063,830

$1,195,7501,238,300 1,260,190 1,332,650 1,360,100Thecapacityandotherfixedcostsrelatetocontracts with11facilities, wheretheCompanyisrequiredtomakecapacityandotherfixedpayments, including paymentswhenafacilityisnotoperating butavailable forservice.These11facilities accountforapproximately 774MWofcapacity, withcontractlengthsrangingfrom20to35years.Thetermsoftheseexistingcontracts allowtheCompanytoscheduleenergydeliveries fromthefacilities andthenpayfortheenergydelivered.

TheCompanyestimates thefixedpaymentsunderthesecontracts willaggregate toapproximately

$8billionovertheirterms,usingescalated contractrates.Contracts relatingtotheremaining facilities inserviceatDecember31,1997,requiretheCompanytopayonlywhenenergyisdelivered, exceptwhentheCompanydecidesthatitwouldbebettertopayaparticular projectareducedenergypaymenttohavetheprojectreduceitshighpricedenergydeliveries asdescribed below.TheCompanycurrently recoversschedulable capacitythroughbaseratesand.energypayments, taxesandotherschedulable fixedcoststhroughtheFAC.TheCompanypaidapproximately

$1,106million,$1,088millionand$980millionin1997,1996and1995for13,500,000 MWh,13,800,000 MWhand14;000,000 MWh,respectively, ofelectricpowerunderallZPPcontracts.

OnJuly9,1997,theCompanyannounced theMRAtoterminate, restateoamendcertainZPPpowerpurchasecontracts.

Asaresultofnegotiations, thecurrently providesforthetermination, restatement oramendment of28PPAswith15ZPPs,inexchangeforanaggregate ofapproximately

$3,616millionincashand42.9millionsharesoftheCompany's commonstockandcertainfixedpriceswapcontracts.

UnderthetermsoftheMRA,theCompanywouldterminate PPAsrepresenting approximately 1,180MWofcapacityandrestatecontracts representing 583MWofcapacity.

Therestatedcontracts arestructured tobeintheformoffinancial swapswithfixedpricesforthefirsttwoyearschangingtoanindexedpricingformulathereafter.

Thecontractquantities arefixedforthefulltenyeartermofthecontracts.

TheMRAalsorequirestheCompanytoprovidetheZPPPartieswithanumberoffixedpriceswapcontracts withatermofsevenyearsbeginning in2003.ThetermsoftheMRAhavebeenandcontinuetobemodified.

Since1996,theCompanyhasnegotiated 2longtermandseverallimitedtermcontractamendments wherebytheCompanycanreducetheenergydeliveries fromthefacilities.

Thesereducedenergyagreements resultedinareduction ofZPPdeliveries ofapproximately 1,010,000 MWhand984,000MWhduring1997and1996,respectively.

SaleofCustomerReceivables:

TheCompanyhasestablished asingle-purpose,wholly-owned financing subsidiary, NMReceivables Corp.,whosebusinessconsistsofthepurchaseandresaleofanundivided interestinadesignated poolofcustomerreceivables, including accruedunbilledrevenues.

Forreceivables sold,theCompanyhasretainedcollection andadministrative responsibilities asagentforthepurchaser.

Ascollections reducepreviously soldundivided

'nterests, newreceivables arecustomarily sold.NMReceivables Corp.hasitsownseparatecreditors which,uponliquidation ofNMReceivables Corp.,willbeentitledtobesatisfied outofitsassetspriortoanyvaluebecomingavailable totheCompany.Thesaleofreceivables areinfeesimpleforareasonabl equivalent valueandarenotsecuredloans.Somereceivables havebecontributed intheformofacapitalcontribution toNMReceivables Corp.infesimpleforreasonably equivalent value,andallreceivables transferred toNM Receivables Corp.areassetsownedbyNMReceivables Corp.infeesimpleandarenotavailable topaytheparentCompany's creditors.

AtDecember31,1997and1996,$144.1and$250million,respectively, ofreceivables hadbeensoldbyNMReceivables, Corp.toathirdparty.Theundivided interestinthedesignated poolofreceivables wassoldwithlimitedrecourse.

Theagreement providesforaformulabasedlossreservepursuanttowhichadditional custome'r receivables areassignedtothepurchaser toprotect'gainstbaddebts.AtDecember31,1997,theamountofadditional receivables assignedtothepurchaser, asalossreserve,wasapproximately

$64.4million.Althoughthisrepresents theformula-based amountofcreditexposureatDecember31,1997undertheagreement, historical l'osseshavebeensubstantially less.Totheextentactuallossexperience ofthepoolreceivables exceedsthelossreserve,thepurchaser absorbstheexcess.Concentrations ofcreditrisktothepurchaser withrespecttoaccountsreceivable arelimitedduetotheCompany's large,diversecustomerbasewithinitsserviceterritory.

TheCompanygenerally doesnotrequirecollateral, i.e.,customerdeposits.

TaxAssessments:

TheInternalRevenueService("IRS")hasconducted anexamination oftheCompany's federalincometaxreturnsfortheyears1989and1990andissuedaRevenueAgents'eport.

TheZRShasraisedanissueconcerning thedeductibility ofpaymentsmadetoZPPsinaccordance withcertaincontracts thatincludeaprovision foratrackingaccount.Atrackingaccountrepresents amountsthatthesemandatedcontracts requiredtheCompanytopayIPPsinexcessoftheCompany's avoidedcosts,including acarryingcharge.TheZRSproposestodisallowacurrentdeduction foramountspaidinexcessoftheavoidedcostsoftheCompany.AlthoughtheCompanybelievesthatanysuchdisallowances fortheyears1989and1990willnothaveamaterialimpactonitsfinancial positionorresultsofoperations, itbelievesthatadisallowance fortheseabove-market paymentsfortheyearssubsequent to1990couldhaveamaterialadverseaffectonitscashflows.Totheextentthatcontracts involving trackingaccountsareterminated orrestatedoramendedundertheMRAwithIPPPartiesasdescribed inNote2,theeffectsofanyproposeddisallowance wouldbemitigated withrespecttotheZPPPartiescoveredundertheMRA.TheCompanyisvigorously defending itspositiononthisissue.TheZRSiscurrently conducting itsexamination oftheCompany's federalincometaxreturnsfortheyears1991through1993.Environmental Contingencies:

Thepublicutilityindustrytypically utilizesand/orgenerates initsoperations abroadrangeofhazardous andpotentially hazardous wastesandby-products.

TheCompanybelievesitishandlingidentified wastesandby-products inamannerconsistent withfederal,stateandlocalrequirements andhasimplemented anenvironmental auditprogramtoidentifyanypotential areasofconcernand,aidincompliance withsuchrequirements.

TheCompanyisalsocurrently conducting aprogramtoinvestigate andrestore,asnecessary tomeetcurrentenvironmental standards, certainproperties associated withitsformergasmanufacturing processandotherpr'operties whichtheCompanyhaslearnedmaybecontaminated withindustrial waste,aswellasinvestigating identified industrial wastesitesastowhichitmaybedetermined thattheCompanycontributed.

TheCompanyhasalsobeenadvisedthatvariousfederal,stateorlocalagenciesbelievecertainproperties requireinvestigation andhasprioritized thesitesbasedonavailable information inordertoenhancethemanagement ofinvestigation andremediation, ifnecessary.

TheCompanyiscurrently awareof124siteswithwhichithasbeenormaybeassociated, including 76whichareCompany-owned.

Thenumberofownedsitesincreased astheCompanyhasestablished aprogramtoidentifyandactivelymanagepotential areasofconcernatitselectricsubstations.

Thiseffortresultedinidentifying anadditional 32sites.Withrespecttonon-owned sites,theCompanymayberequiredtocontribute someproportionate shareofremedialcosts.Althoughonepartycan,asamatteroflaw,beheldliableforalloftheremedialcostsatasite,regardless offault,inpracticecostsareusuallyallocated amongPRPs.Investigations ateachoftheCompany-owned sitesaredesignedto(1)determine ifenvironmental contamination problemsexist,(2)ifnecessary, determine theappropriate remedialactionsand(3)whereappropriate, identifyotherpartieswhoshouldbearsomeorallofthecostofremediation.

Legal actionagainstsuchotherpartieswillbeinitiated whereappropriate.

Aftersiteinvestigations arecompleted, theCompanyexpectstodetermine site-specific remedialactionsandtoestimatetheattendant costsforrestoration.

However,sinceinvestigations areongoingformostsites,theestimated costofremedialactionissubjecttochange.Estimates ofthecostofremediation andpost-remedial monitoring arebaseduponavarietyoffactors,including identified orpotential contaminants;

location, sizeanduseofthesite;proximity tosensitive resources; statusofregulatory investigation andknowledge ofactivities andcostsatsimilarly situatedsites.Additionally, theCompany's estimating processincludesaninitiative wherethesefactorsaredeveloped andreviewedusingdirectinputandsupportobtainedfromtheDEC.ActualCompanyexpenditures aredependent uponthetotalcostofinvestigation andremediation andtheultimatedetermination oftheCompany's shareofresponsibility forsuchcosts,aswellasthefinancial viability ofotheridentified responsible partiessinceclean-upobligations arejointandseveral.TheCompanyhasdeniedanyresponsibility atcertainofthesePRPsitesandiscontesting liability accordingly.

Asaconsequence ofsitecharacterizations andassessments completed todateandnegotiations withPRPs,theCompanyhasaccruedaliability intheamountof$220million,whichisreflected intheCompany's Consolidated BalanceSheetsatDecember31,1997.Thepotential highendoftherangeispresently estimated atapproximately

$650million,including approximately

$285millionintheunlikelyeventtheCompanyisrequiredtoassume100%responsibility atnon-ownedsites.TheamountaccruedatDecember31,1997,incorporates theadditional electricsubstations, previously mentioned, andachangeinthemethodusedtoestimatetheliability for27oftheCompany's largestsitestorelyuponadecisionanalysisapproach.

Thismethodincludesdeveloping severalremediation approaches foreachofthe27sites,usingthefactorspreviously described, andthenassigning aprobability toeachapproach.

Theprobability represents theCompany's bestestimateofthelikelihood oftheapproachoccurring usinginputreceiveddirectlyfromtheDEC.Theprobablecostsforeachapproacharethencalculated toarriveatanexpectedvalue.Whilethisapproachcalculates arangeofoutcomesforeachsite,theCompanyhasaccruedthesumoftheexpectedvaluesforthesesites.TheamountaccruedfortheCompany'remaining sitesisdetermined throughfeasibility studiesoengineering estimates, theCompany's estimated shareofaPRPallocation orwhernobetterestimateisavailable, the,lowendofarangeofpossibleoutcomes.

Inaddition, theCompanyhasrecordedaregulatory assetrepresenting theremediation obligations toberecovered fromratepayers.

Powerchoice providesforthecontinued application ofdeferralaccounting forcostdifferences resulting fromthiseffort.InOctober1997,theCompanysubmitted adraftfeasibility studytotheDEC,whichincludedtheCompany's HarborPointsiteandfivesurrounding non-ownedsites.Thestudyindicates arangeofviableremedialapproaches, however,afinaldetermination hasnotbeenmadeconcerning theremedialapproachtobetaken.Thisrangeconsistsofalowendof$22millionandahighendof$230million,withanexpectedvaluecalculation of$51million,whichisincludedintheamountsaccruedatDecember31,1997.Therangerepresents thetotalcoststoremediate theproperties anddoesnotconsidercontributions fromotherPRPs.TheCompanyanticipates receiving commentsfromtheDEConthedraftfeasibility studybythespringof1999.Atthistime,theCompanycannotdefinitively predictthenatureoftheDECproposedremedialactionplanortherangeofremediation costsit'willrequire.WhiletheCompanydoesnotexpecttoberesponsible fortheentirecosttoremediate these.properties, itisnotpossibleatthistimetodetermine itsshareofthecostofremediation.

InMay1995,theCompanyfiledacomplaint pursuanttoapplicable FederalandNewYorkStatelaw,intheU.S.DistrictCourtfortheNorthernDistrictofNewYorkagainstseveraldefendants seekingrecoveryofpastandfuturecostsassociated withtheinvestigation andremediation oftheHarborPointandsurrounding sites.Inamotioncurrently pendingbeforethecourt,theNewYorkStateAttorneyGeneralhasmovedtodismisstheCompany's claimsagainsttheStateofNewYork,theNewYorkStateDepartment ofTransportation, theThruwayAuthority andCanalCorporation.

TheCompanyhasopposedthismotion.Thecasemanagement orderpresently callsforthecloseofdiscovery onDecember31,1998.AsaresultheCompanycannotpredicttheoutcomeofthependinglitigation againstothe PRPsortheallocation oftheCompany's shareofthecoststoremediate theHarborPointandsurrounding sites.Whereappropriate, theCompanyhasprovidednoticesofinsurance claimstocarrierswithrespecttotheinvestigation andremediation costsformanufactured gasplant,industrial wastesitesandsitesforwhichtheCompanyhasbeenidentified asaPRP.Todate,theCompanyhasreachedsettlements withanumberofinsurance

carriers, resulting inpaymentstotheCompanyofapproximately

$36million,netofcostsincurredinpursuingrecoveries.

UnderPowerChoice theelectricportionorapproximately

$32millionwillbeamortized over10years.Theremaining portionrelatestothegasbusinessandisbeingamortized overthethreeyearsettlement period.Construction Program:TheCompanyiscommitted toanongoingconstruction programtoassuredeliveryofitselectricandgasservices.

TheCompanypresently estimates thattheconstruction programfortheyears1998through2002willrequireapproximately

$1.4billion,excluding AFCandnuclearfuel.Fortheyears1998through2002,theestimates, inmillions, are$328,$269,$264,$275and$300,respectively, whichincludes$26,$25,$22,$20and$38,respectively, relatedtonon-nuclear generation.

Theimpactoftheicestorm(seeNote13)ontheconstruction programwillnotbeknownuntilrestoration effortshavebeencompleted.

Theseamountsarereviewedbymanagement ascircumstances dictate.UnderPowerChoice, theCompanywillseparate, throughsaleorspin-off, theCompany's non-nuclear powergeneration businessfromtheremainder ofthebusiness.

GasSupply,StorageandPipelineCommitments:

Inconnection withitsgasbusiness, theCompanyhaslong-term commitments withavarietyofsuppliers andpipelines topurchasegascommodity, providegasstoragecapability andtransport gascommodity oninterstate gaspipelines.

ThetablebelowsetsforththeCompany's estimated commitments atDecember31,1997,forthenextfiveyears,andthereafter.

(1nthousands ofdollars)YearGasStoraePieline1998199920002001$103)99078,38056,11053,140$95,72099,49081,55060,170200239,86026,610Thereafter 155,56071,130Withrespecttofirmgassupplycommitments, theamountsarebaseduponvolumesspecified inthecontracts givingconsideration fortheminimumtakeprovisions.

Commodity pricesarebasedonNewYorkMercantile Exchangequotesandreservation charges,whenapplicable.

Forstorageandpipelinecapacitycommitments, amountsarebaseduponvolumesspecifiedinthecontracts, andrepresent demandchargespricedatcurrentfiledtariffs.AtDecember31,1997,theCompany'firmgassupplycommitments extendthroughOctober2006,whilethegasstorageandtransportation commitments extendthroughOctober2012.Beginning inMay1996,asaresultofagenericrateproceeding, theCompanywasrequiredtoimplement serviceunbundling, wherecustomers couldchoosetobuynaturalgasfromsourcesotherthantheCompany.Todatethemigration hasnotresultedinanystrandedcostssincethePSChasallowedutilities toassignthepipelinecapacitytothecustomers choosinganothersupplier.

Thisassignment isallowedduringathree-year periodendingMarch1999,atwhichtimethePSCwilldecideonmethodsfordealingwiththeremaining unassigned orexcesscapacity.

InSeptember 1997,thePSCindicated thatitisunlikelyutilities willbeallowedtocontinuetoassignpipelinecapacitytodeparting customers afterMarch1999.TheCompanyisunabletopredicthowthePSCwillresolvetheseissues.

NOTE10.PairValueofFinancial andDerivative Pinancial Instruments Thefollowing methodsandassumptions wereusedtoestimatethefairvalueofeachclassoffinancial instruments:

Cashandshort-term investments:

Thecarryingamountapproximates fairvaluebecauseoftheshortmaturityofthefinancial instruments.

Long-term debtandmandatorily redeemable preferred stock:Thefairvalueoffixedratelong-term debtandredeemable preferred stockisestimated usingquotedmarketpriceswhereavailable ordiscounting remaining cashflowsattheCompany's incremental borrowing rate.ThecarryingvalueofNYSERDAbondsandotherlong-term debtareconsidered toapproximate fairvalue.Derivative financial instruments:

Thefairvalueoffuturesandforwardcontracts aredetermined usingquotedmarketpricesandbrokerquotes.Thefinancial instruments heldorissuedbytheCompanyareforpurposesotherthantrading.Theestimated fairvaluesoftheCompany's financial instruments areasfollows:AtDecember31,Inthousands ofdollars.,

1996Cashandshort-term investments

~.~.Mandatorily redeemable preferred stock.Long-term debt:FirstHortgagebonds.Heditm-term notesPromissory notes...OtherCarryingAaxxmtS378,23286,7302,801,305 20,000413,760229,634FairValueS378,23287,3282,878,368 22,944413,760229,634CarryingAmountS325,39895,6002,841,305 20,000413,760228,461FairValueS325,39886,5162,690,707 21,994413,760'eln1997,theCompany's energymarketing subsidiary begantoengageinbothtradingandnon-trading activities generally usinggasfuturesandelectricandgasforwardcontracts.

AtDecember31,1997,forbothtradingandnon-trading activities, thefairvalueoflong'andshortpositions wasapproximately

$59.9millionand$57.6million,respectively.

Thesefairvaluesexceedtheweightedaveragefairvalueofopenpositions fortheperiodendingDecember31,1997.Thepositions aboveextendforaperiodoflessthanoneyear.Withrespecttothe'seactivities theCompanydoesnothaveanymaterialcounterparty creditriskatDecember31,1997.Transactions enteredintofortradingpurposesareaccounted foronamark-to-market basiswithchangesinfairvaluerecognized asagainorlossintheperiodofthechange.AtDecember31,1997,theopentradingpositions consisted ofoff-balance sheetelectricandgasforwardcontracts.

Thesepositions consisted oflongandshortelectricforwardcontracts withfairvaluesof$45.3million(1,878,000 MWh)and$44.3million(1,778,000 MWh),respectively, andlongandshortgasforwardcontracts withfairvaluesof$9.4million(7.1millionDth)and$10.2million(7.3millionDth),respectively.

Thequantities aboverepresent notionalcontractquantities.

Theeffectsoftradingactivities ontheCompany's 1997resultsofoperations werenotmaterial.

Activities fornon-trading purposesgenerally consistoftransactions enteredintotohedg'ethemarketfluctuations ofcontractual andanticipated commitments.

Gasfuturescontracts areprimarily usedforhedgingpurposes.

Thechangeinfairvalueofthesetransactions aredeferreduntilthegainorlossonthehedgeditemisrecognized.

Thefairvalueofopenpositions fornon-tradingpurposesatDecember31,1997,aswellastheeffectoftheseactivitie ontheCompany'resultsofoperations forthesameperiodending,wasnmaterial.

TheCompany's investments indebtandequitysecurities consistoftrustfundsforthepurposeoffundingthenucleardecommissioning ofUnit1anditsshareofUnit2(seeNote3-"NuclearPlantDecommissioning"

),short-terminvestments heldbyOpinacEnergyCorporation (asubsidiary) andatrustfundforcertainpensionbenefits.

TheCompanyhasclassified allinvestments indebtandequitysecurities asavailable forsaleandhasrecordedallsuchinvestments attheirfairmarketvalueatDecember31,1997.Theproceedsfromthesaleofinvestments were$159.7million,$99.4millionand$70.3millionin1997,1996and1995,respectively.

Netrealizedandunrealized gainsandlossesrelatedtothenucleardecommissioning, trustarereflected in"Accumulated depreciation andamortization" ontheConsolidated BalanceSheets,whichisconsistent withthemethodusedbytheCompanytoaccountforthedecommissioning costsrecovered inrates.Theunrealized gainsandlossesrelatedtotheinvestments heldbyOpinacEnergyCorporation andthepensiontrus'tareincluded, netof0tax,in"Commonstockholders'quity" ontheConsolidated BalanceSheets,whiletherealizedgainsandlossesareincludedin"Otherincomeanddeductions" ontheConsolidated IncomeStatements.

TherecordedfairvaluesandcostbasisoftheCompany's investments indebtandequitysecurities isasfollows:AtDecember31,Inthousands ofdollars1996SecurityTypeU.S.Goverment Obligations.

.~.~Comnercial Paper..TaxExerptObligations.

....Corporate Obligations.r~~~~~~~~GrossUnrealized CostGain(Loss)FairValue106,0351,542107,57780,1155,884(55)85,94492,94917,368(830)109,4873025--30255296260$26650~$0095322029S14,136S1,864S(4)S15,996GrossUnrealized CostGain(Loss)FairValue75,5903,209(147)78,65262,7238,524(422)70,82525062506$256176$14DD2~06D2$269576$24,782S1,530S(33)S26,27990,495739-91,234Usingthespecificidentification methodtodetermine cost,thegrossrealizedgainsandgrossrealizedlosseswere:YearEndedDecember31Realizedgains.....

Realizedlosses....1997$30487Inthousands ofdollars$2,1218061995$2,523328Thecontractual maturities oftheCompany's investments indebtsecurities isasfollows:Inthousands of'dollars AtDecember31,1997Lessthan1year.1yearto5years5yearsto10years.............Dueafter10years....~~.......FairValue$106,67710,84552,526113,946Cost$105,13510,65450,351104,353 NOTB11.StockBasedComensationUndertheCompany's stockcompensation plans,stockunitsandstockappreciation rights("SARs")maybegrantedtoofficers,keyemployees anddirectors.

Inaddition, theCompany's plansallowforthegrantofstockoptionstoofficers.

In1997,1996and1995theCompanygranted209,918unitsand296,300SARs,291,228unitsand376,600SARsand169,500unitsand414,000SARs,respectively.

Also,in'995theCompanygranted85,375stockoptions.AtDecember31,1997,therewere668,132units,1,086,900 SARsand298,583optionsoutstanding.

Stockunitsarepayableincashattheendofadefinedvestingperiod,determined atthedateofthegrant,basedupontheCompany's stockpriceforadefinedperiod.SARsbecomeexercisable, asdetermined atthegrantdate,andarepayableincashbasedupontheincreaseintheCompany's stockpricefromaspecified level.Assuch,fortheseawards,compensation expenseisrecognized overthevestingperiodoftheawardbaseduponchangesintheCompany's stockpriceforthatperiod.Optionsweregrantedovertheperiod1992to1995andbecomeexercisable threeyearsandexpiretenyearsfromthe'grant date.Theseoptionsareallconsidered tobeantidilutive forEPScalculations.

Includedintheresultsofoperations fortheyearsending1997and1996,isapproximately

$3.2and$2.6million,respectively, relatedtotheseplans.Aspermitted bySFASNo.123-"Accounting forStock-Based Compensation"

("SFASNo.123")theCompanyhaselectedtofollowAccounting Principles BoardOpinionNo.25-"Accounting forStockIssuedtoEmployees" (APBNo.25)andrelatedinterpretations inaccounting foritsemployeestockoptions.UnderAPBNo.25,nocompensation expenseisrecognized forstock,optionsbecausetheexercisepriceoftheCompany's employeestockoptions.equalsthemarketpriceoftheunderlying stockonthegrantdate.SincestockunitsandSARsarepayable.incash,theaccounting underAPBNo.25andSFASNo.123isthesame.Therefore, thepro-forma disclosure ofinformation regarding netincome,asrequiredbySFASNo.123,relatesonlytotheCompany's outstanding stockoptions,theeffectofwhichisimmaterial tothefinancial statements fortheyearsended1997,1996and1995.Thereisnoeffectonearningspersharefortheseyearsresulting fromthepro-forma adjustments tonetincome.

NOTE12.Xnformation ReardintheElectricandGasBusinesses TheCompanyisengagedprincipally inthebusinessofproduction,

purchase, transmission, distribution andsaleofelectricity andthepurchase, distribution, saleandtransportation ofgasinNewYorkState.TheCompanyprovideselectricservicetothepublicinanareaofNewYorkStatehavinga.totalpopulation ofabout3,500,000,including amongothers,thecitiesofBuffalo,Syracuse, Albany,Utica,Schenectady, NiagaraFalls,Watertown andTroy.TheCompanydistributes ortransports naturalgasinareasofcentral,northernandeasternNewYorkhavingatotalpopulation ofabout1,700,000 nearlyallwithintheCompany's electricservicearea.Certaininformation regarding theCompany's electricandnaturalgassegmentsissetforthinthefollowing table.Generalcorporate

expenses, propertycommontobothsegmentsanddepreciation ofsuchcommonpropertyhavebeenallocated tothesegmentsinaccordance withthepracticeestablished forregulatory purposes.

Identifiable assetsincludenetutilityplant,materials andsupplies, deferredfinancecharges,deferredrecoverable energycostsandcertainotherregulatory andotherassets.Corporate assetsconsistofotherpropertyandinvestments, cash,accountsreceivable, prepayments, unamortized debtexpenseandcertainotherregulatory

'andotherassets.AtDecember31,1997,totalplantassetsconsisted ofapproximately 24%Nuclear,20%Fossil/Hydro, 42%Transmission andDistribution, 11%Gasand3%Common.Inthousands ofdollars199719961995Operating rcveraess Electric...........

$3,309,441 656963$3,308,979 68167C$3,335,548 581790Total.................$3966404$3990653$3917338Operating incose:Electric~..SS~~~~~~~GS462,24096599$438,59083748$587,28296752Total.s558839$522338S684034OtherInuecand(deductions)s ElectrlcSubtotelo~~~~~~Otherincome..InterestcharesS190000368,83924,997273906s522,33835,943278033s684,0343,069279674Incomebeforefederalandforeinincometaxes$119930S280248S407429Federalandforeignindetaxes:Elec'trIc~~~~~~~~asGTotalncomeoreextraorsnarstemS30,0903000560095$133,24626147s79,57422920102494159393Depreciation andemrtizations Electric.as~~~~~~GTotalConstruction expenditures (including nuclearfuel):Electric..as,~,~~~~~~GTotalS3'11,68327958S339641S221,91568842S290757S302,82527002S329827S277,505745C4$352049S292,99524836$317831S285,72260082S345804Identifiable assets:Elect/ic~~~~~~~~~GaS~~~~~~~~~~Total~~~~~~~~CorrateassetsTotalassets$7,257,163 11850018,442,164 11C1977$9584141$7,592,287 11230458,715,332 762537$7,372,370 12031848,575,554 852081$9427635$9477869 Note13.SubseentEventInearlyJanuary1998,amajoricestormandfloodingcausedextensive damageinalargeareaofnorthernNewYork.TheCompany's electrictransmission anddistribution facilities inanareaofapproximately 7,000squaremilesweredamainterrupting servicetoapproximately 120,000oftheCompany'customers, approximately 300,000people.TheCompanyhadtorebuildmuchofitstransmisanddistribution systemtorestorepowerinthisarea.BytheendofJanuary19servicetoallcustomers wasrestored; however,thefinalcostsofthestormwillnotbeknownascrewscontinuetomakefinalrepairstotemporary measurestorestoreserviceandsalvageoperations "cannotbecompleted untilspring.Thepreliminary estimateofthetotalcostoftherestoration andrebuildeffortscouldexceed$125million.Aportionofthecostwillbecapitalized; however,atthistime,theCompanyisunabletodetermine thecapitalportionuntilrebuildeffortshavebeencompleted andalllabor,materialandothercosts,including chargesfromotherutilities andcontractors, havebeenreceivedandanalyzed.

TheCompanyispursuingfederaldisasterreliefassistance andisworkingwithitsinsurance carrierstoassesswhatportionoftherebuildcostsarecoveredbyinsurance policies.

TheCompanyisalsoanalyzing potential available optionsforstatefinancial aid.TheCompanyisunabletodetermine whatrecoveries, ifany,itmayreceivefromthesesources.Absentrecovery, theCompanywouldfaceachargetoearningsinthefirstquarterof1998toreflectitsestimateofunrecoverable, non-capitalized costs.

NOTE14.uarterlFinancial DataUnaudited Operating

revenues, operating income,netincome(loss)andearnings(loss)percommonsharebyquartersfrom1997,1996and1995,respectively, areshowninthefollowing table.TheCompany,initsopinion,hasincludedalladjustments necessary forafairpresentation oftheresultsofoperations forthequarters.

Duetotheseasonalnatureoftheutilitybusiness, theannualamountsarenotgenerated evenlybyquarterduringtheyear.TheCompany's quarterly resultsofoperations reflecttheseasonalnatureofitsbusiness, withpeakelectricloadsinsummerandwinterperiods.Gassalespeakinthewinter.Inthousands ofdollarsQuarterEndedDecember31,199719961995Operating revenues$960,304971,106966,478Operating income$86,024117,832132,228Netincome(loss)$(115,619)

(25,808)27,874BasicandDilutedEarnings(loss)percomnonshare$(.86)(.24)~13Septaaber 30,199719961995$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$1~163,8321,163,063 1,'124,813"

$231,937214,632256,777$103,02296,122118,736$.65.60.75Inthefourthquarterof1997theCompanywrote-off

$190.0million(85centspershare)fortheestimated amountoftheMRAregulatory assetdisallowed inratesbythePSC.Inthefourthquarterof1996theCompanyrecordedanextraordinary itemforthediscontinuance ofregulatory accounting principles of$103.6million(47centspercommonshare).Inthethirdquarterof1996theCompanyincreased theallowance fordoubtfulaccountsby$68.5million(31centspercommonshare).Inthefourthquarterof1995,theCompanyrecorded$16.9million(8centspercommonshare)forMERITearnedinaccordance withthe1991Agreement.

OwnedDecember31ELECTRICANDGASSTATISTICS ELECTRICCAPABILITY Thousands ofKMX19961995Coal01l*o~~~~~~DualFuel-Oil/GasNuclearHydroPurchased:

NewYorkPowerAuthority 1,3606467001,082661~444916.77.98.613.38.154.61,3336367001,0826174~3681,3166367001,082665~4399Hydro~-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-fired unitwithacapability of8500000)wasputintolong-term coldstandby,butcouldbereturnedtoserv>ceintfireemonths.*~Available capability canbeincreased duringheavyloadperiodsbypurchases fromneighboring interconnected systems.Hydrostationcapab>lityisbasedonaverageDecemberstream-flow conditions.

ELECTRICSTATISTICS Electricsales(Hillions ofQIh):Residential

.Cowercial Industrial Industrial-Special.

Hunicipal service...Otherelectricsystems9,90511,5527,1914,5072353,74610,10911,5647,1484,3262465,43110,05511,6137,0614,0532294,30537,13639,12737,684Electricreveres(Thousands ofdollars):

Residential

.CoemercielIndustrial Industrial-Special.

Hunicipal service..OtherelectricsystemsHiscellaneous

$1,227,245 1,233,417 531,16461,82054,54583,794117,456$1,252,165 1,237,385

~524,85858,44453,795113,39153,698$1,214,848 1,237,502 523,99656,25050,86088,936143,625Electriccustaaers (Average):

Residential Comerciel.Industrial.

Industrial-Special.

Other$3,309,441 1,404,345 146,0391,970851,519$3,308,979 1,405,083 145,1492,045991,302$3,335,548 1,399,725 144,7312I122831,488Residential (Average):

AnnualGlhusepercustomer..........

CosttocustomerperKMh........'nnual revenuepercustomer..........

1,553,958 7,05312.39e1,567,235 7,19512.39e$891.171,561,657 7,18412.08e$867.92 GASSTATISTXCS GasSales(Thousands ofDth):Residential Comnerc1a1lndustl'lelo~~~~~~~~~~~~~~~55,20322,0691,38156,72825,3532,77051,84223,8182,660TotalsalesSpotIMIket~~~~~78,6812,45184,88110,45978,481'1.723Totalgasdelivered 233,945230,011224,817GasReveraIes (Thousands ofdollars):

