ML17053A636

Annual Financial Rept 1978

ML17053A636
Person / Time
Site:	Nine Mile Point
Issue date:	04/23/1979
From:	NIAGARA MOHAWK POWER CORP.
To:
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ML17053A635	List: ML17053A633 ML17053A636 ML17053A637 ML17053A638 ML17053A639
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NUDOCS 7904250420
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NOTICE-THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL.

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Highlights of 1978 1978 Total operating revenues

$ 1 r280r248r000 Income available forcommon stockholders S

112,502,000 Earnings per common share

$1.89 Dividends per common share

$1.36'6 Common shares outstanding (average) 59,661,000

, 1977

% Change

$1,225,832,000 4

98,127,000 15

$1.74 9

$1.31tia 4

56,279,000 6

Utilityplant (gross)

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

S3r905r374r000

$3 647 274 000 7

S 316,280,000 289,931,000 9

32r382r000r000 31 367 000 000 3

1,336,000 1,326,000 1

5,485,000 5,405,000 1

DIVIDENDS PER COMMON SHARE Dollars EARNINGS PER COMMON,TOTAL OPERATING SHARE(RESTATED),.

REVENUES

Dollars,

'ilifonsot dollars p gn Natural gas sales to customers (cubic feet) 95,333,000,000 90,827,000,000 5

Gas customers at end of year 413,000 413,000 Maximum day gas sendout (cubic feet) 637,556,000 660,974,000 (4)

Contents 1 President's letter 3 Financial summary 4 Sales and revenues 5 Dividends, financing 6 Electric growth outlook, construction programs 8 Nuclear power success 9 Alternate energy, environment 10 Gas outlook 11 Consumer programs 12 Employees, stockholders 13 Financial statements 23 Statistics 25 Officers and directors Cover Service representative Howard Blair, Jr. of Potsdam hastens out on nighf troublesho'oting call, a typical assignmen't for him and'the 400 other seivice reps who stand ready to respond to any consumer. energy emergency in our area. A northern New York native who joined the Company 15 years ago,'oward takes personal satisfaction in work-ing "out front" and helping our consumers on a p'erson-to;person ba'sts in being counted o'.

Our service area Niagara Mohawk is one of the na-tion's leading investor-owned utilities, with the largest service area in New York State. Electricity from our massive system, extend-ing from Lake Erie to New Eng-land's borders, to Canada and Pennsylvania, serves the electric needs of 1,336,000 customers. Our natural gas system serves 413,000 customers in central, eastern and northern New York, nearly all within our electric service area. Two Canadian subsidiaries, St. Lawrence Power Company and Canadian Niagara Power Company, Ltd., pro-vide electric service to parts of southern Ontario. Our corporate headquarters is 300 Erie Boulevard W., Syracuse, N.Y. 13202.

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~ Natural Gas Service Area IElectric and Gas Service Area Annual Meeting The annual meeting of stockholders will be held on May,l, 1979 at the company's principal office in Syracuse. Aformal notice of meeting, proxy statement and proxy form,willbe sent to holders ot common stock in early April.

Tf8nsfttr Agents

'.1 Preferred Stock and Preference Stock:

Marine Midland BankNewYork 2 Broadtlvay, New, YorK, N.Y. 10004 Common Stock;

" Moi'g'an Guaranty Trust Company'of New York'0 W. Broadway. New York'.Y,"1,0015

. Disbursing Agent Preferi ed, Preference and Common

, Stocks:

'I Niagara MohawKPower Corporation 300 Erie Boulevard West'-

Syracuse. N,Y.13202;;.

• Stock Exchanges Common and Certain Pieferred Series:

'isted on New YolkStocgExcliange Common Stock:

Also traded on Amsterdam (Netherlands),

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

Ticker Symbol: NMK Form 10-K Report Acopy of the Company's Form 10-K report filed annually withthe Securities and Exchange Commission is available after March 31. 1979 by writing the Vice President and Treasurer at 300 Erie Boulevard West, Syracuse. N.Y. 13202.

The intormation inthia report is not ttiven in connection Nitthtne sale ol. or offer to troy, any security.

To our stockholders n G. Haehl. Jr.