Residential

.Colllercial industrial

~~~~~~~~~~~~~Othergassystems.............$436,136148,2136,549130$417,348162,27513,325138$368,391143,64311,530762Spotmarket.Transportation ofcustomer-owned gas~~6,34655,65737,12450,3813,09648,290GasCustaaers (Average):

Residential

.CoIIIIlcIc1al~~~~~~~~~~~~~~~~Industrial Other484,862.40,955186$681,674477,78641,266206$581,790471,94840,9452251Residential (Average):

Annualdekatherm usepercustomer.....CosttocustomerperDth..........Annualrevenuepercustomer........

Maximmldaygassendout(Dth).......

526,852113.9$7.90$899.511~133,370519,977118.7$7.36$873.501,152,996 513,771109.8$7.11$780.581,211,252 Item9.ChangesinandDisagreements withAccountants onAccounting andFinancial Disclosure.

tTheCompanyhasnothingtoreportfor'hisitem.ZBB~IIItem10.Directors andExecutive OfficersoftheRegistrant.

BusinessBackground ofDirectors CLASSIDIRECTORS

-TERMSEXPIRINGIN1998ALBERT'.BUDNEY,JR.President, NiagaraMohawkPowerCorporation Directorsince1995Mr.Budney,age50,waselectedPresident oftheCompanyin1995.Mr.Budneywaspreviously employedbyUtiliCorp United,Inc.,anenergyservicescompany,asManagingVicePresident oftheUtiliCorp PowerServicesGroupandasPresident oftheMissouriPublicServiceDivision.

Mr.BudneyjoinedUtiliCorp United,Inc.in1993.Priortothat,hewasVicePresident ofStone&WebsterEngineering Corp.,wherehemanagedtheengi'neering firm'sBostonBusinessDevelopment Department.

DirectorofPlumStreetEnterprises, Inc.("PlumStreet");CanadianNiagaraPowerCompany,Limited("CNP");andUtilities MutualInsurance Company.President ofOpinacNorthAmerica,Inc.("OpinacNA"),awholly-owned subsidiary oftheCompany.OpinacNAholds100%ofPlumStreetand,throughitssubsidiary, OpinacEnergyCorporation

("Opinac"),

a50percentinterestinCNP.EDMUNDM.DAVISAttorneyDirectorsince1970MemberofCompensation

&Succession, Corporate PublicPolicy&Environmental Affairs,andFinanceCommittees oftheBoardMr.Davis,age68,retiredin1995asofcounseltoHiscock&Barclay,LLP,Syracuse, NY,Attorneys-at-Law.

Mr.Daviswasapartnerandhadbeenassociated withthelawfirmsince1957.DR.BONNIEGUITONHILLPresident andChiefExecutive OfficerofTheTimesMirrorFoundation andVicePresident ofTheTimesMirrorCompanyDirectorsince1991MemberofAudit,Corporate PublicPolicy&Environmental Affairs,andFinanceCommittees oftheBoardDr.Hill,age56,President andChiefExecutive OfficerofTheTimesMirrorFoundation,-

anon-profit institution, andVicePresident ofTheTimesMirrorCompany,anewsandinformation company,locatedinLosAngeles,CA.Dr.HillservedasDeanandProfessor ofCommerceoftheMcIntireSchoolofCommerceattheUniversity ofVirginiafrom1992-1996.

Priortothat,sheservedastheSecretary ofStateandConsumerServicesAgencyfortheStateofCalifornia.

DirectorofAKSteelCorporation; CrestarFinancial Corporation; HersheyFoodsCorporation; andLouisiana-Pacific Corporation.

HENRYA.PANASCI,JR.Chairman, CygnusManagement Group,LLCDirectorsince1988MemberofCompensation

&Succession, Corporate PublicPolicyandEnvironmental Affairs,andFinanceCommittees oftheBoardMr.Panasci,age69,ChairmanofCygnusManagement Group,LLC,aconsulting firmspecializing inventurecapitalandprivateinvestments locatedinSyracuse, NY.Mr.Panasciretiredin1996asChairmanoftheBoardandChiefExecutive OfficerofFay'sIncorporated, adrugstorechain.Mr.Panascico-founded Fay'sDrugCo.,Inc.,withhisfather,in1958.DirectorofNationalAssociation ofChainDrugStores.CLASSIZDIRECTORS

-TERMSEXPIRINGIN1999WILLIAMF.ALLYNPresident andChiefExecutive OfficerofWelchAllyn,Inc.Directorsince1988MemberofAudit,Compensation

&Succession, andNuclearOversight Committees oftheBoardMr.Allyn,age62,President andChiefExecutive OfficerofWelchAllyn,Inc.,Skaneateles Falls,NY,amanufacturer ofmedicaldiagnostic instrumentation, baicodereadersandopticalscanningdevices.Mr.AllynjoinedWelchAllyn,Inc.in1962andwaselectedtohispresentpositionin1980.DirectorofONBANCorp.,

Inc.;OnBank&TrustCompany;OneidaLimited;andPerfexCorporation.

WILLIAM-E.

DAVISChairmanoftheBoardandChiefExecutive Officer,oftheCompanyDirectorsince1992Chairperson ofExecutive Committee oftheBoardMr.Davis,age55,waselectedChairmanoftheBoardandChiefExecutive OfficeroftheCompanyin1993.Mr.DavisjoinedtheCompanyin1990andwaselectedSeniorVicePresident inApril1992,servinginthatcapacityuntilelectedVice-Chairman, oftheBoardoftheCompanyinNovember1992.DirectorofOpinacNA;PlumStreet;Opinac;CNP;andUtilities MutualInsurance Company.Mr.DavisisalsotheChairmanoftheBoardofPlumStreet'andholdsthepositionofSecretary, Utilities MutualInsurance.

Company.WILLIAMJ.DONLONFormerChairmanoftheBoardandChiefExecutive OfficeroftheCompanyDirectorsince1980Mr.Donlon,age68,retiredin1993asChairmanoftheBoardandChiefExecutive OfficeroftheCompanywith45yearsserviceasanactiveemployee.

DirectorofOpinac;ONBANCorp.,

Znc.;andOnBank&TrustCompany.ANTHONYH.GIOIAChairmanandChiefExecutive OfficerofGioiaManagement, Inc.Directorsince1996MemberofExecutive, Compensation

&Succession, andNuclearOversight Committees oftheBoardMr.Gioia,age56,ChairmanandChiefExecutive OfficerofGioiaManagement, Inc.,aholdingcompanyforseveralcompanies, including threepackaging companies locatedinBuffaloandLockport, NY.Mr.Gioiahasheldhispresent positionsince1987.~~DR.PATTIMcGZLLPEExecutive DirTERSONectoroftheCouncilforInternational ExchangeofScholarsDirectorsince1988MemberofExecutive, Audit(Chairperson),

andCorporate PublicPolicy&Environmental AffairsCommittees oftheBoardDr.Peterson, age54,Executive DirectoroftheCouncilforInternational ExchangeofScholars, anon-profit organization locatedinWashington, DC.From1996to1997,Dr.PetersonwasaSeniorFellowoftheCornellInstitute forPublicAffairs,CornellUniversity, Ithaca,NY.Dr.PetersonalsoservedasPresident ofSt.LawrenceUniversity from1987-1996.

Priortothat,shewasPresident ofWellsCollege.SheholdsthetitlePresident Emeritaatbothinstitutions.

Independent TrusteeofJohnHancockMutualFunds.CLASSIIZDIRECTORS

-TERMSEXPIRING.IN2000,LAWRENCEBURKHARDT, IIINuclearConsultant Directorsince1988Chairperson ofNuclearOversight Committee oftheBoardMr.Burkhardt, age65,independent consultant tothenuclearindustrysince1990.Priortohisretirement in1990,Mr.Burkhardt wasemployedbytheCompanyandservedasExecutive VicePresident ofNuclearOperations.

DirectorofMACTEC,Inc.,formerlyManagement AnalysisCompany.DOUGLASM.COSTLEDistinguished SeniorFellowandChairmanoftheBoardoftheInstitute forSustainable Communities Directorsince1991MemberofExecutive, Audit,Corporate PublicPolicy&.Environmental Affairs(Chairperson),

andNuclearOversight Committees oftheBoardMr.Costle,age58,Distinguished SeniorFellowandChairmanoftheBoardoftheInstitute forSustainable Communities, anon-profit organization locatedinMontpelier, VT.Mr.Costlehasheldhispresentpositionsince1991.FormerDeanoftheVermontLawSchoolinSouthRoyalton, Vermont,andAdministrator oftheU.S.Environmentdl Protection Agency.Independent TrusteeofJohnHancockMutualFunds.DONALDB.RIEFLERFinancial MarketConsultant Directorsince1978MemberofExecutive, Audit,Finance(Chairperson),

andNuclearOversight Committees oftheBoardMr.Riefler,age70,financial marketconsultant andadvisortoJ.P.Morgan,FloridaFSB,PalmBeach,FL,aprivatebankingconcernaffiliat'ed withJ.P.Morgan&Co.,Inc.Priortohisretirement in1991,Mr.RieflerwasChairmanoftheMarketRiskCommittee forJ.P.Morgan&Co.Incorporated andMorganGuarantyTrustCompanyofNewYork.STEPHENB.SCHWARTZRetiredSeniorVicePresident, International BusinessMachinesCorporation Directorsince1992 MemberofExecutive, Compensation

&Succession (Chairperson),

andFinanceCommittees oftheBoardtMr.Schwartz, age63,retiredasSeniorVicePresident ofInternational BusinessMachinesCorporation in1992.Mr.SchwartzjoinedIBM"in1957andwaselectedSeniorVicePresident in1990.DirectorofMFRI,Inc.Theinformation regarding executive officersappearsattheendofPartIofthisForm10-KAnnualReport.SECTION16(A)BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section16(a)oftheSecurities andExchangeActof1934requirestheCompany's directors, executive officersandbeneficial ownersofmorethan10percentofanyclassofequitysecurities oranyotherpersonsubjecttoSection16("reporting persons")

tofileinitialreportsofownership andreportsofchangesinownership oftheCompany's equitysecurities withtheSecurities andExchangeCommission andtheNewYorkStockExchange.

Basedsolelyonareviewofthecopiesofsuchformsandwrittenrepresentations fromtheCompany's directors andexecutive

officers, theCompanybelievesthatduringthepreceding yearthereporting personshavecompliedwithallSection16(a)filingrequirements.

Item11.Executive Compensation BOARDOFDIRECTORS'OMPENSATION ANDSUCCESSION COMMITTEE REPORTONEXECUTIVE COMPENSATION TheCompensation andSuccession Committee oftheBoardofDirectors (the"Committee"

)iscomposedentirelyofnon-employee directors.

TheCommittee hasresponsibility forrecommending officersalariesandfortheadministration oftheCompany's officerincentive compensation plansasdescribed inthisreport.TheCommittee makesrecommendations totheBoardoDirectors whichmakesfinalofficercompensation determinations.

ThisCommittee reportdescribes theCompany's executive officercompensation

policies, thecomponents ofthecompensation program,andthemannerinwhich1997compensation determinations weremadefortheCompany's ChairmanoftheBoardandChiefExecutive Officer,Mr.WilliamE.Davis.The1997Executive OfficerCompensation Programwascomposedentirelyofbasesalary,frozenat1995levels,and1997grantsofstockunitsandstockappreciation rights("SARs")madepursuanttotheLong-Term Incentive PlanadoptedbytheBoardofDirectors onSeptember 25,1996(the"LTIP"),asdescribed laterinthisreport.BASESALARYTheCommittee seekstoensurethatsalariesoftheCompany's

officers, including executive

officers, remaincompetitive withlevelspaidtocomparable positions amongotherUPS.electricandgasutilities withcomparable revenues(collectively referredtoasthe"Comparator Utilities"

).TheCommittee believesthatcompetitive salariesprovidethefoundation oftheCompany's officercompensation programandareessential fortheCompanytoattractandretainqualified

officers, especially inlightoftheincreasing competition withintheindustry.

Eachofficerpositionhasbeenassignedtoacompetitive salaryrange.TheCommittee intendstoadminister salarieswithinthe25thto75thpercentiles ofpracticewithrespecttothoseComparator Utilities.

The1997averagesalaryofthefivenamedexecutive officersfalls below25thpercentile competitive levels.Sinceexecutive officersalarieswerefrozenat1995levels,asacondition forreceiptof1995stockincentive grants,thecompetitiveness ofannualexecutive officercompensation isheavilydependent onstock-related incentives intheformofstockunitsandstockappreciation rightsgrantedunderthe1995StockIncentive Plan("SIP")andtheLTIP.1995STOCKINCENTIVE PLANOnDecember14,1995,theBoardofDirectors approvedtheS1PtopromotethesuccessandenhancethevalueoftheCompanythroughtheretention andcontinued motivation oftheCompany's officersandtofocustheireffortstowardtheexecution ofbusinessstrategies directedtowardimproving financial returnstoshareholders'wards undertheSIPconsisted ofstockunitsandSARs.Thesestockunitgrantswillbepaidincashin1998basedonthefairmarketvalueoftheCompany's commonstockduringthelast12consecutive tradingdaysin1997($9.922).UndertheSIP,dividends arecredited(inanamountequivalent todividends paid,ifany,ontheCompany's commonstock)withrespecttoallstockunitsgranted.Thesecreditsarereinvested attheprevailing stockprice,therebyincreasing thenumberofstockunitspayableattheendoftheperiod.Nodividends werecreditedtoSIPstockunits.TheSARsfirstbecameexercisable onJanuary2,1998,andmaybeexercised untiltheyexpireonDecember31,2002.TheSIPwasstructured sothatanycompensation earnedbyofficersduringthetwo-yearperiod1996and1997,otherthanbasesalary,willbebasedontheCompany's year-end1997stockpriceandtotalreturnsrealizedbyshareholders duringthisperiod.Accordingly, participants (including theexecutive officerslistedintheSummhryCompensation Table)didnotreceiveanysalaryincreases (excepttoreflectpromotions),

annualincentive compensation paymentsorstockoptiongrantsduring1996and1997.Generally

speaking, SIPgrantswerestructured sothattheCompany's stockpricewouldhavetomorethandoubleduringthistwo-yearperiodinorderforthetotalcompensation oftheparticipants toapproximate mediancompetitive levels.TheCommittee doesnotintendtomakefurtherSIPgrantsotherthanthe1995stockunitgrantswhichbecamepayableonDecember31,1997andthe1995stockappreciation rightsgrantswhichbecameexercisable onJanuary2,1998andexpireonDecember31,2002.Long-term incentive grantsweremadein1996,1997,and1998undertheLTIPdescribed below.LONG-TERMINCENTIVE PLANBecausetheCommittee seekstoprovideacontinuous programoflong-term stockincentives, onSeptember 25,1996theBoardofDirectors adoptedtheLTIPandapprovedstockunitandSARgrantsforthe1996-1998 period.Thesestockunitgrantswillbepaidincashinearly1999.Dividends arecredited(inanamountequivalent todividends paid,ifany,ontheCompany's commonstock)withrespecttothe1996-1998 stockunitgrants,whicharereinvested attheprevailing stockprice,therebyincreasing thenumberofstockunitspayableinearly1999.ThepaymentvalueofthestockunitswillbebasedontheaveragefairmarketvalueoftheCompany's commonstockduringthelast12consecutive tradingdaysin1998.The1996LTIPSARgrantsfirstbecomeexercisable onJanuary2,1999,andmaybeexercised untiltheyexpireonDecember31,2005.OnJanuary29,1997,theBoardofDirectors approvedthegrantofLTIPstockunitsandSARsforthe1997-1999 performance period.Thesestockunits,andaccumulated dividendstockunits,willbepaidinearly2000basedonthe averagefairmarketvalueoftheCompany's commonstockduringthelasttwelveconsecutive tradingdaysin1999.TheSARsfirstbecomeexercisable onJanuary2,2000,andcanbeexercised until,theyexpireonDecember31,2006.Thesizeofboththe1996-1998 and1997-1999 LTIPstockunitandSARgrantsweredetermined, basedonthepriceofthe.Company's commonstockatthetimethesegrantsweremade,sothatthecombination oftheofficers'urrent salariesplusthegrantdatepresentvalueofSIP,andLT1Pgrantsforthe1996-1998 and1997-1999 performance periods,wouldapproximate the50thpercentile ofcomparator utilitytotalcompensation practiceforthethree-year period1995through1997.Thecompetitiveness oftheactualcompensation realizedfromSIPandthe1996-1998 and1997-1999 LTIPgrantsisdependent onthemarketvalueoftheCompany's commonstockattheendof1997,1998,and1999.TheBoardofDirectors alsoapprovedaJanuary19,1998grantofLTIPstockunitsandSARsfortheperiod1998-2000.

Thesestockunits,and'nyaccumulated dividendstockunits,willbepaidinearly2001basedontheaveragefairmarketvalueoftheCompany's commonstockduringthelast12consecutive tradingdaysin2000.TheSARswillfirstbecomeexercisable onJanuary2,2001,andcanbeexercised untiltheyexpireonDecember31,2007.The1998stockunitandSARgrantsweredetermined sothattheaveragecurrentsalaryandtheaveragegrantdatepresentvalueofthe1998LT1Pgrantsforthefivenamedexecutive officerswouldapproximate the50thpercentile of1997comparator utilitytotalcompensation practice.

Throughthecombination ofbasesalary,and,during1996,1997and1998,stockunitandSARgrants',theCommittee seekstofocustheeffortsofofficerstowardimproving, annuallyandoverthelonger-term, thefinancial returnsfortheCompany's shareholders.

COMPENSATION OFWILLIAME.DAVIS,CHAIRMANOFTHEBOARDANDCHIEFEXECUTIVE OFFICERMr.DavisbecameChiefExecutive OfficeronMay1,1993.InApril1996,Mr.Davisvoluntarily reducedhisannualsalaryfroma'evelof$490,000tothecurrentlevelof$450,500.TheCommittee hasbeenadvisedbyitsconsultant thatMr.Davis'997 salaryfallswellbelowthe25thpercentile relativetotheChiefExecutive OfficersoftheComparator Utilities.

OnDecember13,1995,theBoardgrantedMr..Davis 25,000stockunitsand142,500'ARs, withanexercisepriceof$10.75,underthe1995StockIncentive Plan.Assetforthabove,SIPstockunitswillbepaidtoMr.Davisandtheothernamedexecutive officersin1998.Mr.Davis'IPstockunitandSARgrantswereintendedtoprovidecompetitive totalcompensation opportunities duringthe1996and1997period,depending ontheCompany's stockprice,considering thathissalarywouldnotbeincreased andthathewouldreceivenoannualincentive compensation paymentsandnostockoptionsduringthistwo-yearperiod.Aspreviously indicated, theCommittee andtheBoardofDirectors seektoprovideacontinuous programoflong-term stockincentives beyond1997whenSIPstockunitgrantsbecamepayableandSIPSARgrantsbecameexercisable.

Accordingly, onSeptember 25,1996theBoardofDirectors approvedagrantof45,000stockunitsand90,000SARs,withanexercisepriceof$8.00,forMr.Davisforthe1996-1998 performance period.OnJanuary29,1997theBoardofDirectors approvedagrantof35,000stockunitsand70,000SARs,withanexercisepriceof$10.30,forthe1997-1999 performance period..Boththe1996-1998 and1997-1999 grantsweremadeunderthetermsoftheLTIP.Thesizeofthe1996-1998 and1997-1999 LTIPgrantsforMr.Daviswasdetermined sothatthegrantdatepresentvalueofbothgrants,incombination withhis currentsalaryandhisSIPgrants,wouldapprox'imate the50thpercentile forComparator Utilitychiefexecutive officersduringthe1995-1997 period.Thecompetitiveness ofthecompensation Mr.DavisactuallyrealizesfromtheSIPandLTIPgrantsisdependent onthemarketvalue oftheCompany's commonstockattheendof1997,1998,and1999.Aspreviously indicated, theBoardofDirectors approvedaJanuary19,1998grantofLTIPstockunitsandSARsforMr.Davisfortheperiod1998-2000.Thesizeofthesegrantswasdetermined sothatthesumofhiscurrentsalaryplusthegrantdatepresentvalueofthe1998stock.unitandSARgrantswouldfallapproximately midway,betweenthe25thand50thpercentiles of1997totalcompensation practiceforelectric/gas utilities ofcomparable size.TheCommittee isawareofthelimitations thattaxlegislation hasplacedonthetaxdeductibility ofcompensation inexcessof$1millionwhichispaidinanyyeartoanexecutive officer.Currently noneoftheexecutive officershasreceivedcompensation subjecttosuchlimitations.

TheCommittee willcontinuetomonitordevelopments inthisareaandtakeappropriate actionstopreservethetaxdeductibility ofcompensation paidtoexecutive

officers, shouldthisbecomenecessary.

Submitted bytheCompensation andSuccession Committee oftheBoardofDirectors:

StephenB.Schwartz, Chairperson WilliamF.AllynEdmundM.DavisAnthonyH.GioiaHenryA.Panasci,Jr.

EXECUTZVE COMPENSATION Thetablebelowsetsforthallcompensation paidbytheCompanyforservicesrenderedinallcapacities duringthefiscalyearsendedDecember31,1997,December31,1996andDecember31,1995,totheChairmanofthe'BoardandChiefExecutive Officerandtoeachoftheotherfourmosthighlycompensated executive officersoftheCompanyforthefiscalyearendedDecember31,1997.SUMMARYCOMPENSATION TABLEFiscalYears1997,1996and1995NamePositionYearAnnualCompensation Salary($)(A)Bonus(S)OtherAnnualCompensation(S)(C)

W.E.DavisChairmanofthe1997BoardandChief1996Executive Officer1995450,501462,351473,542000'1000A.J.Budney,Jr.President and1997ChiefOperating 1996Officer1995315,002315,002236,2510050,000(B)1102,95632I727B.R.SylviaExecutive Vice1997President 19961995295,001295,001295,00111000J.W.PowersSeniorVicePresident D.D.KerrSeniorVicePresident 199719961995199719961995210,190211,002209,251210,001210,001191,0851100011000NameW.E.DavisPositionYearChairmanofthe1997BoardandChief1996Executive Officer1995371,875360,000246,87570,00090,000152,50042,35843,36535,729Long-Term Compensation AwardsRestricted Securities AllOtherStockUnderlying Compensation (S)Awards($)(D)Options/SARs (I)(E)A.J.Budney,Jr.President andChiefOperating

.Officer199719961995185,938180,000148,12535,00045,00076,00016,43624,97548,541B.R.SylviaExecutive VicePresident 199719961995117,938114,00098,75022,20028,50049,00011,15310,17424,832J.W.PowersSeniorVicePresident D.D.KerrSeniorVicePresident 19971996199519971996199585,000142,000085,00082,00074,06316,00030,00022,00016,00020,50031,500187'7830,54158,4667,9539,4157,338 (A)Includesallemployeecontributions totheEmployees'avings FundPlan.(B)1995bonusforMr.Budneyrepresents abonusfor1995guaranteed atthetimehewashiredifearningspersharethresholds werenotmetundertheOfficerIncentive Compensation Plan(anannualincentive compensation planadoptedbytheBoardofDirectors onDecember13,1990,andsuspended for1996and1997asacondition ofparticipation intheSIP).(C)1996and1995OtherAnnualCompensation forMr.Budneyrepresents amountsreimbursed forpaymentoftaxesassociated withrelocation expenses.

1997OtherAnnualCompensation forMessrs.Davis,Budney,SylviaandPowersandMs.Kerrrepresents amountsreimbursed forpaymentoftaxesassociated withnon-cashcompensation.

(D)In1995,57,500stockunitsweregrantedpursuanttotheSIPadoptedbytheBoardstockunitsvestedandbecamepayableonequivalents werecreditedonthesestocktablewerecalculated bymultiplying thepriceofthecompany's stock($9.875)on1995).totheabovenamedexecutive officersofDirectors onDecember14,1995.TheseDecember31,1997.Nodividendunits.The1995valueslistedinthestockunitsgrantedbytheclosingmarketthedateofthegrant(December 31,In1996,109,750stockunitsweregrantedtotheabovenamedexecutive officerspursuanttotheLTIPadoptedbytheBoardofDirectors onSeptember 25,1996.Thesegrantsweremadeforthethree-year periodJanuary.1,1996,throughDecember31,1998,andvestandbecomepayableonDecember31,1998.The1996valueslistedinthetablewerecalculated bymultiplying thestockunitsgrantedby$8.00,thepriceatthetimethesestockunitgrantsweredetermined.

Dividendequivalents, ifany,willbecreditedonthesegrantsandwillbepaidwhentherelatedstockunitsarepaid.ForMr.Powers,thevaluealsoincludesthevalueofstockunitsgrantedin1996underthe1995SIP.In1997,79,600stockunitsweregrantedtotheabovenamedexecutive officerspursuanttotheLTIPadoptedbytheBoardofDirectors onSeptember 25,1996.Thesegrantsweremadeforthethree-year periodJanuary1,1997,throughDecember31,1999,andvestandbecomepayableonDecember31,1999.The1997valueslistedinthetablewerecalculated bymultiplying thestockunitsgrantedby$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.AllOtherCompensation for1997includes:

employercontributions totheCompany's Employees'avings FundPlan:Mr.Davis($4,800),Mr.Sylvia($4,800),Mr.'owers

($4,800),andMs.Kerr($4,800);taxableportionoflifeinsurance premiums:

Mr.Davis($13,743),Mr.Budney($2,436),Mr.Sylvia($3,537),Mr.Powers($3,528),andMs'err($1,653);employercontributions totheCompany's ExcessBenefitPlan: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);severance allowance paidpursuanttoEmployment Agreement:

Mr.Powers($105,500);

personaltravelallowance:

Mr.Sylvia($979).

Thefollowing tablediscloses, fortheChairmanoftheBoardandChiefExecutive Officer,Mr.WilliamE.Davisandtheothernamedexecutive

officers, thenumberandtermsofSARsgrantedduringthefiscalyearendedDecember31,1997.Option/SAR GrantsinLastFiscalYearIndividual GrantsNameW.E.A.J.B.R.J.W.D.D.DavisBudney,Jr.SylviaPowersKerrNumberofSecurities Underlying Options/SARs Granted~(I)70,00035,00022,20016,00016,000%ofTotalOptions/SARs GrantedtoEmployees InFiscalYear23.62%11.81%7.49%5.40%5.40'%xercise orBasePrice($/Sh)10.3010.30'0.3010.3010.30NameW.E.A.J.B.R.J.W.D.D.DavisBudney,Jr.SylviaPowersKerrExpiration Date(A)12/31/2006 12/31/2006 12/31/2006 12/31/2006 12/31/2006 GrantDatePresentValue($)(B)249,200124,60079,03256,96056,960(A)SARsgrantedin1997undertheLTIPbecomeexercisable January2,2000.AllSARsbecomeexercisable uponachangeincontrol.(B)ThegrantdatepresentvalueofSARsiscalculated usingtheBlack-Scholes OptionPricingModelwiththefollowing assumptions:

marketpriceof.thestockat.the,September 29,1997grantdate($10.30);exercisepriceofrightsthatexpireonDecember31,2006($10.30);stockvolatility (0.2957);

dividendyield(2.86%);riskfreerate(6.00%);exerciseterm(10years);Black-Scholes ratio(0.3454);

andBlack-Scholes value($3.56)forrightsthatexpireonDecember31,2006.Stockvolatility anddividendyieldassumptions arebasedon36monthsofresultsfortheperiodendingDecember31,1997.Thefollowing tablesummarizes exercises ofoptionsbytheChairmanoftheBoardandChiefExecutive Officer,Mr.WilliamE.Davis,andtheothernamedexecutive

officers, thenumberofunexercised optionsheldbythemandthespread(thedifference betweenthecurrentmarketpriceofthestockandtheexercisepriceoftheoption,totheextentthatmarketpriceattheendoftheyearexceedsexerciseprice)onthoseunexercised optionsforfiscalyearendedDecember31,1997.-99" Aggregated Option/SAR Exercises inandFiscalYear-EndOptionValuesLastFiscalYearNumberofSecurities Underlying Unexercised Options/SARs AtFiscalYearEnd(I)NameW.E.A.J.B.R.J.W.D.D.DavisBudney,Jr.SylviaPowersKerrSharesAcquiredonValueExercise(I)Realized($)Exercisable 32,625013,0009,0006,000ValueofUnexercised Options/SARs AtFiscalYear-End($)(A)Unexercisable 312,500156,00099,70068,00068,000NameW.E.A.J.B.R.J.W.D.D.DavisBudney,Jr.SylviaPowersKerrExercisable Unexercisable 239,000119,50075,69078,20054,450(A)Calculated basedontheclosingmarketpriceoftheCompany's commonstockonDecember31,1997($10.50).NIAGARAMOHAWKPOWERCORPORATION Comparison ofFive-Year Cumulative TotalReturn(1) vs'&P500,EEIandPeerGroupofEasternRegionUtilities

[ILLUSTRATION OFPERFORMANCE GRAPH--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.

Alldividends assumedtobereinvested overthefive-year period.Inprioryears,theCompanyhascompareditsfive-year totalshareholder returnstoapeergroupcomprised ofthe23easternregionutilities listedlistedbelow.Infutureyears,theCompanyintendstocompareitstotalshareholder returnstotheEdisonElectricInstitute Combination GasandElectricInvestor-Owned Utilities Index("EEIIndex"),whichisapublished industryindex.Inviewofthenationwide deregulation oftheelectricandgasutilityindustry, theCompanybelievesthatanationalpeergroup,suchastheEEIIndex,ismoreappropriate thantheregionalutilitypeergroupusedinprioryears.Furthermore, theEEIIndexismoreappropriate sinceitiscomposedentirelyofcombination electricandgasutilities, likeNiagaraMohawk.-100-PEERGROUPOFEASTERNREGIONUTILITIES:

.Allegheny EnergyInc.AtlanticEnergy,Inc.Baltimore Gas&ElectricCompanyBostonEdisonCompanyCentralHudsonGas&ElectricCorp.CentralMainePowerCo.Consolidated EdisonCo.ofNewYork,DQE,Inc.Northeast Utilities Orange&RocklandUtilities Inc.PECOEnergyCompanyPP&LResources IncPublicServiceEnterprise Groupinc.Rochester Gas&ElectricCorp.TheUnitedIlluminating CompanyDelmarvaPower&LightCo.EasternUtilities Associates GeneralPublicUtilit'ies Corp.'KeyspanEnergyCorp.LongIslandLightingCo.NationalFuelGasCompanyInc.NewEnglandElectricSystemNewYorkStateElectric&GasCorp.(1)TotalreturnsforeachEasternRegionUtilityweredetermined inaccordance withtheSecurities andExchangeCommission's regulations, i.e.,weightedaccording toeachissuer'sstockmarketcapitalization.

RETIREMENT BENEFITSThefollowing tableillustrates themaximumaggregate pensionbenefit,withcertaindeductions forSocialSecurity, payablebytheCompanyunderboththeNiagaraMohawkPensionPlan("BasicPlan")andtheCompany's Supplemental Executive Retirement Plan("SERP")toanofficerinspecified averagesalaryandyears-of-service classifications.

Suchbenefitamountshavebeencalculated asthougheachofficerselectedastraightlifeannuityandretiredonDecember31,1997atage65.Theamountofcompensation takenintoaccountunderatax-qualified planissubjecttocertainannuallimits(adjusted forincreases inthecostofliving,$150,000in1996and$160,000in1997).Thislimitation mayreducebenefitspayabletohighlycompensated individuals.

ANNUALRETIREMENT ALLOWANCE 3-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-year averageannualsalary.ThecreditedyearsofserviceundertheBasicPlanandtheSERPfortheindividuals listedintheSummaryCompensation TableareMr.Davis,8years;Mr.Budney,3years;Mr.'Sylvia,7years;Mr.Powers,34years;Ms.Kerr,24years.TheBasicPlan,anoncontributory, tax-qualified definedbenefitplan,providesallemployees oftheCompanywithaminimumretirement benefitrelatedtothehighestconsecutive five-year averagecompensation.

-101-Compensation coveredbytheBasicPlanincludesonlytheparticipant's basesalaryorpay,subjecttothemaximumannuallimitnotedabove.Directors whoarenotemployees arenoteligibletoparticipate.

TheSERPisanonqualified, noncontributory definedbenefitplanproviding additional benefitstocertainofficersoftheCompanyuponretirement afterage55whohave20ormoreyearsofemployment.

TheCommittee maygrantexceptions totheserequirements.

TheSERPprovidesforpaymentmonthlyofanamountequaltothegreaterof(i)60%ofmonthlybasesalaryaveragedoverthefinal36monthsofemployment, lessbenefitspayableundertheBasicPlan,retirement benefitsaccruedduringpreviousemployment andone-halfofthemaximumSocialSecuritybenefittowhichtheparticipant maybeentitledatthetimeofretirement, or(ii)benefitspayableundertheBasicPlanwithoutregardtotheannualbenefitlimitations imposedbytheInternalRevenueCode.Participants intheSERPmayelecttoreceivetheirbenefitinalumpsumpaymentprovidedcertainestablished criteriaaremet.1EMPLOYEEAGREEMENTS TheCompanyenteredintoemployment agreements withMessrs.Davis,Budney,SylviaandPowersandMs.Kerr,effective asofDecember20,1996,whichsuperseded theirprioragreements withtheCompany.Theagreements haveathree-year term,and,unlesseitherpartygives60dayspriornoticetothecontrary, theagreements areextendedattheendofeachyearforanadditional year.Intheeventofachangeincontrol(asdefinedintheagreement),

theagreement willremainineffectforaperiodofatleast36monthsthereafter unlessanoticenottoextendthetermoftheagreement wasgivenatleast18monthspriortothechangeincontrol.Theagreements providethattheexecutive willreceiveabasesalaryattheexecutive's currentannualsalaryorsuchgreateramountdetermined bytheCompanyandthattheexecutive willbeabletoparticipate intheCompany's incentive compensation plansaccording totheirterms.Inaddition, theexecutive isentitledtobusinessexpensereimbursement,

vacation, sickleave,perquisites, fringebenefits, insurance coverageandothertermsandconditions oftheagreement asareprovidedtoemployee's oftheCompanywithcomparable rankandseniority.

Underanamendment totheagreements effective asofJune9,1997,ifanexecutive hascompleted eightyearsofserviceandattainedage55atthetimeoftheexecutive's termination ofemployment, theexecutive (andeligibledependents) willbeentitledtocoverageformedical,prescription drug,dentalandhospitalization benefitsequaltothoseprovidedbytheCompanyonMarch26,1997forthe'emainder of.the.executive'.s lifewithallpremiumstherefore paidbytheCompany.Ifanexecutive hascompleted eightyearsofservicebuthasnotattainedage55uponterminating employment, suchbenefitswillbeprovidedwhentheexecutive attainsage55.Theemployment agreements alsoprovidethattheexecutive's benefitsundertheSERPwillbebasedontheexecutive's salary,annualincentive awardsandSIPawards,asapplicable.

Further,iftheexecutive's employment isterminated bytheCompanywithoutcause(whetherpriortoorafterachangeincontrol),

orbytheexecutive forgoodreasonaftera'hangeincontrol,oraftercompleting eightyearsofservice,theagreements providethattheexecutive willbedeemedfullyvestedundersuchplanwithoutreduction forearlycommencement.

Iftheexecutive isunderage55atthetimeofsuchtermination, theexecutive willbeentitledtoafullyvestedbenefitundertheSERPuponattaining age55,withoutreduction forearlycommencement.

Theagreements restrictundercertaincircumstances priortoachangeincontroltheexecutive's abilitytocompetewiththeCompanyandtouseconfidential information concerning theCompany.Intheeventofadispute-102-oyeranexecutive's rightsundertheexecutive's agreement following achangeincontroloftheCompany,theCompanywillpaytheexecutive.'s reasonable legalfeeswithrespecttothedisputeunlesstheexecutive's claimsarefountobefrivolous.

Iftheexecutive's employment isterminated bytheCompanywithoutcausepriortoachangeincontrol(asdefinedintheagreement),

theexecutive willbeentitledtoalumpsumseverance benefitinanamountequaltotwotimestheexecutive's basesalaryplusanamountequaltotwotimesthegreateroftheexecutive's (i)mostrecentannualincentive awardor(ii)averageannualincentive awardpaidoverthepreviousthreeyears(aportionofthevalueoftheSIPawardstotheexecutive willbetreatedasincentive awardsfor1996and1997forthispurpose)~Inaddition, theexecutive willreceiveaprorataportionoftheincentive awardwhichwouldhavebeenpayabletotheexecutive forthefiscalyearinwhichtermination ofemployment occursprovidedthattheexecutive hasbeenemployedfor180daysinsuchfiscalyear.Intheeventofsuchtermination ofemployment, theexecutive willalso.beentitledtocontinued participation intheCompany's employeebenefitplansfortwoyears,coverageforthebalanceoftheexecutive's lifeunderalifeinsurance policyproviding adeathbenefitequalto2.5timestheexecutive's basesalaryattermination andpaymentbytheCompanyoffeesandexpensesoranyexecutive recruiting orplacement firminseekingnewemployment.

If,following achangeincontrol,theexecutive's employment isterminated bytheCompanywithoutcauseorbytheexecutive forgoodreason(asdefinedintheagreement),

theexecutive willbeentitledtoalumpsumseverance benefitequaltofourtimestheexecutive's basesalary..Theexecutive willalsobeentitledtotheadditional benefitsreferredtointhelastsentenceofthepreceding paragraph, exceptthatemployeebenefitplancoverageformedical,prescription drug,dentalandhospitalization benefitswillcontinuefortheremainder oftheexecutive's lifewithallpremiumsthereforpaidbytheCompanyandcoverageunderotheremployeebenefitplanswillcontinueforfouyears.Intheeventthatthepaymentstotheexecutive upontermination ofemployment following achangeincontrolwouldsubjecttheexecutive totheexcisetaxonexcessparachute paymentsundertheInternalRevenueCode,theCompanywillreimburse theexecutive forsuchexcisetax(andtheincometaxandexcisetaxonsuchreimbursement).

InNovember1994,theCompanyenteredintoasupplemental agreement withMr.Powersinexchangefor.hisforegoing retirement undertheCompany's Voluntary EmployeeReduction Programandcontinuing employment withtheCompanyuntilDecember31,1996.Thisagreement wasmodifiedbyanagreement betweenMr.PowersandtheCompanyenteredintoinOctober1996inexchangeforhisforegoing retirement onDecember31,1996,andcontinuing employment withtheCompanyforupto12additional months.Mr.PowersretiredfromtheCompanyeffective December31,1997.Undertheagreements, Mr.Powersbecameentitledtoalumpsumpaymentfollowing thesuccessful closingofthesaleofHYDRA-COEnterprises, Inc.,andtoaseverance allowance equaltoone-halfofhisannualsalaryineffectonDecember31,*1996,whichwaspaid.tohiminJanuary1997.Theagreements alsoprovidethatMr.Powerswouldbeentitledto(i)aSIPawardof7,500stockunitsand9,500SARs,whichwouldbefullyvested(assuming retirement during1997)andpayable(inthecaseofstockunits)orexercisable (inthecaseofSARs')onDecember31,1997,(ii)long-term incentive grantsequivalent tothoseprovidedtootherseniorvicepresidents forthe1996-1998 and1997-1999 cycles(prorated forhisperiodofserviceduringthosecycles),(iii)alumpsumpaymentforunusedvacationfor1995,1996and1997uponretirement and(iv)"grandfathered" retireemedicalcoverages ineffectonDecember31,1996.Undertheagreements Mr.PowersalsoisentitledtoabenefitundertheCompany's SERPnoblessthanhis-103-benefitcalculated asofNovember1994,andtohavethefeeshereceivedasamemberoftheboardofdirectors ofOpinacEnergyCorporation,(or wouldhavereceivedintheeventthatsuchfeesareeliminated) takenintoaccountincalculating hisbenefitunderthisplanperiod.InJanuary1997,theCommittee agreedthatifMr.PowerselectedtoreceivealumpsumpaymentofhisbenefitundertheSERP(whichhedid),itwouldbebasedonadiscountratenohigherthantheapplicable discountrateineffectundertheplanonDecember31,1996.COMPENSATION OFDIRECTORS Directors whoarenotemployees oftheCompanyreceiveanannualretainerof$20,000and$1,000perBoardmeetingattended; Directors whoarenotemployees andwhochairanyofthestandingBoardCommittees receiveanadditional annualfeeof$3,000andthosewhoserveonanyofthestandingBoardCommittees, including thechair,receive$850perCommittee meetingattended.

TheCompanyalsoreimburses itsdirectors fortravel,lodgingandrelatedexpensestheyincurinattending BoardandCommittee meetings.

TheBoardofDirectors terminated theOutsideDirectorRetirement.

Planeffective December31,1995.Theplanpaidannualretirement benefitsequaltotheannualretainerineffectatthetimeofretirement tooutsidedirectors whoretiredonorafterage65with10yearsofservice.Directors'nder age60hadthepresentvalueoftheiraccruedbenefitsasofDecember31,1995converted intodeferredstockunitsofequivalent valuewhichbecomepayableuponthedirector's termination fromtheBoard.Directors age60orolderweregivenanelectionto(1)continuetoreceivegrandfathered retirement benefitsbasedontheannualretainerin1995,(2)convertthepresentvalueoftheiraccruedbenefitsintodeferredstockunits,or(3)receivehalfthegrandfathered retirement benefitandconverthalfthepresentvalueoftheiraccruedbenefitintodeferredstockunits.Fourdirectors electedtocontinuetoreceivethegrandfathered Retirement Planbenefits.

DeferredStockUnits("DSUs"),

administered inaccordance withthetermsoftheOutsideDirectorDeferredStockUnitPlanadoptedbytheBoardofDirectors onDecember2,1996,arepaidwhenapersonceasestobeanoutsidedirector, eitherinalumpsumorinfiveequalannualinstallments.

ThefizstDSUinstallment paymentwouldbemadeshortlyafterthedirector's serviceendsandtheotherinstallments would.be.paid.on.thefirstthroughfourthanniversaries ofsuchdate,basedontheprevailing stockpriceatthattime.DSUsarecreditedwithrespecttoanydividends paidduringthetermoftheirdeferral.

Suchdividendcreditsarereinvested intoDSUsofequivalent currentvaluebasedontheprevailing priceoftheCompany's commonstockatthattime.Commencing in1996,andannuallythereafter, eachoutsidedirectoriscreditedwithDSUsequalinvalueto50%oftheprevailing year'sannualretainer(60tforCommittee Chairs).Accordingly, alloutsidedirectors werecreditedwith1,168DSUs(1,402forCommittee Chairs)basedonaclosingstockpriceof$8.5625onMay7,1997.Thebeneficial stockownership tableinItem12,showstheDSUswhichhavebeencreditedtoeachoftheoutsidedirectors underthisplanasofMarch10,1998.TheCompanyprovidescertainhealthandlifeinsurance benefitstodirectors whoarenotemployees oftheCompany'.

Eachoutsidedirectorcoveredunderthe-104-Company's healthcareplanscontributes approximately 20percentofthemonthlycostsassociated withtheseplans.During1997,thefollowing directors receivedtheindicated benefitsundertheforegoing arrangements:

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.Burkhardt receivedaconsulting feeof$18,000during1997.COMPENSATION ANDSUCCESSION COMMITTEE INTERLOCKS ANDINSIDERPARTICIPATION Directors Allyn,EdmundDavis,Gioia,PanasciandSchwartz, al'1ofwhomarenon-employee directors, arethemembersoftheCompensation andSuccession Committee.

Nopersonservingduring1997asamemberoftheCompensation andSuccession Committee oftheBoardservedasanofficeroremployeeoftheCompanyoranyofitssubsidiaries duringorpriorto1997.Nopersonservingduring1997asanexecutive officeroftheCorporation servesorhasservedasadirectororamemberofthecompensation committee ofanyotherentitythathasanexecutive officerwhoservesorhasservedeitherasamemberoftheCompensation andSuccession

'Committee orasamemberoftheBoardofDirectors ofNiagaraMohawkPowerCorporation.

Item12.SecurityOwnership ofCertainBeneficial OwnersandManagement.

SECURITYOWNERSHIP OFCERTAINBENEFICIAL OWNERSThefollowing tableshowsthepersons(asthetermisusedinSection13(d)(3)oftheSecurities ExchangeActof1934)knowntotheCompanytoownmorethanfivepercent(5%)oftheCompany's commonstockasofDecember31,1997.TitleofNameandAddressofAmountandNatureofPercentClassBeneficial OwnerBeneficial Ownership OfClassCommonStockFMRCorp.14,441,831(1)82Devonshire StreetBoston,Massachusetts 0210910.00%CommonStockFidelityManagement TrustCo.11,829,786(2) 82Devonshire StreetBoston,Massachusetts 021098.19%CommonStockThePrudential Insurance CompanyofAmerica8,404,245(3)751BroadStreetNewark,NewJersey07102-3777 5.82%(1)Includes1,873,631shareswithrespecttowhichFMRCorp.hassolevotingpowerand14,441,831 withsolepowertodisposeortodirectdisposition asreportedonSchedule13G,datedFebruary14,1998,filedwiththeSEC.(2)Theaboverepresents sharesintheCompany's Non-Represented andRepresented Employees'avings FundPlans.FidelityManagement TrustCompanyservesasTrustee.TheTrusteewillvoteallsharesofcommonstockheldintheTrustsestablished forthePlansinaccordance withthedirections receivedfromtheemployees participating inthePlans.TheTrusteewillvotesharesforwhichitreceivesnoinstructions inthesameproportion asitvotessharesforwhichitreceivesinstructions.

-105-(3)Includes789,900shareswithrespecttowhichPrudential Insurance CompanyofAmericahassolevotingpower;7,575,445 shareswithsharedpowertovote;789,900shareswithsolepowertodisposeortodirectdisposition; and7,614,345shareswithsharedpowertodispose,asreportedonSchedule13G,datedFebruary10,1998,filedwiththeSEC.TheCompanybelievesthatholdersofapproximately 88.2%oftheCompany's commonstockoutstanding asofDecember31,1997,electedtoholdtheirshares,notintheirownnames,butinthenamesofbankingorfinancial intermediaries.

Accordingly, asofthatdate,127,431,405 shareswereregistered inthenomineenameofTheDepository TrustCompany,Cede&Co.SECURZTYOWNERSHIP OFDZRECTORS ANDEXECUTZVE OFFICERSThefollowing tablereflectssharesoftheCompany's commonstockbeneficially owned(ordeemedtobebeneficially ownedpursuanttotherulesoftheSecurities andExchangeCommission) asofMarch10,1998,byeachdirectoroftheCompany,eachofthenamedexecutive officersintheSummaryCompensation Tablebelowandthecurrentdirectors andexecutive officersof,theCompanyasagroup.Thetablealsoliststhenumberofstockunitscreditedtodirectors, namedexecutive officersandthedirectors andexecutive officersoftheCompanyasagroupasofMarch10,1998,pursuanttotheCompany's compensation andbenefitprograms.

Novotingrightsareassociated withstockunits.TitleofClassCommonStockNameandAddressofBeneficial OwnerDirectors:

WilliamF.AllynAlbertJ.Budney,Jr.LawrenceBurkhardt, IIlDouglasM.CostleEdmundM.DavisWilliamE.DavisWilliamJ.DonlonAnthonyH.GioiaBonnieGuitonHillHenryA.Panasci,Jr.PattiMcGillPetersonDonaldB.RieflerStephenB.SchwartzAmountandNatureofBeneficial Ownership*

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)AllDirectors andExecutive Officers(23)asagroup197,260(7)-106-TitleofClassCommonStockNameandAddressofBeneficial OwnerDirectors:

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)AllDirectors andExecutive Officers(23)asagroup569,297*Basedoninformation furnished totheCompanybytheDirectors andExecutive Officers.

ZncludessharesofcommonstockcreditedundertheEmployees'avings FundPlanasofMarch10,1998.~*Lessthanonepercent.(1)Includesoptionsfor10,000sharesofcommonstockexercisable within60days.(2)Includespresently exercisable optionsfor42,625sharesofcommonstock.(3)Includespresently exercisable optionsfor13,333sharesofcommonstock.(4)Includespresently exercisable optionsfor18,000sharesofcommonstock.(5)Includespresently exercisable optionsfor12,000sharesofcommonstock.(6)Includespresently exercisable optionsfor9,000sharesofcommonstock.(7)Includespresently exercisable optionsfor141,083sharesofcommonstock.(8)Represents deferredstockunitsgrantedpursuanttotheOutsideDirectorDeferredStockUnitPlan.Novotingrightsareassociated withdeferredstockunits.Foradditional information regarding deferredstockunits,refertoItem11.Executive Compensation

-"Compensation ofDizectors".

(9)Represents stockunitsgrantedin1995pursuanttotheSIPandin1996,1997and1998pursuanttotheLTZP.Novotingrightsareassociated withstockunits.Foradditional information regarding stockunitsgrantedtonamedexecutives, refertoItem11'xecutive Compensation

-"Long-Term Incentive Plan").InadditiontothesharesoftheCompany's commonstock,AlbertJ.Budney,Jr.indirectly owns100sharesoftheCompany's Preferred Stock,9H%Series.Item13.CertainRelationships andRelatedTransactions.

TheCompanyhasnothingtoreportforthisitem.P-107-PARTZVItem14.Exhibits, Financial Statement Schedules, andReportsonFormS-K.(a)Certaindocuments filedaspartoftheForm10-K.(1)INDEXOFFINANCIAL STATEMENTS ReportofIndependent Accountants Consolidated Statements ofIncomeandRetainedEarningsforeachofthethreeyearsintheperiodendedDecember31,1997Consolidated BalanceSheetsatDecember31,1997andConsolidated Statements ofCashFlowsforeachofthethreeyearsintheperiodendedDecember31,,1997NotestoConsolidated Financial Statements 1996Separatefinancial statements oftheCompanyhavebeenomittedsinceitisprimarily anoperating companyandallconsolidated subsidiaries arewholly-owned directlyorbysubsidiaries.

(2)Thefollowing financial statement schedules oftheCompanyfortheyearsendedDecember31,1997,1996and1995areincluded:

ReportofIndependent Accountants onFinancial Statement ScheduleConsolidated Financial Statement Schedule:

IZ--Valuation andQualifying AccountsandReservesTheFinancial Statement Scheduleaboveshouldbereadinconjunction withtheConsolidated Financial Statements inPartIZ,Item8(Financial Statements andSupplementary Data).Schedules otherthanthosementioned aboveareomittedbecausetheconditions recpxiring theirfilingdonotexistorbecausetherecyxired information isgiveninthefinancial statements, including thenotesthereto.(3)ListofExhibits:

SeeExhibitIndex.(b)ReportsonForm8-K:Form8-KReporting Date-October10,1997Itemreported-Item5.OtherEvents.Registrant filedinformation concerning thePowerChoice settlement

~Form8-KReporting Date-February11,1998Itemreported-Item5.OtherEvents.Registrant filedinformation concerning theJanuary1998icestorm.(c)Exhibits.

SeeExhibitIndex.(d),Financial Statement Schedule.

See(a)(2)above.-108-REPORTOFINDEPENDENT ACCOUNTANTS ONFINANCIAL STATEMENT SCHEDULETotheBoardofDirectors ofNiagaraMohawkPowerCorporation Ourauditsoftheconsolidated financial statements ofNiagaraMohawkPowerCorporation referredtoinourreportdatedMarch26,1998appearing inthisForm10-KalsoincludedanauditoftheFinancial Statement SchedulelistedinItem14(a)ofthisForm10-K.Inouropinion,thisFinancial Statement Schedulepresentsfairly,inallmaterialrespects, theinformation setforththereinwhenreadinconjunction withtherelatedconsolidated financial statements.

PRICEWATERHOUSE LLPSyracuse, NewYorkMarch26,1998-109-NIAGARAHOHAWRPOWBRCORPORATION ANDSUBSZDZARY COMPANIES SCHEDULEZZ-VALUATION AND{}UALZFYZNG ACCOUNTSANDRESERVES(ZnThousands ofDollars)Page1of2ColumnADescription Allowance forDoubtfulAccounts-deductedfromAccountsReceivable intheConsolidated BalanceSheets199719961995ColumnBBalanceatBeginning ofPeriod$52,09620,0003,600ChargedtoCostsandExpenses46,549127,64831,284ColumnCAdditions ChargedtoOtherAccounts$3,000(b)800(b)16400(b)ColumnDDeductions (a)$39,09796,352.31,284ColumnEBalanceatEndofPeriod$62,54852,09620,000(a)Uncollectible accountswrittenoffnetofrecoveries of$14,416,$12,842,and$10,830in1997,1996and1995,respectively.

(b)TheCompanyincreased itsallowance fordoubtfulaccountsin1995andrecordedaregulatory assetof$16,400,whichreflectstheamountthattheCompanyexpects.torecoverinrates.In1996,regulatory assetincreased by$800to$17,200andin1997,regulatory assetincreased

$3,000to$20,200.-110-NIAGARAMOHAWKPOWERCORPORATION ANDSUBSIDIARY COMPANIES SCHEDULEZZ-VALUATION ANDQUALIFYING ACCOUNTSANDRESERVES(ZnThousands ofDollars)Page2of2ColumnAColumnBColumnCAdditions ColumnDColumnEDescription BalanceatBeginning ofPeriodChargedtoCostsandExpensesChargedtoOtherAccountsDeductions BalanceatEndofPeriod(c)Miscellaneous Valuation Reserves199719961995$37,74039,42629,197$2,20710,26118,719$$4,04911,9478,490$35,89837,74039,426(c)Thereservesrelateprimarily tocertaininventory andnon-ratebaseproperties.

11-NIAGARAMOHAWKPOWERCORPORATZON Exhibit1ndexInthefollowing exhibitlist,NMPCreferstotheCompanyandCNYPreferstoCentralNewYorkPowerCorporation, apredecessor company.Eachdocumentreferredtobelowisincorporated byreference tothefilesoftheCommission, unlessthereference tothedocumentinthelistisprecededbyanasterisk.

PreviousfilingswiththeCommission areindicated asfollows:A--NMPCC--NMPCF--CNYPG--CNYPV--NMPCX--NMPCZ-.-NMPCCC--NMPCDD--NMPCGG--NMPCHH--NMPCII--NMPCJJ--NMPCKK--NMPCOO--NMPCQQ--NMPCSS--NMPCTT--NMPCW--NMPCCCC--NMPC ZZZ--NMPC OOO--NMPC PPP--NMPC QQQ--NMPC RRR--NMPC Registration Registration Registration Registration Registzation Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement.

No.Statement No.Statement No.Statement No.Statement No.Statement, No.Statement No.Statement No.Statement No.Statement No.Statement No.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.Quarterly ReportonForm10-QforquarterendedMarch31,1993;andQuarterly ReportonForm10-Qforquarterended-September 30,1993;Quarterly ReportonForm10-QforquarterendedJune30,1995;andQuarterly ReportonForm10-QforquarterendedSeptember 30,1996;Quarterly ReportonFozm10-QforquarterendedJune30,1997;andQuarterly ReportonForm10-QforquarterendedSeptember 30,1997.RepoitonForm8-KdatedJuly9,1997;andReportonForm8-KdatedOctober10,1997.Inaccordance withParagraph 4(iii)ofItem601(b)of.Regulation S-K,theCompanyagreestofurnishtotheSecurities andExchangeCommission, uponrequest,acopyoftheagreements comprising the$804millionseniordebtfacilitythattheCompanycompleted withabankgroupduringMarch1996.Thetotalamountoflong-term debtauthorized undersuchagreement doesnotexceed10percentofthetotalconsolidated assetsoftheCompanyanditssubsidiaries.

-112-IncorationReference ExhibitNo.3(a)(1)3(a)(2)3(a)(3)DescritionofInstnment

--Certificate ofConsolidation ofHewYorkPowerandLightCorporation, BuffaloNiagaraElectricCorporation andCentralHewYorkPo~erCorporation, filedintheofficeoftheNewYorkSecretary ofState,January5,1950.--Certificate ofAmendment ofCertificate ofIncorporation ofNMPC,filedintheofficeoftheHewYorkSecretary ofState,January5,1950.--Certificate ofAmerxhcnt ofCertificate ofIncorporation ofNMPC,pursuanttoSection36oftheStockCorporation LawofNewYork,filedAugust22,1952,intheofficeoftheHcwYorkSecretary ofState.PreviousFiliPreviousExhibitDesition3(a)(2)3(a)(3)3(a)(4)3(a)(5)3(a)(6)3(a)(7)3(a)(8)3(a)(9)--Certificate ofHMPCpursuanttoSection11oftheStockCorporation LawofHewYorkfiledMay5,1954intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofHMPC,pursuanttoSection36oftheStockCorporation LawofNewYork,filedJanuary9,1957intheofficeoftheNewYorkSecretary ofState.--Certificate ofHMPCpursuanttoSection11oftheStockCorporation LawofHewYork,filedMay22,1957inthcofficeoftheNewYorkSecretary ofState.--Certificate ofNMPCpursuanttoSection11oftheStockCorporation LawofNewYork,filedFebruary18,1958intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmendncnt ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofHewYork,filedMay5,1965intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofKMPCunderSection805oftheBusinessCorporation LawofHewYork,filedAugust24,1967intheofficeoftheHewYorkSecretary ofState.3(a)(4)3(a)(5)3(a)(6)3(a)(7)3(a)(8)3(a)(9)3(a)(10)3(a)(11)--Certificate ofAmendnent ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYork,filedAugust19,1968intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmcrxhent ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofNewYork,filedSeptember 22,1969intheofficeoftheNewYorkSecretary ofState.3(a)('10) 3(a)(11)3(a)(12)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYork,filedMay12,1971intheofficeoftheNewYorkSecretary ofState.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

--Certificate ofAmendment ofCertificate ofIncorporation ofNHPCunderSection805oftheBusinessCorporation LawofNewYork,filedAugust18,1972intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmendsent ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYork,filedJune26,1973intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmendnent ofCertificate ofIncorporation ofNHPCunderSection805oftheBusinessCorporation LawofNewYork,filedMay9,1974intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofNHPCunderSection805oftheBusinessCorporation LawofNewYork,filedHarch12,1975intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmenchent ofCertificate ofIncorporation ofNHPCunderSection805oftheBusinessCorporation LawofMewYork,filedHay7,1975intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmerdnent ofCertificate ofIncorporation ofNHPCunderSection805oftheBusinessCorporntion LawofNewYork,filedAugust27,1975intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmerdnent ofCertificate ofIncorporation ofNHPCunderSection805oftheBusinessCorporation LawofNewYork,filedHay7,1976intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledSeptember 28,1976intheofficeoftheNewYorkSecretary ofStnte.--Certificate ofAmendment ofCertificate ofIncorporation ofNHPCunderSection805oftheBusinessCorporation LawofNewYorkfiledJanuary27,1978intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmerdnent ofCertificate ofIncorporation ofNHPCunderSection.805oftheBusinessCorporation LawofNewYorkfiledHay8,1978intheofficeoftheNewYorkSecretary ofState.--Certificate ofCorrection oftheCertificate ofAmendment filedHay7,1976oftheCertificate ofIncorporation underSection105oftheBusinessCorporation LawofNewYorkfiledJuly13,1978intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmendnent ofCertificate ofIncorporation ofNHPCunderSection805oftheBusinessCorporation LawofNewYorkfiledJuly17,1978intheofficeoftheNewYorkSecretary ofState.IncorationReference 3(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-IncorationReference ExhibitNo.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

--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofHewYorkfiledMarch3,1980intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmenchent ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofHewYorkfiledMarch31,1981intheofficeoftheHewYorkSecretary

'ofState.--Certificate ofAmendnent ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledMarch31,1981intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledApril22,1981intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmerxhent ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofHewYorkfiledMay8,1981intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmenchent ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledApril26,1982intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmerxhent ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofHewYorkfiledJanuary24,1983intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledAugust3,1983intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofHewYorkfiledDeceaher27,1983intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmerdnent ofCertificate ofIncorporation ofNMPCunderSection,805oftheBusinessCorporation LawofHewYorkfiledDecember27,1983intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofHewYorkfiledJune4,1984intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmenchent ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofHewYorkfiledAugust29,'1984intheofficeoftheHewYorkSecretary ofState.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-IncorationReference ExhibitNo.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

--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofHewYorkfiledApril17,1985,intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmendnent ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofHewYorkfiledMay3,1985,intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledDecember24,1986intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledJune1,1987intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmendnent ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledJuly16,1987intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmerxhent ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledMay27,1988intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmendnent ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledSeptember 27,1990intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmerxhent ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation"Law ofNewYorkfiledOctober18,1991intheofficeoftheHewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofNewYork.filedMay5,1994intheofficeoftheNewYorkSecretary ofState.-.Certificate ofAmendment ofCertificate ofIncorporation ofHMPCunderSection805oftheBusinessCorporation LawofHewYorkfiledAugust5,1994intheofficeoftheNewYorkSecretary ofState.--By-Laws ofNMPC,asamendedFebruary26,1998.--Agreement tofurnishcertaindebtinstrwents.

--Mortgage TrustIndenture datedasofOctober1,1937betweenNMPC(formerly CNYP)andMarineMidlandBank,N.A.(formerly namedTheMarineMidlandTrustCompanyofHewYork),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)<<*FiledOctober15,1937aftereffective dateofRegistration Statement Ho.2-3414.-116-IncarationReference ExhibitNo.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

--Supplemental Indenture.

datedasofDecember1,1938,supplemental toExhibit4(1).--Supplemental Indenture datedasofApril15,1939,supplemental toExhibit4(1).--Supplemental Indenture datedasofJuly1,1940,supplemental toExhibit4(1).--Supplemental Indenture datedasofOctober1,1944,supplemental toExhibit4(1)~--Supplemental Indenture datedasofJune1,1945,supplemental toExhibit4(1)~--Supplemental Indenture datedasofAugust17,1948,supplementaL toExhibit4(1).--Supplemental Indenture datedasofDecesher31,1949,supplemental toExhibit4(1).--Supplemental Indenture,dated asofJanuary1,1950,supplemental toExhibit4(1).--Supplemental Indenture datedasofOctober1,1950,supplemental toExhibit4(1).--Supplemental Indenture datedasofOctober19,1950,supplemental toExhibit4(1).--Supplemental Indenture datedasofFebruary20,1953,supplemental toExhibit4(1).--Supplemental Indenture datedasofApril25,1956,supplemental toExhibit4(1):-.Supplemental Indenture datedasofMarch15,1960,supplementaL toExhibit4(1).--Supplemental Indenture datedasofOctober1,1966,supplemental toExhibit4('I).--Supplemental Indenture datedasofJuly15,1967,supplementaL toExhibit4(1).--Supplemental Indenture datedasofAugust1,'1967,supplemental toExhibit4(1).--Supplemental Indenture datedasofAugust1,1968,supplemental toExhibit4(1).--Supplemental Indenture datedasofMarch15,1977,supplemental toExhibit4(1).--Supplemental Indenture datedasofAugust'I,1977,supplemental toExhibit4(1)~PreviousFiliGCCGGCCCPreviousExhibitDesition2-32-42-57-62-82-97.97-'107-1'I7-'124-164-192-232-274-294-302-302-394(b)(40)-117-IncorationReference ExhibitNo.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

--Supplemental Indenture datedasofMarch1,1978,supplemental toExhibit4(1).--Supplemental Indenture datedasofJune15,1980,supplemental toExhibit4(1).--Supplemental Indenture datedasofNovember1,1985,supplemental toExhibit4('I).--Supplemental Indenture datedasofOctober1,1989,supplemental toExhibit4(1)~--Supplemental Indenture datedasofJune1,1990,supplemental toExhibit4(1)~--Supplemental Indenture datedasofNovember1,1990,supplemental toExhibit4(1)..-Supplemental Indenture datedasofMarch1,'1991,supplemental toExhibit4('I).--Supplemental Indenture datedasofOctober1,199I,supplementaL toExhibit4(1).--Supplemental Indenture datedasofApril1,1992,supplemental toExhibit4(1).--Supplemental Indenture datedasofJune.1,1992,supplemental toExhibit4(1).--SuppLemental Indenture datedasofJuly1,1992,supplemental toExhibit4(1).--Supplemental Indenture datedasofAugust1,1992,supplemental toExhibit4(1).--Supplemental Indenture datedasofApril'I,'1993,supplemental toExhibit4(1).--Supplemental Indenture datedasofJuly1,1993,supplemental toExhibit4(1).--Supplemental Indenture datedasofSeptember 1,1993,supplemental toExhibit4(1).--Supplemental Indenture datedasofHarch1,1994,supplemental toExhibit4(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)--Supplemental Indenture datedasofJuly1,1994,supplemental toExhibit4(1).e--Supplemental Indenture datedasofHay1,1995,supplemental toExhibit4(1).--Agreement datedasofAugust16,1940,betgeenCNYP,TheChaseNationalBankoftheCityofNewYork,asSuccessor Trustee,andTheHarineHidlandTrustCompanyofNewYork,asTrustee.4(86)4(87)7-23-118-ExhibitNo.DescritionofInstrcinent IncorationReference 10.110.210-310-4--Agreement datedMarch'I,1957betweenthePo~erAuthority oftheStateofNewYorkandNMPCastosale,transmission anddisposition ofSt.Lawrencepower.--Agreement datedFebruary10,1961betweenthePowerAuthority oftheStateofHewYorkandNMPCastosale,transmission anddisposition ofNiagararedevelopment power.;-Agreement datedJuly26,1961betweenthePowerAuthority oftheStateofHewYorkandNMPCsupplemental toExhibit10-2.--Agreement datedasofMarch23,1973betweenthePowerAuthority oftheStateofNewYorkandHMPCastothesale,transmission anddisposition ofBlenheim-Gi lboapower.DDDD13-11'13-613-75-810.510-6a10-6b10-710-Ba-.Agreement datedJanuary23,1970betweenConsolidated GasSupplyCorporation (formerly namedHewYorkStateHaturalGasCorporation) andNMPC.KK--HewYorkPowerPoolAgreement datedasofFebruary1,1974betweenHMPCandsixotherHewYorkutilities andthePowerAuthority oftheStateofHewYork.--NewYorkPowerPoolAgreement datedasofApril27,1975betweenHMPCandsixotherHewYorkelectricutilities andthePowerAuthority oftheStateofHewYork(thepartiestotheAgreement havepetitioned theFederalPowerCottmission foranorderpermitting suchAgreement, whichincreases thereservefactorofallpartiesfrom.14to.18,tosupersede theHewYorkPowerPoolAgreement datedasofFebruary1,1974).--Agreement datedasofOctober3'I,1968betweenHMPC,CentralHudsonGas8ElectricCorporation andConsolidated EdisonCompanyofNewYork,Inc.astoJointElectricGenerating Plant(theRosetonStation).

--Memorancha ofUnderstanding datedas5-85-105-10b5-1010-Bb10-Bc10.9aofMay30,1975betweenNMPCandRochester Gas8ElectricCorporation withrespecttoOswegoUnitHo.6.--Memorandcla ofUnderstanding datedasofMay30,1975betweenHMPCandRochester GasandElectricCorporation withrespecttoOswegoUnitHo.6.--BasicAgreement datedasofSeptember 22,1975betweenHMPCandRochester GasandElectricCorporation withrespecttoOswegoUnitNo.6.--Memoranchln ofUnderstanding datedasofMay30,1975betweenNMPCandfourotherNewYorkelectricutilities withrespecttoNineMilePointNuclearStationUnitNo.2~SSSSSS5-135-'135-13b5-14-119-IncorationReference ExhibitNo.10-9b10-9cDescritionofInstrment

--BasicAgreement datedasofSeptember 22,1975betweenNHPCandfourotherNewYorkelectricutilities withrespecttoNineHilePointNuclearStationUnitNo.2.--NineHilePointNuclearStationUnitNo.2Operating Agreement.

PreviousFiliPreviousExhibitDesition5-14b10-1910-10a10-10b10-1110-12<<10-13<<10-14(A)10-15-.Memorarxhm ofUnderstanding datedasofHay16,1974,asamendedMay30,1975,bet~canNHPCandthreeotherNewYorkelectricutilities withrespecttotheSterlingNuclearStation.SS--BasicAgreement datedasofSeptember 22,1975betweenNHPCandthreeotherNewYorkelectricutilities withrespecttotheSterlingNuclearStations.

--MasterRestructuring Agreement, datedasofJuly9,1997,betweentheCon@anyandthesixteenindependent powerproducers signatory thereto.--PowerChoice settlement filedwiththePSConOctober10,1997--PSCOpinionandOrderregarding approvalofthePowerChoice settlement agreement withPSC,issuedandeffective March20,1998.--Preferred Consent,December, 1997--NHPCOfficers'ncentive Compensation Plan-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-.NHPCLongTermIncentive Plan-PlanDocunent.

--NHPCManagement Incentive Compensation Plan-PlanDocunent.

--CEOSpecialAwardPlan.--NHPCDeferredCompensation Plan.--Amendnent toNHPCDeferredCompensation Plan--NHPCPerformance ShareUnitPlan.--NHPC1992StockOptionPlan.--NHPC1995StockIncentive Plan--Employment Agreement betweenNMPCandDavidJ.Arrington, Sr.VicePresident, HunanResources, datedDecember20,1996.--Employment Agreement betweenNHPCandAlbertJ~Budney,Jr.,President andChiefOperating Officer,datedDecember20,1996.--Employment Agreement betweenNHPCandIllI(1amE.Davis,ChairmanoftheBoardandChiefExecutive Officer,datedDecember20,1996.10-110-1710-210-1610.1710-1810-3110-1710-1810-19(A)Management contractorcompensatory planorarrangement requiredtobefiledasanexhibitpursuanttoItem601ofRegulation S-K.-120-IncorationReference ExhibitNo.DescritionofInstrtment PreviousFiliPreviousExhibitDesition(A)10-27--Employment Agreement betweenNHPCandDarleneD.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--Employment Agreement betweenNHPCandGaryJ.Lavine,Sr.VicePresident, LegalandCorporate Relations, datedDecember20,1996.--Employment Agreement betweenNHPCandJohnW.Powers,Sr.VicePresident andChiefExecutive Officer,datedDecember20,1996.--Employment Agreement betweenNMPCandB.RalphSylvia,Executive VicePresident, ElectricGeneration andChiefNuclearOfficer,datedDecember20,1996.--Esployment Agreement betweenNHPCandTheresaA.Flaim,VicePresident-Corporate Strategic

Planning, datedDecember20,1996.--Employment Agreement betweenNMPCandStevenW.Tasker,VicePresident-Controller, datedDecember20,1996.--Employment Agreement betweenNHPCandKapuaA.Rice,Corporate Secretary, datedDecember20,1996.--Amendment toEmployment Agreement betweenNHPCandDavidJ.Arrington, AlbertJ.Budney,Jr.,WilliamE.Davis,DarleneD.Kerr,GaryJ.Lavine,JohnW.PowersandB.RalphSylvia,datedJune9,1997.--Employment Agreement betweenNMPCandWilliamF.Edwards,datedSepterher 25,1997.m--Employment Agreement betweenNHPCandJohnH.Hueller,datedJanuary19,1998.--Deferred StockUnitPlanforOutsideDirectors.

g10-2110-2210-2310-2410-25'10-2610-310-410-27*11--Statement settingforththecoaputation ofaveragenumberofsharesofcosmonstockoutstanding.

<<12--Statements ShowingComputations ofCertainFinancial Ratios.<<21--Subsidiaries oftheRegistrant.

• 23<<27--Consent ofPriceWaterhouse LLP,independent accountants.

--Financial DataSchedule.

(A)Management contractorcompensatory planorarrangement requiredtobefiledasanexhibitpursuanttoItem601ofRegulation S-K.-121-NXAGARAMOHAWKPOWERCORPORATION ANDSUBSIDZARZES COMPUTATION OPAVBRAGENUMBEROPSHARESOPCOMMONSTOCKOUTSTANDXNG YearEndedDeceeher31(1)SharesofCotatonStock(2)NumberofDays~nnixxxndin (3)ShareDays~2xIAverageNumberofSharesOutstanding asShownonConsolidated Statements ofincome(3DividedbyNumberofDasinYearJanuary1-Deceaher31Sharesissuedatvarioustisesduringtheperiod-Acquisition

-SyracuseQburbanGasCcapany,Inc.144,365,214 5413714441935'I52,693,303,110 14260096.527075632061444042031996January1-December31Sharesissuedatvarioustimesduringtheyear-Aisition-SyracusenGasCompany,Inc.144,332,1233309114436521452,825,557,018 639765352831954671144349603January1-December31Sharesissued-DividendReinvestment Plan-January31Acquisition

-SyracuseSuburbanGasCompany,inc.-October4144,311,466 19,016I6411443321233653358952,673,6850090 6,370,360 14604952680201499144329319Numberofdaysoutstanding notshownassharesrepresent anaccwalation ofweekly,monthlyandquarterly issuesthroughout theyear.Sharedaysforsharesissuedarebasedonthetotalnutrherofdayseachsharewasoutstanding duringtheyear.Note:Earningspersharecalculated onbothabasicanddilutedbasisarethesameduetotheeffectsofrounding.

-122-NIAGARANOHANKP(NERCORPORATION ANDSUBSIDIART CNIPANIES Statement ShoMingCoaputations ofRatioof.EarningstoFixedCharges,RatioofEarningstoFixedChargesuithoutAFCandRatioofEarningstoFixedChargesandPreferred StockDiviA.NetIncomeperStatements ofIncomeB.TaxesBasedonIncomeorProfitsC.Earnings, BeforeIncomeTaxesD.FixedCharges(a)E.EarningsBeforeIncomeTaxesandFixedChargesF.Allowance forFundsUsedDuringConstruction G.EarningsBeforeIncomeTaxesandFixedChargeswithoutAFCPreferred DividendFactor:H.Preferred DividendRequirements I.RatioofPre-TaxIncometoNetIncome(C/A)J.Preferred DividendFactor(HxI)K.FixedChargesasabove(0)L.FixedChargesandPreferred Dividends ConhinedH.RatioofEarningstoFixedCharges(E/D)N~RatioofEarningstoFixedChargesuithoutAFC(G/D)O.RatioofEarningstoFixedChargesandPreferred Dividends Combined(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)Includesaportionofrentalsdeemedrepresentative oftheinterestfactor:$26,149for1997,$26,600for1996,$27,312for1995$29,396for1994and$27,821for1993~/-123-Exhibit21NIAGARAMOHAWKPOWERCORPORATZON ANDSUBSIDIARY COMPANIES Subsidiaries oftheRegistrant NameofComanStateofOranization OpinacNorthAmerica,Inc.(Note1)DelawareNMUranium,Znc.EMCO-TECH, Inc.(Note2)-NMHoldings, Inc.(Note3)MoreauManufacturing Corporation BeebeeIslandCorporation NMReceivables Corp.TexasNewYorkNewYorkNewYorkNewYorkNewYorkNote1:Note2:Note3:AtDecember31,1997,OpinacNorthAmerica,.

Znc.ownsOpinacEnergyCorporation andPlumStreetEnterprises, Inc.OpinacEnergyCorporation hasa50percentinterestinCNP,whichisincorporated intheProvinceofOntario,Canada.CNPownsCowleyRidgePartnership (anAlberta,Canadageneralpartnership) andCanadianNiagaraWindPowerCompany,Znc.(incorporated intheProvinceofAlberta,Canada).PlumStreetEnterprises, Znc.,("PlumStreet")anunregulated company,isincorporated intheStateofDelaware.

PlumStreetownsPlumStreetEnergyMarketing, Inc.(incorporated intheStateofDelaware),

GlobalEnergyEnterprises IndiaPrivateLimited,90%ofDolphinInvestments International, Inc.(acorporation organized andexistingunderthelawsofNevis,WestIndies,whichowns45%ofAtlantisEnergieSystemsAG(acorporation organized andexistingunderthelawsoftheFederalRepublicofGermany)),

25%ofTelergyJointVentureand26%ofDirectGlobalPower,inc.EMCO-TECH, Inc.isinactiveatDecember31,1997.AtDecember31,1997,NMHoldings, Znc.ownsSalmonShores,Inc.,MoreauPark,Inc.,Riverview, Inc.,HudsonPointe,Znc.,UpperHudsonDevelopment, Znc.,LandManagement aDevelopment, Inc.,OPropco,Znc.andLandWest, Inc.-124-

~~EXHIBIT23CONSENTOFINDEPENDENT ACCOUNTANTS Weherebyconsenttotheincorporation byreference intheRegistration Statement onFormS-8(Nos.33-36189, 3342771and333-13781) andtotheincorporation byreference intheProspectus constituting partoftheRegistration Statement onFormS-3(Nos.33-50703, 33-51073, 33-54827and33-55546) ofNiagaraMohawkPowerCorporation ofourreportdatedMarch26,1998appearing intheCompany's Form10-KdatedMarch26,1998.Wealsoconsenttotheincorporation byreference ofourreportontheFinancial Statement

Schedule, whichappearsinthisForm10-KPRICEWATERHOUSE LLPSyracuse, NewYorkMarch26,1998-125-SIGNATURES Pursuanttotherequirements ofSection13or15(d)oftheSecurities ExchangeActof1934,theRegistrant hasdulycausedthisreporttobesignedonitsbehalfbytheundersigned, thereunto dulyauthorized.

NIAGARAMOHAWKPOWERCORPORATION (Registrant)

Date:March26,1998BysStevenW.TaskerStevenW.TaskerVicePresident-Controller andPrincipal Accounting OfficerPursuanttotherequirements oftheSecurities ExchangeActof1934,thisreporthasbeensignedbelowbythefollowing personsonbehalfoftheRegistrant andinthecapacities andonthedatesindicated.

Siciaature TitleDatesWilliamF.AllWilliamF.AllynDirectorMarch26,1998sAlbertJ.BudneJr.AlbertJ.Budney,Jr.Director, President March26,1998sLawrenceBurkhardt IIIDirectorLawrenceBurkhardt, IIIMarch26,1998sDoulasM.CostleDouglasM.CostleDirectorMarch26,1998sEdmundM.DavisEdmundM.DavisDirectorMarch26,1998sWilliamE.DavisWilliamE.DavisChairmanoftheBoardofDirectors andChiefExecutive OfficerMarch26,1998-126-Sicinature TitleDatesWilliamJ.DonlonWilliamJ.DonlonDirectorMarch26,1998sAnthonH.GioiaAnthonyH.GioiaDirectorMarch26,1998sBonnieGuitonHillBonnieGuitonHillDirectorMarch26,1998sHenA.PanasciJr.HenryA.Panasci,Jr.DirectorMarch26,1998sPattiMcGillPetersonPattiMcGillPetersonDirectorMarch26,1998sDonaldB.RieflerDonaldB.RieflerDirectorMarch26,1998sStehenB.SchwartzStephenB.SchwartzDirectorMarch26,1998sWilliamF.EdwardsWilliamF.EdwardsSeniorVicePresident andChiefFinancial OfficerMarch26,1998sStevenW.TaskerStevenW.TaskerVicePresident-Controller andPrincipal Accounting OfficerMarch26,1998-127-L7SECURITIES ANDEXCHANGECOMMISSION Washington, D.C.20549FORMI0-K/AAmendment No.22ANNUALREPORTPURSUANTTOSECTION13OR15(5)OFTHESECURITIES EXCHANGEACTOF1934ForthefiscalyearendedDecember31,1997ORTRANSITION REPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIES EXCHANGEACTOF1934Forthetransition periodfromtoCommission FileNumber:1-2987NiagaraMohawkPowerCorporation (Exactnameofregistrant asspecified initscharter)StateofNewYork(Stateorotherjurisdiction ofincorporation ororganization) 300ErieBoulevard WestSyracuse, NewYork(Addressofprincipal executive offices)154265555 (I.R.S.EmployerIdentification No.)13202(ZipCode)(315)474-1511Reistrant's telehonenumber,includinareacode6.10%Series7.72%SeriesSecurities registered pursuanttoSection12(g)oftheAct:NoneSecurities registered pursuanttoSection12(b)oftheAct:(Eachclassisregistered ontheNewYorkStockExchange)

TitleofeachclassCommonStock($1parvalue)Preferred Stock($100parvalue-cumulative):

3.40%Series4.10%Series3.60%Series4.85%Series3.90%Series5.25%SeriesPreferred Stock($25parvalue-cumulative):

9.50%SeriesAdjustable RateSeriesA8SeriesCIndicatebycheckmarkwhethertheregistrant (1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecurities ExchangeActof1934duringthepreceding 12months(orforsuchshorterperiodthattheregistrant wasrequiredtofilesuchreports),

and(2)hasbeensubjecttosuchfilingrequirements forthepast90days.YES[X)NO[jIndicatebycheckmarkifdisdosure ofdelinquent filerspursuanttoItem405ofRegulation S-Kisnotcontained herein,andwillnotbecontained, tothebestofregistrant's knowledge, indefinitive proxyorinformation statements incorporated byreference inPartIIIofthisForm10-Koranyamendment tothisForm10-KlXJStatetheaggregate marketvalueofthevotingstockheldbynon-affiliates oftheregistrant.

~~Approximately

$1,800,000,000 atMarch26,1998.dicatethenumberofsharesoutstanding ofeachoftheregistrant's classesofcommonstock,asofthelatestpracticable date.Commonstock,$1parvalue,outstanding atNlarch26,1998-144,419,351

NIAGARAMOHAWKPOWERCORPORATION INFORMATION REQUIREDINFORM10-K/AItemNumberGlossaryofTermsPARTIIItem6.Item7.Item8.PARTIVSelectedConsolidated Financial Data.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations.

Financial Statements andSupplementary Data.38Item14.Exhibits, Financial Statement Schedules, andReportsonForm8-K.86Signatures 105 NIAGARAMOHAWKPOWERCORPORATION IGLOSSARYOFTERMSTERMDEFINITION AFCCNPCOPSCTCDECDOEAllowance forFundsUsedDuringConstruction CanadianNiagaraPowerCompany,LimitedCompetitive Opportunities Proceeding Competitive Transition ChargesNewYorkStateDepartment ofEnvironmental Conservation U.S.Department ofEnergyDthDekatherm:

onethousandcubicfeetofgaswithaheatcontentof1,000BritishThermalUnitspercubicfootEBITDAEarningsbeforeInterestCharges,InterestIncome,IncomeTaxes,Depreciation andAmortization, Amortization ofNuclearFuel,Allowance forFundsUsedDuringConstruction, MRARegulatory Assetamortization, non-cashregulatory deferrals andotheramortizations andextraordinary items(anon-GAAPmeasureofcashflow)FACFuelAdjustment Clause:aclauseinarateschedulethatprovidesforanadjustment tothecustomer's billifthecostoffuelvariesfromaspecified unitcostFASBFERCGAAPGRTFinancial Accounting Standards BoardFederalEnergyRegulatory Commission Generally AcceptedAccounting Principles GrossReceiptsTaxGigawatt-hour:

onegigawatt-hour equalsonebillionwatt-hours IPPIndependent PowerProducer:

anypersonthatownsoroperates, inwholeorinpart,oneormoreIndependent PowerFacilities IPPPartyIndependent PowerProducers thatareapartytotheMRA ISOKWIndependent SystemOperatorKilowatt:

onethousandwatts.Kilowatt-hour:

aunitofelectrical energyequaltoonekilowattofpowersuppliedortakenfromanelectriccircuitsteadilyforonehourMERITMeasuredEquityReturnIncentive TermMasterRestructuring Agreement

-anagreement toterminate, restateoramendIPPPartypowerpurchaseagreements MRAregulatory assetRecoverable coststoterminate, restateoramendIPPPartycontracts, whicharedeferredandamortized underPowerChoice MWMegawatt:

onemillionwattsMegawatt-hour:

onethousandkilowatt-hours NRCNYPANYPPU.S.NuclearRegulatory Commission NewYorkPowerAuthority NewYorkPowerPoolNYPPMemberSystemsEightMemberSystemsare:thesevenNewYorkStateinvestor-owned electricutilities andNYPANYSERDANewYorkStateEnergyResearchandDevelopment Authority PowerChoice agreement Company's five-year electricrateagreement, whichincorporates theMRA,approvedinFebruary1998PPAPowerPurchaseAgreement:

long-term contiacts underwhichautilityisobligated topurchaseelectricity fromanIPPatspecified ratesPRPPotentially Responsible PartyPSCNewYorkStatePublicServiceCommission PURPAPublicUtilityRegulatory PoliciesActof1978,asamended.OneoffivebillssignedintolawonNovember8,1978,astheNationalEnergyAct.Itsetsforthprocedures andrequirements applicable tostateutilitycommissions, electricandnaturalgasutilities andcertainfederal regulatory agencies.

Amajoraspectofthislawisthemandatory purchaseobligation fromqualifying facilities.

QFQualifying Facility:

anindividual (orcorporation) thatownsand/oroperatesagenerating facilitybutisnotprimarily engagedinthegeneration orsaleofelectricpower.QFsareeitherpowerproduction orcogeneration facilities thatqualifyunderSection201ofPURPA.ROEReturnonCommonStockEquitySFASNo.71Statement ofFinancial Accounting Standards No.71"Accounting fortheEffectsofCertainTypesofRegulation" SFASNo.101Statement ofFinancial Accounting Standards No.101"Regulated Enterprises

-Accounting fortheDiscontinuance ofApplication ofFASBStatement No.71"SFASNo.106Statement ofFinancial Accounting Standards No.106"Employers'ccounting forPostretirement BenefitsOtherThanPensions" SFASNo.109SFASNo.121Statement ofFinancial Accounting Standards No.109"Accounting forIncomeTaxes"Statement ofFinancial Accounting Standards No.121"Accounting fortheImpairment ofLong-Lived AssetsandforLong-Lived AssetstoBeDisposedOf'FASNo.130SFASNo.131Statement ofFinancial Accounting Standards No.130"Reporting Comprehensive Income"Statement ofFinancial Accounting Standards No.131"Disclosures aboutSegmentsofanEnterprise andRelatedInformation" SFASNo.132Statement ofFinancial Accounting Standards No.132"Employers'isclosure aboutPensionsandOtherPostretirement Benefits" strandedcostsUtilitycoststhatmaybecomeunrecoverable duetoachangeintheregulatory environment Unit1Unit2NineMilePointNuclearStationUnitNo.1NineMilePointNuclearStationUnitNo.2 NIAGARAMOHAWKPOWERCORPORATION ITEM6.SELECTEDCONSOLIDATED FINANCIAL DATAThefollowing tablesetsforthselectedfinancial information oftheCompanyfor,eachofthefiveyearsduringtheperiodendedDecember31,1997,whichhasbeenderivedfromtheauditedfinancial statements oftheCompany,andshouldbereadinconnection therewith.

Asdiscussed inItem7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations andItem8.Financial Statements andSupplementary Data-"NotestoConsolidated Financial Statements,"

thefollowing selectedfinancial dataisnotlikelytobeindicative oftheCompany's futurefinancial condition orresultsofoperations.

19971996*199519941993Operations:

(000's)Operating revenuesNetincomeCommonstockdata: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%$1.71RateofreturnoncommonequityDividends paidpercommonshareDividendpayoutratio5.5%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-zedeemable preferred stock440,000440,000440,000~440,000290,000Mandatorily redeemable preferred stockIong-tenn debt76,6103,417'8186,730'\3,477,87996'SO106t000123~2003~5824143i297~8743g258~6126,661,5186e5901816~633i2166~306i2726i128~277 19971996"199519941993Long-term debtmaturingwithinoneyear67,09548,08465,06477,971216,185TOTALS6@728~613S6g638'65S6p698'80S6g384'43S6g344/462Capitalization ratios:{including long-term debtmaturingwithinoneyear)CommonstockequityPreferred stock40.5%7.739.0%7.937.5%8.038.6%8.538.7%6.5Long-term debt51.853.154.552.954.8Financial ratios:RatioofearningstofixedchargesRatioofearningstofixedchargesandpreferred stockdividends 2.021.671.571.312.291.901.911.632.312.00Otherratios-%ofoperating revenues:

Fuel,electricity purchased andgaspurchased 44,4%43.5%40.3%39.6%36.1%Otheroperation andmaintenance expensesDepreciation andamortization Federalandforeignincometaxes,andothertaxesOperating incomeBalanceavailable forcommonstock21.18.615.114.13.723.'38.313.613.11.820.98.117.317.55.323.17.414.713.33.526.97.016.217.56.1Miscellaneous:

(000's)Grossadditions toutilityplantS290757S352~049S345'04S490~124S519~612TotalutilityplantAccumulated depreciation andamortization Totalassets11,075,874 4,207,8309,584,141 10,839,34110,649,30110,485,33910,108,5293~881'263~641~4483g449~6963~231'37l9g4276359~477~8699g649~8169g471'27+Amountsincludeextraordinary item,seeNote2.RateandRegulatory IssuesandContingencies.

NIAGARAMOHAWKPOWERCORPORATION Certainstatements includedinthisAnnualReportonForm10-Kareforward-looking statements asdefinedinSection21EoftheSecurities ExchangeActof1934,including thehedgeagainstupwardmovementinmarketpricesprovidedbytherestructured andamendedPPAs,theimprovement inoperating cashflowsasaresultoftheMRAandPowerChoice, therecoverability oftheMRAregulatory assetthroughthepriceschargedforelectricservice,theeffectofaPSCnaturalgasproposalontheCompany's resultsofoperations, expectedearningsoverthefive-year termofthePowerChoice agreement, theeffectoftheelimination oftheFACunderPowerChoice ontheCompany's financial condition, thereduction innetincomeresulting fromthenon-cashamortization oftheMRAregulatory asset,theeffectoftheJanuary1998icestormdamagerestoration costsontheCompany's capitalrequirements, recoverability ofenvironmental compliance costsandnucleardecommissioning coststhroughrates,andtheimprovement intheCompany's financial condition expectedasaresultoftheMRAandtheimplementation ofPowerChoice.

TheCompany's actualresultsanddevelopments maydiffermaterially fromtheresultsdiscussed inorimpliedbysuchforward-looking statements, duetorisksanduncertainties thatexistintheCompany's operations andbusinessenvironment, including, butnotlimitedto,mattersdescribed inthecontextofsuchforward-looking statements, aswellassuchotherfactorsassetforthintheNotestoConsolidated Financial Statements contained herein.ITEM7.MANAGEMENT'S DISCUSSION ANDANALYSISOFFINANCIAL CONDITION ANDRESULTSOFOPERATIONS EVENTSAFFECTING 1997ANDTHEFUTURE'nJuly9,1997,theCompanyannounced theMRAtoterminate, restateoramendIPPpowerpurchasecontracts inexchangeforcash,sharesoftheCompany's commonstockandcertainfinancial contracts.

ThetermsoftheMRAhavebeenandmaycontinuetobemodified.

InFebruary1998,thePSCapprovedthePowerChoice settlement agreement, whichincorporates thetermsoftheMRA.UnderPowerChoice, aregulatory assetwillbeestablished forthecostsoftheMRAanditwillbeamortized overaperiodgenerally nottoexceedtenyears.TheCompany's ratesunderPowerChoice aredesignedtopermitrecoveryoftheMRAregulatory asset.Inapproving PowerChoice, thePSClimitedtheestimated valueoftheMRAregulatory assetthatcanberecovered toapproximately

$4,000million,whichisexpectedtoresultinachargetothesecondquarterof1998earningsof$190.0millionor85centspershareupontheclosingoftheMRA.ThePowerChoice agreement, whilehavingtheeffectofsubstantially depressing earningsduringitsfive-year term,willsubstantially improveoperating cashflows.InDecember1997,thepreferred shareholders gavetheCompanyapprovaltoincreasetheamountofunsecured debtthattheCompanymayissueby$5billion.Thisauthorization enablestheissuanceofunsecured debttoconsummate theMRA.