Niagara Mohawk's earnings showed a noticeable gain over those of 1977up 15/ per common share to $ 1.89 in 1978.

This improvement resulted principally from electric and natural gas rate in-creases, totaling $ 35 millionannually, effective July 8. Also influential were reduced maintenance costs and the continuance oftightened cost controls. These earnings reflect the fact that 1978 kilowatt-hour sales to our customers were 3%

above those of 1977, while gas sales were up 5%.

Because earning projections remained substantially below levels approved by the Public Service Commission in its July 1978 decision, we requested the Commis-sion to reconsider the electric portion ofthe case and to approve a $ 37 million, 3>/j% increase. This adjustment would have helped us achieve the revenue levels already approved by the Commission. Unfortunately, that was not to be. On February 8, 1979, the Commission considered our request at an open meeting. It is the Company's understanding that the Commission agreed to allow Niagara Mohawk a rate increase ofapprozimately $ 17 million, less than halfour request.

A formal opinion is expected by early March.

Based on our cost and revenue projections for the early 1980s, but consistent with federal wage and price gnideli nes, we are now proceeding with plans to file for electric and gas rate increases in spring 1979. Under most circumstances, nearly a one-year lead time must be allowed for the evaluation ofour filingbefore new rates may be placed into effect. We must aggressively seek such rate adjustments to maintain earnings.

Most dramatic ofall the cost increases affecting our business is the spiraling cost ofconstructing new electric generating facilities to meet long-term energy re-quirements in our service area. For example, the cost, including financing, ofa nuclear-electric generating unit, about $247 per kilowatt in 1969, has in-creased more than fivefold to approximately $ 1,300 per kilowatt in 1978. Coal-fired plant construction costs have also multiplied drastically. The PSC has re-cently denied the combined effort ofNew York State utilities to activate Empire State Power Resources, Inc. (ESPRI) as an electric construction and generation company. This disappointing action precludes the financing cost savings ESPRI offered. In addition, ESPRI was expected to provide a single engineering, con-struction and management organization at cost savings over the now separate groups ofeach utility.

Discussed in some detail on page 6, the slowdown in upstate New York' economy and the impact ofhigher energy costs have resulted in the rescheduling ofmajor power installations. Atpresent, our planners estimate our 15-year elec-tric growth at an average 2.4% annually, with even less growth through 1981, as against a 4.4% annual growth projection made in 1973. Despite the resulting decline in our construction program, we still estimate the need for $635 million in capital ezpenditures over the next three years. The completion ofa sixth generating unit at our Oswego Steam Station in 1980 willhelp assure our cus-tomers that we can meet their needs.

The five-year-old, costly saga ofefforts by the Town ofMassena to expropriate our electric distribution facilities dragged on as 1978 ended. Last fall, the New York State Court ofAppeals ruled that Massena [representing only 0.2%%uo ofour electric sales] could condemn our properties under New York State Law and enter the electric distribution business. ivfonths later, Niagara Mohawk continues to serve Massena while a condemnation commission begins its work and the

Town contends for temporary possession without any long-range assurance or confidence ofsuccess.

Elsewhere in our system, municipal takeover proposals are suggested from time to time. Recently, however, the diminished availability oflow-cost, untaxed hydro power from the New York State Power Authority has discouraged all but the most zealous supporters ofgovernment ownership.

The once bleak outlook for natural gas supply brightened in 1978. Because of conservation, increased wellhead production and the advent ofliquefied natural gas, we now have gas available to serve markets closed for years due to a lack o an assured supply. More widespread use ofgas in homes, businesses and industries, stimulated by revised federal policies, willhelp reduce dependence upon expen-sive foreign oil. Use ofnatural gas instead ofoil also carries environmental benefits. We have filed with the PSC tariffmodifications to permit unrestricted sale and use ofnatural gas.

Early in 1979, we reported with gratification that our Nine MilePoint Nuclear Station achieved status in 1978 as the "Number One" boiling water reactor unit in the world. Designed and engineered by our own in-house technical talent, the nearly 10-year-old, 610,000-kilowatt unit operated 95 Pc ofthe calendar year 1978. This surpasses the performance ofany similar nuclear reactor in the world.

More importantly, this outstanding nuclear performance saved upstate New York consumers many millions ofdollars in energy costs. It offset the equivalent use o

~I 7.3 millionbarrels ofoil. More details on this "nuclear success story're pre-

"':.'s'anted on page 8.

'"C'onstruction financing requirements were met in 1978 by sa!e o 78 b sa!e ofS40 millionof

,8'.375><'. preferred stock, and S50 millionof9i/2trt mortgage bonds, both private placements, and a negotiated offering of 3.5 millionshares ofcommon stock. At year end, our short-term debt was only $ 24 million. Permanent financing re-quirements for 1979 are not anticipated to exceed S150 million,inclu ing receipts from common stock sales via the Dividend Reinvestment and Stoc Purchase Plan and the Employee Savings Fund Plan.

,We were especially pleased in December 1978 to raise the quarterly dividend

,-;-"on our common stock to 36/ per share, thereby raising the indicated annual dividend to S1.44 from the previous 81.34. This adjustment, the fourth increase for our common dividend in six years, is in keeping with our pledge to provide our stockholders a fair return on their constantly growing investment.

As we enter this final year ofthe 1970s a challenging, often traumatic decade for all in the electric and gas utilityindustry each ofus in management at Niagara Mohawk expresses gratitude to our stockholders and employees for their support and confidence.

February 21, 1979 John G. Haehl, Jr.

President tt Chief Executive Officer

I'inancial review In 1978, earnings were S1.89 per hare, up 15'! over 1977 when wer shares were outstanding.

otal revenues were S1,280 mil-lion in 1978, an increase ofS54 millionor 4.4%. Contributing to the rise in revenues were increased sales, modestly higher rates and additional revenues from pur-chased gas adjustments. The tables on page 4 indicate changes in elec-tric and gas revenues and sales.

Electric Niagara Mohawk's electric reve-nues increased S33 millionin 1978, reaching S 1,020 millionfollowing an increase ofS125 millionthe previous year. These revenues benefited from periodic rate ad-justments including a S28 million annual adjustment effective July 8,

,1978. In a welcome reversal of trends, fuel and purchased power costs passed on to our customers through the Company's adjustment clause were lower in 1978, the re-ELECTAIC SALES Millionsof kw-hrs.

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r GAS SALES Millionsof cubic lect suit ofa reduction in fuel costs.

Electric sales to our customers in-creased 3.1%, surpassing the 2.8~zr rise in 1977.

Following the July 1978 rate in-crease, Niagara Mohawk filed an appeal with the PSC stating that the new rates would fall far short of generating the Commission-approved revenue levels. The Company emphasized that an addi-tional S37 million(3.5%) increase in rates would be essential to realize the approved earnings levels. The Company further pointed out that sales forecasts in the original rate case were based on projections made in 1976, more than It/jyears before the PSC de-cision, while actual sales in 1977 and 1978 proved to be much lower than anticipated. Unfortunately, Commission consideration ofour request at a recent open meeting indicates agreement to grant less than half the Company's requested increase.

A. formal decision was an-ticipated by early March 1979.

About 10,000 customers were added to Niagara Mohawk's elec-tric lines in 1978, bringing the total to 1,336,000 at the year end. Aver-age price per kilowatt-hour paid by residential consumers rose from 3.85ft! to 3.93ft!, up only 2% com-pared to the increase in the Con-sumer Price Index of7.7'. It is worth noting that this is about the same unit cost as in 1936more than 40 years ago. On December 18, 1978, the Company recorded a new electric peak load of 5,485,000 kilowans, some 80,000 kw over the 1977 peak.

Total cost offuel for electric gener-ation leveled offin 1978 after a S70 millionincrease in 1977. Our fuel costs were adversely affected in 1977 by the need to take Nine MilePoint Nuclear Station out of service for normal refueling and maintenance. However, in 1978 outstanding performance by the nuclear station served to stabilize fuel costs by reducing consumption Gas mechanic Harvey Tennant has seen more than a few changes take place in the natural gas business since he joined the Company back in 1959. Installing plastic service laterals at a new Syracuse area housing development, Harvey is one of 700 who serve in Niagara Mohawk's gas operations. These professionals are al-ways ready to meet the rugged and de-manding tasks of maintaining safe, de-pendable gas service.

ofmore expensive fossil fuels.