ThePowerChoice agreement callsfortheCompanytoconductanauctiontosellallofitsfossilandhydrogeneration assets.InearlyJanuary1998,amajoricestormcausedextensive andcostlydamagetotheCompany's facilities innorthernNewYork.MASTERRESTRUCTURING AGREEMENT ANDTHEPOWERCHOICE AGREEMENT TheCompanyenteredintothePPAsthataresubjecttotheMRAbecauseitwasrequiredtodosounderPURPA,whichwasintendedtoprovideincentives forbusinesses tocreatealternative energysources.UnderPURPA,theCompanywasrequiredtopurchaseelectricity generated byqualifying facilities ofIPPsatpricesthatwerenotexpectedtoexceedthecostthatotherwise wouldhavebeenincurredbytheCompanyingenerating itsownelectricity, orinpurchasing itfromothersources(knownas"avoidedcosts").WhilePURPAwasafederalinitiative, eachstateretainedcertaindelegated authority overhowPURPAwouldbeimplemented withinitsborders.Initsimplementation ofPURPA,theStateofNewYorkpassedthe"Six-Cent Law,"establishing 6centsperKWhastheflooronavoidedcostsforprojectslessthan80MWinsize.TheSix-CentLawremainedinplaceuntilitwasamendedin1992todenythebenefitofthestatutetoanyfuturePPAs.Theavoidedcostdeterminations underPURPAwereperiodically increased bythePSCduringthisperiod.PURPAandtheSix-CentLaw,incombination withotherfactors,attracted largenumbersofIPPstoNewYorkState,and,inparticular, totheCompany's serviceterritory, duetothearea'sexistingenergyinfrastructure andavailability ofcogeneration hosts.Thepricingtermsofsubstantially allofthePPAsthattheCompanyenteredintoincompliance withPURPAandtheSix-CentLaworotherNewYorklawswerebased,attheoptionoftheIPP,eitheronadministratively determined avoidedcostsorminimumprices,bothofwhichhaveconsistently beenmaterially higherthanthewholesale marketpricesforelectricity.

SincePURPAandtheSix-CentLawwerepassed,theCompanyhasbeenrequiredtopurchaseelectricity fromIPPsinquantities inexcessofitsowndemandandatpricesinexcessofthatavailable totheCompanybyinternalgeneration orforpurchaseinthewholesale market.Infact,by1991,theCompanywasfacingapotential obligation topurchasepowerfromIPPssubstantially inexcessofitspeakdemandof6,093MW.Asaresult,theCompany's competitive positionandfinancial performance havedeteriorated andthepriceofelectricity paidperKWhbyitscustomers hasrisensignificantly abovethenationalaverage.Accordingly, in1991theCompanyinitiated aparallelstrategyofnegotiating individual PPAbuyouts,cancellations andrenegotiations, andofpursuingregulatory andlegislative supportandlitigation tomitigatetheCompany's obligation underthePPAs.Bymid-1996, thisstrategyhadresultedinreducingthecapacityoftheCompany's obligations topurchasepowerunder.its PPAportfolio toapproximately 2,700MW.Notwithstanding thisreduction incapacity, overthesameperiodthepaymentsmadetotheIPPsundertheirPPAsrosefromapproximately

$200millionin1990toapproximately

$1.1billionin1997asindependent powerfacilities fromwhichtheCompanywasobligated topurchaseelectricity commenced operations.

TheCompanyestimates thatabsenttheMRA,paymentsmadetotheIPPspursuanttoPPAswouldcontinuetoescalatebyapproximately

$50millionperyearuntil2002.

Recognizing thecompetitive trendsintheelectricutilityindustryandtheimpracticability ofremedying thesituation throughaseriesofcustomerrateincreases, inmid-1996theCompanybegancomprehensive negotiations toterminate, amendorrestateasubstantial portionofabove-marketPPAsinanefforttomitigatetheescalating costofthesePPAsaswellastopreparetheCompanyforamorecompetitive environment.

Thesenegotiations ledtotheMRAandthePowerChoice agreement.

MASTERRESTRUCTURING AGREEMENT.

OnJuly9,1997,theCompanyenteredintotheMRAwith16IPPPartieswhosellelectricity totheCompanyunder29PPAs.TheMRAspecifically contemplated thattwoIPPs,OxbowPowerofNorthTonawanda, NewYork,Inc.("Oxbow")andNorConwouldenterintofurthernegotiations concerning theirtreatment undertheMRA.Following suchnegotiations, Oxbowhaswithdrawn fromtheMRA,but,basedonthevalueofitsallocation undertheMRAandthetermsofitsexistingPPA,Oxbow'swithdrawal doesnotmaterially impactthecostreductions associated withtheMRA.TheCompanyandNorConhaveagreedtoreplaceNorCon'sinitialallocation undertheMRAwithanallcashallocation whichhas,intheCompany's estimation, avalueapproximately

$60millionhigherthanNorCon'sinitialallocation.

AthirdIPPPartyhasagreedtotakecashinexchangeforthesharesofcommonstockallocated toitintheMRA.Asaresultofthesecashallocations, thereare3,054,000 fewersharesofcommonstockallocated totheIPPsundertheMRA.TheMRAhasbeenamendedtoexpireonJuly15,1998.TheMRAcurrently providesforthetermination, restatement oramendment of28PPAswith15IPPs,whichrepresent approximately 80%oftheCompany's over-market purchased powerobligations, inexchangeforanaggregate of$3,616millionincashand42.9millionsharesoftheCompany's commonstockandcertainfinancial contracts.

TheclosingoftheMRAissubjecttoanumberofconditions, including theCompanyandtheIPPPartiesnegotiating individual restatedandamendedcontracts, thereceiptofallregulatory approvals, thereceiptofallconsentsbythirdpartiesnecessary forthetransactions contemplated bytheMRA(including thetermination oftheexistingPPAsandthetermination oramendment ofallrelatedthirdpartyagreements),

theIPPPartiesenteringintonewthirdpartyarrangements whichwillenableeachIPPPartytorestructure itsprojectsonareasonably satisfactory economicbasis,theCompanyhavingcompleted allnecessary financing arrangements andtheCompanyandtheIPPPartieshavingreceivedallnecessary approvals fromtheirrespective boardsofdirectors, shareholders andpartners.

WhileoneormoreoftheIPPPartiesmayundercertaincircumstances terminate theMRAwithrespecttoitself,theCompany's obligation toclosetheMRAissubjecttoitsdetermination thatasaresultofanysuchterminations thebenefitsanticipated tobereceivedbytheCompanypursuanttotheMRAhavenotbeenmaterially andadversely affected.

TheCompanyexpectsthatpriortotheconsummation oftheMRA,themixofconsideration tobereceivedbytheIPPPartiesmayberenegotiated.

Theforegoing isqualified initsentiretybythetextoftheMRA(seeExhibit10-11).AstheConditions Determination Date(thedatebywhichallIPPPartiesmustsatisfyorwaivetheirthirdpartyconditions orwithdrawfromtheMRA)hasnotoccurred, theCompanycannotpredictwhethersuchconditions willbesatisfied, whethersomeIPPPartiesmaywithdraw, whetherthetermsoftheMRAmightberenegotiated, orwhethertheMRAwillbeconsummated.

IntheeventtheCompanyisunabletosuccessfully completetheMRAandtherefore implement PowerChoice, itwouldpursueallalternatives including atraditional raterequest.10 Theprincipal effectsoftheMRAaretoreducesignificantly theCompany's existingpaymentobligations underthePPAs,whichcurrently consistofapproximately 2,700MWofcapacityatDecember31,1997.Whileearningswillbedepressed duringthefive-year term,thesavingsinannualenergypayments, coupledwiththeratesestablished inPowerChoice, willyieldfreecashflowthatcanbededicated tothenewdebtserviceobligations associated withthepaymentofcashtotheIPPParties.UnderthetermsoftheMRA,theCompany's significant longtermandescalating IPPpaymentobligations willberestructured intoadefinedandmoremanageable obligation andaportfolio ofrestatedandamendedPPAswithpriceanddurationtermsthattheCompanybelievesaremorefavorable thantheexistingPPAs.UndertheMRA,19PPAsrepresenting approximately 1,180MWofcapacitywillbeterminated completely thusallowingthiscapacitytobereplacedthroughthecompetitive marketatmarketbasedprices.TheCompanyhasnocontinuing obligation topurchaseenergyfromtheterminating IPPParties.AlsoundertheMRA,8PPAsrepresenting approximately 541MWofcapacitywillberestatedoneconomictermsandconditions thataremorefavorable totheCompanythantheexistingPPAs.Therestatedcontracts haveatermof10yearsandarestructured asfinancial swapcontracts wheretheCompanyreceivesormakespaymentstotheIPPPartiesbaseduponthedifferential betweenthecontractpriceandamarketreference priceforelectricity.

Thecontractpricesarefixedforthefirsttwoyearschangingtoanindexedpricingformulathereafter.

Contractquantities arefixedforthefull10yeartermofthecontracts.

Theindexedpricingstructure ensuresthatthepricepaidforenergyandcapacitywillfluctuate relativetotheunderlying marketcostofgasandgeneralindicesofinflation.

Untilsuchtimeasacompetitive energymarketstructure becomesoperational intheStateofNewYork,therestatedcontracts providetheIPPPartieswithaputoptionforthephysicaldeliveryofenergy.Additionally, onePPArepresenting 42MWofcapacitywillbeamendedtoreflectashortened termandalowerstreamoffixedunitprices.Finally,theMRArequirestheCompanytoprovidetheIPPPartieswithanumberoffixedpriceswapcontracts withatermofsevenyearsbeginning in2003.Thefixedpriceswapcontracts willbecashsettledmonthlybaseduponastreamofdefinedquantities andprices.AlthoughagainsttheCompany's forecastofmarketenergypricestherestructured andamendedPPAsrepresent anexpectedabove-market paymentobligation, theCompany's portfolio ofthesePPAsprovidesitanditscustomers withahedgeagainstsignificant upwardmovementinmarketpricesthatmaybecausedbyachangeinenergysupplyordemand.Thisportfolio andmarketpurchases containtermsthatarebelievedtobemoreresponsive'ompetitive marketpricechanges.(SeeItem8.Financial Statements andSupplementary Data-"Note9.Commitments andContingencies

-Long-term Contracts forthePurchaseofElectricPower").POWERCHOICE AGREEMENT.

ThePowerChoice agreement establishes afive-year rateplanthatwillreduceaverageresidential andcommercial ratesbyanaggregate of3.2%overthefirstthreeyears.Thisreduction willincludecertainsavingsthatwillresultfrompartialreductions oftheNewYorkStateGRT.Industrial customers willseeaveragereductions of25%relativeto1995pricelevels;thesedecreases willincludediscounts currently offeredtosomeindustrial 11 customers throughoptionalandflexiblerateprograms.

Thecumulative ratereductions, netofGRTsavings,areestimated tobeapproximately

$112million,tobeexperienced onagenerally ratablebasisoverthefirstthreeyears'oftheagreement.

DuringthetermofthePowerChoice agreement, theCompanywillbepermitted todefercertaincosts,associated primarily withenvironmental remediation, nucleardecommissioning andrelatedcosts,andchangesinlaws,regulations, rulesandorders.Inyearsfourandfiveofitsrateplan,theCompanycanrequestanannualincreaseinpricessubjecttoacapof1%oftheall-inprice,excluding commodity costs(e.g.,transmission, distribution, nuclear,andforecasted CTC).Inadditiontothepricecap,thePowerChoice agreement providesfortherecoveryofdeferrals established inyearsonethroughfourandcostvariations intheMRAfinancial contracts resulting fromindexingprovisions ofthesecontracts.

Theaggregate ofthepricecapincreaseandrecoveryofdeferrals issubjecttoanoveralllimitation ofinflation.

UnderthetermsofthePowerChoice agreement, alloftheCompany's customers willbeabletochoosetheirelectricity supplierinacompetitive marketbyDecember1999TheCompanywillcontinuetodistribute electricity throughitsdistribution andtransmission facilities andwouldbeobligated tobetheso-called provideroflastresortforthosecustomers whodonotexercisetheirrighttochooseanewelectricity supplier.

ThePowerChoice agreement providesthattheMRAandthecontracts executedpursuanttheretoshallbefoundtobeprudent.ThePowerChoice agreement furtherprovidesthattheCompanyshallhaveareasonable opportunity torecoveritsstrandedcosts,including thoseassociated withtheMRAandthecontracts executedthereto,throughaCTCand,undercertaincircumstances, throughexitfeesorinratesforbackupservice.UnderthePowerChoice agreement, anMRAregulatory asset,aggregating approximately

$4,000million,willbeestablished.

Inthisway,thecostsoftheMRAwouldbedeferredandamortized overaperiodgenerally nottoexceedtenyears.TheCompany's ratesunderPowerChoice aredesignedtopermitrecoveryoftheMRAregulatory assetandtopermitrecoveryof,andareturnon,theremainder ofitsassets,asappropriate.

ThePowerChoice agreement, whilehavingtheeffectofsubstantially depressing earningsduringitsfive-year term,willsubstantially improveoperating cashflows.ThePowerChoice agreement callsfortheCompanytodivestallofitsfossilandhydrogeneration assets.Divestiture isintendedtobeaccomplished throughanauction.Winningbidswouldbeselectedwithin11monthsofPSCapprovaloftheauctionplan,whichwasfiledwiththePSCseparately fromthePowerChoice agreement.

TheCompanywillreceiveaportionoftheauctionsaleproceedsasanincentive toobtainmaximumvalueinthesale.Thisincentive wouldberecovered fromsaleproceeds.

TheCompanyagreedthatifitdoesnotreceiveanacceptable bidforanasset,theCompanywillformasubsidiary toholdanysuchassetsandthenlegallyseparatethissubsidiary fromtheCompanythroughaspin-offtoshareholders orotherwise.

Ifabidofzeroorbelowisreceivedforanasset,theCompanymaykeeptheassetaspartofitsregulated business.

Theauctionprocesswillservetoquantifyanystrandedcostsassociated withtheCompany's fossilandhydrogenerating assets.TheCompanywillhaveareasonable opportunity torecoverthesecoststhroughtheCTCandotherwise asdescribed above.Aftertheauctionprocessiscomplete, theCompanyhasagreednottoownanynon-nuclear 12 generating assetsintheStateofNewYork,subjecttocertainexceptions providedinthePowerChoice agreement.

Underthetermsofthenoteindenture preparedinconnection withthefinancing oftheMRA.theCompanywillberequiredtouseamajorityofthecashportionofnetproceedsfromthesaleofitsfossilandhydrogenerating assetstoreduceindebtedness.

Suchrestrictions wouldnotapplyintheeventthattheCompanywasunabletosuccessfully conclude.theconsummation oftheMRAandtherefore ofPowerChoice butnonetheless soldsuchassets.ThePowerChoice agreement contemplates thattheCompany's nuclearplantswillremainpartoftheCompany's regulated business.

TheCompanyhasbeensupportive ofthecreationofastatewide NewYorkNuclearOperating, Companythatitexpectswouldimprovetheefficiency ofnuclearunitsthroughout thestate.ThePowerChoice agreement stipulates thatabsentsuchastatewide

solution, theCompanywillfileadetailedplanforanalyzing otherproposals regarding itsnuclearassets,including thefeasibility ofanauction,transferand/ordivestiture ofsuchfacilities, within24monthsofPowerChoice approval.

ThePowerChoice agreement alsoallowstheCompanytoformaholdingcompanyatitselection.

TheCompanyplanstoseekitsshareholders'pproval atits1998annualmeetingtotheformation ofaholdingcompany,theimplementation ofwhichwouldonlyoccurfollowing variousregulatory approvals.

AtitspublicsessiononFebruary24,1998,thePSCvotedtoapprovethePowerChoice agreement, whichincorporates thetermsoftheMRA.Subjecttothesatisfaction oftheconditions totheMRA,thePSC'sapprovalofPowerChoice shouldallowtheCompanytoconsummate theMRAinthefirsthalfof1998.ThePowerChoice agreement willonlybecomeeffective upontheclosingoftheMRA.Inapproving PowerChoice, thePSCmadethefollowing changes,amongothers,totheagreement:

i)customers whohadmadeasubstantial investment inon-sitegeneration asofOctober10,1997willbegrandfathered andnothavetopaytheCTC;ii)savingsfromanyreduction intheinterestrateassociated withthedebtissuedinconnection withtheMRAfinancing ascomparedtoassumptions underlying theCompany's PowerChoice filingwillbedeferredforfuturedisposition; andiii)changethegeneration auctionincentive to15%ofproceedsinexcessofnetbookvaluefornon-Oswegoassetsand5%ofproceedsinexcessof$100millionforOswegoassets.InitswrittenorderdatedMarch20,1998,thePSCmadeseveralotherchangestothePowerChoice agreement, inadditiontothosediscussed attheFebruary24session.ThePSCdetermined tolimittheestimated valueoftheMRAregulatory assetthatcanberecovered fromcustomers, toapproximately

$4,000million.Theestimated valueoftheMRAregula-:::ry assetincludestheissuanceof42.9millionsharesofcommonstock,whichthePSC,indeter;:iining therecoverable amountofsuchassetvaluedat$8pershare.TheCompany's commonstoc::closedat$127/16pershareonMarch26,1998.Theaccounting implications ofthelimitatioii iivaluearediscussed under"Accounting Implications ofthePowerChoice Agreement andMas:.i'estructuring Agreement."

ThePSCalsomodifiedthereduction inaverageresidential:.i:d commercial rates.ThePowerChoice agreement measuredthe3.2%reduction against19.5prices.ThePSCdetermined thatthepercentage reduction shouldbeappliedagainstthelowerof1995pricesorthemostcurrenttwelve-month period.Totheextentpricesforthemostcurrenttwelve-month periodarelowerthan1995prices,theamountofcumulative ratereductions 13 described belowwillincrease.

Lastly,thePSCorderedtheCompanynottoproceedtoconsummate theMRAwithrespecttoonecontractheldbyonedeveloper untilasatisfactory resolution ofacogeneration steamhostcontractisreached.NewYorklawprovidespartiestherighttoappealtheCommission's decisionapproving thePowerChoice agreement withinfourmonthsofthedateofthatdecision.

Inaddition, partieshavetherighttopetitiontheCommission forrehearing ofthedecisionwithin30daysofthedateofthedecision.

Ifapetitionforrehearing isfiledandtheCommission issuesadecisiononrehearing, partiesmayappealthedecisiononrehearing withinfourmonthsofthedateofthedecisiononrehearing.

Suchanappealorpetitionforrehearing maybebasedonthefailureoftherecordtoshowareasonable basisforthetermsofthePowerChoice agreement andmayresultinanamendment oftherecordtocorrectsuchfailure,inrenegotiation ofsuchtermsorinrenegotiation ofthePowerChoice agreement asawhole.Therecanbenoassurance that,onappealoronrehearing, theapprovalofthePowerChoice agreement willbeupheldorthatsuchappealorrehearing willnotresultintermssubstantially lessfavorable totheCompanythanthosedescribed herein.Alloftheforegoing discussion ofthePowerChoice agreement isqualified initsentiretybythetextoftheagreement andPSCOrder(seeExhibits10-12and10-13).ACCOUNTING IMPLICATIONS OFTHEPOWERCHOICE AGREEMENT ANDMASTERRESTRUCTURING AGREEMENT TheCompanyconcluded asofDecember31,1996,thatthetermination, restatement oramendment ofIPPcontracts andimplementation ofPowerChoice wastheprobableoutcomeofnegotiations thathadtakenplacesincethePowerChoice announcement.

UnderPowerChoice, theseparated non-nuclear generation businesswouldnolongerberate-regulated onacost-of-servicebasisand,accordingly, regulatory assetsrelatedtothenon-nuclear powergeneration

business, amounting toapproximately

$103.6million($67.4millionaftertaxor47centspershare)werechargedagainst1996incomeasanextraordinary non-cashcharge.Asdescribed under"MasterRestructuring Agreement andthePowerChoice Agreement,"

thePSCinitswrittenorderissuedMarch20,1998limitedtheestimated valueoftheMRAregulatory assetthatcanberecovered fromcustomers toapproximately

$4,000million.Theultimateamountoftheregulatory assettobeestablished mayvarybasedoncertaineventsrelatedtotheclosingoftheMRA.Theestimated valueoftheMRAregulatory assetincludestheissuanceof42.9millionsharesofcommonstock,whichthePSC,indetermining therecoverable amountofsuchassetvaluedat$8pershare.Becausethevalueoftheconsideration tobepaidtotheIPPPartiescanonlybedetermined attheMRAclosing,.the alueofthelimitation ontherecoverability oftheMRAregulatory assetisexpectedtoberecordedasachargetoexpenseinthesecondquarterof1998upon'theclosingoftheMRA.Thechargetoexpensewillbedetermined asthedifference between$8pershareandtheCompany's closingcoinmonstockpriceonthedatetheMRAcloses,multiplied by42.9millionshares,UsingtheCompany's commonstockpriceonMarch26,1998of127/16pershare,thechargetoexpensewouldbeapproximately

$190million(85centspershare).14 UnderPowerChoice, theCompany's remaining electricbusiness(nucleargeneration andelectrictransmission anddistribution business) willcontinuetoberate-regulated onacost-of-service basisand,accordingly, theCompanycontinues toapplySFASNo.71tothesebusinesses.

Also,theCompany's IPPcontracts, including thoserestructured undertheMRAandthosenotsorestructured willcontinuetobetheobligations oftheregulated business.

Asdescribed under"MasterRestructuring Agreement andthePowerChoice Agreement,"

theconsummation oftheMRA,aswellasimplementation ofPowerChoice, issubjecttoanumberofcontingencies.

TheEmergingIssuesTaskForce("EITF")oftheFASHreachedaconsensus onIssueNo.97-4"Deregulation ofthePricingofElectricity

-IssuesRelatedtotheApplication ofSFASNo.71andSFASNo.101"inJuly1997.TheCompanydiscontinued theapplication ofSFASNo.71andappliedSFASNo.101withrespecttothefossilandhydrogeneration businessatDecember31,1996,inamannerconsistent withtheEITFconsensus.

Inaddition, EITF97-4doesnotrequiretheCompanytoearnareturnonregulatory assetsthatarisefromaderegulating transitionplaninassessing theapplicabilityofSFASNo.71.

IntheeventtheMRAandPowerChoice areimplemented, theCompanybelievesthattheregulated cashflowstobederivedfrompricesitwouldchargeforelectricserviceover10years,including theCTC,assumingnounforeseen reduction indemandorbypassoftheCTCorexitfees,willbesufficient torecovertheMRAregulatory assetandproviderecoveryofandareturnontheremainder ofitsassets,asappropriate.

IntheeventtheCompanycouldnolongerapplySFASNo.71inthefuture,itwouldberequiredtorecordanafter-'tax non-cashchargeagainstincomeforanyremaining unamortized regulatory assetsandliabilities.

Depending onwhenSFASNo.71wasrequiredtobediscontinued, suchchargewouldlikelybematerialtotheCompany's reportedfinancial condition andresultsofoperations andtheCompany's abilitytopaycommonandpreferred dividends.

ThePowerChoice agreement whilehavingtheeffectofsubstantially depressing earningsduringitsfive-year term,willsubstantially improveoperating cashflows.IntheeventtheCompanyisunabletosuccessfully completetheMRAandtherefore implement PowerChoice, itwouldpursueallalternatives including atraditional raterequest.However,notwithstanding sucharaterequest,itislikelythatapplication ofSFASNo.71wouldbediscontinued fortheremaining electricbusiness, sincetheCompany's currentratestructure wouldnolongerbesufficient torecoveritscosts.Theresulting non-cashafter-tax chargesagainstincome,basedonregulatory assetsandliabilities associated withthenucleargeneration andelectrictransmission anddistribution businesses asofDecember31,1997,wouldbeapproximately

$526.5millionor$3.65pershare.Inaddition, theCompanywouldberequiredtoreassessthecarryingamountsofitslong-lived assetsinaccordance withSFASNo.'.!.SFASNo.121requireslong-lived assetsandcertainidentifiable intangibles heldandused-anentitybereviewedforimpairment whenevereventsorchangesincircumstances indicatetha~.hecarryingamountofanassetmaynotberecoverable orwhenassetsaretobedisposedr'nperforming thereviewforrecoverability, theCompanyisrequiredtoestimatefutureundiscounted cashflowsexpectedtoresultfromtheuseoftheassetand/oritsdispositi..

TheCompanywouldalsoberequiredtodetermine theextenttowhichadversepurchasecommitments, ifany,arerequiredtoberecordedasobligations.

Variousrequirements

';derapplicable lawandregulations andundercorporate instruments, including thosewithrespectto15 issuanceofdebtandequitysecurities.

paymentofcommonandpreferred dividends, andcertaintypesoftransfers ofassetscouldbeadversely impactedbyanysuchwrite-downs.

Withtheimplementation ofPowerChoice, specifically theseparation ofnon-nuclear generation asanentitythatwouldnolongerbecost-of-service regulated, theCompanyisrequiredtoassessthecarryingamountsofitslong-lived assetsinaccordance withSFASNo.121.TheCompanyhasdetermined thatthereisnoimpairment ofitsfossilandhydrogenerating assets.Totheextenttheproceedsresulting fromthesaleofthefossilandhydroassetsarenotsufficient toavoidaloss,theCompanywouldbeabletorecoversuchlossthroughtheCTC.ThePowerChoice agreement providesfordeferralandfuturerecoveryoflosses,ifany,resulting fromthesaleofthenon-nuclear generating assets.TheCompanybelievethatitwillbepermitted torecordaregulatory assetforanysuchlossinaccordance withEITF97-4.TheCompany's fossilandhydrogeneration plantassetshadanetbookvalueofapproximately

$1.1billionatDecember31,1997.PSCCOMPETITIVE OPPORTUNITIES PROCEEDING

-ELECTRICOnMay16,1996,thePSCissueditsOrderintheCOPScase,whichcalledforamajorrestructuring ofNewYorkState'selectricindustry.

TheCOPSordercalledforacompetitive wholesale powermarketandtheintroduction ofretailaccessforallelectriccustomers.

Thegoalscitedinitsdecisionincludedloweringconsumerrates,increasing choice,continuing reliability ofservice,continuing environmental andpublicpolicyprograms, mitigating concernsaboutmarketpowerandcontinuing customerprotection andtheobligation toserve.ThePSCdecisionintheCOPSproceeding statesthatrecoveryofutilitystrandedcostsmaybeaccomplished byanon-bypassable "wirescharge"tobeimposedbydistribution companies.

ThePSCdecisionalsostatesthatacarefulbalancing ofcustomerandutilityinterests andexpectations isnecessary, andthatthelevelofstrandedcostrecoverywillultimately dependupontheparticular circumstances ofeachutility.OnJune10,1997,thePSCorderedamulti-utility, retailaccesspilotprogramthatwouldallowqualified farmersandfoodprocessors toshopforelectricity andotherenergyservices.

ThePSCrequiredutilities toadjustthecurrentdeliveryratesforfarmersandfoodprocessors, whichresultedinratereductions ofabout10percentforfarmersand3percentto6percentforfoodprocessors.

Deliveryunderthisprogrambeganinlate1997.TheCompanydoesnotbelievethatthisorderwillhaveamaterialadverseeffectonitsfinancial positionorresultsofoperations.

OnAugust27,1997,thePSCrequested commentsonitsstaffstentative conclusions abouthownucleargeneration andfossilgeneration shouldbetreatedafterdecisions aremadeontheindividual electricrestructuring agreements currently pendingbeforethePSC.ThePSCstaffconcluded thatbeyondthetransition period(theperiodcoveredbytheindividual restructuring agreements including PowerChoice),

nucleargeneration shouldoperateonacompetitive basis.Inaddition, thePSCstaffconcluded thatasaleofgeneration plantstothirdpartiesisthepreferred meansofdetermining thefairmarketvalueofgeneration plantsandoffersthegreatestpotential forthemitigation ofstrandedcosts.ThePSCstaffalsoconcluded thatrecoveryofsunkcosts,including postshutdowncosts,wouldbesubjecttoreviewbythePSCandthis16 processshouldtakeintoaccountmitigation measurestakenbytheutility,including thestepsithastakentoencourage competition initsservicearea.TheCompany's nucleargeneration assetshadanetbookvalueof$1.5billion(excluding thereservefordecommissioning) atDecember31,1997.InOctober1997,themajorityofutilities withinterests innuclearpowerplants,including theCompany,requested thatthePSCreconsider itsstaffsnuclearproposal.'n

addition, theutilities raisedthefollowing issues:impediments tonuclearplantsoperating inacompetitive mode;impediments tothesaleofplants;responsibility fordecommissioning anddisposalofspentfuel;safetyandhealthconcerns; andenvironmental andfueldiversity benefits.

Inlightofalloftheseissues,theutilities recommended thatamoreformalprocessbedeveloped toaddressthoseissues.Thethreeinvestor-owned utilities, Rochester GasandElectricCorporation, Consolidated EdisonCompanyofNewYork,Inc.andtheCompany,whicharecurrently pursuingformation ofanuclearoperating companyinNewYorkState,alsofiledaresponsewiththePSCinOctober1997.Theresponsestatedthataforceddivestiture ofthenuclearplantswouldadduncertainty todeveloping astatewide approachtooperating theplantsandrequested thatsuchaforceddivestiture proposalberescinded.

Theresponsealsostatedthatimplementation ofaconsolidated six-unitoperation wouldcontribute tothemitigation ofunrecovered nuclearcosts.TheNYPA,whichisalsopursuingformation ofthenuclearoperating company,submitted itsowncommentswhichweresimilartothecommentsofthethreeutilities.

InFebruary1998,thePSCestablished aformalproceeding tofurtherexamineissuesrelatedtonuclearplantsandthefeasibility ofapplyingmarket-based pricingtothesefacilities.

See"MasterRestructuring Agreement andPowerChoice Agreement" aboveforadiscussion ofthetreatment ofnuclearoperations duringthetermofPowerChoice.

FERCRULEMAKING ONOPENACCESSANDSTRANDEDCOSTRECOVERYInApril1996,theFERCissuedFERCOrder888.,Order888promotescompetition byrequiring thatpublicutilities owning,operating, orcontrolling interstate transmission facilities filetariffswhichofferothersthesametransmission servicestheyprovideforthemselves, undercomparable termsandconditions.

TheCompanyhascompliedwiththisrequirement byfilingitsopenaccesstransmission tariffwithFERConJuly7,1996.Baseduponsettlement discussions withvariousparties,aproposedsettlement wassubmitted totheFERCinthefirstquarterof1997.Thesettlement hasnotbeenapprovedbytheFERCatthistime.Hearingswereconducted inSeptember 1997withnon-settling parties.AMarch1998Administrative LawJudge'recommended decisioninthisproceeding recommended lowertariffsthanthosefiledbytheCompany.TheCompanyisunabletodetermine theultimateresolution ofthisissueorwhenadecisionwillbeissuedbyFERC.UnderFERCOrder888,theNYPPwasrequiredtofilereformedpowerpoolingagreements thatestablish open,non-discriminatory membership provisions andmodifyanyprovisions thatareundulydiscriminatory orpreferential.

OnJanuary31,1997,theNYPPMemberSystems(the17 "MemberSystems")submitted acomprehensive proposaltoestablish anISO,aNewYorkStateReliability Council("NYSRC")

andaNewYorkPowerExchange("NYPE")thatwillfosterafullycompetitive wholesale electricity marketinNewYorkState.TheISOwouldprovideforthereliableoperation ofthetransmission systeminNewYorkStateandprovidenondiscriminatory openaccesstotransmission servicesunderasingleISOtariff.ThroughtheISO,thetransmission owners,including theCompany,wouldbecompensated fortheuseoftheirtransmission systemsonacost-of-service basis.TheNYSRCwouldestablish thereliability rulesandstandards bywhichtheISOoperatesthebulkpowersystem.TheISOwouldalsoadminister thedailyelectricenergymarketandtheNYPEwouldfacilitate theelectricenergymarketonaday-ahead basis.OnMay2,1997,theMemberSystemsmadeasupplemental filingrelatedtotheproposedNYSRCandonAugust15,1997,sixoftheMemberSystemsfiledanapplication formarket-basedrateauthority inthenewwholesale marketstructure.

OnDecember19,1997,theMemberSystemssubmitted arevisedfilingwhichreflected thefundamental components oftheinitialJanuary31,1997filing.However,theDecember19,1997filingprovidesforadditional explanatory materials, incorporates FERC'sguidancesetforthinFERCordersinvolving otherpowerpoolsandISOs,andsetsfortharevisedgovernance structure oftheISO.TheCompanyisunabletopredictwhenFERCwillactonthesesubmittals, orwhetheritwillapprovethefilingswithorwithoutmodifications.

However,theCompany's PowerChoice agreement doesnotcondition retailaccessonthepresenceofanISO.InOrder888,theFERCalsostatedthatitwouldprovidefortherecoveryofprudentandverifiable wholesale strandedcostswherethewholesale customerwasabletoobtainalternative powersuppliesasaresultofOrder888'sopenaccessmandate.Order888lefttothestatestheissueofretailstrandedcostrecovery.

Wherenewlycreatedmunicipal electricutilities requiredtransmission servicefromthedisplaced utility,theFERCstatedthatitwouldentertain requestsforstrandedcostrecoverysincesuchmunicipalization ismadepossiblebyopenaccess.TheFERCalsoreservedtherighttoconsiderstrandedcostsonacase-by-casebasisifitappearedthatopenaccesswasbeingusedtocircumvent strandedcostreviewbyanyregulatory agency.Numerousparties,including theCompany,filedrequestsforrehearing ofOrder888.InMarch1997,theFERCissuedOrder888-A,whichgenerally affirmedOrder888andgrantedrehearing ononlyahandfulofissues.OneofthoseissueswaswhethertheFERCwouldreviewstrandedcostsinannexation casesasitcommitted todoinmunicipalization cases.InOrder888-AtheFERCstatedthatitwouldreviewstrandedcostsresulting fromterritorial annexation byanexistingmunicipal electricsystem,providedthatsystemreliedontransmission fromthedisplaced utility.TheFERCdeniedtheCompany's requestforrehearing onhowstrandedcostswouldbecalculated andotherissues.InNovember1997,FERCissuedOrder888-B.ThisOrderlargelyaffirmedthepositions setforthinOrder888-Awhileclarifying thattheFERCrecognizes theexistence ofconcurrent statejurisdiction overstuddedcostsarisingfrommunicipalization.

TheFERCacknowledged inOrder888-Bthatthestatesmaybefirsttoaddresstheissueofretail-turned-wholesale strandedcosts,andstatedthatitwillgivethestatessubstantial deference wheretheyhavedoneso.InlateJanuary1997,theCompanyprovided26communities inSt.LawrenceandFranklincountieswithestimates theyrequested ofthestrandedcoststheymightbeexpectedtopayiftheywithdrawfromtheCompany's systemtocreategovernment-controlled utilities.

Thepreliminary 18 estimateofthecombinedpotential strandedcostliability forthecommunities rangesfromalowof$225milliontoahighof$452million,depending upontheforecastofelectricity marketpricesthatisused.Theseamountsdonotincludethecostsofcreatingandoperating amunicipal utility.Atthistime,21oftheoriginal26communities arestillpursuingthematter.Ifthese21communities withdrewfromtheCompany's system,theCompanywouldexperience apotential revenuelossofapproximately

$60millionto$65millionperyear.Inaddition, theCompanyisawareofothercommunities thatareconsidering municipalization.

However,theCompanyisunabletopredictwhetherthosecommunities wouldpursuemunicipalization.

Thestrandedcostcalculations werebasedonamethodology prescribed bytheFERC.Becausenomunicipality hasmovedforwardwithcondemnation, thevalueoftheCompany's facilities hasnotbeendeductedfromthestrandedcostestimates.

Thestrandedcostsincludedintheseestimates arethecommunities'hare ofobligations thatwereincurredonbehalfofallcustomers tofulfilltheCompany's legalobligations toensureadequate, reliableelectricity service.Suchlegitimate andprudentcostsarecurrently includedinelectricity rates.Government-mandated paymentstoIPPsrepresent thelargestsinglecomponent ofthesecosts.These21communities seekingtowithdrawfromtheCompany's systemalsoproposetodisconnect entirelyfromtheCompany's systemandtotaketransmission servicefromanotherutility.Theybelievethat,giventheprovisions ofOrder888,FERCwouldnotapprovetheCompany's requestforstranded'ostrecoveryunderthesecircumstances.

TheCompanyhasresponded that,regardless oftheresultattheFERC,opportunities forstrandedcostrecoveryinthismattercouldalsobepursuedbeforethePSCandinastatecondemnation proceeding.

(See"MasterRestructuring Agreement andthePowerChoice Agreement.")

TheCompanyisunabletopredicttheoutcomeofthismatter.OTHERFEDERALANDSTATEREGULATORY INITIATIVES PSCPROPOSALOFNEWIPPOPERATING ANDPPAMANAGEMENT PROCEDURES.

InAugust1996,thePSCproposedtoexaminethecircumstances underwhichautility,including theCompany,maylegallycurtailpurchases fromIPPs;whetherutilities shouldbepermitted tocollectdatathatwillassistinmonitoring IPPs'ompliance withfederalQFrequirements, uponwhichthemandatedpurchases arepredicated; andifutilities shouldbeallowedtodemandsecurityfromIPPstoensuretherepayment ofamountsaccumulated intrackingaccountsmadeundertheirpurchased powercontracts.

ThePSCnotedthatsomeofthecurrentIPPcontracts arefarabovemarketpricesandarecausingutilities toseekrateincreases.

Inaddition, thePSCstatedthatitsproposalwasinitiated toprotectratepayers, sinceitwouldensurejustandreasonable ratesintheeventongoingnegotiations betweenutilities andIPPsfail.MONITORING.

InDecember1996,thePSCgavetheNewYorkStateutilities, including theCompany,theauthority tocollectdatatoassisttheminmonitoring IPPs'ompliance withbothfederalQFstandards andstaterequirements.

ThePSCstatedthatifQFsarenotmeetingrequirements, theobligation topaythefullcontractrate,whichisfundedbyutilityratepayers, isgenerally excusedormitigated.

Furthermore, ifthedatacollected throughaQFmonitoring programindicates afacilityisnotmeetingfederalstandards, theutilitycouldpetitiontheFERC19 todecertify theQF,whichcouldresultinpenalties thatcouldincludecancellation ofthecontract.

Asimilarpenaltycouldbeimposedifitisdetermined aQFhasfailedtomaintaincompliance withstatelaw.Underthemonitoring program,QFsarerequiredtosubmitdataasofMarch1eachyearforthepreviouscalendaryear.Inaccordance withthetermsoftheMRA,theCompanywillnotimplement anyQFmonitoring programfortheIPPParties.However,theCompanycontinues tomonitorthoseIPPsthatarenotIPPPartiesforcontinued QFcompliance underPSCregulation.

CURTAILMENT.

OnMay20,1997,thePSCaddressed theprocedures underwhichautility,including theCompany,maylegallycurtailpurchases fromIPPsthatareQFs,'nless curtailment isspecifically prohibited bycontract.

Curtailment isallowedbyaFERCrule,undercertainoperational circumstances whenpurchases fromtheQFswillexceedthecoststheutilitywouldincurifitgenerated thepoweritself.AdvancenoticemustbeprovidedtotheQFalongwiththereasonsforsuchcurtailment, whicharesubjecttoverification bythePSCeitherbeforeoraftercurtailment.

ThePSCstatedthatPURPA,whichencouraged generation byIPPs,wassupposedtoberevenue-neutral.

However,theynotedthatthishasnotbeenthesituation inNewYorkStateandratepayers havebeenundulyburdenedbecauseoftheirlackofspecificcurtailment procedures.

Thedecisiontopermitcurtailment isnotlikelytoaffectthe'PPAscoveredbytheMRA,whichrepresents approximately 80%oftheCompany's over-market purchased powerobligations, asdescribed previously.

However,thedecisioncouldaffectmostoftheremaining IPPcontracts.

TheCompanyisunabletodetermine theeffectofthesestatements untilsuchatimeasthereisafinalorder.TheCompanycannotpredictwhetherthePSCwilltakeanyactiononthefirmsecurityissue.However,thefirmsecurityissuewithrespecttotheIPPPartiescoveredundertheMRAwouldbesettledupontheclosingoftheMRA.MULTI-YEAR GASRATESETTLEMENT AGREEMENT.

TheCompany,MultipleIntervenors (anunincorporated association ofapproximately 60largecommercial andindustrial energyuserswithmanufacturing andotherfacilities locatedthroughout NewYorkState)andPSCstaffreachedathree-year settlement thatwasconditionally approvedbythePSConDecember19,1996.ThePSCorderedconditional approvalonthethree-year settlement agreement untilafinal,redrafted agreement, whichreflectstheCommission's order,issubmitted forfinalapproval.

Thesettlement resultsina$10millionannualreduction inbaseratesora$30milliontotalreduction overthethree-year termofthesettlement.

Thisreflectsa$19millionreduction intheamountoffixednon-commodity coststoberecoverable inbaserates,offsetbya$9millionincreaseinannualbaserates.TheCompanyestima'tes thatthecombination ofin-handsupplierrefundsandfurtherreductions inupstreampipelinecostswillbesufficient tofundthe$19millionannualreduction innon-commodity costrecovery.

Ifthenon-commodity costreductions exceed$57million($19millionannually) duringthethree-year settlement period,theexcess,upto$40millionwillbecreditedtoaContingency ReserveAccount("CRA")tobeutilizedforratepayer benefitintherateyearendingOctober31,2000orbeyond.Totheextenttheactualnon-commodity costreductions exceed$57millionby20 morethan$40million,theCompanymayretainanyexcesssubjecttoareturnonequitysharingprovision.

Intheeventthenon-commodity reductions fallshortofthe$57millionestimate, theCompanywillbeartheriskofanyshortfall.

Intheeventthatthetermination orrestructuring ofIPPcontracts resultsinmargin(revenues lessfuelcosts)orpeakshavinglosses,themarginlosseswouldbecollected currently subjectto80%/20%(ratepayer/shareholder) sharingandthepeakshavinglosseswillbedeferredtotheCRA,subjecttolimitsspecified inthesettlement.

Inreturnfortakingonthisrisk,theCompanyhasachievedaportionoftherevisedratestructure thathadbeenproposedtoreduceitsthroughput risk.TheCompanyobtainedanROEcapof13.5%with50/50sharingbetweenratepayers andshareholders inexcessofthecap.TheCompanyalsohasanopportunity toearnupto$2.25millionannuallyifitsgascommodity costsarelowerthanamarketbasedtargetwithoutbeingsubjecttotheROEcap.TheCompanyhasanequal$2.25millionriskifgascommodity costsexceedthetarget.Anadditional majorbenefitoftherevisedratedesignisthatthemarginmadeoneachadditional newcustomerwillsignificantly increasetotheextentadditional throughput doesnotrequireadditional upstreampipelinecapacityforservice.This,alongwiththeapprovaloftheCompany's ProgressFund,whichallowstheCompanytouseutilityrevenuesinanamountnottoexceed$11millionintotalforthepurposeofproviding financing forlargecustomers toconvertorincreasetheirgasuse.willprovidenewopportunities forgrowth.GENERICGASRATEPROCEEDING.

Asaresultofthegenericrateproceeding, inwhichthePSCorderedallNewYorkutilities toimplement aserviceunbundling beginning inMay1996,nearly3,000customers havechosentobuynaturalgasfromothersources,withtheCompanycontinuing toprovidetransportation serviceforaseparatefee.ThesechangeshavenothadamaterialimpactontheCompany's marginssincethemarginistraditionally derivedfromthedeliveryserviceandnotfromthecommodity sale.Themarginfordeliveryforresidential andcommercial aggregation servicesequalsthemarginonthetraditional salesserviceclasses.Todatethismigration hasnotresultedinanystrandedcostssincethePSChasallowedtheutilities toassignthepipelinecapacitytothecustomers converting fromsalestotransportation.

Thisassignment isallowedduringathree-year periodendingMarch1999,atwhichtimethePSCwilldecideonmethodsfordealingwiththeremaining unassigned orexcesscapacity.

Asapartofthegenericrateproceeding, allutilities arerequiredtofileareportwiththePSCinApril1998,describing actionsthathavebeentakentomitigatepotential strandedcostsascustomers migratetotransportation service.Inaclarifying orderinthisproceeding, issuedSeptember 4,1997,thePSChasindicated thatitisunlikelythatutilities willbeallowedtocontinuetoassignpipelinecapacitytodeparting customers afterMarch1999.Onaseparatebutparallelpath,inSeptember 1997,thePSCissuedforcommentitsstaffspositionpaperonthefutureofthenaturalgasindustry, including recommendations forincreasing competition andexpanding customerchoiceinthenaturalgasmarketplace.

Thestaffproposed, amongotherthings,thatallregulated naturalgasutilities exitthebusinessofpurchasing naturalgasforcustomers overthenextfiveyears.Thiswouldcompletethetransition ofcustomers fromsalestotransportation serviceonly.Theregulated utilities wouldonlydelivernaturalgaspurchased bycustomers fromcompetitive suppliers.