About one-third ofNiagara Mohawk's electric sales is met by energy purchased from other elec-tric systems. The unit cost ofsuch "purchased power" has increased in each ofthe past two years.

Natural gas Natural gas revenues climbed $22 millionin 1978 and S24 millionin 1977 due largely to price increases

, allowed by the Federal Energy Regulatory Commission to Con-solidated Gas Supply Corporation, our sole supplier. A Niagara Mohawk rate adjustment of 3.37'$

8 millionannually) effective July 8, 1978 also contributed to the revenue increase.

In addition, gas sales registered a significant turnaround in 1978, in-creasing 5+o to 95.3 billioncubic feet. This followed a 9.3% drop the previous year. The year-to-year re-versal reflects the colder weather in 1978 followingmandated energy curtailments during the first halfof 1977. Gas customers numbered 413,000 at the end ofboth years.

Average revenue per thousand cubic feet (mcf) ofgas for residen-tial customers was 12/ or 4.2~7r'ore in 1978 than in 1977.

Other factors Higher labor costs were the pri-mary reason for the increase of $ 15 millionin "other operation ex-penses" in 1978 and S14 millionin 1977. Maintenance expenses for 1978 were $4 millionbelow those incurred in 1977 when S18 million more in maintenance work was re-quired at our steam generating sta-tions and on our electric distribu-tion system than in 1976.

ELECTRIC Revenues Increase (decrease) from prior period In millions ofdollars 1978 1977 Class of Service

% of total

% increase from 1977 electric Electric Kilowatt-revenues revenues hours Increase in base rates.............

Fuel and purchased power cost increases Sales to ultimate consumers.......

Sales to other electric systems.....

Miscellaneous operating revenues

$12.0

$ 54.2 (2.6) 78.9 19.6 13.8 0.8 (24.0) 2.8 1.8 832.6

$124.7 Residential.......

Commercial......

Industrial.........

Municipal service 31, 5

3 33 2

4 25 2

3 2

3 3

3 1

5 12 100%

3 3

Total to ultimate consumers 91 Other electric systems......

6 Miscellaneous.............

3 GAS Revenues Increase (decrease) from prior period In millions ofdollars 1978 1977 Class of service

% of total

% increase from 1977 gas as ubic revenues revenues feet Increase in base rates.........

Purchased gas cost increases Gas sales 8 2.2 8 8.2 9.8 27.9 9.9 (12.2)

$21.9

$23.9 Residential..

Commercial Industrial....

61 5

1 23 18 14 13 11 5

Total to ultimate consumers 97 9

5 Other gas systems..........

2 23 13 Miscellaneous.............

1 13 100%

9 5

THE 1978 REVENUE DOLLARAND WHERE IT WENT Change In thousands from of dollars 1977 Change In thousands from of dollars 19?7

$478,266 5%

374, Residential customers

, ~~r s'I (-I' I,i:~,ti Fuel for production of electricity 244

$311,000 394,656 5

291,071 3

116,255 5

314 Commercial customers 234 Industrial customers 95 Allothers Wages, salaries, employee benefits Income and other taxes Gas purchased Interest and other costs net Dividends to stockholders Electricity purchased Depreciation Retained in business 14'.

177 459 6%

14K 173,076 4

124 158,229 11 11'.

140,283 (3) 9r.

109 921 10 80 99,536 7

6C 80,683 5

2g 30 061 25

1st quarter

$.31 2nd quarter

.33f/a 3rd quarter

.33f/a 4th quarter

.33f/a

$1.31'/a 15'4 16Ys 14s/4 17f/a 15 16a/s 15 Federal and Canadian income taxes (net) rose S2 millionin 1978, at-tributable to increased earnings. In 1978 the Company changed its as-mption regarding the deductibil-y for tax purposes ofnuclear fuel disposal costs as described in Notes 1 and 9 to the Consolidated Finan-cial Statements.

Real estate, revenue and other taxes were up by S4 millionin 1978 and $ 17 millionin 1977 because of property additions, higher tax rates and improved revenues.

The increase in allowance for funds used during construction S11 million in 1978 and $ 13 millionin 1977resulted from additional construction work in progress and nuclear fuel in process.