IfthisproposalisadoptedbythePSC,thenitwouldeliminate theneedtoregulatenaturalgaspurchasing practices sincemarketforceswouldestablish naturalgasprices.21 Thepositionpaperidentified anumberofissuesthatwouldneedtoberesolvedinorderforthisproposaltobesuccessful.

Theprimaryissuesarethepipelinecapacityandgassupplycontracts thatthelocalutilities havewithinterstate pipelines thatextendbeyondtheproposedfive-year transition period,theobligation oftheutilitytoserveassupplieroflastresort,andtheissueofsystemreliability.

TheCompanyandotherpartiessubmitted commentsandreplycommentstothePSCinlateNovemberandDecemberof1997,respectively.

Withtheexception oftheissuestoberesolvedbythePSC,asmentioned above,theCompanydoesnotbelievethatthisproposalwillhaveamaterialadverseeffectonitsresultsofoperations orfinancial condition, sincetheCompany's naturalgasmarginisderivedfromthedeliveryserviceandnotfromthecommodity sale.Theresolution oftheissuesidentified bythePSCcouldresultinunrecovered strandedcostsfortheCompany.TheCompanyisunabletopredicthowthePSCwillresolvethoseissues.Foradiscussion oftheCompany's gassupply,storageandpipelinecommitments, seeItem8.Financial Statements andSupplementary Data-"Note9.Commitments andContingencies

-GasSupply,StorageandPipelineCommitments.")

NRCANDNUCLEAROPERATING MATTERS.InOctober1996,theNRCrequiredcompanies withnuclearplantstoprovidetheNRCwithaddedconfidence andassurance thattheirplantsareoperatedandmaintained withinthedesignbasis,andanydeviations arereconciled inatimelymanner.Suchinformation, whichwasfiledwithintherequired120days,willbeusedbytheNRCtoverifythatcompanies areincompliance withthetermsandconditions oftheirlicense(s) andNRCregulations.

Inaddition, itwillallowtheNRCtodetermine ifotherinspection activities orenforcement actionsshouldbetakenonaparticular company.Inthelettertransmitting therequested information totheNRC,theCompanyconcluded thatithasreasonable assurance that(i)designbasisrequirements arebeingtranslated intooperating, maintenance, andtestingprocedures; and(ii)system,structure andcomponent configuration andperformance areconsistent withthedesignbasis.Also,theCompanyhasaneffective administrative toolfortheidentification, documentation, notification, evaluation, correction, andreporting ofconditions, events,activities, andconcernsthathavethepotential foradversely affecting thesafeandreliableoperation ofUnit1andUnit2.InApril1997andDecember1997,theCompanyreceivednoticesfromtheNRCofa$200,000fineand$50,000fine,respectively, forviolations atUnit1andUnit2.Thepenalties wereforviolations relatedtocorrective actionsanddesigncontrol.TheCompanypaidthefinesandisimplementing corrective action.OnJanuary23,1998,theCompanyreceivednoticeofaproposed$55,000finefromtheNRCforviolations ofNRCrequirements relatedtoradioactive wasteissues.TheCompanydoesnotplantocontesttheproposedNRCfine.InJanuary1998,theNRCissueditsSystematic Assessment ofLicenseePerformance (the"SALP")reportonUnit1andUnit2,whichcoverstheperiodJune1996toNovember1997.TheSALPreport,whichisanextensive assessment oftheplants'erformance intheareasofoperations, maintenance, engineering andsupport,statedthattheperformance ofUnit1andUnit22, 2wasgenerally good,althoughratingswerelowerthanthepreviousassessment.

TheCompanyagreeswiththeNRC'sdetermination thatthereareareasofitsperformance thatneedimprovement andistakingseveralactionstomakethoseneededimprovements.

TheCompanybelievesthatNRCsafetyenforcement isbecomingmorestringent asindicated bytheNRC'srequestforinformation, finesthattheCompanyhasbeenassessedandlowerSALPratingsandthattheremaybeadirectcostimpactoncompanies withnuclearplantsasaresult.TheCompanyisunabletopredicthowsuchachangedoperating environment mayaffectitsresultsofoperations orfinancial condition.'ome ownersofolderGeneralElectricCompanyboilingwaterreactors, including theCompany,haveexperienced crackinginhorizontal weldsintheplants'ore shrouds.Inresponsetoindustryfindings, theCompanyinstalled pre-emptive modifications totheUnit1coreshroudduringa1995refueling andmaintenance outage.Thecoreshroud,astainless steelcylinderinsidethereactorvessel,surrounds thefuelanddirectstheflowofreactorwaterthroughthefuelassemblies.

Inspections conducted aspartoftheMarch1997refueling andmaintenance outagedetectedcrackinginverticalweldsnotreinforced bythe1995repairs.OnApril8,1997,theCompanyfiledacomprehensive inspection andanalysisreportwiththeNRCthatconcluded thatthecondition oftheUnit1coreshroudsupportsthesafeoperation oftheplant.COnMay8,1997,theNRCapprovedtheCompany's requesttooperateUnit1untilthenextscheduled mid-cycle outage,late1998.TheCompanyagreedtoproposeaninspection planfortheoutageandsubmittheplantotheNRCatleastthreemonthsbeforetheoutageisscheduled tobegin.TheCompanybelievesithasastrongtechnical basistooperateUnit1withoutamid-cycleoutageandisseekingthenecessary approvalfromtheNRCtopostponetheinspections untiltheunit'srefueling andmaintenance outageinspring1999,buttherecanbenoassurance thatsuchapprovalwillbegranted.TheUnit1refueling andmaintenance outage,originally plannedtobecompleted inearlyApril1997,wascompleted onMay10,1997duetothecore'shroud issue.OnSeptember 15,1997,Unit1wastakenoutofserviceduetoleakinginoneoffourback-upcondensers.

Thestandbycondensers serveasaback-upsystemfortheremovalofreactorsteam.Thecondensers aremaintained inareadystateduringnormalplantoperations.

Testsandinspections wereconducted ontheremaining condensers andsimilar-conditions werefound.OnDecember10,1997,Unit1wasreturnedtoserviceafterthereplacement ofallfourcondensers, whichcostapproximately

$6.7million.OTHERCOMPANYEFFORTSTOADDRESSCOMPETITIVE CHALLENGES TAXINITIATIVES.

TheCompanyisworkingwithutility,customerandstaterepresentatives toexplainthenegativeimpactthatallutilitytaxes,including theGRT,arehavingonratesandthestateoftheeconomy.Atthesametime,theCompanyisalsocontesting thehighrealestatetaxesitisassessedbymanytaxingauthorities, particularly thoseimposedupongenerating facilities.

23 TheNewYorkStateLegislature passedastatebudgetinAugust1997whichincludesareduction oftheGRToverthreeyears.Forgasandelectricutilities, thetaximposedongrossincomewillbereducedfrom3.5%to3.25%onOctober1,1998,andfrom3.25%to2.5%onJanuary1,2000.Thestatetaximposedongrossearningswillremainunchanged at.75%,bringingthetotalGRTto3.25%-afullpercentage pointlowerthantoday'slevelof4.25%.Thesavingsfromthereduction oftheGRTwillbepassedontotheCompany's customers.

TheCompanybelievesthatfurthertaxreliefisneededtorelievetheCompany's customers ofhighenergycostsandtoimproveNewYorkState'scompetitive positionastheindustrymovestowardacompetitive marketplace.

Thefollowing tablesetsforthasummaryofthecomponents ofothertaxes(exclusive ofincometaxes)incurredbytheCompanyintheyears1995through1997:Inmillionsoidollars199719961995PropertytaxexpenseSalestaxPayrolltaxGrossReceiptsTaxOthertaxes$250.713.434.1184.60.1$249.4$264.814.113.936.437.3184.1190.20.55.2TotaltaxexpenseChargedtoconstruction, subsidiaries andregulatory recognition Totalothertaxes482.9484.5511.4<11.41(8.7)6.1$471.5$475.8$517.5sssssssssssssssssssssssssssssssssssssssssas saassssssssasssssss CUSTOMERDISCOUNTS.

Inrecentyears,someindustrial customers havefoundalternative suppliers oraregenerating theirownpower.Inaddition, aweakenedeconomyorattractive energypriceselsewhere havecontributed tootherindustrial customerdecisions torelocateorclose.Inaddressing thethreatoffurtherlossofindustrial load,thePSCestablished guidelines togovernflexibleelectricratesofferedbyutilities toretainqualified industrial customers.

Undertheseguidelines, theCompanyfiledforanewservicetariffinAugust1994(SC-11),underwhichallnewcontractratesareadministered basedondemonstrated industrial andcommercial competitive pricingalternatives including, butnotlimitedto,on-sitegeneration, fuelswitching, facilityrelocation andpartialplantproduction shifting.

Contracts arefortermsnottoexceedsevenyearswithoutPSCapproval.

Inaddition, theCompanyhNeconomicdevelopment programswhichprovidetariffbasedincentives toretainandgrowload.AsofJanuary1998,theCompanyhas152executedcontracts underitsflexibletariffofferings.

Thesecontracts havebeensignedtomitigatethelostmarginimpactsassociated withcustomers executing the'competitive alternatives mentioned above.Inaddition, manyofthesecontracts includeanincreaseinproduction levelsand/orattractnewcustomers totheCompany's serviceterritory.

24 In1997and1996,thetotalamountofcustomerdiscounts (economic development programsandflexiblepricing)was$90.6millionand$75.5million,respectively.

TheCompanyrecovered

$46.6millionand$56.7millioninrates,respectively.

Pendingimplementation ofPowerChoice, theCompanybudgeteditsdiscounts toincreasetoapproximately

$95.4millionin1998assomediscounts grantedin1997areineffectforanentireyearandfurtherdiscounts aregranted.TheCompanyisaggressively usingSC-11toincreasesalestoexistingcustomers andtoattractnewcustomers toitsserviceterritory.

Withthereduction inindustrial pricesprovidedinPowerChoice, thelevelofdiscounts thathavebeennecessary shoulddeclineinthefuture.REGULATORY AGREEMENTS/PROPOSALS (See"MasterRestructuring Agreement andthePowerChoice Agreement.")

1995RATEORDER.OnApril21,1995,theCompanyreceivedaratedecision(1995rateorder)fromthePSCwhichapprovedanapproximately

$47millionincreaseinelectricrevenuesanda$4.9millionincreaseingasrevenues.

YEAR2000COMPUTERISSUEAstheyear2000approaches, theCompany,alongwithmanyothercompanies, couldexperience potentially seriousoperational

problems, sincemanycomputerprogramsthatweredeveloped willnotproperlyrecognize calendardatesbeginning withtheyear2000.Further,thereareembeddedchipscontained withingeneration, transmission, distribution andgasequipment thatmaybedate-sensitive.

Inthesecircumstances whereanembeddedchipfailstorecognize thecorrectdate,electricorgasoperations couldbeadversely affected.

TheCompanyisaddressing theseissuessothatitscomputersystemsand,wherenecessary, itsembeddedchipswillprocessdatesgreaterthan1999,therebypreventing anyadverseoperational orfinancial impacts.TheCompanyhasbeenaddressing theyear2000information technology issuethroughtheremediation andreplacement ofexistingbusinessapplications andpartsofitstechnical infrastructure.

Inlate1997,theservicesofaleadingcomputerservicesandconsulting firmwereretainedtoconductanassessment oftheCompany's entireyear2000program.Asaresultoftheassessment, aCompany-wide year2000projectmanagement officehasbeenformedandyear2000projectmanagershavebeenappointed withineachbusinessgroupandeffortsareunderwaytoevaluatethescopeoftheproblemforembeddedtechnologies/process controlsystemsinallbusinessgroupswithintheCompany.ACompany-wide programdirectorandanexecutive levelsteeringcommittee havebeenputinplacetooverseeallaspectsoftheprogram.TheCompanyisalsoevaluating theexposuretoyear2000problemsofthirdpartieswithwhomtheCompanyconductsbusiness.

TheCompanyexpectstocompleteaninventory ofexposures, including anassessment ofpriorities, costsandresources, bythethirdquarterof1998.FailuresoftheCompanyand/orthirdpartycomputersystemsandembeddedchipscouldhaveamaterialimpactontheCompany's abilitytoconductitsbusiness.

Untilfurtherprogressismadeontheseefforts,management isunabletoestimatethetotalyear2000compliance expense,butitisintheprocessofassessing thisexpense.25 RESULTSOFOPERATIONS Earningsfor1997were$145.9million,or$1.01pershare,ascomparedto$72.1million,or50centspershare,in1996and$208.4million,or$1.44pershare,in1995.Incomparing year-to-yearresults,earningsin1996reflectcertainsignificant eventsthatwerenotrepeatedin1997.Earningsin1996werereducedbyanafter-tax write-off of$67;4million,or47centspershare.associated withthediscontinued application ofregulatory accounting principles totheCompany's fossilandhydrogeneration business.

LargelyasaresultoftheCompany's 1996assessment oftheincreased riskofcollecting significantly higherlevelsofpast-duecustomerbills,baddebtexpensein1996w'ashigherthanin1997by$81.1million,reducingearningsin1996,comparedto1997,by37centspershare.However,earningsin1996wereaidedbya$15millionafter-tax gainonthesaleofa50percentinterestinCNPwhichadded10centspershareto1996earnings.

Industrial customerdiscounts notrecovered inratesin1997exceeded1996levelsby$25.2million,reducing1997ear'nings by11centspershare(seeOtherCompanyEffortstoAddressCompetitive Challenges

-"Customer Discounts.")

Inaddition, adeclineinhigher-margin residential salesalsoadversely impacted1997earnings.

Thelower-margin industrial-special sales(salesbytheCompanyonbehalfofNYPA)andindustrial salesincreased.

Asaresult,totalpublicsaleswereessentially thesameassalesin1996.Earningsfor1995werehurtbylowersalesquantities ofelectricity andnaturalgas,ascomparedwithamountsusedtoestablish 1995prices.Saleswereprimarily affectedbythecontinuing weakeconomicconditions inupstateNewYork,lossofindustrial customers'oad toNYPAanddiscounts granted.Thesefactorssimilarly impacted1996and1997results.Inaddition, 1995earningsincludedtherecording ofaone-time, non-cashadjustment ofprioryears'emand-side management

("DSM")incentive

revenues, revenuesearnedundertheUnit1operating incentive sharingmechanism andagainonthesaleofHYDRA-COthatcollectively increased 1995earningsby17centspershare.TheCompany's 1997earnedROEwas5.5%ascomparedto2.8%(5.4%beforeextraordinary loss)in1996and8.4%in1995.TheCompany's ROEauthorized inthe1995orlastratesettingprocessis11.0%fortheelectricbusinessand11.4%forthegasbusiness.

Factorscontributing toearningsbelowauthorized levelsin1997included, amongotherthings,salesbelowthose'orecasted indetermining rates,contractual increases incapacitypaymentstoIPPsandincreasing discounts tocustomers.

Asdiscussed under"MasterRestructuring Agreement andthePowerChoice Agreement" and"Accounting Implications ofthePowerChoice Agreement andMasterRestructuring Agreement,"

theCompanyforecasts thatearningsforthefive-year termofthe,PowerChoice agreement willbesubstantially depressed.

Thelevelofearningsfor1998willalsobeimpacted, inpart,bythedateofimplementation ofPowerChoice, thePowerChoice chargeof$190millionexpectedtobetakeninthesecondquarterof1998andmayalsobenegatively impactedbythefinancial effectsoftheJanuary1998icestorm(seeItem8.Financial Statements andSupplementary Data-"Note13.Subsequent Event").Thefollowing discussion andanalysishighlights itemsthatsignificantly affectedoperations duringthethree-year periodendedDecember31,1997.Thisdiscussion andanalysisisnotlikelytobeindicative offutureoperations orearnings, particularly inviewoftheprobabletermination, restatement oramendment ofIPPcontracts andimplementation ofPowerChoice.

It26 alsoshouldbereadinconjunction withItem8.Financial Statements andSupplementary Dataandotherfinancial andstatistical information appearing elsewhere inthisreport.ELECTRICREVENUESwere$3,309millioninboth1997and1996,adecreaseof$26.1million,or0.8%from1995.Asshowninthefollowing table,FACrevenuesincreased

$42.8millionin1997,primarily asaresultoftheCompany's abilityin1997torecoverincreased paymentstotheIPPsthroughtheFAC.However,thisincreasewasoffsetbyadecreaseinrevenuesfromsalestoother.electricsystemsandlowerelectricsalesduetowarmerweather.UnderPowerChoice, revenuesmaydeclineascustomers choosealternative suppliers.

However,theCompanywillrecoverstrandedcoststhroughtheCTC.See"MasterRestructuring Agreement andthePowerChoice Agreement."

Electricoperating revenuesdecreased in1996,primarily duetoadecreaseinmiscellaneous electricrevenues.

Miscellaneous electricrevenueswerelowerin1996primarily because1995electricrevenuesincludedtherecording of$71.5millionofunbilled, non-cashrevenuesinaccordance withthe1995rateorder,$13.0millionofrevenuesearnedunderMERIT(anincentive mechanism relatedtoimprovement inkeyperformance areaswhichendedin1996)andaone-time, non-cashadjustment ofprioryear'sDSMincentive revenuesandareduction intheDSMrebatecostprogram.However,higherelectricsalesduetocolderweather,anincreaseinsalestootherelectricsystems,anincreaseinFACrevenuesandhigherelectricrates(effective April26,1995)partlyoffsetthosefactorsthatcontributed tolowerelectricrevenues.

FACrevenuesincreased

$28.3millionin1996,whichprimarily reflectstheCompany's increased paymentstotheIPPsrecovered throughtheFAC.INCREASE(DECREASE)

FROMPRIORYEAR(Inmillionsoidollars)ELECTRICREVENUES19971996TOTALAmortization otunbilledrevenuesBaseratesFuelad)ustment clauserevenuesChangesinvolumeandmixotsalestoultimateconsumers SalestootherelectricsystemsMERITrevenueDSMrevenue<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)TheFACiseliminated underthePowerChoice agreement.

ChangesinFACrevenuesaregenerally margin-neutral (subjecttoanincentive mechanism discussed inItem8.Financial Statements andSupplementary Data-"Note1.SummaryofSignificant Accounting Policies"

),whilesalestootherutilities, becauseofregulatory sharingmechanisms andrelatively lowprices,generally resultinlowmargincontributions totheCompany.Thus,fluctuations intheserevenuecomponents donotgenerally haveasignificant impactonnetoperating income.Electric27 revenuesreflectthebillingofaseparatefactorforDSMprograms, whichprovidedfortherecoveryofprogramrelatedrebatecosts.ELECTRICKILOWATT-HOUR SALESwere37.1billionin1997,39.1billionin1996and37.7billionin1995.The1997decreaseof2.0billionKWh,or5.1%ascomparedto1996,isrelatedprimarily toa31.0%decreaseinsalestootherelectricsystems.(SeeItem8.Financial Statements andSupplementary Data-"Electric andGasStatistics

-ElectricStatistics"

).The1996increaseof1.4billionKWh,or3.8%ascomparedto1995,reflectsa26.2%increaseinsalestootherelectricsystemsanda1.2%increaseinsalestoultimatecustomers duetothecolderweather.Salestootherelectricsystemswerelowerprimarily duetoareduction intheavailability ofnucleargeneration asaresultoftheoutagesatUnit1.TheCompanyisanticipating littleornogrowthin1998insalestoultimateconsumers, whichwillbesensitive tothebusinessclimateinitsserviceterritory.

DetailsofthechangesinelectricrevenuesandKWhsalesbycustomergrouparehighlighted inthetablebelow:INCREASE(DECREASE)

FROMPRIORYEAR1997~OFELECTRC19971996CLASSOFSERVICEREVENUESREVENUESSALESREVENUESSALESResidential Commercial Industrial Industrial-Special Municipal service37.1$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)0.21.23.96.75.87.4Totaltoultimateconsumers OtherelectricsystemsMiscellaneous 94.0(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%Asindicated inthetablebelow,internalgeneration decreased 10.1%in1997,principally duetotheoutageatUnit1andareduction inhydroelectric powerasaresultoflowerthannormalprecipitation inthesummermonths.In1997,Unitl,wasoutofservicefor153days,duetoaplannedrefueling andmaintenance outage(whichtook68days)andfortheemergency condenser replacement (whichtookapproximately 85days)whilein1996,Unit2wasoutofservicefora36dayplannedrefueling andmaintenance outage.(See"OtherFederalandStateRegulatory Initiatives

-NRCandNuclearOperating Matters.")

Theamountofelectricity delivered totheCompanybytheIPPsdecreased byapproximately 277GWhor2.0%.However,totalIPPcostsincreased byapproximately

$18.0millionor1.7%,asdiscussed below.(See"MasterRestructuring Agreement andthePowerChoice Agreement"

).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)Electricity purchased:

IPPs:CapacityEnergyandtaxes13,520220.8885.713,797212.8875.714,023:181.2798.7(2')3.81.1(1.6)17.49.6TotalIPPpurchases Other13,5209,4211,106.5130.222,9411,236.713,7979,569.23,3661,088.5130.614,0239,4631,219.123,486979.9126.51,106.4(2.0)(1.5)(1.8)1.7(0.3)(1.611.1(0.5)11.13.210.2Totalgenerated andpurchased Fuelad)ustment clauseLosses/Company use40,7391,416.9(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%

Theabovetablepresentsthetotalcostsforpurchased electricity, whilereflecting onlyfuelcostsforCompanygeneration.

Othercostsofgeneration, suchastaxes,otheroperating expensesanddepreciation areincludedwithinotherincomestatement lineitems.TheCompany's management ofitsIPPpowersupplygenerally dividestheprojectsintothreecategories:

hydroelectric, "mustrun"cogeneration andschedulable cogeneration projects.

Following ahigherthannormalspringrunoff,theprecipitation inthesummermonthswaslowerthanusual.Asaresult,hydroelectric IPPprojectsdelivered 242GWhor13.7%lessunderPPAsthantheydidforthesameperiodlastyear,representing decreased paymentstothoseIPPsof$15.7million.Asubstantial portionoftheCompany's portfolio ofIPPprojectsoperateona"mustrun"basis.Thismeansthattheytendtorunatmaximumproduction levelsregardless oftheneedfororeconomicvalueoftheelectricity produced.

Outputfrom"mustrun"cogeneration IPPswas230GWhor2.6%lowerthanproducedlastyear,inpartduetolowerenergypurchases fromtheSitheIndependence plant.However,paymentstothoseIPPswere$12.8millionhigher.Thiswasduetoacombination ofoutputturndownarrangements withindividual projectsandescalating contractrates.Aturndownarrangement isanagreement wheretheCompanycompensates anIPPtoreducetheoutputfromtheirfacility.

Althoughoutputisreduced,theneteconomicimpactisfavorable totheCompanyanditscustomers sincetheelectricity isreplacedfromthemarketorotherlowercostsources.Quantities purchased fromschedulable cogeneration IPPsincreased 195GWhor6.3%andpaymentsincreased

$20.9million.Theincreased paymentsarelargelyduetoescalating contractratesforcapacity(fixed)andincreased volumesofenergy.ThetermsofthesePPAsallowtheCompanytoschedule(withcertainconstraints) energydeliveries andpayfortheenergysupplied.

Inaddition, theCompanyisrequiredtomakefixedpaymentsiftheIPPplantsremainavailable forservice.(SeeItem8.Financial Statements andSupplementary Data-"Note9.Commitments andContingencies

-Long-term Contracts forthePurchaseofElectricPower").GASREVENUESdecreased by$24.7million,or3.6%in1997,andincreased by$99.9million,or17.2%,in1996.Asshowninthetablebelow,gasrevenuesdecreased in1997primarily duetodecreased salestoultimatecustomers asaresultofthemigration ofcommercial salescustomers tothetransportation class,decreased spotmarketsalesandadecreaseinbaseratesof$5.9millioninaccordance withthe1996rateorder.Thiswaspartially offsetbyhighergasadjustment clauserecoveries andanincreaseinrevenuesfromthetransportation ofcustomer-ownedgas(see"OtherFederalandStateRegulatory Initiatives

-GenericGasRateProceeding"

).Gasrevenuesincreased in1996primarily duetoincreased salestoultimatecustomers duetocolderweather,increased spotmarketsales,highergasadjustment clauserecoveries, anincreaseinrevenuesfromthetransportation ofcustomer-owned gasandanincreaseinbaseratesof$3.1millioninaccordance withthe1995rateorder.Ratesfortransported gas(excluding aggregation services) yieldlowermarginsthangassolddirectlybytheCompany.Therefore, increases inthevolumeofgastransportation serviceshave30 nothadaproportionate impactonearnings, particularly ininstances wherecustomers thattookdirectservicefromtheCompanymovetoatransportation-only class.Inaddition, changesinpurchased gasadjustment clauserevenuesaregenerally margin-neutral.INCREASE(DECREASE)

E'ROl4PRIORYEAR(Znmillionsofdollars)GASREVENUES19971996TOTALBaseratesTransportation ofcustomer-owned gasPurchased gasadjustment clauserevenuesSpotmarketsalesChangesinvolumeandmixofsalestoultimateconsumers (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,excluding transportation ofcustomer-owned gasandspotmarketsales,were78.7millionDthin1997,a7.3/odecreasefrom1996,anda0.3'/oincreasefrom1995.(SeeItem8.Financial Statements andSupplementary Data-"Electric andGasStatistics

-GasStatistics"

).'Thedecreasein1997wasinallultimateconsumerclasses,inpartduetothewarmerweather.Inaddition, spotmarketsales(salesforresale),whicharegenerally fromthehigher.pricedgasavailable totheCompanyandtherefore yieldmarginsthataresubstantially lowerthantraditional salestoultimatecustomers, decreased 8.0millionDth.Thiswaspartially offsetbyanincreaseintransportation volumesof18.1millionDthor13.5'/otocustomers purchasing gasdirectlyfromproducers.

TheCompanyhasexperienced anincreaseincustomers ofapproximately 17,800since1995,primarily intheresidential class,anincreaseof3.5/o.31 ChangesingasrevenuesandDthsalesbycustomergrouparedetailedinthetablebelow:INCREASE(DECREASE)

FROMPRIORYEAR1997%OFGAS19971996.CLASSOFSERVICEREVENUESREVENUESSALESREVENUESSALESResidential Commercial Industrial 66.4%22.61.04.5%(8.7)(50.9)(2.7)%(13.0)(50.1)13.3%13.015.69.4%6.44.1Totaltoultimateconsumers OthergassystemsTransportation ofcustomer-owned gasSpotmarketsalesMiscellaneous 90.08.51.00.5(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%Thetotalcostofgaspurchased decreased 6.6%in1997andincreased 34.0%in1996.Thecostfluctuations generally correspond tosalesvolumechanges,asspotmarketsalesactivitydecreased, aswellaschangesingasprices.TheCompanysold2.5,10.5and1.7millionDthonthespotmarketin1997,1996and1995,respectively.

Thetotalcostofgasdecreased

$24.4millionin1997.Thiswastheresultofa5.3milliondecreaseinDthpurchased andwithdrawn fromstorageforultimateconsumersales($18.8million)anda$22.5milliondecreaseinDthpurchased forspotmarketsales,partially offsetbya3.3%increaseintheaveragecostperDthpurchased

($10.7million)anda$6.3millionincreaseinpurchased gascostsandcertainotheritemsrecognized andrecovered throughthepurchased gasadjustment clause.Thetotalcostofgaspurchased increased

$93.8millionin1996.Thiswastheresultofa9.3millionincreaseinDthpurchased andwithdrawn fromstorageforultimateconsumersales($29.6million),

a$25.6millionincreaseinDthpurchased forspotmarketsalesanda12.9%increaseintheaveragecostperDthpurchased

($38.7million).

Gaspurchased forspotmarketsalesdecreased

$22.5millionin1997andincreased

$25.6millionin1996.TheCompany's netcostperDthsold,aschargedtoexpenseandexcluding spotmarketpurchases, increased to$3.82in1997from$3.62in1996andwas$3.17in1995.Throughtheelectricandpurchased gasadjustment clauses,costsoffuel,purchased powerandgaspurchased, aboveorbelowthelevelsallowedinapprovedrateschedules, arebilledorcreditedtocustomers.

TheCompany's electricFACprovidesforapartialpass-through offuelandpurchased powercostfluctuations fromthoseforecastinrateproceedings, withtheCompanyabsorbing aportionofincreases orretaining aportionofdecreases toamaximumof$15millionperrateyear.TheCompanyabsorbedlossesofapproximately

$11.8million,$1.4millionand$13.1millionin1995,1996and1997,respectively.

UnderPowerChoice, theFACwillbeterminated.

TheCompanydoesnotbelievethattheelimination oftheFACwillhaveamaterialadverseeffectonitsfinancial condition, asaresultofitsmanagement of(1)powersuppliesprovidedthrough:(i)theoperation ofitsownpowerplants,andfuturepowerpurchasearrangements aspartoftheplannedauctionofitsfossilandhydroassets,(ii)fixedpower32 purchases fromNYPAandremaining IPPsand(iii)fixedandindexedswaparrangements withIPPPartiesand(2)thetransferoftheriskassociated withelectricity commodity pricestothecustomerthroughimplementation ofretailaccessincludedinthePowerChoice agreement.

OTHEROPERATION ANDMAINTENANCE EXPENSEdecreased in1997by$92.9million.or10.0%,ascomparedtoanincreaseof$110.3millionor13.5%in1996.Thesechangesin1996and1997eachresultprimarily fromachangein1996intheCompany's assessment ofuncollectible customeraccounts, whichgivesgreaterrecognition totheincreased riskofcollecting pastduecustomerbills,resulting inincreases intheCompany's allowance fordoubtfulaccountsandasignificantly higherexpenserecognition in1996.Baddebtexpensewas$31.2million,$127.6millionand$46.5millionin1995,1996and1997,respectively.

In1997,write-offswere$39.0millionandtheCompanyincurreda$10.5millionincreaseinallowance fordoubtfulaccounts.

Theincreaseintheallowance fordoubtfulaccountswasattributable toincreases inthecollection riskassociated withresidential accountsreceivable andarrears.TheCompanyhasimplemented anumberofcollection initiatives thatareexpectedtoresultinlowerarrearslevelsandpotentially lowertheallowance fordoubtfulaccounts.

Otheroperation andmaintenance expensealsodecreased in1997asaresultofareduction inadministrative andgeneralexpensesof$15.8million,primarily duetoareduction inlegalcosts.OTHERINCOMEdecreased by$10.9millionin1997andincreased by$32.9millionin1996.Despitehigherinterestincome($12.0million)relatedtoincreasing cashbalances, "otherincome"waslowerin1997,since1996.reflected againonthesaleofa50%interestinCNP($15.0million).

The1996increasealsoreflected higherinterestincome($10.9million)asaresultofanincreaseintemporary cashinvestments.

Inaddition, "otherincome"washigherin1996sincetherewerecustomerservicepenalties andcertainotheritemswrittenoffbecausetheyweredisallowed inratesin1995.FEDERALANDFOREIGNINCOMETAXESincreased by$24.1millionin1997primarily duetoanincreaseinpre-taxincomeanddecreased by$56.9millionin1996primarily duetoadecreaseinpre-taxincome.Othertaxesdecreased by$4.4millionin1997anddecreased by$41.6millionin1996.The1997decreasewasprimarily duetolowerpayrolltaxes($2.3million)andlowersalestaxes($0.7million).

The1996decreasewasprimarily asaresultoflowerrealestatetaxes($15.4million),

lowerGRTs($6.1million)primarily duetoareduction intheGRTsurcharge during1996,lowerNewYorkStateexcessdividendtaxaccrualduetoasuspension ofthecommonstockdividend($4.6million)andyear-to-yeardifferences intheaccounting forregulatory deferrals

($15.2million)associated primarily withasettlement oftaxissueswithrespecttotheCompany's Dunkirkfacility.

INTERESTCHARGESremainedfairlyconstantfortheyears1995through1997.However,dividends onpreferred stockdecreased by$0.9millionand$1.3millionin1997and1996.respectively.

Dividends onpreferred stock'decreased in1997primarily duetoareduction inpreferred stockoutstanding throughsinkingfundredemptions anddecreased in1996primarily duetoadecreaseinthecostofvariablerateissues.Theweightedaveragelong-term debtinterestrateandpreferred dividendratepaid,reflecting theactualcostofvariablerateissues,changedto7.81%and7.04%,respectively, in1997from7.71%and7.09%,respectively, in1996andfrom7.77%and7.19%,respectively, in1995.33 EFFECTSOFCHANGINGPRICESTheCompanyisespecially sensitive toinflation becauseoftheamountofcapitalittypically needsandbecauseitspricesareregulated usingaratebasemethodology thatreflectsthehistorical costofutilityplant.TheCompany's consolidated financial statements arebasedonhistorical eventsandtransactions whenthepurchasing powerofthedollarwassubstantially different thannow.Theeffectsofinflation onmostutilities, including theCompany,aremostsignificant intheareasofdepreciation andutilityplant.TheCompanycouldnotreplaceitsnon-nuclear utilityplantandequipment forthehistorical costvalueatwhichtheyarerecordedontheCompany's books.Inaddition, theCompanywouldnotreplacethesewithidentical assetsduetotechnological advancesandcompetitive andregulatory changesthathaveoccurred.

Inlightoftheseconsiderations, thedepreciation chargesinoperating expensesdonotreflectthecostofproviding serviceifnewgenerating facilities wereinstalled.

TheCompanywillseekadditional revenueorreallocate resources, ifpossible, tocoverthecostsofmaintaining serviceasassetsarereplacedorretired.FINANCIAL

POSITION, LIQUIDITY ANDCAPITALRESOURCES FINANCIAL POSITION.

TheCompany's capitalstructure atDecember31,1997was51.8%long-term debt,7.7%preferred stockand40.5%commonequity,ascomparedto53.1%,7.9%and39.0%respectively, atDecember31,1996.Theculmination ofthetermination, restatement oramendment ofIPPcontracts willsignificantly increasetheleverageoftheCompanytonearly65%atthetimeofclosing.Throughtheanticipated increased operating cashfiowresulting fromtheMRAandPowerChoice agreement, theplannedrapidrepayment ofdebtshoulddeleverage theCompanyovertime.Bookvalueofthecommonstockwas$18.89pershareatDecember31,1997,ascomparedto$17.91pershareatDecember31,1996.WiththeissuanceofequityatbelowbookvaluetotheIPPPartiesaspartoftheMRA,bookvaluepersharewillbediluted.Inaddition, earningspersharewillbedilutedbytheeffectoftheissuancetotheIPPPartiesofapproximately 42.9millionsharesoftheCompany's commonstock.TheCompany's EBITDAfor1997wasapproximately

$962million,anduponimplementation oftheMRAandPowerChoice isexpectedtoincreasetoapproximately

$1,200millionto$1,300millionperyear.EBITDArepresents earningsbeforeinterestcharges,interestincome,incometaxes,depreciation andamortization, amortization ofnuclearfuel,allowance forfundsusedduringconstruction, non-cashregulatory deferrals andotheramortizations andextraordinary items.EBITDAisanon-GAAPmeasureofcashflowsandispresented toprovideadditional information abouttheCompany's abilitytomeetitsfuturerequirements fordebtservicewhichwouldincreasesignificantly uponconsummation oftheMRA.EBITDAshouldnotbeconsidered analternative tonetincomeasanindicator ofoperating performance o'"asanalternative tocashflows,aspresented ontheConsolidated Statement ofCashFlows,asameasureofliquidity.

34 The1997ratioofearningstofixedchargeswas2.02times.Theratiosofearningstofixedchargesfor1996and1995were1.57timesand2.29times,respectively.

Thechangeintheratiowasprimarily duetochangesinearningsduringtheperiod.AssumingtheMRAisimplemented, theratioofearningstofixedchargeswillsubstantially decreaseinthefuture,sincetheMRAandPowerChoice agreement willhavetheeffectofsubstantially depressing earningsduringitsfive-yearterm,whileatthesametimesubstantially improving operating cashflows.Theprimaryobjective oftheMRAistoconvertalargeandgrowingoff-balance sheetpaymentobligation thatthreatens thefinancial viability oftheCompanyintoafixedandmanageable capitalobligation.

COMMONSTOCKDIVIDEND.

TheBoardofDirectors omittedthecommon'stockdividendbeginning thefirstquarterof1996.Thisactionwastakentohelpstabilize theCompany's financial condition andprovideflexibility astheCompanyaddresses growingpressurefrommandatedpowerpurchases andweakersalesandistheprimaryreasonfortheincreaseinthecashbalance.Inmakingfuturedividenddecisions, theBoardofDirectors willevaluate, alongwithstandardbusinessconsiderations, thefinancial condition oftheCompany,theclosingoftheMRAandimplementation ofPowerChoice, orthefailuretoimplement suchactions,contractual restrictions thatmightbeenteredintoinconjunction withfinancing theMRA,thedegreeofcompetitive pressureonitsprices,thelevelofavailable cashflowandretainedearningsandotherstrategic considerations.

TheCompanyexpectstodedicateasubstantial portionofitsfutureexpectedpositivecashflowtoreducetheleveragecreatedinconnection withtheimplementation oftheMRA.ThePowerChoice agreement'establishes limitstotheannualamountofcommonandpreferred stockdividends thatcanbepaidbytheregulated business.

Thelimitisbasedupontheamountofnetincomeeachyear,plusaspecified amountrangingfrom$50millionin1998to$100millionin2000.Thedividendlimitation issubjecttoreviewafterthetermofthePowerChoice agreement.

Furthermore, theCompanyforecasts thatearningsforthefive-year termofthePowerChoice agreement willbesubstan'tially depressed, asnon-cashamortization oftheMRAregulatory assetisoccurring andtheinterestcostsontheIPPdebtisthegreatest.

See"Accounting Implications ofthePowerChoice Agreement andMasterRestructuring Agreement."

CONSTRUCTION ANDOTHERCAPITALREQUIREMENTS.

TheCompany's totalcapitalrequirements consistofamountsfortheCompany's construction program(seeItem8.Financial Statements andSupplementary Data-"Note9.Commitments andContingencies

-Cons'truction

'rogram,").

TheJanuary1998icestormdamagerestoration costsmayfurtheraddtotheserequirements (seeItem8.Financial Statements andSupplementary Data-"Note13.Subsequent Event"),nucleardecommissioning fundingrequirements (SeeItem8.Financial Statements andSupplementary Data-"Note3.-Nuclear Operations

-NuclearPlantDecommissioning" and-"NRCPolicyStatement andProposal"

),workingcapitalneeds,maturingdebtissuesandsinkingfundprovisions onpreferred stock,aswellasrequirements tocompletetheMRAandaccomplish therestructuring contemplated bythePowerChoice agreement.

Annualexpentiitures fortheyears1995to1997forconstruction andnuclearfuel,including relatedAFCandoverheads capitalized, were$345.8million,$352.1millionand$290.8million,'respectively, andarebudgetedtobeapproximately

$358millionfor1998andtorangefrom$279-$352millionforeachofthesubsequent fouryears.Theseestimates includeconstruction expenditures fornon-nucleargeneration of$20millionto$38millionperyear.35 InadditiontotheassumedcostoftheMRArequirements, asdescribed below,mandatory debtandpreferred stockretirements areexpectedtoaddapproximately another$77milliontothe1998estimateofcapitalrequirements.

Theestimateofconstruction additions includedincapital~requirements fortheperiod1998to2002willbereviewedbymanagement-to giveeffecttothestormrestoration costsandtheoverallobjective offurtherreducingconstruction spendingwherepossible.

Seediscussion in"Liquidity andCapitalResources" sectionbelow,whichdescribes howmanagement intendstomeetitsfinancing needsforthisfive-year period.UndertheMRA,theCompanywillpayanaggregate of$3,616millionincash.TheCompanyexpectstoissueseniorunsecured debttofundthisrequirement, whichisexpectedtoconsistofbothdebtissuedthroughapublicmarketofferinganddebtissuestobankswhichwouldservetoreplaceitsexisting$804millionseniordebtfacility, discussed below.TheCompany's preferred shareholders gavetheCompanyapprovaltoincreasetheamountofunsecured debttheCompanymayissueby$5billion.Previously, theCompanywasabletoissue$700millionundertherestrictions ofitsamendedCertificate ofIncorporation.

Thisauthorization willenabletheissuanceofunsecured debttoconsummate theMRA.Inaddition, theCompanybelievesthattheabilitytouseunsecured indebtedness willincreaseitsflexibility inplanningandfinancing itsbusinessactivities.

LIQUIDITY ANDCAPITALRESOURCES.

Externalfinancing plansaresubjecttoperiodicrevisionasunderlying assumptions arechangedtoreflectdevelopments, marketconditions and,mostimportantly, conclusion oftheMRAandimplementation ofPowerChoice.

Theultimateleveloffinancing duringtheperiod1998through2002willbeaffectedby,amongotherthings:thetimingandoutcomeoftheMRAandthecashtaxbenefitsanticipated becausetheMRAisexpectedtoresultinanetoperating lossfor1998incometaxpurposes; theimplementation ofthePowerChoice agreement, levelsofcommondividendpayments, ifany,andpreferred dividendpayments; theresultsoftheauctionoftheCompany's fossilandhydroassets;theCompany's competitive positionandtheextenttowhichcompetition penetrates theCompany's markets;uncertain energydemandduetotheweatherandeconomicconditions; andtheeffectsoftheicestormthatstruckaportionoftheCompany's serviceterritory inearly1998.TheproceedsofthesaleofthefossilandhydroassetswillbesubjecttothetermsoftheCompany's mortgageindenture andthenoteindenture thatwillbeenteredintoinconnection withtheMRAdebtfinancing.

TheCompanycouldalsobeaffectedbytheoutcomeoftheNRC'sconsideration ofnewrulesforadequatefinancial assurance ofnucleardecommissioning obligations.

(SeeItem8.NotestoConsolidated Financial Statements

-"Note3.NuclearOperations

-NRCPolicyStatement andProposal" and"Note13.Subsequent Event").TheCompanyhasan$804millionseniordebtfacilitywithabankgroup,consisting ofa$255milliontermloanfacility, a$125millionrevolving creditfacilityand$424millionforlettersofcredit.Theletterofcreditfacilityprovidescreditsupportfortheadjustable ratepollution controlrevenuebondsissuedthroughtheNYSERDA.Theinterestrateapplicable totheseniordebtfacilityisvariablebasedoncertainrateoptionsavailable undertheagreement andcurrently approximates 7.7%(butiscappedat15%).AsofDecember31,1997,theamountoutstanding undertheseniordebtfacilitywas$529million,consisting of$105millionunderthetermloanfacilityanda$424millionletterofcredit,leavingtheCompanywith$275millionofborrowing 36 capability underthefacility.

ThefacilityexpiresonJune30,1999(subjecttoearliertermination iftheCompanyseparates itsfossil/hydro generation businessfromitstransmission anddistribution

business, oranyothersignificant restructuring plan).TheCompanyiscurrently negotiating withthelenderstoreplacetheseniordebtfacilitywithalargerfacilitytofinanceaportionoftheMRA.Thisfacilityiscollateralized byfirstmortgagebondswhichwereissuedonthebasisofadditional propertyundertheearningstestrequiredunderthemortgagetrustindenture

("FirstMortgageBonds").AsofDecember31,1997,theCompanycouldissueanadditional

$1,396millionaggregate principal amountofFirstMortgageBondsundertheCompany's mortgagetrustindenture.

Thisamountisbaseduponretiredbondswithoutregardtoaninterestcoveragetest.TheCompanyispresently precluded fromissuingFirstMortgageBondsbasedonadditional property.

Althoughnoassurance canbeprovided, theCompanybelievesthattheclosingoftheMRAandimplementation ofPowerChoice willresultinsubstantially depressed earningsduringitsfive-yearterm,butwillsubstantially improveoperating cashflows.Thereisriskthroughout theelectricindustrythatcreditratingscoulddeclineiftheissueofstrandedcostrecoveryisnotsatisfactorily resolved.

IntheeventtheMRAisnotclosed,andcomparable solutions arenot'available, theCompanywillundertake otheractionsnecessary toactinthebestinterests ofstockholders andotherconstituencies.

Ordinarily, construction relatedshort-term borrowings arerefundedwithlong-term securities onaperiodicbasis.Thisapproachgenerally resultsintheCompanyshowingaworkingcapitaldeficit.ThishasnotbeenthecaseinthelasttwoyearsastheCompany's cashbalancehasincreased, reflecting suspension ofthecommonstockdividendin1996.WorkingcapitaldeficitsmayalsobearesultoftheseasonalnatureoftheCompany's operations aswellastimingdifferences betweenthecollection ofcustomerreceivables andthepaymentoffuelandpurchased powercosts.TheCompanybelievesithassufficient borrowing capacitytofunddeficitsasnecessary inthenearterm.However,theCompany's borrowing capacitytofundsuchdeficitsmaybeaffectedbythefactorsdiscussed aboverelatingtotheCompany's externalfinancial plans.Since1995,past-dueaccountsreceivable haveincreased significantly.

Anumberoffactorshavecontributed totheincrease, including risingprices(particularly toresidential customers).

Risingpriceshavebeendrivenbyincreased paymentstoIPPsandhightaxesandhavebeenpassedonincustomers'ills.

ThestagnanteconomyintheCompany's serviceterritory sincetheearly1990'shasadversely affectedcollection ofpast-dueaccounts.

Also,laws,regulations andregulatory policiesimposemorestringent collection limitations ontheCompanythanthoseimposedonbusinessingeneral;forexample,theCompanyfacesmorestringent requirements toterminate serviceduringthewinterheatingseason.Theincreaseintheallowance fordoubtfulaccountswasattributable tothereassessment ofthecollection riskassociated withresidential accountsreceivable andarrears.TheCompanyhasimplemented anumberofcollection initiatives thatareexpectedtoresultinlowerarrearslevelsandpotentially lowertheallowance fordoubtfulaccounts.

TheCompanyhasandwillcontinuetoimplement avarietyofstrategies toimproveitscollection ofpastdueaccountsandreduceitsbaddebtexpense.37 Theinformation gatheredindeveloping thesestrategies enabledmanagement toupdateitsriskassessment oftheaccountsreceivable portfolio.

Basedonthisassessment, management determined thatthelevelofriskassociated primarily withtheolderaccountshadincreased andthehistorical lossexperience nolongerapplied.Accordingly, theCompanydetermined thatasignificant portionofthepast-dueaccountsreceivable (principally ofresidential customers) mightbeuncollectible, andhadwritten-off asubstantial numberoftheseaccountsaswellasincreased itsallowance fordoubtfulaccountsin1996.In1997and1996,theCompanycharged$46.5millionand$127.6million,respectively tobaddebtexpense.Theallowance fordoubtfulaccountsisbasedonassumptions andjudgments astotheeffectiveness ofcollection efforts.Futureresultswithrespecttocollecting thepast-duereceivables mayprovetobedifferent fromthoseanticipated.

AlthoughtheCompanyhasexperienced alevelofimprovement incollection efforts,futureresultsarenecessarily dependent uponthefollowing factors,including, amongotherthings,theeffectiveness ofthestrategies discussed above,thesupportofregulators andlegislators toallowutilities tomovetowardscommercial collection practices andimprovement inthecondition oftheeconomyintheCompany's serviceterritory.

TheCompanyhasbeenpursuingPowerChoice toaddresshighpricesthataretheresultoftraditional priceregulation, buttheintroduction ofcompetition requiresthatpoliciesandpractices thatwerecentraltotraditional regulation, including thoseinvolving collections, bechangedsoasnottojeopardize thebenefitsofcompetition.

NETCASHPROVIDEDBYOPERATING ACTIVITIES decreased

$162.8millionin1997primarily duetoadecreaseof$105.9millionintheamountofaccountsreceivable soldundertheaccountsreceivable salesprogram(whichtheCompanyhasbudgetedtorestorein1998)partially offsetbyanincreaseindeferredtaxesof$53.9million.NETCASHUSEDININVESTING ACTIVITIES increased

$62.4millionin1997primarily asaresultofanincreaseinothercashinvestments of$116.1millionoffsetbyadecreaseintheacquisition ofutilityplantof$62.9million.NETCASHUSEDINFINANCING ACTIVITIES decreased

$106.1million,primarily duetoanetreduction of$94.7millioninthepaymentsonlong-term debt.ITEM8.FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATAA.FINANCIAL STATEMENTS ReportofManagement ReportofIndependent Accountants Consolidated Statements ofIncomeandRetainedEarningsforeachofthethreeyearsintheperiodendedDecember31,1997.Consolidated BalanceSheetsatDecember31,1997and1996.Consolidated Statements ofCashFlowsforeachofthethreeyearsintheperiodendedDecember31,1997.NotestoConsolidated Financial Statements.

38 REPORTOFMANAGEMENT Theconsolidated financial statements oftheCompanyanditssubsidiaries werepreparedbyandaretheresponsibility ofmanagement.

Financial information contained elsewhere inthisAnnualReportisconsistent withthatinthefinancial statements.

Tomeetitsresponsibilities withrespecttofinancial information, management maintains andenforcesasystemofinternalaccounting

controls, whichisdesignedtoprovidereasonable assurance, onacosteffective basis,astotheintegrity, objectivity andreliability ofthefinancial recordsandprotection ofassets.Thissystemincludescommunication throughwrittenpoliciesandprocedures, anorganizational structure thatprovidesforappropriate divisionofresponsibility andthetrainingofpersonnel.

Thissystemisalsotestedbyacomprehensive internalauditprogram.Inaddition, theCompanyhasaCorporate PolicyRegisterandaCodeofBusinessConduct(the"Code")thatsupplyemployees withaframework describing anddefiningtheCompany's overallapproachtobusinessandrequireallemployees tomaintainthehighestlevelofethicalstandards aswellasrequiring all'management employees toformallyaffirmtheircompliance withtheCode.Thefinancial statements havebeenauditedbyPriceWaterhouse LLP,theCompany's independent accountants, inaccordance withGAAP.Inplanningandperforming itsaudit,PriceWaterhouse LLPconsidered theCompany's internalcontrolstructure inordertodetermine auditingprocedures forthepurposeofexpressing anopiniononthefinancial statements, andnottoprovideassurance ontheinternalcontrolstructure.

Theindependent accountants'udit doesnotlimitinanywaymanagement's responsibility forthefairpresentation ofthefinancial statements andallotherinformation, whetherauditedorunaudited, inthisAnnualReport.TheAuditCommittee oftheBoardofDirectors, consisting offiveoutsidedirectors whoarenotemployees, meetsregularly withmanagement, internalauditorsandPriceWaterhouse LLPtoreviewanddiscussinternalaccounting

controls, auditexaminations andfinancial reporting matters.PriceWaterhouse LLPandtheCompany's internalauditorshavefreeaccesstomeetindividually withtheAuditCommittee atanytime.withoutmanagement beingpresent./s/WilliamE.DavisWilliamE.DavisChairmanoftheBoardandChiefExecutive OfficerNiagaraMohawkPowerCorporation 39 REPORTOFINDEPENDENT ACCOUNTANTS TotheStockholders andBoardofDirectors ofNiagaraMohawkPowerCorporation Inouropinion,theaccompanying consolidated balancesheetsandtherelatedconsolidated statements ofincomeandretainedearningsandofcashflowspresentfairly,inallmaterialrespects, thefinancial positionofNiagaraMohawkPowerCorporation anditssubsidiaries atDecember31,1997and1996,andtheresultsoftheiroperations andtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,1997,inconformity withgenerally acceptedaccounting principles.

Thesefinancial statements aretheresponsibility oftheCompany's management; ourresponsibility istoexpressanopiniononthesefinancial statements basedonouraudits.Weconducted ourauditsofthesestatements inaccordance withgenerally acceptedauditingstandards whichrequirethatweplanandperformtheaudittoobtainreasonable assurance aboutwhetherthefinancial statements arefreeofmaterialmisstatement.

Anauditincludesexamining, onatestbasis,evidencesupporting theam'ountsanddisclosures inthefinancial statements, assessing theaccounting principles usedandsignificant estimates madebymanagement, andevaluating theoverallfinancial statement presentation.

Webelievethatourauditsprovideareasonable basisfortheopinionexpressed above.Asdiscussed inNote15totheaccompanying financial statements, theCompanyhasrestatedits1997financial statements toeliminate the$190millionchargerelatedtothelimitation ontherecoverability oftheregulatory assetdescribed inNote2.Asdiscussed inNote2,theCompanybelievesthatitcontinues tomeettherequirements forapplication ofStatement ofFinancial Accounting Standards No.71,Accounting forthesectsofCertainTypesofRegulation (SFASNo.71)foritsnucleargeneration, electrictransmission anddistribution andgasbusinesses.

IntheeventthattheCompanyisunabletocompletethetermination, restatement oramendment oftheindependent powerproducercontracts, thisconclusion couldchangein1998andbeyond,resulting inmaterialadverseeffectsontheCompany's financial condition andresultsofoperations.

Asdiscussed inNote2,theCompanydiscontinued application ofSFASNo.71foritsnon-nucleargeneration businessin1996.PRICARHOUSELLPSyracuse, NewYorkMarch26,1998,exceptNote2(thirdparagraph) andNote15,astowhichthedateisMay29,199840

NIAGARAMOHAWKPOWERCORPORATION ANDSUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OFINCOMEANDRETAINEDEARNINGSInthousands ofdollarsFortheyearendedDecember31,199719961995Operating revenues:

Electric$3,309,441$3,308,979$3,335,548 Gas656,963681,674581,790Operating expenses:

3966~40439906533~917'38Fuelforelectricg'eneration Electricity puzchased Gaspurchased Otheroperation andmaintenance expenses179,4551,236,108 345,610835,2821,182,892370,0401,137,937276j232928,224817,897181,486165,929Depreciation andamortization (Note1)Othertaxes339,641471,469329,827475,846317,831517,4783~407~5653468~3153g233'04Operating income558,839522,338684,034Otherincome(Note1)24,99735,9433,069Incomebeforeinterestcharges583,836558,281687,103Interestcharges(Note1)273,906278,033279,674IncomebeforefederalandforeignincometaxesFederalandforeignincometaxes(Note7)309,930126,595280,248407,429102,494159,393Incomebeforeextraordinary item183,335Extraordinary itemforthediscontinuance ofregulatory accounting principles, netofincometaxesof$36,273in1996(Note2)177,754'48,036,(67,364)Netincome(Note15)183,335Dividends onpreferred stock37,397110,39038,281248,03639,596Balanceavailable forcommonstockDividends oncommonstock145,938145,93872,10972,109208,440161,65046,79041 Retainedearningsatbeginning ofyear657,482585,373538,583RetainedearningsatendofyearS803,420S657,482S585,373sssssaasssassssssssssssssssssssssssssssssaasssasaasssssssaassssss Averagenumberofsharesofcommonstockoutstanding (inthousands) 144,404144,35014'4,329Basicanddilutedearningsperaverageshareofcommonstockbeforeextraordinary itemS1.01S0.97S1.44Extraordinary itemSS(0.47)SBasicanddilutedearningsperaverageshareofcommonstockS1.01S0.50S1.44Dividends oncommonstockpaidpershareSS-S1.12ssssssaassssssasasssssssasaaaaaasssssssssssssssssssssssssssaaaasa

()Denotesdeduction Theaccompanying notesareanintegralpartofthesefinancial statements 42 NIAGARAMOHAWKPOWERCORPORATION ANDSUBSIDIARY COMPANIES CONSOLIDATED BALANCESHEETSZnthousands ofdollarsASSETSAtDecember31,19971996Utilityplant(Note1):Electricplant$NuclearFuelGasplantCommonplantConstruction workinprogressTotalutilityplantLess:Accumulated depreciation andamortization NetutilityplantOtherpropertyandinvestments 8,752,865577,4091,131,541319,409294'5011,075,8744,207,8306,868,044371,709$8,611,419573,0411,082,298292,591279,99210,839,341 3,881,7266,957,615257,145Currentassets:Cash,including temporary cashinvestments of$315,708and$223,829,respectively 378,232325,398Accountsreceivable (lessallowance fordoubtfulaccountsof$62,500and$52,100,respectively)

(Notes1and9)492,244Materials andsupplies, ataveragecost:373,305Coalandoilforproduction ofelectricity GasstorageOtherPrepaidtaxesOther27,64239,447118,30815,51820,3091,091,700 20,78843,431120,91411,97625,329921,141Regulatory assets(Note2)Regulatory taxassetDeferredfinancechargesDeferredenvironmental restoration costs(Note9)Unamortized debtexpensePostretirement benefitsotherthanpensions399,119239,880220,00057,31256,464416,599239,880225,00065,99360,48243 Other204,049206,352Otherassets1,176,8241,214,306 75,86477,428$9~584~141$9427~635sssssaaas%$

$8%%sSsSOOseeSSSSSsssWSSSSSSSSSSSSSsSSSSSSssSS Theaccompanying notesareanintegralpartofthesefinancial statements 44 NIAGARAMOHAWKPOWERCORPORATION ANDSUBSIDIARY COMPANIES CONSOLIDATED BALANCESHEETSInthousands ofdollarsAtDecember31,CAPITALIZATION ANDLIABILITIES Capitalization (Note5):19971996Commonstockholders'quity:

Commonstock,issued144,419,351 and144,365,214 shares,respectively S144,419$144,365CapitalstockpremiumandexpenseRetainedearnings1,779,688 803,4201,783,725657,4822,727,527 Non-redeemable preferred stock440,0002,585,572 440,000Mandatorily redeemable preferred stockLong-term debtTotalcapitaliration 76,6103,417,3816,661'1886,7303,477,8796,590,181Currentliabilities:

Long-term debtduewithinoneyear(Note5)Sinkingfundrequirements onredeemable preferred stock(Note5)AccountspayablePayableonoutstanding bankchecksCustomers'eposits AccruedtaxesAccruedinterestAccruedvacationpayOther67,09510'20263,09523,72018,3729,00562,64336,53264,75648g0848,870271,83032,00815,5054,21663,25236,43652,455555,338532,656Regulatory liabilities (Note2):DeferredfinancechargesOtherliabilities:

239,880239,880Accumulated deferredincometaxes(Notes1and7)1,387,032 1,357,518 45 Employeepensionandotherbeneiits(Note8)240,211238,688Deferredpensionsettlement gainUnbilledrevenues(Note1)Other12,43843,281224,443lg907,405 19,26949g881174,5621,839,918Commitments andcontingencies (Notes2and9)Liability forenvironmental restoration 220,000225,000$9,584,141$9,427,635sssaasasssssssESSmggaaSSSSSSSSRSSSaaaaaSseSSaaSSSSSWSSSSS Theaccompanying notesareanintegralpartofthesefinancial statements 46 NIAGARAMOHAWKPOWERCORPORATION ANDSUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OFCASHFLOWSINCREASE(DECREASE)

INCASHInthousands ofdollarsFortheyearendedDecember31,199719961995Cashflowsfromoperating activities:

(11,175)4,18076,204Netincome$183,335$Ad)ustments toreconcile netincometonetcashprovidedbyoperating activities:

Extraordinary itemfor~thediscontinuance ofregulatory accounting principles, netofincometaxesDepreciation andamortiration 339,641Electricmarginrecoverable Amortiration ofnuclearfuel25,241Provision fordeferredincometaxes46,994Gainonsaleofsubsidiary Unbilledrevenues(6,600)Netaccountsreceivable (118,939)Materials andsupplies(1,306)AccountspayableandaccruedexpensesAccruedinterestandtaxesChangesinotherassetsandliabilities 67,364329,82738,077317,83158,58834,295(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$248,036Netcashprovidedbyoperating activities 537,575700,402700,005Cashflowsfrominvesting activities:

Construction additions (286,389)Nuclearfuel(4,368)Less:Allowance forotherfundsusedduringconstruction 5,310(296,689)(332,443)(55,360)(13,361)3,6651,063Acquisition ofutilityplantDecreaseinmaterials andMaterials andsuppliesrelatedtonconstruction Accountspayableandaccruedexpensesrelatedtoconstruction Otherinvestments Proceedsfromsaleofsub-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)

Netcashusedininvesting activities (393'71)(331~611)(277~004)

Cashflowsfromfinancing activities:

Proceedsfromlong-tean debtRedemption ofpreferred stockReductions oflong-term debtNetchangeinshort-term debtDividends paidOther(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 Netcashusedinfinancing activities (90,770)(196,868)

(363,856)

NetincreaseincashCashatbeginning ofyear52,834325,398171,92359,145153~47594i330CashatendofyearS378~232S325i398S153i475SSSEsassssssssssspssaaassssssspsasssasssssssssssssssssssssssssEEE Supplemental disclosures ofcashflowinformation:

Cashpaidduringtheyearfor:InterestIncometaxesS279,957S286,497S,290,352S82,331S95,632S47,378EEEsssasssssssssssssassEsssssssssEsssssssssssssssssasssaaasassssa Theaccompanying notesareanintegralpartofthesefinancial statements 48 NotestoConsolidated Financial Statements NOTE1.SUMMARYOFSIGNIFICANT ACCOUNTING POLICIESTheCompanyissubjecttoregulation bythe'PSCandFERCwithrespecttoitsratesforserviceunderamethodology whichestablishes pricesbasedontheCompany's cost.TheCompany's accounting policiesconformtoGAAP,including theaccounting principles forrate-regulated entitieswithrespecttotheCompany's nuclear.transmission, distribution andgasoperations (regulated business),

andareinaccordance withtheaccounting requirements andratemaking practices oftheregulatory authorities.

TheCompanydiscontinued theapplication ofregulatory accounting principles toitsfossilandhydrogeneration operations in1996(seeNote2).Inordertobeinconformity withGAAP,management isrequiredtouseestimates inthepreparation oftheCompany's financial statements.

PRINCIPLES OFCONSOLIDATION:

Theconsolidated financial statements includetheCompanyanditswholly-owned subsidiaries.

Intercompany balancesandtransactions havebeeneliminated.

UTILITYPLANT:Thecostofadditions toutilityplantandreplacements ofretirement unitsof..propertyarecapitalized.

Costincludesdirectmaterial, labor,overheadandAFC.Replacement ofminoritemsofutilityplantandthecostofcurrentrepairsandmaintenance ischargedtoexpense.Wheneverutilityplantisretired,itsoriginalcost,togetherwiththecostofremoval,lesssalvage,ischargedtoaccumulated depreciation.

Thediscontinuation ofSFASNo.71didnotaffectthecarryingvalueoftheCompany's utilityplant.ALLOWANCE FORFUNDSUSEDDURINGCONSTRUCTION:

TheCompanycapitalizes AFCinamountsequivalent tothecostoffundsdevotedtoplantunderconstruction foritsregulated business.

AFCratesaredetermined inaccordance withFERCandPSCregulations.

TheAFCrateineffectduring1997was9.28%.AFCissegregated intoitstwocomponents, borrowedfundsandotherfunds,andisreflected inthe"Interest charges"andthe"Otherincome"sections, respectively, oftheConsolidated Statements ofIncome.TheamountofAFCcreditsrecordedineachofthethreeyearsendedDecember31,inthousands ofdollars,wasasfollows:199719961995OtherincomeInterestcharges$5,3104,396$3,6653,690Sl,0637,987Asaresultofthediscontinued application ofSFASNo.71tothefossilandhydrooperations, theCompanycapitalizes interestcostassociated withtheconstruction offossil/hydro assets.DEPRECIATION, AMORTIZATION ANDNUCLEARGENERATING PLANTDECOMMISSIONING COSTS:Foraccounting andregulatory

purposes, depreciation iscomputedonthestraight-line basisusingthelicenselivesfornuclearandhydroclassesofdepreciable propertyandtheaverageservicelivesforallotherclasses.Thepercentage relationship betweenthetotalprovision fordepreciation andaveragedepreciable propertywas49 approximately 3%fortheyears1995through1997.TheCompanyperformsdepreciation studiestodetermine servicelivesofclassesofpropertyandadjuststhedepreciation rateswhennecessary.

Estimated decommissioning costs(coststoremoveanuclearplantfromserviceinthefuture)for'heCompany's Unit1anditsshareofUnit2arebeingaccruedovertheservicelivesoftheunits,recovered inratesthroughanannualallowance andcurrently chargedtooperations throughdepreciation.

TheCompanyexpectstocommencedecommissioning ofbothunitsshortlyaftercessation ofoperations atUnit2(currently plannedfor2026),usingamethodwhichremovesordecontaminates theUnitscomponents promptlyatthattime.SeeNote3-"NuclearPlantDecommissioning."

TheFASBissuedanexposuredraftinFebruary1996entitled"Accounting forCertainLiabilities RelatedtoClosureorRemovalCostsofLong-Lived Assets."Thescopeoftheprojectincludescertainplantdecommissioning costs,including thoseforfossil,hydroandnuclearplants.Ifapproved, aliability wouldberecognized, withacorresponding plantasset,wheneveralegalorconstructive obligation existstoperformdismantlement orremovalactivities.

TheCompanycurrently recognizes theliability fornucleardecommissioning overtheservicelifeoftheplantasanincreasetoaccumulated depreciation anddoesnot'recognize theclosureorremovalobligation associated withitsfossilandhydroplants.TheCompany's PowerChoice agreement providesfortherecoveryofnucleardecommissioning costs.Asdiscussed inNote2,theCompanyintendstosellitsfossilandhydrogenerating assetsthroughanauctionprocess.Totheextenttheassetsaresold,theeffectofthisexposuredraftontheCompanyshouldbemitigated.

However,theCompanycannotpredicttheresultsoftheauction.Theadoptionoftheproposedstandardisnotexpectedtoimpactthecashflowfromtheseassets.TheFASBcontinues todiscusstheissuesaddressed intheexposuredraft,aswellasthetimingofitsimplementation.

Amortization ofthecostofnuclearfuelisdetermined onthebasisofthequantityofheatproducedforthegeneration ofelectricenergy.Thecostofdisposalofnuclearfuel,whichpresently is$.001perKWhofnetgeneration available forsale,isbaseduponacontractwiththeDOE.Thesecostsarechargedtooperating expenseandrecovered fromcustomers throughbaseratesorthroughthefueladjustment clause.REVENUES:

Revenuesarebasedoncyclebillingsrenderedtocertaincustomers monthlyandothersbi-monthly forenergyconsumedandnotbilledattheendofthefiscalyear.AtDecember31,1997and1996,approximately

$8.6millionand$11.1million,respectively, ofunbilledelectricrevenuesremainedunrecognized inresultsofoperations, areincludedin"Otherliabilities."

UndertheCompany's PowerChoice agreement, theamountofunrecognized electricunbilledrevenueasofthePowerChoice implementation datewillbenettedagainstcertainotherregulatory assetsandliabilities.

Thereafter, changesinelectricunbilledrevenueswillnolongerbedeferred.

In1995,theCompanyused$71.5millionofelectricunbilledrevenuestoreducethe1995revenuerequirement.

AtDecember31,1997and1996,$34.7millionand$38.8million,respectively, ofunbilledgasrevenuesremainunrecognized inresultsofoperations andmaybeusedtoreducefuturegasrevenuerequirements.

Theunbilledrevenuesincludedinaccountsreceivable atDecember31,1997and1996,were$211.9millionand$218.5million,respectively.

50 TheCompany's tariffsincludeelectricandgasadjustment clausesunderwhichenergyandpurchased gascosts,respectively, aboveorbelowthelevelsallowedinapprovedrateschedules, arebilledorcreditedtocustomers.

TheCompany,asauthorized bythePSC,chargesoperations forenergyandpurchased gascostincreases intheperiodofrecovery.

ThePSChasperiodically authorized theCompanytomakechangesinthelevelofallowedenergyandpurchased gascostsincludedinapprovedrateschedules.

Asaresultofsuchperiodicchanges,aportionofenergycostsdeferredatthetimeofchangewouldnotberecovered ormaybeoverrecovered underthenormaloperation oftheelectricandgasadjustment clauses.However,theCompanyhastodatebeenpermitted todeferandbillorcreditsuchportionstocustomers, throughtheelectricandgasadjustment clauses,overaspecified periodoftimefromtheeffective dateofeachchange.TheCompany's electricFACprovidesforpartialpass-through offuelandpurchased powercostfluctuations fromamountsforecast, withtheCompanyabsorbing aportionofincreases orretaining aportionofdecreases uptoamaximumof$15millionperrateyear.Thereafter, 100%ofthefluctuation ispassedontoratepayers.

TheCompanyalsoshareswithratepayers fluctuations fromamountsforecastfornetresalemarginandtransmission

benefits, withtheCompanyretaining/absorbing 40%andpassing60%throughtoratepayers.

Theamountsretainedorabsorbedin1995through1997werenotmaterial.

UnderthePowerChoice

.agreement, theFACwillbediscontinued.

InDecember1996,theCompany,MultipleIntervenors andthePSCstaffreachedathreeyeargassettlement thatwasconditionally approvedbythePSC.Theagreement eliminated thegasadjustment clauseandestablished agascommodity costadjustment clause("CCAC").

TheCompany's gasCCACprovidesforthecollection orpassbackofcertainincreases ordecreases fromthebasecommodity costofgas.ThemaximumannualriskorbenefittotheCompanyis$2.25million.

Allsavingsandexcesscostsbeyondthatamountwill flowtoratepayers.

Foradiscussion oftheratemaking associated withnon-commodity gascosts,seeItem7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations-

"OtherFederalandStateRegulatory Initiatives

-Multi-Year GasRateSettlement Agreement."

FEDERALINCOMETAXES:AsdirectedbythePSC,theCompanydefersanyamountspayablepursuanttothealternative minimumtaxrules.Deferredinvestment taxcreditsareamortized overtheusefullifeoftheunderlying property.

STATEMENT OFCASHFLOWS:TheCompanyconsiders allhighlyliquidinvestments, purchased witharemaining maturityofthreemonthsorless,tobecashequivalents.

EARNINGSPERSHARE:Basicearningspershare("EPS")iscomputedbasedontheweightedaveragenumberofcommonsharesoutstanding fortheperiod.Thenumberofoptionsoutstanding atDecember31,1997,1996and1995thatcouldpotentially dilutebasicEPS,(butareconsidered antidilutive foreachperiodbecausetheoptionsexercisepricewasgreaterthantheaveragemarketpriceofcommonshares),isimmaterial.

Therefore, thecalculation ofbothbasicanddilutiveEPSarethesameforeachperiod.51 RECLASSIFICATIONS:

Certainamountsfromprioryearshavebeen'reclassified ontheaccompanying Consolidated Financial Statements toconformwiththe1997presentation.

COMPREHENSIVE INCOME:InJune1997,FASBissuedSFASNo.130.SFASNo.130establishes standards forreporting comprehensive income.Comprehensive incomeisthechangeintheequityofacompany,notincluding thosechangesthatresult&omshareholder transactions.

Allcomponents ofcomprehensive incomearerequiredtobereportedinanewfinancial statement thatisdisplayed withequalprominence asexistingfinancial statements.

TheCompanywillberequiredtoadoptSFASNo.130onJanuary1,1998.TheCompanydoesnotexpectthatadoptionofSFASNo.130willhaveasignificant impactonitsreporting anddisclosure requirements.

SEGMENTDISCLOSURES:

AlsoinJune1997,FASBissuedSFASNo.131.SFASNo.131establishes standards foradditional disclosure aboutoperating segmentsforinterimandannualfinancial statements.

Morespecifically, itrequiresfinancial information tobedisclosed forsegmentswhoseoperating resultsarereviewedbythechiefoperating officerfordecisions onresourceallocation.

Italsorequiresrelateddisclosures aboutproductandservices, geographic areasandmajorcustomers.

TheCompanywillberequiredtoadoptSFASNo.131forthefiscalyearendingDecember31,1998.TheCompanydoesnotexpectthattheadoptionofSFASNo.131willhaveasignificant impactonitsreporting anddisclosure requirements.

PENSIONANDOTHERPOSTRETIREMENT BENEFITS:

InFebruary1998,FASBissuedSFASNo.132.SFASNo.132revisesemployers'isclosures aboutpensionandotherpostretirement benefitplans.Itdoesnotchangethemeasurement orrecognition ofthoseplans.Itstandardizes thedisclosure requirements forpensionsandotherpostretirement benefitstotheextentpracticable andrequiresadditional information onchangesinthebenefitobligations andfairvaluesofplanassets.TheCompanywillberequiredtoadoptSFASNo.132forthefiscalyearendingDecember31,1998.TheCompanydoesnotexpecttheadoptionofSFASNo.132willhaveasignificant impactonitsreporting anddisclosure requirements.

NOTE2.RATEANDREGULATORY ISSUESANDCONTINGENCIES TheCompany's financial statements conformtoGAAP,including theaccounting principles forrate-regulated entitieswithrespecttoitsregulated operations.

Substantively, theseprinciples permitapublicutility,regulated onacost-of-service basis,todefercertaincostswhichwouldotherwise bechargedtoexpense,whenauthorized todosobytheregulator.

Thesedeferredcostsareknownasregulatory assets,whichinthecaseoftheCompanyareapproximately

$937million,netofapproximately

$240millionofregulatory liabilities atDecember31,1997.Theseregulatory assetsareprobableofrecovery.

Theportionofthe$937millionwhichhasbeenallocated tothenucleargeneration andelectrictransmission anddistribution businessisapproximately

$810million,whichisnetofapproximately

$240millionofregulat'ory liabilities.

Regulatory assetsallocated totherate-regulated gasdistribution businessare$127million.Generally, regulatory assetsandliabilities wereallocated totheportionofthebusinessthatincurredtheunderlying transaction thatresultedintherecognition oftheregulatory assetorliability.

Theallocation methodsusedbetweenelectricandgasareconsistent withthoseusedinpriorregulatory proceedings.

52 TheCompanyconcluded asofDecember31,1996thatthetermination, restatement oramendment ofIPPcontracts andimplementation ofPowerChoice wastheprobableoutcomeofnegotiations thathadtakenplacesincethePowerChoice announcement.

UnderPowerChoice, theseparated non-nuclear gener'atio'n businesswouldnolongerberate-regulated onacost-of-servicebasisand,accordingly, regulatory assetsrelatedtothenon-nuclear powergeneration

business, amounting toapproximately

$103.6million($67.4millionaftertaxor47centspershare)waschargedagainst1996incomeasanextraordinary non-cashcharge.ThePSCinitswrittenorderissuedMarch20,1998approving PowerChoice, determined tolimittheestimated valueoftheMRAregulatory assetthatcanberecovered fromcustomers toapproximately

$4,000million.Theultimateamountoftheregulatory assettobeestablished mayvarybasedoncertaineventsrelatedtotheclosingoftheMRA.Theestimated valueoftheMRAregulatory assetincludestheissuanceof42.9millionsharesofcommonstock,whichthePSCindetermining therecoverable amountofsuchasset,valuedat$8pershare.Becausethevalueoftheconsideration tobepaidtotheIPPPartiescanonlybedetermined attheMRAclosing,thevalueofthelimitation ontherecoverability oftheMRAregulatory assetisexpectedtoberecordedasachargetoexpenseinthesecondquarterof1998upontheclosingoftheMRA.Thechargetoexpensewillbedetermined asthedifference between$8pershareandtheCompany's closingcommonstockpriceonthedatetheMRAcloses,multiplied by42.9millionshares.UsingtheCompany's commonstockpriceonMarch26,1998of$127/16pershare,thechargetoexpensewouldbeapproximately

$190million(85centspershare).UnderPowerChoice, theCompany's remaining electricbusiness(nucleargeneration andelectrictransmission anddistribution business) willcontinuetoberate-regulated onacost-of-service basisand,accordingly, theCompanycontinues toapplySFASNo.71tothesebusinesses.

Also,theCompany's IPPcontracts, including thoserestructured undertheMRAandthosenotsorestructured willcontinuetobetheobligations oftheregulated business.

TheEITFoftheFASBreachedaconsensus onIssueNo.97-4"Deregulation ofthePricingofElectricity

-IssuesRelatedtotheApplication ofSFASNo.71andSFASNo.101"inJuly1997.Asdiscussed previously, theCompanydiscontinued theapplication ofSFASNo.71andappliedSFASNo.101withrespecttothefossilandhydrogeneration businessatDecember31,1996,inamannerconsistent withtheEITFconsensus.

Inaddition, EITF97-4doesnotrequiretheCompanytoearnareturnonregulatory assetsthatarisefromaderegulating transition planinassessing theapplicability ofSFASNo.71.IntheeventtheMRAandPowerChoice areimplemented, theCompanybelievesthattheregulated cashflowstobederivedfrompricesitwillchargeforelectricse'rviceover10years,including theCTC,assumingnounforeseen reduction indemandorbypassoftheCTCorexitfees,willbesufficient torecovertheMRAregulatory assetandtoproviderecoveryofandareturnontheremainder ofitsassets,asappropriate.

IntheeventtheCompanycouldnolongerapplySFASNo.71inthefuture,itwouldberequiredtorecordanafter-tax non-cashchargeagainstincomeforanyremaining unamortized regulatory assetsandliabilities.

Depending onwhenSFASNo.71wasrequiredtobediscontinued, suchchargewouldlikelybematerialtotheCompany's reportedfinancial condition andresultsofoperations andtheCompany's abilitytopaydividends.

53 ThePowerChoice agreement, whilehavingtheeffectofsubstantially depressing earningsduringitsfive-year term,willsubstantially improveoperating cashflows.-Withtheimplementation ofPowerChoice, specifically theseparation ofnon-nuclear generation

'sanentitythatwouldnolongerbecost-of-service regulated, theCompanyisrequiredtoassessthecarryingamountsofitslong-lived assetsinaccordance withSFASNo.121.SFASNo.121requireslong-lived assetsandcertainidentifiable intangibles heldandusedbyanentitytobereviewedforimpairment whenevereventsorchangesincircumstances indicatethatthecarryingamountofanassetmaynotberecoverable orwhenassetsaretobedisposedof.Inperforming thereviewforrecoverability, theCompanyisrequiredtoestimatefutureundiscounted cashflowsexpectedtoresultfromtheuseoftheassetand/oritsdisposition.

TheCompanyhasdetermined thatthereisnoimpairment ofitsfossilandhydrogenerating assets.Totheextenttheproceedsresulting fromthesaleofthefossilandhydroassetsarenotsufficient toavoidaloss,theCompanywouldbeabletorecoversuchlossthroughtheCTC.ThePowerChoice agreement providesfordeferralandfuturerecoveryoflosses,ifany,resulting fromthesaleofthenon-nucleargenerating assets.TheCompanybelievesthatitwillbepermitted torecordaregulatory assetforanysuchlossinaccordance withEITF97-4.TheCompany's fossilandhydrogeneration plantassetshadanetbookvalueofapproximately

$1.1billionatDecember31,1997.Asdescribed inItem7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations

-"MasterRestructuring Agreement andthePowerChoice Agreement,"

theconclusion ofthetermination, restatement oramendment ofIPPcontracts, andclosingofthefinancing necessary toimplement suchtermination, restatement oramendment, aswellasimplementation ofPowerChoice, issubjecttoanumberofcontingencies.

IntheeventtheCompanyisunabletosuccessfully bringtheseeventstoconclusion, itislikelythatapplication ofSFASNo.71wouldbediscontinued.

Theresulting non-cashafter-tax chargesagainstincome,basedonregulatory assetsandliabilities associated withthenucleargeneration andelectrictransmission anddistribution businesses asofDecember31,1997,wouldbeapproximately

$526.5millionor$3.65pershare.Variousrequirements underapplicable lawandregulations andundercorporate instruments, including thosewithrespecttoissuanceofdebtandequitysecurities, paymentofcommonandpreferred dividends andcertaintypesoftransfers ofassetscouldbeadversely impactedbyanysuchwrite-downs.TheCompanyhasrecordedthefollowing regulatory assetsonitsConsolidated BalanceSheetsreflecting therateactionsofitsregulators:

REGULATORY TAXASSETrepresents theexpectedfuturerecoveryfromratepayers ofthetaxconsequences oftemporary differences betweentherecordedbookbasesandthetaxbasesofassetsandliabilities.

Thisamountisprimarily timingdifferences relatedtodepreciation.

Theseamountsareamortized andrecovered astherelatedtemporary differences reverse.InJanuary1993,thePSCissuedaStatement ofInterimPolicyonAccounting andRatemaking Procedures thatrequiredadoptionofSFASNo.109onarevenue-neutralbasis.DEFERREDFINANCECHARGESrepresent thedeferralofthediscontinued portionofAFCrelatedtoCWIPatUnit2whichwasincludedinratebase.In1985,pursuanttoPSCauthorization, theCompanydiscontinued accruingAFConCWIPforwhichacashreturnwas54 beingallowed.Thisamount,whichwasaccumulated indeferreddebitandcreditaccountsuptothecommercial operation dateofUnit2,awaitsfuturedisposition bythePSC.Aportionofthedeferredcreditcouldbeutilizedtoreducefuturerevenuerequirements overaperiodshorterthanthelifeofUnit2,withalikeamountofdeferreddebitamortized andrecovered inratesovertheremaining lifeofUnit2.Power'Choice providesfornetting,andtherebyelimination ofthedebitandcreditbalancesofdeferredfinancecharges.DEFERREDENVIRONMENTAL RESTORATION COSTSrepresent theCompany's shareoftheestimated coststoinvestigate andperformcertainremediation activities atbothCompany-ownedsitesandnon-ownedsiteswithwhichitmaybeassociated.

TheCompanyhasrecordedaregulatory assetrepresenting theremediation obligations toberecovered fromratepayers.

PowerChoice andtheCompany's gassettlement providefortherecoveryofthesecostsoverthesettlement periods.TheCompanybelievesfuturecosts,beyondthesettlement periods,willcontinuetoberecovered inrates.SeeNote9-"Environmental Contingencies."

UNAMORTIZED DEBTEXPENSErepresents thecoststoissueandredeemcertainlong-term debtsecurities whichwereretiredpriortomaturity.

Theseamountsareamortized asinterestexpenseratablyoverthelivesoftherelatedissuesinaccordance withPSCdirectives.

POSTRETIREMENT BENEFITSOTHERTHANPENSIONSrepresent theexcessofsuchcostsrecognized inaccordance withSFASNo.106overtheamountreceivedinrates.Inaccordance withthePSCpolicystatement, postretirement benefitcostsotherthanpensionsarebeingphased-intoratesoverafive-year periodandamountsdeferredwillbeamortized andrecovered overaperiodnottoexceed20years.Substantially alloftheCompany's regulatory assetsdescribed abovearebeingamortized toexpenseandrecovered inratesoverperiodsapprovedintheCompany's electricandgasratecases,respectively.

NOTE3~NUCLEAROPERATIONS NUCLEARPLANTDECOMMISSIONING:

TheCompany's sitespecificcostestimates fordecommissioning Unit1anditsownership interestinUnit2atDecember31,1997areasfollows:SiteStudy(year)EndofPlantLite(year)Radioactive Dismantlement toBegin(year)MethodofDecommissioning Unit1199520092026DelayedDismantlement Unit219952026,2028Immediate Dismantlement CostofDecommissioning (inJanuary1998dollars)InmillionsofdollarsRadioactive Components Non-radioactive Components FuelDryStorage/Continuing Care$48111778$676$20148$29255 TheCompanyestimates thatbythetimedecommissioning iscompleted, theabovecostswillultimately amountto$1.7billionand$.9billionforUnit1andUnit2,respectively, usingapproximately 3.5%asanannualinflation factor.Inadditiontothecostsmentioned above,theCompanyexpectstoincurpost-shutdown costsforplantrampdown, insurance andpropertytaxes.In1998dollars,thesecostsareexpectedtoamountto$119millionand$63millionforUnit1andtheCompany's shareofUnit2,respectively.

Theamountswillescalateto$210millionand$190millionforUnit1andtheCompany's shareofUnit2,respectively, bythetimedecommissioning iscompleted.

In1997,theCompanymadeadjustments tothecashflowassumptions atUnit1forfueldrystorage,radioactive costcomponents, propertytaxandinsurance, tomoreaccurately reflecttheestimated costofeachcostcomponent.

Therevisions reducedthetotalcostestimatebyapproximately

$10million(in1998dollars).

NRCregulations requireownersofnuclearpowerplantstoplacefundsintoanexternaltrusttoprovideforthecostofdecommissioning radioactive portionsofnuclearfacilities andestablish minimumamountsthatmustbeavailable insuchatrustatthetimeofdecommissioning.

Theannualallowance forUnit1andtheCompany's shareofUnit2wasapproximately

$23.7million,..foreachofthethreeyearsendedDecember31,1997.Theamountwasbaseduponthe1993NRCminimumdecommissioning costrequirements of$437millionand$198million(in1998dollars)forUnit1andtheCompany's shareofUnit2,respectively.

InOpinionNo.95-21,theCompanywasauthorized, untilthePSCordersotherwise, tocontinuetofundtotheNRCminimumrequirements.

PowerChoice permitsraterecoveryforallradioactive andnon-radioactive costcomponents forbothunits,including post-shutdown costs,basedupontheamountsestimated inthe1995sitespecificstudiesdescribed above,whicharehigherthantheNRCminimum.Thereisnoassurance thatthedecommissioning allowance recovered inrateswillultimately aggregate asufficient amounttodecommission theunits.TheCompanybelievesthatifdecommissioning costsarehigherthancurrently estimated, thecostswouldultimately beincludedintherateprocess.Decommissioning costsrecovered inratesarereflected in"Accumulated depreciation and.amortization" onthebalancesheetandamountto$266.8millionand$217.7millionatDecember31,1997and1996,respectively forbothunits.Additionally atDecember31,1997,thefairvalueoffundsaccumulated intheCompany's externaltrustswere$164.7millionforUnit1and$51.0millionforitsshareofUnit2.Thetrustsareincludedin"Otherpropertyandinvestments."

Earningsontheexternaltrustaggregated

$40.3millionthroughDecember31,1997and,becausetheearningsareavailable tofunddecommissioning, havealsobeenincludedin"Accumulated depreciation andamortization."

Amountsrecovered fornon-radioactive dismantlement areaccumulated inaninternalreservefundwhichhasanaccumulated balanceof$45.2millionatDecember31,1997.NRCPOLICYSTATEMENT ANDPROPOSAL.

TheNRCissuedapolicystatement ontheRestructuring andEconomicDeregulation oftheElectricUtilityIndustry(the"PolicyStatement"

)in1997.ThePolicyStatement addresses theNRC'sconcernsabouttheadequacyofdecommissioning fundsandaboutthepotential impactonoperational safety.CurrentNRC56 regulations allowautilitytosetasidedecommissioning fundsannuallyovertheestimated lifeofaplant.ThePolicyStatement declarestheNRCwill:Continuetoconductreviewsoffinancial qualifications, decommissioning fundingandantitrust requirements ofnuclearpowerplants;Establish andmaintainworkingrelationships withstateandfederalrateregulators; Identifyallnuclearpowerplantowners,indirectaswellasdirect;andRe-evaluate theadequacyofcurrentregulations inlightofeconomicandotherchangesresulting fromratederegulation.

InadditiontotheabovePolicyStatement, theNRCisproposing toamenditsregulations ondecommissioning fundingtoreflectconditions expectedfromderegulation oftheelectricpowerindustry.

Theamendedrulewould:Revisethedefinition ofan"electric utility"toreflectchangescausedbyrestructuring withintheindustry.

Definea"Federallicensee" asanylicenseewhichhasthefullfaithandcreditbackingoftheUnitedStatesgovernment.

Onlysuchlicensees couldusestatements ofintenttomeetdecommissioning financial assurance requirements forpowerreactors.

Requirenuclearpowerplantlicensees toreporttotheNRConthestatusoftheirdecommissioning fundsatleastonceeverythreeyearsandannuallywithinfiveyearsoftheplannedendofoperation.

NRC'spresentrulecontainsnosuchrequirement becauseStateandFederalrate-regulating bodiesactivelymonitorthesefunds.Aderegulated nuclearutilitywouldhavenosuchmonitoring.

Permitnuclearlicensees totakecreditonearningsforprepaiddecommissioning trustfundsandexternalsinkingfundsfromthetimethefundsaresetasidethroughtheendofthedecommissioning period.Thepresentruledoesnotpermitsuchcreditbecauseitassumedthatinflation andtaxeswoulderodeanyinvestment return.NRChasdecided,however,thatthispositionisnotborneoutbyhistorical performance ofinflation-adjusted fundsinvestedinU.STreasuryinstruments.

TheCompanyisunabletopredicttheoutcomeofthismatter.PSCSTAFF'STENTATIVE CONCLUSIONS ONTHEFUTUREOFNUCLEARGENERATION:

OnAugust27,1997,thePSCrequested commentsonitsstaffstentative conclusions abouthownucleargeneration andfossilgeneration shouldbetreatedafterdecisions 57 aremadeontheindividual electricrestructuring agreements currently pendingbeforethePSC.ThePSCstaffconcluded thatbeyondthetransition period(theperiodcoveredbythevariousNewYorkutilityrestructuring agreements, including PowerChoice),

nucleargeneration shouldoperateonacompetitive basis.Inaddition, thePSCstaffconcluded thatasaleofgeneration plantstothirdpartiesisthepreferred meansofdetermining thefairmarket-value ofgeneration plantsandoffersthegreatestpotential forthemitigation ofstrandedcosts.ThePSCstaffalsoconcluded thatrecoveryofsunkcosts,including postshutdowncosts,wouldbesubjecttoreviewbythePSCandthisprocessshouldtakeintoaccountmitigation measurestakenbytheutility,including thestepsithastakentoencourage competition initsservicearea.InOctober1997,themajorityofutilities withinterests innuclearpowerplants,including theCompany,requested thatthePSCreconsider itsstaffsnuclearproposal.

Inaddition, theutilities raisedthefollowing issues:impediments tonuclearplantsoperating inacompetitive mode;impediments tothesaleofplants;responsibility fordecommissioning anddisposalofspentfuel;safetyandhealthconcerns; andenvironmental andfueldiversity benefits.

Inlightofalloftheseissues,theutilities recommended thatamoreformalprocessbedeveloped toaddressthoseissues.Thethreeinvestor-owned utilities, Rochester GasandElectricCorporation, Consolidated Edison'ompanyofNewYork,Inc.andtheCompany,whicharecurrently pursuingformation ofanuclearoperating companyinNewYorkState,alsofiledaresponsewiththePSCinOctober1997.Theresponsestatedthataforceddivestiture ofthenuclearplantswouldadduncertainty todeveloping astatewide approachtooperating theplantsandrequested thatsuchaforceddivestiture proposalberescinded.

Theresponsealsostatedthatimplementation ofaconsolidated six-unitoperation wouldcontribute tothemitigation ofunrecovered nuclearcosts.NYPA,whichisalsopursuingformation ofthenuclearoperating company,submitted itsowncommentswhichweresimilartothecommentsofthethreeutilities.

PowerChoice contemplates thattheCompany's nuclearplantswillremainpartoftheCompany's regulated businessandthattheCompanywillcontinueeffortstopursueastatewide solutionsuchastheNewYorkNuclearOperating Company.Thesettlement stipulates thatabsentastatewide

solution, theCompanywillfileadetailedplanforanalyzing proposedsolutions foritsnuclearassets,including thefeasibility ofanauction,transferand/ordivestiture within24monthsofPowerChoice approval.

AtDecember31,1997,thenetbookvalueoftheCompany's nuclearassetswasapproximately

$1.5billion,excluding thereservefordecommissioning.

NUCLEARLIABILITY INSURANCE:

TheAtomicEnergyActof1954,asamended,requiresthepurchaseofnuclearliability insurance fromtheNuclearInsurance Poolsinamountsasdetermined bytheNRC.Atthepresenttime,theCompanymaintains therequired$200millionofnuclearliability insurance.

Withrespecttoanuclearincidentatalicensedreactor,thestatutory limitfortheprotection ofthepublicunderthePrice-AndersonAmendments Actof1988whichisinexcessofthe$200millionofnuclearliability insurance, iscurrently

$8.2billionwithoutthe5%surcharge discussed below.Thislimitwouldbefundedbyassessments ofupto$75.5millionforeachofthe110presently licensednuclearreactorsintheUnitedStates,payableataratenottoexceed58

$10millionperreactorperyear.Suchassessments aresubjecttoperiodicinflation indexingandtoa5%surcharge iffundsproveinsufficient topayclaims.Withthe5%surcharge

included, thestatutory limitis$8.6billion.TheCompany's interestinUnits1and2couldexposeittoamaximumpotential loss,foreachaccident, of$111.8million(with5%assessment) throughassessments of$14.1millionperyearintheeventofaseriousnuclearaccidentatitsownoranotherlicensedU.S.commercial nuclearreactor.Theamendments alsoprovide,amongotherthings,thatinsurance andindemnity willcoverprecautionary evacuations, whetherornotanuclearincidentactuallyoccurs.NUCLEARPROPERTYINSURANCE:

TheNineMilePointNuclearSitehas$500millionprimarynuclearpropertyinsurance withtheNuclearInsurance Pools(ANI/MRP).

Inaddition, thereis$2.25billioninexcessofthe$500millionprimarynuclearinsurance withNuclearElectricInsurance Limited("NEIL").Thetotalnuclearpropertyinsurance is$2.75billion.NEILalsoprovidesinsurance coverageagainsttheextraexpenseincurredinpurchasing replacement powerduringprolonged accidental outages.Theinsurance providescoverageforoutagesfor156weeks,aftera21-weekwaitingperiod.NEILinsurance issubjecttoretrospective premiumadjustment underwhichtheCompanycouldbeassesseduptoapproximately

$11.3millionperloss.LOWLEVELRADIOACTIVE WASTE:TheCompanycurrently usestheBarnwell, SouthCarolinawastedisposalfacilityforlowlevelradioactive waste;however,continued accesstoBarnwellisnotassuredandtheCompanyhasimplemented alowlevelradioactive wastemanagement programsothatUnit1andUnit2arepreparedtoproperlyhandleinterimon-sitestorageoflowlevelradioactive wasteforatleasta10yearperiod.UndertheFederalLowLevelWastePolicyAmendment Actof1985,NewYorkStatewasrequiredbyJanuary1,1993tohavearrangedforthedisposalofalllowlevelradioactive wastewithinthestateorinthealternative, contracted forthedisposalatafacilityoutsidethestate.Todate,NewYorkStatehasmadenofundingavailable tosupportsitingforadisposalfacility.

NUCLEARFUELDISPOSALCOST:InJanuary1983,theNuclearWastePolicyActof1982(the"NuclearWasteAct")established acostof$.001perKWhofnetgeneration forcurrentdisposalofnuclearfuelandprovidesforadetermination oftheCompany's liability totheDOEforthedisposalofnuclearfuelirradiated priorto1983.TheNuclearWasteActalsoprovidesthreepaymentoptionsforliquidating suchliability andtheCompanyhaselectedtodelaypayment,withinterest, untiltheyearinwhichtheCompanyinitially planstoshipirradiated fueltoanapprovedDOEdisposalfacility.

AsofDecember31,1997,theCompanyhasrecordedaliability of$114.3millionforthedisposalofnuclearfuelirradiated priorto1983.Progressindeveloping theDOEfacilityhasbeenslowanditisanticipated thattheDOEfacilitywillnotbereadytoacceptdeliveries untilatleast2010.However,inJuly1996,theUnitedStatesCircuitCourtofAppealsfortheDistrictofColumbiaruledthattheDOEmustbeginaccepting spentfuelfromthenuclearindustrybyJanuary31,1998eventhoughapermanent storagesitewillnotbereadybythen.TheDOEdidnotappealthisdecision.

OnJanuary31,1997,theCompanyjoinedanumberofotherutilities, states,stateagenciesandregulatory commissions infilingasuitintheU.S.CourtofAppealsfortheDistrictofColumbiaagainsttheDOE.Thesuit59 requested thecourttosuspendtheutilities paymentsintotheNuclearWasteFundandtoplacefuturepaymentsintoanescrowaccountuntiltheDOEfulfillsitsobligation toacceptspentfuel.OnJune3,1997,theDOEnotifiedutilities thatitlikelywillnotmeetitsJanuary-1,1998deadlineandthatthedelaywasunavoidable pursuanttothetermsofthestandardontractwithDOEforfueldisposal.

DOEalsoindicated itwasnotobligated toprovideafina..cial remedyforsuchunavoidable delay.OnNovember14,1997theUnitedStatesCourtofAp~..visfortheDistrictofColumbiaCircuitissuedawritofmandamusprecluding DOEfrom:,<cusing itsowndelayonthegroundsthatithasnotyetpreparedapermanent repository orinterimstoragefacility.

OnDecember11,1997,27utilities, including theCompany,petitioned theDOEtosuspendtheirfuturepaymentstotheNuclearWasteFunduntiltheDOEbeginsmovingfuelfromtheirplantsites.Thepetitionfurthersoughtpermission toescrowpaymentstothewastefundbeginning inFebruary1998.OnJanuary12,1998,theDOEdeniedthepetition.

TheCompanyisunabletodetermine thefinaloutcomeofthismatter.PTheCompanyhasseveralalternatives underconsideration toprovideadditional storagefacilities, asnecessary.

Eachalternative willlikelyrequireNRCapproval, mayrequireotherregulatory approvals andwouldlikelyrequireincurring additional costs,whichtheCompanyhasincludedinitsdecommissioning estimates forbothUnit1anditsshareofUnit2.TheCompanydoesnotbelievethatthepossibleunavailability oftheDOEdisposalfacilityuntil2010willinhibitoperation ofeitherUnit..0NOTE4.JOINTLY-OWNED GENERATING FACILITIES Thefollowing tablereflectstheCompany's shareofjointly-owned generating facilities at,December31,1997.TheCompanyisrequiredtoprovideitsrespective shareoffinancing foranyadditions tothefacilities.

Poweroutputandrelatedexpensesaresharedbasedonproportionate ownership.

TheCompany's shareofexpensesassociated with-these facilities isincludedintheappropriate operating expensesintheConsolidated Statements ofIncome.UnderPowerChoice, theCompanywilldivestallofitsfossilandhydrogeneration assetswithanetbookvalueof$1.1billion,including itsinterests injointly-owned facilities.

Inthousands oEdollarsPercentOwnership UtilityPlantAccumulated Construction Depreciation WorkinProgressRosetonSteamStationUnitsNo.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)Theremaining ownership interests areCentralHudsonGasandElectricCorporation

("CentralHudson"),theoperatoroftheplant(35%),andConsolidated EdisonCompanyofNewYork,Inc.(40%).OutputofRosetonUnitsNo.1and2,whichhaveacapability of1,200,000 KW,issharedinthesameproportions asthecotenants'espective ownership interests.

60 (b)TheCompanyistheoperator.

Theremaining ownership interestisRochester GasandElectric("RGkE")(24%).OutputofOswegoUnitNo.6,whichhasa'capability of850,000KW,issharedinthesameproportions asthecotenants'espective ownership interests.

(c)TheCompanyistheoperator.

Theremaining ownership interests areLongIslandLightingCompany("LILCO")

(18%),NewYorkStateElectricEcGasCorporation

("NYSEG")

(18%),RG&E(14%),andCentralHudson(9%).OutputofUnit2,whichhasacapability of1,143,000 KW,issharedinthesameproportions asthecotenants'espective ownership interests.

InJune1997,LILCOandLongIslandPowerAuthority

("LIPA")enteredintoanagreement, whereby,uponcompletion ofcertaintransactions, LILCO'sstockwouldbesoldtoLIPA.Itisanticipated thatLIPAwouldownLILCO's18%ownership interestinUnit2.InJuly1997,theNewYorkStatePublicAuthorities ControlBoardunanimously approvedtheagreements relatedtotheLIPAtransaction, subjecttocertainconditions, andLILCO'sstockholders subsequently approvedthistransaction.

61 NOTE5.CAPITALIZATION CAPITALSTOCKTheCompanyisauthorized toissue185,000,000 sharesofcommonstock,$1parvalue;3,400,000 sharesofpreferred stock,$100parvalue;19,600,000 sharesofpreferred stock,$25parvalue;and8,000,000 sharesofpreference stock,$25parvalue.Thetablebelowsummarizes changesinthecapitalstockissuedandoutstanding andtherelatedcapitalaccountsfor1995,1996and1997:CC)0(ONSTOCKSlPARVAUJEPRE)KRRED STOCKS)00PARVALUESHARCSAHOUNT'HARES NONREDEEHASLE~

REDEEHABLE PREFERRED STOCKCAPITALSTOCK$25PARVAU)EPREHIUHANDEXPENSES)(ARESNON-RCDCEHASLC'EDECHASL'NET)

'eceaber31,1994:Issued144,3)Ig46620,657Slie,3112,376,000$210,000$27,600(a)12,774,005 S230,000$89,350(a)$1,779,504283Redeaptions (18,000)(1~800)l366,000)(9,150)1,319Foreigncurrencytranslation ad)ustaent Deceaber31,1995)IssuedRedeaptions Fore1gncurrencytranslation adjustaent

)44,332,12333.091144,3322,358,000 33(18,000)$210,000(1,800)(344F000)(8,600)$25,800(a)12,408,005 S230,000$80,200Is)3,141$1.784,247214(28)1708)Deceaber31,1996:IssuedRedeaptions Foreigncurrencytranslation adiustaent 144,365'1454,137144g3652,340,000 54(18,000)$210,000ll,800)(282,801)$24,000(a),12,064,005

$230,000$71,600(a)(7,070)$1,783,725 426104(4,567)Deceaber31,1997:144,419,351

$144,~192,322,000 W$210,000$22,200(a)1178120'230,000$64,530(a)$1,779,688

'nthousands ofdollars{a)Includessinkingfundrequirements duewithinoneyear.Thecumulative amountofforeigncurrencytranslation adjustment atDecember31,1997was$(15,448).

NON-REDEEMABLE PREFERRED STOCK(Optionally Redeemable)

TheCompanyhadcertainissuesofpreferred stockwhichprovideforoptionalredemption at'December 31,asfollows:SeriesSharesInthousands Redemption priceperofdollarsshare(Beforeadding19971996accumulated dividends)

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%6,000,000 150,000150,000Adjustable Rate-25.00(a)SeriesA1,200,000 SeriesC2,000,000 30,00050,00030,00050,00025.0025.00$440,000$440,000(a)Notredeemable until1999.MANDATORILY REDEEMABLE PREFERRED STOCKAtDecember31,theCompanyhadcertainissuesofpreferred stock,asdetailedbelow,whichprovideformandatory andoptionalredemption.

Theseseriesrequiremandatory sinkingfundsforannualredemption andprovideoptionalsinkingfundsthroughwhichtheCompanymayredeem,atpar,alikeamountofadditional shares(limitedto120,000sharesofthe7.45%series).Theoptiontoredeemadditional amountsisnotcumulative.

TheCompany's fiveyearmandatory sinkingfundredemption requirements forpreferred stock,inthousands, for1998through2002areasfollows:$10,120;$7,620;$7,620;$7,620and$3,050,respectively.

Theaggregate preference ofpreferred sharesuponinvoluntary liquidation oftheCompanyistheaggregate parvalueofsuchshares,plusanamountequaltothedividends accumulated andunpaidonsuchsharestothedateofpaymentwhetherornotearnedordeclared.

/63 SharesRedemption pricepershare{BeforeaddingInthousands ofdollarsaccumulated dividends)

Series19971996199719961997EventualMinimumPreferred

$100parvalue:7.45%222,000240,000Pzeferred

$25parvalue:$22,200$24,000$101.69$100.007.85%8.375%731,204914,005100<<000200~00018,2802,50022,85025.285,00025.0025.0025.00Adjustable Rate-SeriesB1,750,0001,750,000Lesssinkingfundrequirements 43,75086,73010,12043,75025.0095,6008,87025.00$76,610$86,730LONG-TERM DEBTLong-term debtatDecember31consisted ofthefollowing:

Inthousands ofdollarsSERIESFirstmortgage61/4%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 Promissory notes:*Adjustable RateSeriesdueJuly1,2015December1,2023December1,2025December1,2026March1,2027July1,2027TermLoanAgreement Unsecured notespayable:MediumTermNotes,Variousrates,due2000-2004 OtherUnamortized premium(discount)

TOTALLONG-TERM DEBTLesslong-term debtduewithinoneyear100,00069,80075,00050,00025,76093,200105,00020,000154,295{9,884)3,484,476 67,095100,00069,80075,00050,00025,76093,200105,00020,000156,606t10,708)3,525,96348,084$3I417'8183i477879SSSPSSSSSSSSSSSSSSSSSSSSSSSPSPSSSSSSSSSSSSSSUSSSSSSSSSSSSSSSPS

• Tax-exempt pollution controlrelatedissuesSeveralseriesofFirstMortgageBondsandPromissory Noteswereissuedtosecurealikeamountoftax-exempt revenuebondsissuedbyNYSERDA.Approximately

$414millionofsuchsecurities bearinterestatadailyadjustable interestrate(withaCompanyoptiontoconverttootherrates,including afixedinterestratewhichwouldrequiretheCompanytoissueFirstMortgageBondstosecurethedebt)whichaveraged3.63%for1997and3.46%for1996andaresupported bybankdirectpaylettersofcredit.Pursuanttoagreements betweenNYSERDAandtheCompany,proceedsfromsuchissueswereusedforthepurposeoffinancing theconstruction ofcertainpollution controlfacilities attheCompany's generating facilities ortorefundoutstanding tax-exempt bondsandnotes(seeNote6).Otherlong-term debtin1997consistsofobligations undercapitalleasesofapproximately

$29.7million,aliability totheDOEfornuclearfueldisposalofapproximately

$114.3millionandaliability forIPPcontractterminations ofapproximately

$10.3million.Theaggregate maturities oflong-term debtforthefiveyearssubsequent toDecember31,1997,excluding capitalleases,inmillions, areapproximately

$64,$108,$158,$310and$230respectively.

TheCompany's aggregate maturities willincreasesignificantly uponclosingoftheMRA.SeeItem7.Management's Discussion andAnalysisofFinancial Condition andResultsofOperations-

"MasterRestructuring Agreement andthePowerChoice Agreement."

NOTE6.BANKCREDITARRANGEMENTS TheCompanyhasan$804millionseniordebtfacilitywithabankgroupconsisting ofa$255milliontermloanfacility, a$125millionrevolving creditfacilityand$424millionforlettersofcredit.Theletterofcreditfacilityprovidescreditsupportfortheadjustable ratepollution controlrevenuebondsissuedthroughtheNYSERDAdiscussed inNote5.AsofDecember31,1997,65 theamountoutstanding undertheseniordebtfacilitywas$529million,consisting of$105millionunderthetermloanfacilityanda$424millionletterofcredit,leavingtheCompanywith$275millionofborrowing capability underthefacility.

ThefacilityexpiresonJune30,1999(subjecttoearliertermination iftheCompanyseparates itsfossil/hydro generation businessfromitstransmission anddistribution

business, oranyothersignificant restructuring plan).Theinterestrateapplicable tothefacilityisvariablebasedoncertainrateoptionsavailable undertheagreement andcurrently approximates 7.7%(butcappedat15%).TheCompanyiscurrently negotiating withthelenderstoreplacetheseniordebtfacilitywithalargerfacilitytofinancepartoftheMRA.TheCompanydidnothaveanyshort-term debtoutstanding atDecember31,1997and1996.NOTE7.FEDERALANDFOREIGNINCOMETAXESSeeNote9-"TaxAssessments."

Components ofUnitedStatesandforeignincomebeforeincometaxes:Inthousands ofdollarsUnitedStatesForeignConsolidating eliminations 1997$315,027(1,621)(3,476)1996$269,12828,522(17,402)1995$400,08717,609(10,267)Incomebeforeextraordinary itemandincometaxes$309,930$280,248$407,429~Following isasummaryofthecomponents ofFederalandforeignincometaxandareconciliation betweentheamountofFederalincometaxexpensereportedintheConsolidated Statements ofIncomeandthecomputedamountatthestatutory taxrate:Inthousands ofdollars19971996~1995Components ofFederalandforeignincometaxes: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$159,393Reconciliation betweenFederalandforeignincometaxesandthetaxcomputedatprevailing U.S.statutory rateonincomebeforeincometaxes:66 Computedtax$108,475$98,087$142,601Increase(reduction) attributable toflow-through ofcertaintaxadjustments:

Depreciation CostofremovalDeferredinvestment taxcreditamortiration Other36,411(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$36,273in1996associated withtheextraordinary itemforthediscontinuance ofregulatory accounting principles.

AtDecember31,thedeferredtaxliabilities (assets)werecomprised ofthefollowing:

InthosandsofdollarsAlternative minimumtax()nbilled revenueOtherTotaldeferredtaxassetsDepreciation relatedInvestment taxcreditrelatedOtherTotaldeferredtaxliabilities 1997(17,448)(88,859)(247,438)

(353,745) 1,358,827 79,858302,0921,740,777 1996(64,313)(83,577)(237,850)

(385,740) 1,421,550 84,294237,4141,743,258 Accumulated deferredincometaxes$1,387,032$1,357,518NOTE8.PENSIONANDOTHERRETIREMENT PLANSTheCompanyandcertainofitssubsidiaries havenon-contributory, defined-benefit pensionplanscoveringsubstantially alltheiremployees.

Benefitsarebasedontheemployee's yearsofserviceandcompensation level.TheCompany's generalpolicyistofundthepensioncostsaccruedwithconsideration giventothemaximumamountthatcanbedeductedforFederalincometaxpurposes.

67 Netpensioncostfor1997,1996and1995includedthefollowing components:

Inthousands ofdollars199719961995Servicecost-benefitsearnedduringtheperiodInterestcostonpro3ected benefitobligation ActualreturnonplanassetsNetamortization anddeferralTotalpensioncost(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$4.1millionfor1995wasrelatedtoconstruction laborand,accordingly, waschargedtoconstruction projects.

Thefollowing tablesetsforththeplan'sfundedstatusandamountsrecognized intheCompany's Consolidated BalanceSheets:Inthousands ofdollarsAtDecember31,Actuarial presentvalueofaccumulated benefitobligations:

VestedbeneiitsNon-vested benefits1997$990,41573,4301996$803,20283,107Accumulated benefitobligations Additional amountsrelatedtopro)ected payincreases Pro)ected benefitsobligation forservicerenderedtodatePlanassetsatfairvalue,consisting primarily oflistedstocks,bonds,otherfixedincomeobligations andinsurance contracts Planassetsinexcessofpro)ected benefitobligations Unrecognized netobligation atJanuary1,1987beingrecognized overapproximately 19yearsUnrecognized netgainfromactualreturnonplanassetsdifferent fromthatassumedUnrecognized netgainfrompastexperience different fromthatassumedandeffectsofchangesinassumptions amortized over10yearsPriorservicecostnotyetrecognized innetperiodicpensioncost1,063,845 886,309108,583141,4721,172,4281,027,781(131,910)(132,041)(19,446)(22,005)265,100219,68019,920(50,473)66,129(49,651)(1,304,338)(1,159,822)Pensionliability includedintheconsolidated balancesheets$83,191$82,11268 Principle Actuarial Assumptions

('1)DiscountRateRateofincreaseinfuturecompensation levels(plusmeritincreases)

Long-tean rateofreturnonplanassets7.002.509.257.502.509.25Inadditiontoproviding pensionbenefits, theCompanyanditssubsidiaries providecertainhealthcareandlifeinsurance benefitsforactiveandretiredemployees anddependents.

Undercurrentpolicies, substantially alloftheCompany's employees maybeeligibleforcontinuation ofsomeofthesebenefitsuponnormalorearlyretirement.

TheCompanyaccountsforthecostofthesebenefitsinaccordance withPSCpolicyrequirements whichcomplywithSFASNo.106.TheCompanyhasestablished varioustruststofunditsfuturepostretirement benefitobligation.

In1997,1996and1995,theCompanymadecontributions tosuchtrustsofapproximately

$13.5million,$28.5millionand$53.1million,respectively, whichrepresent theamountreceivedinratesandfromcotenants.

Netpostretirement benefitcostfor1997,1996and1995includedthefollowing components:

Servicecost-benefitsattributed toserviceduringtheperiodInthousands of,dollars1997,,19961995$12,300$12,900$12,600Interestcostonaccumulated benefitobligation 34,80037~50045'00Actualreturnonplanassets(24,500)(12,900)(11,200)Amortization ofthetransition obligation over20yearsNetamortization 10,9009,50013,5006,00018,80014,600Totalpostretirement benefitcost$43,000$57,000$80,200SSSSSSSSSSSSSSSWRSSSSSSaaSaaaSssaeSSaaaSSsssSsSSSsSSSSSRSSSSSSSSR Thefollowing tablesetsforththeplan'sfundedstatusandamountsrecognized intheCompany's Consolidated BalanceSheets:Inthousands ofdollarsAtDecember31,19971996Actuarial presentvalueofaccumulated benefitobligations:

Retiredandsurviving spousesActiveeligibleActiveineligible

$392,83243,29983,720$370,25931,03069,44169 Accumulated benefitobligation Planassetsatfairvalue,consisting primarily oflistedstocks,bondsandotherfixedobligations Accumulated postretirement benefitobligation inexcessofplanassetsUnrecognized netlossfrompastexperience different fromthatassumedandeffectsofchangesinassumptions Priorservicecostnotyetrecognized inpostretirement benefitcost519,851(181,101)338,750(48,466)30,086470,730(143,071) 327,659(36,048)39,205Unrecognized transition obligation beingamortized over20years(163,350)

(174,240)

Accruedpostretireqent benefitliability includedintheconsolidated balancesheet$157,020$156,576sasssssssssassasaessEssssssaaaaspsssspsaaaasEaaaassssasaaaa Principal actuarial assumptions

(%):Discountrate7.007.50Long-term rateofreturnonplanassetsHealthcarecosttrendrate:Pre-65Post-659.258.006.006.507.00-8.00During1996,theCompanychangedtheeligibility requirements forplanbenefitsforemployees whoretireafterMay1,1996.Generally, planbenefitsarenowaccruedforeligibleparticipants beginning afterage45.Previoustothischange,theCompanyaccruedthesebenefitsovertheemployees'ervice life.Theeffectofthischangeresultedinadecreaseintheaccumulated benefitobligation foractiveineligible employees.'t December31,1997,theassumedhealthcosttrendratesgradually declineto5.0%in2001.Ifthehealthcarecost'trend ratewasincreased byonepercent,theaccumulated postretirement benefitobligation asofDecember31,1997wouldincreasebyapproximately 6.7%andtheaggregate oftheserviceandinterestcostcomponent ofnetperiodicpostretirement benefitcostfortheyearwouldincreasebyapproximately 5.8%.TheCompanyrecognizes theobligation toprovidepostemployment benefitsiftheobligation isattributable toemployees'ast

services, rightstothosebenefitsarevested,paymentisprobableandtheamountofthebenefitscanbereasonably estimated.

AtDecember31,1997and1996,theCompany's postemployment benefitobligation isapproximately

$13.3millionand$13million,respectively.

70 NOTE9.COMMITMENTS ANDCONTINGENCIES SeeNote2.LONG-TERM CONTRACTS FORTHEPURCHASEOFELECTRICPOWER:AtJanuary1,1998,theCompanyhadlong-term contracts topurchaseelectricpowerfromthefollowing generating facilities ownedbyNYPA:facilityExpiration dateoi,contractPurchased Estimated capacityannualinMWcapacitycostNiagara-hydroelectric projectSt.Lawrence-hydroelectric project20072007951104$27,369,000 1,300,000Blenheim-Gilboa

-pumpedstoragegenerating station20022701,3257,500,000 S36,169,000 Thepurchasecapacities shownabovearebasedonthecontracts currently ineffect.Theestimated annualcapacitycostsaresubjecttopriceescalation andareexclusive ofapplicable energycharges.Thetotalcostofpurchases underthesecontracts andtherecentlycancelled contractwithFitzpatrick nuclearplantwasapproximately, inmillions,

$91.0,$93.3and$92.5fortheyears1997,1996and1995,respectively.

InMay1997,theCompanycancelled itscommitment topurchase110MWofcapacityfromtheFitzpatrick facility.

TheCompanycontinues tohaveacontractwithFitzpatrick topurchaseforresaleupto46MWofpowerforNYPA'seconomicdevelopment customers.

Undertherequirements ofPURPA,theCompanyisrequiredtopurchasepowergenerated byIPPs,asdefinedtherein.TheCompanyhas141PPAswith148facilities, ofwhich143areonline,amounting toapproximately 2,695MWofcapacityatDecember31,1997.Ofthisamount2,382MWisconsidered firm.Thefollowing tableshowsthepaymentsforfixedandothercapacitycosts,andenergyandrelatedtaxestheCompanyestimates itwillbeobligated tomakeunderthesecontracts withoutgivingeffecttotheMRA.Thepaymentsaresubjecttothetestedcapacityandavailability ofthefacilities, scheduling andpriceescalation.

71

{Inthousands ofdollars)SCHEDULABLE FIXEDCOSTSVARIABLECOSTSYEARCAPACITYOTHERENERGYANDTAXESTOTAL199819992000200120028247,740252,130242,030244,620248,940841,42042,45044,08045,65047,330S906,590943,720974,0801,042,3801,063,830 81,195,750 1,238,3001,260,1901,332,6501,360,100Thecapacityandotherfixedcostsrelatetocontracts with11facilities, wheretheCompanyisrequiredtomakecapacityandotherfixedpayments, including paymentswhenafacilityisnotoperating butavailable forservice.These11facilities accountforapproximately 774MWofcapacity, withcontractlengthsrangingfrom20to35years.Thetermsoftheseexistingcontracts allowtheCompanytoscheduleenergydeliveries fromthefacilities andthenpayfortheenergydelivered.

TheCompanyestimates thefixedpaymentsunderthesecontracts willaggregate toapproximately

$8billionovertheirterms,usingescalated contractrates.Contracts

.relatingtotheremaining facilities inserviceatDecember31,1997,requiretheCompanytopayonlywhenenergyisdelivered, exceptwhentheCompanydecidesthatitwouldbebettertopayaparticular projectareducedenergypaymenttohavetheprojectreduceitshighpricedenergydeliveries asdescribed below.TheCompanycurrently recoversschedulable capacitythroughbaseratesandenergypayments, taxesandotherschedulable fixedcoststhroughtheFAC.TheCompanypaidapproximately

$1,106million,$1,088millionand$980millionin1997,1996and1995for13,500,000 MWh,13,800,000 MWhand14,000,000 MWh,respectively, ofelectricpowerunderallIPPcontracts.

OnJuly9,1997,theCompanyannounced theMRAtoterminate, restateoramendcertainIPPpowerpurchasecontracts.

Asaresultofnegotiations, theMRAcurrently providesforthetermination, restatement oramendment of28PPAswith15IPPs,inexchangeforanaggregate ofapproximately

$3,616millionincashand42.9millionsharesoftheCompany's commonstockandcertainfixedpriceswapcontracts.

UnderthetermsoftheMRA,theCompanywouldterminate PPAsrepresenting approximately 1,180MWofcapacityandrestatecontracts representing 583MWofcapacity.

Therestatedcontracts arestructured tobeintheformoffinancial swapswithfixedpricesforthefirsttwoyearschangingtoanindexedpricingformulathereafter.

Thecontractquantities arefixedforthefulltenyeartermofthecontracts.

TheMRAalsorequirestheCompanytoprovidetheIPPPartieswithanumberoffixedpriceswapcontracts withatermofsevenyearsbeginning in2003.ThetermsoftheLIRAhavebeenandcontinuetobemodified.

Since1996,theCompanyhasnegotiated 2longtermandseverallimitedtermcontractamendments wherebytheCompanycanreducetheenergydeliveries fromthefacilities.

Thesereducedenergyagreements resultedinareduction ofIPPdeliveries ofapproximately 1,010,000 MWhand984,000MWhduring1997and1996,respectively.

72 SALEOFCUSTOMERRECEIVABLES:

TheCompanyhasestablished asingle-purpose, wholly-owned financing subsidiary, NMReceivables Corp.,whosebusinessconsistsofthepurchaseandresaleofanundivided interestinadesignated poolofcustomerreceivables, including accruedunbilledrevenues.

Forreceivables sold,theCompanyhasretainedcollection andadministrative responsibilities asagentforthepurchaser.

Ascollections reducepreviously soldundivided interests, newreceivables arecustomarily sold.NMReceivables Corp.hasitsownseparatecreditors which,uponliquidation ofNMReceivables Corp.,willbeentitledtobesatisfied outofitsassetspriortoanyvaluebecomingavailable totheCompany.Thesaleofreceivables areinfeesimpleforareasonably equivalent valueandarenotsecuredloans.Somereceivables havebeencontributed intheformofacapitalcontribution toNMReceivables Corp.infeesimpleforreasonably equivalent value,andallreceivables transferred toNMReceivables Corp.areassetsownedbyNMReceivables Corp.infeesimpleandarenotavailable topaytheparentCompany's creditors.

AtDecember31,1997and1996,$144.1and$250million,respectively, ofreceivables hadbeensoldbyNMReceivables, Corp.toathirdparty.Theundivided interestinthedesignated poolofreceivables wassoldwithlimitedrecourse.

Theagreement providesforaformulabasedlossreservepursuanttowhichadditional customerreceivables areassignedtothepurchaser toprotectagainstbaddebts.At'December 31,1997,theamountofadditional receivables assignedtothepurchaser, asalossreserve,wasapproximately

$64.4million.Althoughthisrepresents theformula-basedamountofcreditexposureatDecember31,1997undertheagreement, historical losseshavebeensubstantially less.Totheextentactuallossexperience ofthepoolreceivables exceedsthelossreserve,thepurchaser absorbstheexcess.Concentrations ofcreditrisktothepurchaser withrespecttoaccountsreceivable arelimitedduetotheCompany's large,diversecustomerbasewithinitsserviceterritory.

TheCompanygenerally doesnotrequirecollateral, i.e.,customerdeposits.

TAXASSESSMENTS:

TheInternalRevenueService("IRS")hasconducted anexamination oftheCompany's federalincometaxreturnsfortheyears1989and1990andissuedaRevenueAgents'eport.

TheIRShasraisedanissueconcerning thedeductibility ofpaymentsmadetoIPPsinaccordance withcertaincontracts thatincludeaprovision foratrackingaccount.Atrackingaccountrepresents amountsthatthesemandatedcontracts requiredtheCompanytopayIPPsinexcessoftheCompany's avoidedcosts,including acarryingcharge.TheIRSproposestodisallowacurrentdeduction foramountspaidinexcessoftheavoidedcostsoftheCompany.AlthoughtheCompanybelievesthatanysuchdisallowances fortheyears19S9and1990willnothaveamaterialimpactonitsfinancial positionorresultsofoperations, itbelievesthatadisallowance fortheseabove-market paymentsfortheyearssubsequent to1990couldhaveamaterialadverseaffectonitscashflows.Totheextentthatcontracts involving trackingaccountsareterminated orrestatedoramendedundertheMRAwithIPPPartiesasdescribed inNote2,theeffectsofanyproposeddisallowance wouldbemitigated withrespecttotheIPPPartiescoveredundertheMRA.TheCompanyisvigorously defending itspositiononthisissue.TheIRSiscurrently conducting itsexamination oftheCompany's federalincometaxreturnsfortheyears1991through1993.73 ENVIRONMENTAL CONTINGENCIES:

Thepublicutilityindustrytypically utilizesand/orgenerates initsoperations abroadrangeofhazardous andpotentially hazardous wastesandby-products.

TheCompanybelievesitishandlingidentified wastesandby-products inamannerconsistent withfederal,stateandlocalrequirements andhasimplemented anenvironmental auditprogramtoidentifyanypotential areasofconcernandaidincompliance withsuchrequirements.

TheCompanyisalsocurrently conducting aprog'ramtoinvestigate andrestore,asnecessary tomeetcurrentenvironmental standards, certainproperties associated withitsformergasmanufacturing processandotherproperties whichtheCompanyhaslearnedmaybecontaminated withindustrial waste,aswellasinvestigating identified industrial wastesitesastowhichitmaybedetermined thattheCompanycontributed.

TheCompanyhasalsobeenadvisedthatvariousfederal,stateorlocalagenciesbelievecertainproperties requireinvestigation andhasprioritized thesitesbasedonavailable information inordertoenhancethemanagement ofinvestigation andremediation, ifnecessary.

TheCompanyiscurrently awareof124siteswithwhichithasbeenormaybeassociated, including 76whichareCompany-owned.

Thenumberofownedsitesincreased astheCompanyhasestablished aprogramtoidentifyandactivelymanagepotential areasofconcernatitselectricsubstations.

Thiseffortresultedinidentifying anadditional 32sites.Withrespecttonon-owned sites,theCompanymayberequiredtocontribute someproportionate shareofremedialcosts.Althoughonepartycan,asamatteroflaw,beheldliableforalloftheremedialcostsatasite,regardless offault,inpracticecostsareusuallyallocated amongPRPs.Investigations ateachoftheCompany-owned sitesaredesignedto(1)determine ifenvironmental contamination problemsexist,(2)ifnecessary, determine theappropriate remedialactionsand(3)whereappropriate, identifyotherpartieswhoshouldbearsomeorallofthecostofremediation.

Legalactionagainstsuchotherpartieswillbeinitiated whereappropriate.

Aftersiteinvestigations arecompleted, theCompanyexpectstodetermine site-specificremedialactionsandtoestimatetheattendant costsforrestoration.

However,sinceinvestigations areongoingformostsites,theestimated costofremedialactionissubjecttochange.Estimates ofthecostofremediation andpost-remedial monitoring arebaseduponavarietyoffactors,including identified orpotential contaminants;

location, sizeanduseofthesite;proximity tosensitive resources; statusofregulatory investigation andknowledge ofactivities andcostsatsimilarly situatedsites.Additionally, theCompany's estimating processincludesaninitiative wherethesefactorsaredeveloped andreviewedusingdirectinputandsupportobtainedfromtheDEC.ActualCompanyexpenditures aredependent uponthetotalcos<ofinvestigation andremediation andtheultimatedetermination oftheCompany.'s shareofrespcisibility

>orsuchcosts,aswellasthefinancial viability ofotheridentified responsible partiessineclean-upobligations arejointandseveral.TheCompanyhasdeniedanyresponsibility atceitainofthesePRPsitesandiscontesting liability accordingly.

Asaconsequence ofsitecharacterizations andassessments completed todateandnegotiauons withPRPs,theCompanyhasaccruedaliability intheamountof$220million,whichisrcilected intheCompany's Consolidated BalanceSheetsatDecember31,1997.Thepotential highendoftherangeispresently estimated atapproximately

$650million,including approximately

$28574 millionintheunlikelyeventtheCompanyisrequiredtoassume100%responsibility atnon-ownedsites.TheamountaccruedatDecember31.1997,incorporates theadditional electricsubstations, previously mentioned, andachangeinthemethodusedtoestimatetheliability for27oftheCompany's largestsitestorelyuponadecisionanalysisapproach.

Thismethodincludesdeveloping severalremediation approaches foreachofthe27sites,usingthefactorspreviously described, andthenassigning aprobability toeachapproach.

Theprobability represents theCompany's bestestimateofthelikelihood oftheapproachoccurring usinginputreceiveddirectlyfromtheDEC.Theprobablecostsforeachapproacharethencalculated toarriveatanexpectedvalue.Whilethisapproachcalculates arangeofoutcomesforeachsite,theCompanyhasaccruedthesumoftheexpectedvaluesforthesesites.TheamountaccruedfortheCompany's remaining sitesisdetermined throughfeasibility studiesorengineering estimates, theCompany's estimated shareofaPRPallocation orwherenobetterestimateisavailable, thelowendofarangeofpossibleoutcomes.

Inaddition, theCompanyhasrecordedaregulatory assetrepresenting theremediation obligations toberecovered fromratepayers.

PowerChoice providesforthecontinued application ofdeferralaccounting forcostdifferences resulting fromthiseffort.InOctober1997,theCompanysubmitted adraftfeasibility studytotheDEC,whichincludedtheCompany's HarborPointsiteandfivesurrounding non-owned sites.Thestudyindicates arangeofviableremedialapproaches, however,afinaldetermination hasnotbeenmadeconcerning theremedialapproachtobetaken.Thisrangeconsistsofalowendof$22millionandahighendof$230million,withanexpectedvaluecalculation of$51million,whichisincludedintheamountsaccruedatDecember31,1997.Therangerepresents thetotalcoststoremediate theproperties anddoesnotconsidercontributions fromotherPRPs.TheCompanyanticipates receiving commentsfromtheDEConthedraftfeasibility studybythespringof1999.Atthistime,theCompanycannotdefinitively predictthenatureoftheDECproposedremedialactionplanortherangeofremediation costsitwillrequire.WhiletheCompanydoesnotexpecttoberesponsible fortheentirecosttoremediate theseproperties, itisnotpossibleatthistimetodetermine itsshareofthecostofremediation.

InMay1995,theCompanyfiledacomplaint pursuanttoapplicable FederalandNewYorkStatelaw,intheU.S.DistrictCourtfortheNorthernDistrictofNewYorkagainstseveraldefendants seekingrecoveryofpastandfuturecostsassociated withtheinvestigation andremediation oftheHarborPointandsurrounding sites.Inamotioncurrently pendingbeforethecourt.theNewYorkStateAttorneyGeneralhasmovedtodismisstheCompany's claimsagainsttheStateofNewYork,theNewYorkStateDepartment ofTransportation, theThruwayAuthority andCanalCorporation.

TheCompanyhasopposedthismotion.Thecasemanagement orderpresently callsforthecloseofdiscovery onDecember31,1998.Asaresult,theCompanycannotpredicttheoutcomeofthependinglitigation againstotherPRPsortheallocation oftheCompany's shareofthecoststoremediate theHarborPointandsurrounding sites.Whereappropriate, theCompanyhasprovidednoticesofinsurance claimstocarrierswithrespecttotheinvestigation andremediation costsformanufactured gasplant,industrial wastesitesandsitesforwhichtheCompanyhasbeenidentified asaPRP.Todate,theCompanyhasreachedsettlements withanumberofinsurance

carriers, resulting inpaymentstotheCompanyofapproximately

$36million,netofcostsincurredinpursuingrecoveries.

UnderPowerChoice theelectricportionorapproximately

$32millionwillbeamortized over10years.The75 remaining portionrelatestothegasbusinessandisbeingamortized overthethreeyearsettlement period.CONSTRUCTION PROGRAM:TheCompanyiscommitted toanongoingconstruction programtoassuredeliveryofitselectricandgasservices.

TheCompanypresently estimates thattheconstruction programfortheyears1998through2002willrequireapproximately

$1.4billion,excluding AFCandnuclearfuel.Fortheyears199Sthrough2002,theestimates.

inmillions, are$328,$269,$264,$275and$300,respectively, whichincludes$26,$25,$22,$20and$3S,respectively, relatedtonon-nuclear generation.

Theimpactoftheicestorm(seeNote13)ontheconstruction programwillnotbeknownuntilrestoration effortshavebeencompleted.

Theseamountsarereviewedbymanagement ascircumstances dictate.UnderPowerChoice, theCompanywillseparate, throughsaleorspin-off, theCompany's non-nuclearpowergeneration businessfromtheremainder ofthebusiness.

GASSUPPLY,STORAGEANDPIPELINECOMMITMENTS:

Inconnection withitsgasbusiness, theCompanyhaslong-term commitments withavarietyofsuppliers andpipelines topurchasegascommodity, providegasstoragecapability andtransport gascommodity oninterstate gaspipelines.

Thetablebelow.setsforththeCompany's estimated commitments at'ecember31,1997,forthenextfiveyears,andthereafter.

(Inthousands ofdollars)YEARGASSUPPLYGASSTORAGE/PIPELINE 19981999200020012002Thereafter 8103,99078,38056,11053,14039'60155,560895,72099,49081,55060,17026,61071,130Withrespecttofirmgassupplycommitments, theamountsarebaseduponvolumesspecified inthecontracts givingconsideration fortheminimumtakeprovisions.

Commodity pricesarebasedonNewYorkMercantile Exchangequotesandreservation charges,whenapplicable.

Forstorageandpipelinecapacitycommitments, amountsarebaseduponvolumesspecified inthecontracts, andrepresent demandchargespricedatcurrentfiledtariffs.AtDecember31,1997,theCompany's firmgassupplycommitments extendthroughOctober2006,whilethegasstorageandtransportation commitments extendthroughOctober2012.Beginning inMay1996,asaresultofagenericrateproceeding, theCompanywasrequiredtoimplement serviceunbundling, wherecustomers couldchoosetobuynaturalgasfromsourcesotherthantheCompany.Todatethemigration hasnotresultedinanystrandedcostssincethePSChasallowedutilities toassignthepipelinecapacitytothecustomers choosinganothersupplier.

Thisassignment isallowedduringathree-year periodendingMarch1999,atwhichtimethePSCwilldecideonmethodsfordealingwiththeremaining unassigned orexcess76 capacity.

InSeptember 1997,thePSCindicated thatitisunlikelyutilities willbeallowedtocontinuetoassignpipelinecapacitytodeparting customers afterMarch1999.TheCompanyisunabletopredicthowthePSCwillresolvetheseissues.NOTE10.FAIRVALUEOFFINANCIAL ANDDERIVATIVE FINANCIAL INSTRUMENTS Thefollowing methodsandassumptions wereusedtoestimatethefairvalueofeachclassoffinancial instruments:

CASHANDSHORT-TERM INVESTMENTS:

Thecarryingamountapproximates fairvaluebecauseoftheshortmaturityofthefinancial instruments.

LONG-TERM DEBTANDMANDATORILY REDEEMABLE PREFERRED STOCK:Thefairvalueoffixedratelong-term debtandredeemable preferred stockisestimated usingquotedmarketpriceswhereavailable ordiscounting remaining cashflowsattheCompany's incremental borrowing rate.ThecarryingvalueofNYSERDAbondsandotherlong-term debtreconsidered toapproximate fairvalue..DERIVATIVE FINANCIAL INSTRUMENTS:

Thefairvalueoffuturesandforwardcontracts aredetermined usingquotedmarketpricesandbrokerquotes.Thefinancial instruments heldorissuedbytheCompanyareforpurposesotherthantrading.Theestimated fairvaluesoftheCompany's financial instruments areasfollows:AtDecember31,1997Inthousands ofdollars1996CarryingAmountFairValueCarryingAmountFairValueCashandshort-term investments 8378,2328378,2326325,3988325,398Mandatorily redeemable preferred stock86,73087,32895,60086,516Long-term debt:FirstMortgagebonds2,801,305 2,878,368 Medium-term notes20'0022~944Promissory notes413,760413,760Other229,634229,6342,841,305 20,000413,760228,4612,690,70721,994413,760228,461In1997,theCompany's energymarketing subsidiary begantoeri'gageinbothtradingandnon-tradingactivities generally usinggasfuturesandelectricandgasforwardcontracts.

AtDecember31,1997,forbothtradingandnon-trading activities, thefairvalueoflongandshortpositions wasapproximately

$59.9millionand$57.6million,respectively.

Thesefairvaluesexceedtheweightedaveragefairvalueofopenpositions fortheperiodendingDecember31,1997.Thepositions aboveextendforaperiodoflessthanoneyear.Withrespecttotheseactivities theCompanydoesnothaveanymaterialcounterparty creditriskatDecember31,1997.77 Transactions enteredintofortradingpurposesareaccounted foronamark-to-market basiswithchangesinfairvaluerecognized asagainorlossintheperiodofthechange.AtDecember31,1997,theopentradingpositions consisted ofoff-balance sheetelectricandgasforwardcontracts.

Thesepositions consisted oflongandshortelectricforwardcontracts withfairvaluesof$45.3million(1,878,000 MWh)and$44.3million(1,778,000 MWh),respectively, andlongandshortgasforwardcontracts withfairvaluesof$9.4million(7.1millionDth)and$10.2million(7.3millionDth),respectively.

Thequantities aboverepresent notionalcontractquantities.

Theeffectsoftradingactivities ontheCompany's 1997resultsofoperations werenotmaterial.

Activities fornon-trading purposesgenerally consistoftransactions enteredintotohedgethemarketfluctuations ofcontractual andanticipated commitments.

Gasfuturescontracts areprimarily usedforhedgingpurposes.

Thechangeinfairvalueofthesetransactions aredeferreduntilthegainorlossonthehedgeditemisrecognized.

Thefairvalueofopenpositions fornon-tradingpurposesatDecember31,1997,aswellastheeffectoftheseactivities ontheCompany's resultsofoperations forthesameperiodending,wasnotmaterial.

TheCompany's investments indebtandequitysecurities consistoftrustfundsforthepurposeof'undingthenucleardecommissioning ofUnit1anditsshareofUnit2(seeNote3-"NuclearPlantDecommissioning"

),short-term investments heldbyOpinacEnergyCorporation (asubsidiary) andatrustfundforcertainpensionbenefits.

TheCompanyhasclassified allinvestments indebtandequitysecurities asavailable forsaleandhasrecordedallsuchinvestments attheirfairmarketvalueatDecember31,1997.Theproceedsfromthesaleofinvestments were$159.7million,$99.4millionand$70.3millionin1997,1996and1995,respectively.

Netrealizedandunrealized gainsandlossesrelatedtothenuclear,decommissioning trustarereflected in"Accumulated depreciation andamortization" ontheConsolidated BalanceSheets,whichisconsistent withthemethodusedbytheCompanytoaccountforthedecommissioning costsrecovered inrates.Theunrealized gainsandlossesrelatedtotheinvestments heldbyOpinacEnergyCorporation andthepensiontrustareincluded, netoftax,in"Commonstockholders'quity" ontheConsolidated BalanceSheets,whiletherealizedgainsandlossesareincludedin"Otherincomeanddeductions" ontheConsolidated IncomeStatements.

TherecordedfairvaluesandcostbasisoftheCompany's investments indebtandequitysecurities isasfollows:78 AtDecember31,1997Inthousands ofdollars,1996SecurityTypeGrossUnrealized FairCostGain(Loss)ValueCostGrossUnreali,zed Gain(Loss)FairValueU.S.Government Obligations Commercial Paper106,0351,542-107'77S14,136S1,864S(4)S15,996S24,782$1,530S(33)$26,27990,495739-91,234TaxExemptObli.gations 80'155,884(55)85,94475~5903g209(147)78'52Corporate Obligations Other3,0253,02592~94917~368(830)109~48762'238~524(422)2,58670,8252,586$296~260$26~658S(889)$322'29$256~176$14~002S(602)$269'76Usingthespecificidentification methodtodetermine cost,thegrossrealizedgainsandgrossrealizedlosseswere:Inthousands ofdollarsYearEndedDecember31,RealizedgainsRealizedlosses1997$3,4876861996$2,1218061995$2,523328Thecontractual maturities oftheCompany's investments indebtsecurities isasfollows:Inthousands ofdollarsAtDecember31,1997Lessthan1year1yearto5years5yearsto10yearsDueafter10yearsFairValue$106,67710,84552,526113,946Cost$105,13510,65450,351104,353NOTE11.STOCKBASEDCOMPENSATION UndertheCompany's stockcompensation plans,stockunitsandstockappreciation'rights

("SARs")maybegrantedtoofficers, keyemployees anddirectors.

Inaddition, theCompany's plansallowforthegrantofstockoptionstoofficers.

In1997,1996and1995theCompanygranted209,918unitsand296,300SARs,291,228unitsand376,600SARsand169,500units79 and414,000SARs,respectively.

Also,in1995theCompanygranted85,375stockoptions.AtDecember31,1997,therewere668,132units,1,086,900 SARsand298,583optionsoutstanding.

Stockunitsarepayableincashattheendofadefinedvestingperiod,determined atthedateofthegrant,basedupontheCompany's stockpriceforadefinedperiod.SARsbecomeexercisable, asdetermined atthegrantdate,andarepayableincashbasedupontheincreaseintheCompany's stockpricefromaspecified level.Assuch,fortheseawards,compensation expenseisrecognized overthevestingperiodoftheawardbaseduponchangesintheCompany's stockpriceforthatperiod.Optionsweregrantedovertheperiod1992to1995andbecomeexercisable threeyearsandexpiretenyearsfromthegrantdate.Theseoptionsareallconsidered tobeantidilutive forEPScalculations.

Includedintheresultsofoperations fortheyearsending1997and1996,isapproximately

$3.2and$2.6million,respectively, relatedtotheseplans.Aspermitted bySFASNo.123-"Accounting forStock-Based Compensation"

("SFASNo.123")theCompanyhaselectedtofollowAccounting Principles BoardOpinionNo.25-"Accounting forStockIssuedtoEmployees" (APBNo.25)andrelatedinterpretations inaccounting foritsemployeestockoptions.UnderAPBNo.25,nocompensation expenseisrecognized forstockoptionsbecausetheexercisepriceoftheCompany's employeestockoptionsequalsthemarketpriceoftheunderlying stockonthegrantdate.SincestockunitsandSARsarepayableincash,theaccounting underAPBNo.25andSFASNo.123isthesame..'herefore, thepro-forma disclosure ofinformation regarding netincome,asrequiredbySFASNo.123,relatesonlytotheCompany's outstanding stockoptions,theeffectofwhichisimmaterial tothefinancial statements fortheyearsended1997,1996and1995.Thereisnoeffectonearningspersharefortheseyearsresulting fromthepro-forma adjustments tonetincome.NOTE12.INFORMATION REGARDING THEELECTRICANDGASBUSINESSES TheCompanyisengagedprincipally inthebusinessofproduction,

purchase, transmission, distribution andsaleofelectricity andthepurchase, distribution, saleandtransportation ofgasinNewYorkState.TheCompanyprovideselectricservicetothepublicinanareaofNewYorkStatehavingatotalpopulation ofabout3,500,000, including amongothers,thecitiesofBuffalo,Syracuse, Albany,Utica,Schenectady, NiagaraFalls,Watertown andTroy.TheCompanydistributes ortransports naturalgasinareasofcentral,northernandeasternNewYorkhavingatotalpopulation ofabout1,700,000 nearlyallwithintheCompany's electricservicearea.Certaininformation regarding theCompany's electricandnaturalgassegmentsissetforthinthefollowing table.Generalcorporate

expenses, propertycommontobothsegmentsanddepreciation ofsuchcommonpropertyhavebeenallocated tothesegmentsinaccordance withthepracticeestablished forregulatory purposes.

Identifiable assetsincludenetutilityplant,materials andsupplies, deferredfinancecharges,deferredrecoverable energycostsandcertainotherregulatory andotherassets.Corporate assetsconsistofotherpropertyandinvestments, cash,accountsreceivable, prepayments, unamortized debtexpenseandcertainotherregulatory andotherassets.AtDecember31,1997,totalplantassetsconsisted ofapproximately 24%Nuclear,20%Fossil/Hydro, 42%Transmission andDistribution, 11%Gasand3%Common.80 1997Inthousands ofdollars19961995Operating revenues:

ElectricGas$3,309,441$3,308,979$3,335,548656963681~674581~790Total'3,966,404$3,990,653$3,917,338aasaaaaaaaasssaaaaasaaasaasaaassssaaasaraaaaaaaaaasaaaraaaaaaaaaa Operating, income:ElectricGasS462,240S438,590S587,28296,59983,74896,752TotalS558,839$522,338S684,034aaassaaraaaasraaasaasaaaaasaaarsaaaaaaaaaaraaaaraaasasaaaasaasaas Federalandforeignincometaxes:Electric96,590Gas30,005133,24626,147TotalS339,641S329,827S317,831aasasarsasssaaaasssaasassssssssaasssassaasaaasssassssaaassaassaaa Construction expenditures

<including nuclearfuel):Electric$221,915$277,505$285,722Gas68,84274,54460,082Total126,595102,494159,393aaaaaaaasaaaaaaaaaaaaaaaaaaaaaaaaasapasaaraaaaaaaaasaaasssaaasass

-Incomebeforeextraordinary item$183,335$177,754$248,036sssaasaaasssaaarsasaaraarassraasaasararrrssrassaaaaassssssssssssa Depreciation andamortization:

ElectricS311,683S302,825$292,995Gas27,95827,00224,836Total$290,757$352,049$345,804Identifiable assets:ElectricGas$7,257,163$7,372,3701,185,0011,203,184$7,592,2871,123,045 TotalCorporate assetsTotalassets8~442~1648I575i5548g715i332li141~977852i081762i537$9i584~141$9~427i635$9i477i869NOTE13.SUBSEQUENT EVENTInearlyJanuary1998,amajoricestormandfloodingcausedextensive damageinalargeareaofnorthernNewYork.TheCompany's electrictransmission anddistribution facilities inanareaofapproximately 7,000squaremilesweredamaged,interrupting servicetoapproximately 120,000oftheCompany's customers, orapproximately 300,000people.TheCompanyhadtorebuildmuchofitstransmission anddistribution systemtorestorepowerinthisarea.BytheendofJanuary1998,servicetoallcustomers wasrestored; however,thefinalcostsofthestormwillnotbeknownascrewscontinuetomakefinalrepairstotemporary measurestorestoreserviceandsalvageoperations cannotbecompleted untilspring.Thepreliminary estimateofthetotalcostoftherestoration andrebuildeffortscouldexceed$125million.Aportionofthecostwillbecapitalized; however,atthistime,theCompanyisunabletodetermine thecapitalportionuntilrebuildeffortshavebeencompleted andalllabor,material81 andothercosts,including chargesfromotherutilities andcontractors, havebeenreceivedandanalyzed.

TheCompanyispursuingfederaldisasterreliefassistance andisworkingwithitsinsurance carrierstoassesswhatportionoftherebuildcostsarecoveredbyinsurance.

policies.

TheCompanyisalsoanalyzing potential available optionsforstatefinancial aid.TheCompanyisunabletodetermine whatrecoveries, ifany,itmayreceivefromthesesources.Absentrecovery, theCompanywouldfaceachargetoearningsinthefirstquarterof1998toreflectitsestimateofunrecoverable, non-capitalized costs.NOTE14.QUARTERLY FINANCIAL DATA(UNAUDITED Operating

revenues, operating income,netincome(loss)andearnings(loss)percommonsharebyquartersfrom1997,1996and1995,respectively, areshowninthefollowing table.TheCompany,initsopinion,hasincludedalladjustments necessary forafairpresentation oftheresultsofoperations forthequarters.

Duetotheseasonalnatureoftheutilitybusiness, theannualamountsarenotgenerated evenlybyquarterduringtheyear.TheCompany's quarterly resultsofoperations reflecttheseasonalnatureofitsbusiness, withpeakelectricloadsin'summerandwinterperiods.Gassalespeakinthewinter.Znthousands odollarsOPERATING QUARTERENDEDREVENUESBASICANDDZLUTEDOPERATZNG INCOMEBASICANDDILUTEDNETEARNINGSINCOME(LOSS)PER(LOSS)COMMONSHAREDecember31,1997$960,304$86,024$7,881$(.01)1996971~106117832(25~808)(24)1995966,478132,22827,874.13September 30,1997$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$103,022$.6519961163'63214'3296~1226019951,124,813256,777118,736.75Inthefourthquarterof1996theCompanyrecordedanextraordinary itemforthediscontinuance ofregulatory accounting principles of$103.6million(47centspercommonshare).Inthethirdquarterof1996theCompanyincreased theallowance fordoubtfulaccountsby$68.5million(31centspercommonshare).Inthefourthquarterof1995,theCompanyrecorded$16.9million(8centspercommonshare)forMERITearnedinaccordance withthe1991Agreement.

NOTE15.ADJUSTMENT OF1997FINANCIAL STATEMENTS OnMay29,1998,afterdiscussion withtheStaffoftheSecurities andExchangeCommission, theCompanydetermined thatthe$190millionlimitation ontherecoverability oftheMRA82 regulatory asset,asdiscussed inNote2-"RateandRegulatory IssuesandContingencies,"

shouldbechargedtoexpenseinthequarterinwhichtheMRAcloses.Accordingly, the1997financial statements, aspresented herein,havebeenrestatedtoeliminate the$190millioncharge(85centspershare)andtheCompanyexpectsthatthesecondquarter1998financial statements willreflectsuch$190millioncharge.ELECTRICANDGASSTATISTICS ELECTRICCAPABILITY Owned:December31,1997Thousands ofKW19961995Coal0114DualFuelNuclearHydro-Oil/Gas1,3606467001,0826614,44916.77.98.6'3.38.154.61,3336367001,0826174,3681,3166367001,0826654,399Purchased:

NewYorkPowerAuthority IPPsHydroNuclear1,3252,3823,70716.229.245.41,3101102,4063,8261,3251102,3903,825Totalcapability~~

8,156RSHRR100.08,194RSQaa8,224SSSSEElectricpeakload6,348SSSSP6,0216,211In1994,OswegoUnitNo.5(anoil-f'red unitwithacapability of850,000KW)wasputintolong-term coldstandby,butcouldbereturnedtosezviceinthreemonths.Available capability canbeincreased duringheavyloadperiodsbypurchases fromneighboring interconnected systems.Hydrostationcapability isbasedonaverageDecemberstream-flowconditions.

83 ELECTRICSTATISTICS Electricsales(Millions ofKWh):Residential Commercial Industrial Industrial-Special Municipal serviceOtherelectricsystemsSubsidiary 19979,90511,5527,1914,5072353,746199610,10911,5647,1484,3262465,431303199510,05511,6137,0614,0532294,30536837,136Electricrevenues(Thousands ofdollars):

39'2737~684Residential Commercial Industrial Industrial-Special Municipal serviceOtherelectricsystemsMiscellaneous Subsidiary

$1,227,2451,233,417531,16461,82054,54583,794117,456S1,252,1651,237,385 524,85858,44453,795113,39153,69815,243$1,214,848 1,237,502 523,99656,25050,86088,936143,62519,531Electriccustomers (Average)

$3,309,441$3,308,979$3,335,548Residential Commercial Industrial Industrial-Special OtherSubsidiary lp404,345 146,0391,970851,5191,405,083145,1492,045991,30213,5571,399,725 144,7312,122831,48813,5081,553,9581,567,2351,561,657Residential (Average):

AnnualKWhusepercustomerCosttocustomerperKWh(incents)Annualrevenuepercustomer7,05312.39$873.897,19512.39$891.177,18412.08$867.9284 GASSTATISTICS 199719961995GasSales(Thousands ofDth):Residential Commercial Industrial Othergassystems55,20322,0691,3812856,72825,3532,7703051,84223,8182,660,161TotalsalesSpotmarket,Transportation ofcustomer-ownedgas78,68184,88178,4812,45110,4591,723152,813134,671144,613Totalgasdelivered 233,945230,011224,817GasRevenues(Thousands ofdollars):

Residential Commercial Industrial OthergassystemsSpotmarketTransportation ofcustomer-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$581~790Residential Commercial Industrial OtherTransportation 484,86240,9551866843477,78641,2662066713471,94840,9452251652Residential (Average) 526,852519,977513,771Annualdekatherm usepercustomerCosttocustomerperDthAnnualrevenuepercustomerMaximumdaygassendout(Dth)113.9118.7$7.90$7.36$899.51$873.501~133~370lg152'96109.8$7.11$780.581,211,252 85 ITEM14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ANDREPORTSONFORM8-K.(a)Certaindocuments filedaspartoftheForm10-K.(1)INDEXOFFINANCIAL STATEMENTS ReportofIndependent Accountants Consolidated Statements ofIncomeandRetainedEarningsforeachofthethreeyearsintheperiodendedDecember31,1997Consolidated BalanceSheetsatDecember31,1997and1996Consolidated Statements ofCashFlowsforeachofthethreeyearsintheperiodendedDecember31,1997NotestoConsolidated Financial Statements Separatefinancial statements oftheCompanyhavebeenomittedsinceitisprimarily anoperating companyandallconsolidated subsidiaries arewholly-owned directlyorbysubsidiaries.

(2)Thefollowing financial statement schedules oftheCompanyfortheyearsendedDecember31,1997,1996and1995areincluded:

ReportofIndependent Accountants onFinancial Statement ScheduleConsolidated Financial Statement Schedule:

II-Valuation andQualifying AccountsandReservesTheFinancial Statement Scheduleaboveshouldbereadinconjunction withtheConsolidated Financial Statements inPartII,Item8(Financial Statements andSupplementary Data).Schedules otherthanthosementioned aboveareomittedbecausetheconditions requiring theirfilingdonotexistorbecausetherequiredinformation isgiveninthefinancial statements, including thenotesthereto.(3)ListofExhibits:

SeeExhibitIndex.86 (b)ReportsonForm8-K:Form8-KReporting Date-October10,1997Itemreported-Item5.OtherEvents.Registrant filedinformation concerning thePowerChoice settlement.

Form8-KReporting Date-February11,1998Itemreported-Item5.OtherEvents.Registrant filedinformation concerning theJanuary1998icestorm.(c)Exhibits.

SeeExhibitIndex.(d)Financial Statement Schedule.

See(a)(2)above.87 REPORTOFINDEPENDENT ACCOUNTANTS ONFINANCIAL STATEMENT SCHEDULETotheBoardofDirectors ofNiagaraMohawkPowerCorporation Ourauditsoftheconsolidated financial statements ofNiagaraMohawkPowerCorporation referredtoinourreportdatedMarch26,1998appearing inthisForm10-KalsoincludedanauditoftheFinancial Statement SchedulelistedinItem14(a)ofthisForm10-K.Inouropinion,thisFinancial Statement Schedulepresentsfairly,inallmaterialrespects, theinformation setforththereinwhenreadinconjunction withtherelatedconsolidated financial statements.

/s/PRICEWATERHOUSE LLP'yracuse, NewYorkMarch26,199838 NIAGARAMOHAWKPOWERCORPORATION ANDSUBSIDIARY COMPANIES SCHEDULEII-VALUATION ANDUALIFYING ACCOUNTSANDRESERVES(ZnThousands ofDollars)ColumnAColumnBColumnCColumnDColumnEAdditions Description Allowance forDoubtfulAccounts-deductedfromAccountsReceivable intheConsolidated BalanceSheetsBalanceatBeginning ofPeriodChargedtoCostsandExpensesChargedtoOtherAccountsDeductions (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)Uncollectible accountswrittenoffnetofrecoveries of$14,416,$12,842,and$10,830in1997,1996and1995,respectively.

TheCompanyincreased itsallowance fordoubtfulaccountsin1995andrecordedaregulatory assetof$16,400,whichreflectstheamountthattheCompanyexpectstorecoverinrates.In1996,regulatory assetincreased by$800to$17,200andin1997,regulatory assetincreased

$3,000to$20,200.NIAGARAMOHAWKPOWERCORPORATION ANDSUBSIDIARY COMPANIES SCHEDULEII-VALUATION ANDUALIFYING ACCOUNTSANDRESERVES(ZnThousands ofDollars)ColumnAColumnBColumnCColumnDColumnEAdditions Description

)(iscellaneous Valuation ReservesBalanceatBeginning ofPeriodChargedtoChargedtoCostsandOtherExpensesAccountsBalanceatEndDeductions ofPeriod(c)199719961995$37,74039,42629,197$2,207$10,26118,719$4,04911,9478,490$35,89837,74039,426(c)Thereservesrelateprimarily tocertaininventory andnon-ratebaseproperties.

89

.NIAGARAMOHAWKPOWERCORPORATION EXHIBITINDEXInthefollowing exhibitlist,NMPCreferstotheCompanyandCNYPreferstoCentra!ewYorkPowerCorporation, apredecessor company.Eachdocumentreferredtobelowi:incorporated byreference tothefilesoftheCommission, unlessthereference tothed'.'ument inthelistisprecededbyanasterisk.

PreviousfilingswiththeCommission areindicate:

asfollows:A--NHPCC--NHPCF-CNYPG--CNYPV--NMPCX--NMPCZ--NHPCCC--NHPCDD--NHPCGG--NMPCHH--NMPC11--NMPCJJ-"NHPCKK""NHPCOO--NMPCQQ--NHPCSS--NMPCTT--NHPCVV--NMPCCCC--NMPC III--NMPCOOO--NMPC PPP--NMPC QQQ""NHPC RRR-"NMPC Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Registration Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.Statement No.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$andAnnualReportonForm10-KforyearendedDecember31,1996.Quarterly ReportonForm10-QforquarterendedMarch31,1993$andQuarterly ReportonForm10-QforquarterendedSeptember 30,1993$andQuarterly ReportonForm10-QforquarterendedJune30,1995$andQuarterly ReportonForm10-QforquarterendedSeptember 30,1996$Quarterly ReportonForm10-QforquarterendedJune30,1997$andQuarterly ReportonForm10-QforquarterendedSeptember 30,1997.ReportonForm8-KdatedJuly9,1997$andReportonForm8-KdatedOctober10,1997.Inaccordance withParagraph 4(iii)ofItem601(b)ofRegulation S-K,theCompanyagreestofurnishtotheSecurities andExchangeCommission, uponrequest,acopyoftheagreements comprising the$804millionseniordebtfacilitythattheCompanycompleted withabankgroupduringMarch1996.Thetotalamountoflong-term debtauthorized undersuchagreement doesnotexceed10percentofthetotalconsolidated assetsoftheCompanyanditssubsidiaries.

90 INCORPORATION BYREFERENCE EXHIBITNO~DESCRIPTION OFINSTRUMENT PREVIOUSFILINGPREVIOUSEXHIBITDESIGNATION 3(a)(1)--Certificate ofConsolidation ofNewYorkPowerandLightCorporation, BuffaloNiagaraElectricCorporation andCentralNewYorkPowerCorporation, filedintheofficeoftheNewYorkSecretary ofState,January5,1950.3(a)(1)3(a)(2)--Certi,ficate ofAmendment ofCertificate ofIncorporation ofNMPC,filedintheofficeoftheNewYorkSecretary ofState,January5,1950.3(a)(2)3(a)(3)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPC,pursuanttoSection36oftheStockCorporation LawofNewYork,filedAugust22,1952,intheofficeoftheNewYorkSecretary of'State.3(a)(4)--Certificate ofNMPCpursuanttoSection11oftheStockCorporation LawofNewYorkfiledMay5,1954intheofficeoftheNewYorkSecretary ofState.3(a)(5)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPC,pursuanttoSection36oftheStockCorporation LawofNewYork,filedJanuary9,1957intheofficeoftheNewYorkSecretary ofState.3(a)(6)--Certificate ofNMPCpursuanttoSection11oftheStockCorporation LawofNewYork,filedMay22,1957intheofficeoftheNewYorkSecretary ofState.3(a)(7)--Certificate ofNMPCpursuanttoSection11oftheStockCorporation LawofNewYork,filedFebruary18,1958intheofficeoftheNewYorkSecretary ofState.3(a)(8)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYork,filedMay5,1965intheofficeoftheNewYorkSecretary ofState.3(a)(9)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYork,filedAugust24,1967intheofficeoftheNewYorkSecretary ofState.3(a)()0)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYork,filedAugust19,1968intheofficeoftheNewYorkSecretary ofState.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)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYork,filedSeptember 22,1969intheofficeoftheNewYorkSecretary ofState.3(a)(11)3(a)(12)--Certificate ofAmendment ofCertificate 91 q~~ofIncorporation ofNMPCunderSection805oftheBusinessCorpozation LawofNewYork,filedMay12,1971intheofficeoftheNewYorkSecretary ofState.3(a)(13)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYork,filedAugust18,1972intheofficeoftheNewYorkSecretary ofState.3(a)(12)3(a)(13)3(a)(14)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYork,filedJune26,1973intheofficeoftheNewYorkSecretary ofState.3(a)(14)3(a)(15)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYork,filedMay9,1974intheofficeoftheNewYorkSecretary ofState.3(a)(15)3(a)(16)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYork,filedMarch12,1975intheofficeoftheNewYorkSecretary ofState.3(a)(16)3(a)(17)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSecti.on805oftheBusinessCorporation LawofNewYork,filedMay7,1975intheofficeoftheNewYorkSecretary ofState.3(a)(1I)3(a)(18)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation l,awofNewYork,filedAugust27,1975intheofficeoftheNewYorkSecretary ofState.3(a)(18)3(a)(19)--Certificate ofAmendment ofCeztificate of"Incorporation ofNMPCunderSectS.on805oftheBusinessCorporation LawofNewYork,filedMay7,1976intheofficeoftheNewYorkSecretary ofState.3(a)(19)3(a)(20)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledSeptember 28,1976intheofficeoftheNewYorkSecretary ofState.3(a)(20)3(a)(21)Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledJanuary27,1978intheofficeoftheNewYorkSecretary ofState.e3(a)(21)3(a)(22)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporatio'n LawofNewYorkfiledMay8,1978intheofficeoftheNewYorkSecretary ofState.3(a)(22)3(a)(23)-Certificate ofCorrection oftheCertificate ofAmendment filedMay7,1976oftheCertificate ofIncorporation underSection105oftheBusinessCorporation LawofNewYorkfiledJuly13,1978intheofficeofthe92 NewYorkSecretary ofState.3(a)(24)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledJuly17,1978intheofficeoftheNewYorkSeczetary ofState.3(a)(23)3(a)(24)3(a)(25)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCozporation LawofNewYorkfiledMarch3,1980intheofficeoftheNewYorkSecretary ofState.3(a)(25)3(a)(26)3(a)(27)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledMarch31,1981intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmendment ofCertiiicate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledMarch31,1981intheofficeoftheNewYorkSecretary ofState.3(a)(26)3(a)(27)3(a)(28)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledApril22,19S1intheofficeoftheNewYorkSecretary ofState.3(a)(28)3(a)(29)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledMay8,1981intheofficeoftheNewYorkSecretary ofState.3(a)(29)3(a)(30)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledApril26,1982intheofficeoftheNewYorkSecretary ofState.3(a)(30)3(a)(31)--Certificate ofAmendment oiCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledJanuary24,1983intheofficeoftheNewYorkSecretary ofState.3(a)(32)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledAugust3,1983intheofficeoftheNewYorkSecretary ofState.3(a)(31)3(a)(32)3(a)(33)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledDecember27,1983intheofficeoftheNewYorkSecretary ofState.3(a)(33)3(a)(34)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledDecember27,1983intheofficeoftheNewYorkSecretary ofState.3(a)(34)3(a)(35)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation Lawof93 p~~NewYorkfiledJune4,1984intheofficeoftheNewYorkSecretary ofState.3(a)(35)3(a)(36)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledAugust29,1984intheofficeoftheNewYorkSecretary ofState.3(a)(36)3(a)(37)3(a)(38)--Certificate ofAmendment ofCertificate ofZncozpozation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledApril17,1985,intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledMay3,1985,intheofficeoftheNewYorkSecretary ofState.3(a)(37)3(a)(38)3(a)(39)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledDecember24,1986intheofficeoftheNewYorkSecretary ofState.3(a)(39)3(a)(40)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledJune1,1987intheofficeoftheNewYorkSecretary ofState.3(a)(40)3(a)(41)3(a)(42)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledJuly16,1987intheofficeoftheNewYorkSecretary ofState.--Certificate ofAmendment ofCertificate ofZncozporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledMay27,1988intheofficeoftheNewYorkSecretary ofState.3(a)(41)3(a)(42)3(a)(43)"-Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledSeptember 27,1990intheofficeoftheNewYorkSecretary ofState.3(a)(4313(a)(44)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYozkfiledOctober18,1991intheofficeoftheNewYorkSecretary ofState.3(a)(44)3(a)(45)--Certificate ofAmendment ofCertificate ofZncozporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledMay5,1994intheofficeoftheNewYorkSeczetazy ofState.3(a)(45)3(a)(46)--Certificate ofAmendment ofCertificate ofIncorporation ofNMPCunderSection805oftheBusinessCorporation LawofNewYorkfiledAugust5,1994intheofficeoftheNewYorkSecretary ofState.3(a)(46)'3(b)-By-LawsofNMPC,asamendedFebruary26,1998.94 4(a)--Agreement tofurnishcertaindebtinstruments.

4(b)4(b)(l)--Mortgage TrustIndenture datedasofOctober1,1937betweenNMPC(formerly CNYP)andMarineMidlandBank,N.A.(formerly namedTheMarineMidlandTrustCompanyofNewYork),asTrustee.FiledOctober15,1937aftereffective dateofRegistration Statement No.2-3414.4(b)(2)--Supplemental Indenture datedasofDecember1,1938,supplemental toExhibit4(1).VV2-34(b)(3)4(b)(4)--Supplemental Indenture datedasofApril15,1939,supplemental toExhibit4(1).--Supplemental Indenture datedasofJuly1,1940,supplemental toExhibit4(1).VVVV2-54(b)(5)--Supplemental Indenture datedasofOctober1,1944,supplemental toExhibit4(1).7-64(b)(6)--Supplemental Indenture datedasofJune1,1945,supplemental toExhibit4(1).VV2-84(b)(7)--Supplemental Zndenture datedasofAugust17,1948,supplemental toExhibit4(1).2-94(b)(8)--Supplemental Indenture datedasofDecember31,1949,supplemental toExhibit4(1).7-94(b)(9)--Supplemental Indenture datedasofJanuary1,1950,supplemental toExhibit4(1).7-104(b)(10)4(bl(11)4(b)(12)--Supplemental Indenture datedasofOctober1,1950,supplemental toExhibit4(1)i--Supplemental Indenture datedasofOctober19,1950,supplemental toExhibit4(1).--Supplemental Indenture datedasofFebruary20,1953,supplemental toExhibit4(1).7-117-124-164(b)(13)--Supplemental Indenture datedasofApril25,1956,supplemental toExhibit4(1).4-194(b)(14)--Supplemental Indenture datedasofMarch15,1960,supplemental toExhibit4(1).CC2-234(b)(15)4(b)(16)--Supplemental Indenture datedasofOctober1,1966,supplemental toExhibit4(1).--Supplemental Indenture datedasofJuly15,1967,supplemental toExhibit4(1).GGHH2-274-2995 g~~4(b)(17)--Supplemental Indenture datedasofAugust1,1967,supplemental toExhibit4(1).HH4-304(b)(18)4(b)(19)--Supplemental Indenture datedasofAugust1,1968,supplemental toExhibit4(1).--Supplemental Indenture datedasofMarch15,1977,supplemental toExhibit4(1).ZZVV2-302-394(b)(20)--Supplemental Indenture datedasofAugust1,1977,supplemental toExhibit4(1).CCC4(b)(40)4(b)(21)--Supplemental Indenture datedasofMarch1,1978,supplemental toExhibit4(1).CCC4(b)(42)4(b)(22)4(b)(23)--Supplemental Zndenture datedasofJune15,1980,supplemental toExhibit4(1).--Supplemental Indenture datedasofNovember1,1985,supplemental to,Exhibit4<1).CCCIZZ4(b)(46)4(b)(64)4(bl(24)--Supplemental Indenture datedasofOctober1,1989,supplemental toExhibit4(1).4(b)(73)4<b)(25)4(b)(26)--Supplemental Indenture datedasofJune1,1990,supplemental toExhibit4(1).--Supplemental Indenture datedasofNovember1,1990,supplemental toExhibit4(1).PPPPPP4(b)(74)4(b)(75)4(b)(27)--Supplemental Indenture datedasofMarch1,1991,supplemental toExhibit4(1).4(b)(76)4<b)(28)--Supplemental Indenture datedasofOctober1,1991,supplemental toExhibit4(1)~4(b)(77)4(b)(29)4(b)<30)4<b)(31)--Supplemental Indenture datedasoiApril1,1992,supplemental toExhibit4(1).--Supplemental Indenture datedasofJune1,1992,supplemental toExhibit4(1).--Supplemental Zndenture datedasofJuly1,1992,supplemental toExhibit4(1).4(b)(78)4(b)(I9)4(b)(80)4(b)(32)4(b)(33)4(b)(34)--Supplemental Indenture datedasofAugust1,1992,supplemental toExhibit4(1).--Supplemental Indenture datedasofApril1,1993,supplemental toExhibit4(1)~--Supplemental Indenture datedasofJuly1,1993,supplemental to4<b)(81)4(b)(82)96

(~I~Exhibit4(1).4(b)(83)4(b)(35)--Supplemental Indenture datedasofSeptember 1,1993,supplemental toExhibit4(1).4(b)(84)4(b)(36)--Supplemental Indenture datedasofMarch1,1994,'upplemental toExhibit4(1).4(b)(85)4(b)(37)--Supplemental Indenture datedasofJuly1,1994,supplemental toExhibit4(1).4(86)4(b)(38)--Supplemental Indenture datedasofHay1,1995,supplemental toExhibit4(l).4(87)4(b)(39)--Agreement datedasofAugust16,1940,betweenCNYP,TheChaseNationalBankoftheCityofNewYork,asSuccessor Trustee,andTheMarineMidlandTrustCompanyofNewYork,asTrustee.7-2310-1--Agreement datedMarch1,1957betweenthePowerAuthority oftheStateofNewYorkandNMPCastosale,transmi.ssion anddisposition ofSt.Lawrencepower.13-1110-210-3--Agreement datedFebruary10,1961betweenthePowerAuthority oftheStateofNewYorkandNMPCastosale,transmission anddisposition ofNiagararedevelopment power.--Agreement datedJuly26,1961betweenthePowerAuthority oftheStateofNewYorkandNMPCsupplemental toExhibit10-2.DDDD13-613-710-4--Agreement datedasofHarch23,1973betweenthePowerAuthority oftheStateofNewYorkandNMPCastothesale,transmission anddisposition ofBlenheim-Gilboa power.5-810-5--Agreement datedJanuary23,1970betweenConsolidated GasSupplyCorporation (formerly namedNewYorkStateNaturalGasCorporation) andNMPC.5-810-6a--NewYorkPowerPoolAgreement datedasofFebruary1,1974betweenNHPCandsixotherNewYorkutilities andthePowerAuthority oftheStateotNewYork.5-10e10-6b--NewYorkPowerPoolAgreement datedasofApril27,1975betweenNMPCandsixotherNewYorkelectricutilities andthePowerAuthority oftheStateofNewYork(thepartiestotheAgreement havepetitioned theFederalPowerCommission foranorderpermitting suchAgreement, whichincreases thereservetactorofallpartiesfrom.14to.18,tosupersede theNewYorkPowerPoolAgreement datedasofFebruary1,1974).5-10b97 10-7--Agreement datedasofOctober31,1968betweenNMPC,CentralHudsonGas&ElectricCorporation andConsolidated EdisonCompanyofNewYork,Inc.astoJointElectricGenerating Plant(theRosetonStation).10-Ba10-Bb--Memorandum ofUndezstanding datedasoiMay30,1975betweenNMPCandRochester Gas&ElectricCorporation withrespecttoOswegoUnitNo.6.--Memorandum ofUnderstanding datedasofMay30,1975betweenNMPCandRochester GasandElectricCorporation withrespecttoOswegoUnitNo.6.SSSS10-Sc--BasicAgreement datedasofSeptember 22,1975betweenNMPCandRochester GasandElectricCorporation withrespecttoOswegoUnitNo.6.VV10-9a--Memozandum ofUnderstanding datedasofMay30,1975betweenNHPCandfourotherNewYorkelectricutilities withrespecttoNineMilePointNuclearStationUnitNo.2.SS10-9b--BasicAgreement datedasofSeptember 22,1975betweenNMPCandfourotherNewYorkelectricutilities withrespecttoNineMilePointNuclearStationUnitNo.2.VV10-9c--NineMilePointNuclearStationUnitNo.2Operating Agreement.

10-10a--Memorandum ofUnderstanding datedasofMay16,1974,asamendedHay30,1975,betweenNMPCandthreeotherNewYorkelectricutilities withrespecttotheSterlingNuclearStation.SS10"lob--BasicAgreement datedasofSeptember 22,1975betweenNMPCandthreeotherNewYorkelectricutilities withrespecttotheSterlingNuclearStations.

VV10-11--MasterRestructuring Agreement, datedasofJuly9,1997,betweentheCompanyandthesixteenindependent powerproducers signatory thereto.10-12--PowerChoice settlement filedwiththePSConOctober10,1997~10"13--PSCOpinionandOrderregarding approvalofthePowerChoice settlement agreement withPSC,issuedandeffective Harch20,1998."10-14(A)10-15--Preferred Consent,December,

)997--NMPCOfiicers'ncentive Compensation Plan-PlanDocument.

(A)10-16--NMPCLongTermIncentive Plan-PlanDocument.

(A)10-17--NMPCManagement Incentive Compensation Plan-98 PlanDocument10-)7(A)10-18--CEOSpecialAwardPlan.10-2(A)10-19--NHPCDeferredCompensation Plan.*(A)10-20

--Amendment toNMPCDeferredCompensation Plan(A)10-21--NMPCPerformance ShareUnitPlan.(A)10-22--NMPC1992StockOptionPlan.<PAGE>(A)10-23--NMPC1995StockIncentive Plan"(A)10-24

--Employment Agreement betweenNMPCandDavidJ.Arrington, Sr.VicePresident, HumanResources, datedDecember20,1996.10-17(A)10-25--Employment Agreement betweenNHPCandAlbertJ.Budney,Jr.,President andChiefOperating Officer,December20,1996.g(A)10-26--Employment Agreement betweenNHPCandWilliamE.Davis,ChairmanoftheBoardandChiefExecutive Officer,dated'ecember 20,1996.g(A)10-27--Employment Agreement betweenNHPCandDarleneD.Kerr,Sr.VicePresident, EnergyDistribution, datedDecember20,1996.(A)10-28--Employment Agreement betweenNMPCandGaryJ.Lavine,Sr.VicePresident, LegalandCorporate Relations, datedDecember20,1996.(A)10-29--Employment Agreement betweenNMPCandJohnW.Powers,Sr.VicePresident, andChiefExecutive Officer,datedDecember20,1996.(A)10-30--Employment Agreement betweenNMPCandB.RalphSylvia,Executive VicePresident, ElectricGeneration andChiefNuclearOfficer,datedDecember20,1996.10-23(A)10-31--Employment Agreement betweenNMPCandTheresaA.Flaim,VicePresident-Corporate Strategic

Planning, datedDecember20,1996."10-24(A)10-32--Employment Agreement betweenNHPCandStevenW.Tasker,VicePresident-Controller, datedDecember20,1996.(A)10-33-Employment Agreement betweenNMPCandKapuaA.Rice,Corporate Secretary, datedDecember20,1996.(A)10-34--Amendment toEmployment Agreement betweenNMPCandDavidJ.Arrington, AlbertJ.Budney,Jr.,WilliamE.Davis,DarleneD.Kerr,GaryJ.Lavine,JohnW.PowersandB.RalphSylvia,datedJune9,1997.10-3(A)10-35--Employment Agreement betweenNMPCandWilliamF.Edwards,datedSeptember 25,1997.m~(A)10-36

--Employment Agreement betweenNMPCand10-499 JohnH.Mueller,datedJanuary19,1998.(A)10-37--Deferred StockUnitPlanforOutsideDirectors g10-27--Statement settingforththecomputation ofaveragenuWerofsharesofcommonstockoutstanding.

12--Statements ShowingComputations ofCertainFinancial Ratios.'21--Subsidiaries oftheRegistrant.

23--Consent ofPriceWaterhouse LLP,independent accountants.

~27--Financial DataSchedule.

{A)Management contractorcompensatory planorarrangement requiredtobefiledasanexhibitpursuanttoItem601ofRegulation S-K.100 CgEXHIBIT11NIAGARAMOHAWKPOWERCORPORATION ANDSUBSIDIARIES COMPUTATION OFAVERAGENUMBEROFSHARESOFCOMMONSTOCKOUTSTANDING YearEndedDecember31,1997(1)SharesofCommonStock(2)NumberofDaysOutstanding (3)ShareDays(2x1)AverageNumberofSharesOut-standingasShown'nConsolidated Statements ofIn-come(3DividedbyNumberofDaysinYear)Sharesissuedatvarioustimesduringtheperiod-Acquisition

-SyracuseSuburbanGasCompany,Inc.54,1371996144,419,351 sssssasssss January1-December31144,365,214 36552,693,303,11014,260,09652,707,563,206sRsssssassssss.144,404i283 asaassassss January1-December31144,332,123Sharesissuedatvarioustimesduringtheyear-36652i825'57'18 Acquisition

-SyracuseSuburbanGasCompany,Inc.199533,091144,365,214 SSSSRRSRRSS 6,397,65352,831,954,671assssassssssss 144,349,603ssssssssass January1-December31144,311,466 Sharesissued-36552'73'85'90 DividendReinvestment Plan-January31Acquisition

-SyracuseSuburbanGasCompany,Inc.-October419,0161,641335896,370,360146,049144,332,123Saaaaaaaaaa 52,680,201,499assssssssassaa 144,329,3)9 aassaaaaaaa

• Numberofdaysoutstanding notshownassharesrepresent anaccumulation ofweekly,monthlyandquarterly issuesthroughout theyear.Sharedaysforsharesissuedarebasedonthetotalnumberofdayseachsharewasoutstanding duringtheyear.Note:Earningspersharecalculated onbothabasicanddilutedbasisarethesameduetotheeffectsofrounding.

EXHIBIT12NIAGARAMOHAWKPOWERCORPORATION ANDSUBSIDIARY COMPANIES STATEMENT SHOWINGCOMPUTATIONS OFRATIOOFEARNINGSTOFIXEDCHARGES,RATIOOFEARNINGSTOFIXEDCHARGESWITHOUTAFCANDRATIOOFEARNINGSTOFIXEDCHARGESANDPREFERRED STOCKDIVIDENDS YearEndedDecember31,19971996199519941993A.NetIncomeperStatements ofIncome$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.Allowance forFundsUsedDuringConstruction 9,7067,3559,0509,07916,232G.EarningsBeforeZncomeTaxesandFixedChargeswithoutAFCPreferred DividendFactor:$604,675QQPSaaQR$477,579SHSEaSOS$713,352$594,648$721,871H.Preferred DividendRequirements Z.RatioofPre-TaxIncometoNetIncome(C/A)$37,3971.69$38,2811.60S39,5961.64S33,673S31,8571.631.54J.Preferred DividendFactor(HxI)K.FixedChargesasabove(D)L.FixedChargesandPreferred Dividends Combined$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.RatioofEarningstoFixedChargesandPreferred Dividends Combined(E/L)1.991.671.551.312.261.901.89261.63(a)Includesaportionofrentalsdeemedrepresentative oftheinterestfactor:$26,:for1997,$26,600for1996,$27,312for1995,$29,396for1994and$27,821for1993.102 c,EXHIBIT21NIAGARAMOHAWKPOWERCORPORATION ANDSUBSIDIARY COMPANIES SUBSIDIARIES OFTHEREGISTRANT NameofCompanyStateofOrganization OpinacNorthAmerica,Inc.(Note1)NMUranium,Inc.EMCO-TECH, Inc.(Note2)NMHoldings, Inc.(Note3)MoreauManufacturing Corporation BeebeeIslandCorporation NMReceivables Corp.DelawareTexasNewYorkNewYorkNewYorkNewYorkNewYorkNOTE1:AtDecember31,1997,OpinacNorthAmerica,Inc.ownsOpinacEnergyCorporation andPlumStreetEnterprises, Inc.OpinacEnergyCorporation hasa50percentinterestinCNP,whichisincorporated intheProvinceofOntario,Canada.CNPownsCowleyRidgePartnership (anAlberta,Canadageneralpartnership) andCanadianNiagaraWindPowerCompany,Inc.(incorporated intheProvinceofAlberta,Canada).PlumStreetEnterprises, Inc.,("PlumStreet")anunregulated company,isincorporated intheStateofDelaware.

PlumStreetownsPlumStreetEnergyMarketing, Inc.(incorporated intheStateofDelaware),

GlobalEnergyEnterprises IndiaPrivateLimited,90%ofDolphinInvestments International, Inc.(acorporation organized andexistingunderthelawsofNevis,WestIndies,whichowns45%ofAtlantisEnergieSystemsAG(acorporation organized andexistingunderthelawsoftheFederalRepublicofGermany)),

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

EXHIBIT23CONSENTOFINDEPENDENT ACCOUNTANTS Weherebyconsenttotheincorporation byreference intheRegistration Statement onFormS-8(Nos.33-36189, 33-42771and333-13781) andtotheincorporation byreference intheProspectus constituting partoftheRegistration Statement onFormS-3(Nos.33-50703, 33-51073,33-54827, 33-55546and33349541) andintheProspectus/Proxy Statement constituting partoftheRegistration Statement onFormSQ(No.333-49769) ofNiagaraMohawkPowerCorporation ofourreportdatedMarch26,1998,exceptNote2(thirdparagraph) andNote15,astowhichthedateisMay.29,1998appearing intheCompany's Form10-K/A,Amendment No.2,datedMay29,1998.Wealsoconsenttotheincorporation byreference ofourreportontheFinancial Statement

Schedule, whichappearsintheForm10-K.PRICEWATERHOUSE LLPSyracuse, NewYorkMay29,1998104

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SIGNATURE Pursuanttotherequirements ofSection13or15(d)oftheSecurities ExchangeActof1934,theRegistrant hasdulycausedthisreporttobesignedonitsbehalfbytheundersigned, thereunto dulyauthorized.

NIAGARAMOHAWKPOWERCORPORATION (Registrant)

Date:May29,1998StevenW.TaskerVicePresident-Controller andPrincipal Accounting Officer105