A rise in the cost ofcapital and the issuance ofadditional securities to finance construction resulted in in-creases in dividend requirements on preferred stock, average number ofshares ofcommon stock outstanding and interest charges for both 1978 and 1977.

lvldends higher quarterly dividend of36/

per share, payable December 31, 1978 to holders ofcommon stock ofrecord November 27, was de-

. clared in October. The previous 33I/2g dividend had been in effect since a 2t/2g increase in May 1977.

Itwas the fourth dividend hike in the past six years.

The table below shows dividends per share ofour common stock and quoted prices:

Dividend paid Price range 1978 per share High Low 1st quarter

$.33f/a

$ 1574

$14f/a 2nd quarter

.33f/a 15 13s/4 3rd quarter

.33f/a 15f/s 13s/4 4th quarter

.36 14r/s 13'l.

36'/a 1977 Financing In December, Niagara Mohawk sold $ 31.5 millionof9t/~% 25-year first mortgage bonds through"pri-vate placement, with an additional S18.5 millionsold in February 1979. Last July, S34 millionof 7.75% series S25 par value prefer-ence stock (1,360,000 shares) was sold to redeem S30 million, 11.75% series $ 100 par value pre-ferred stock (300,000 shares) on August 31. The redemption price was S111.75 per share, plus divi-dends accrued to the redemption date. InJanuary 1978, we issued

$40 million(1,600,000 shares) of 8'%eries $25 par value pre-ferred stock.

InJune, 3.5 millionshares ofcom-mon stock were sold publicly at S14.25 per share. Throughout the year some 1.6 millionshares were sold through our Dividend Reinvestment and Stock Purchase Plan and Employee Savings Fund Plan. Except for the preference stock sale inJuly, these transactions were made to finance our construc-tion program.

Management study Niagara Mohawk is in the third year ofa PSC-ordered study of management and operations by an independent consulting firm, Arthur Young & Company.

Phase Two ofthis study calls for implementation ofmutually agreed upon recommendations presented by Arthur Young in Phase One. In some cases, Niagara Mohawk had initiated improvements which were later folded into the Phase One recommendations.

Some ofthe recommendations willrequire con-siderable time to implement.

We are continually making other major reorganization efforts, such as the merger ofthe Information Systems Department into the Man-agement Systems and Services De-partment. Improvements have also been made in the scheduling of maintenance work, budget report-ing and project management.

INCOME (BEFORE INTEREST AND INCOME TAXES) AND INTEREST CHARGES Millionsof dollars 1978 q4's

~4

" '26+

1977 1976 1975 1974 Interest Income charges TOTAL TAXES, INCLUDING INCOME TAXES Millionsof dollars 1978 1977 1976 1975 1974 AVERAGE GROSS ELECTRIC UTILITYPLANT PER ELECTRIC CUSTOMER Oollars 1978 P!+

~ 4.%~HZ

~:

668 1977

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~2:f 1975 ri,g ~ 'r'tf

1974,

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. C2;005 AVERAGE COST OF FUEL BURNED Dollars 1978 1977 1976 1975 1974 Barrel Tonofcoal of oil

A forward look at the '80s Before the OPEC oil embargo and the onset ofpersistently high infla-tion and other economic ills, long-term growth in electric energy use was expected to average 4.47'er year in our service territory.

By the mid-1970s, new projections began to indicate a reduction in customer demand for electricity, the result ofweakening economic trends, rising prices forprimary energy and customer conservation.

Niagara Mohawk and most other U.S. utilities have been affected, with present estimates in our ser-vice territory pointing to an average yearly growth ofonly about 2.4%.

From an energy supplier's stand-point, this change in outlook has added another facet to the already complex process ofplanning large, base-load generating units and re-lated transmission facilities. One result has been the deferral ofthe scheduled completion dates for major new generating units.

Despite the slowdown in growth, Niagara Mohawk must continue planning additional energy facilities for future needs. Substantial power projectswith long lead times willbe essential, even though cur-rent forecasts are below original es-timates. Sufficient supplies ofreli-able electric energy mrrst be availa-ble when needed to meet the ex-pected growth in demand in our service territory.

Construction programs The next power producer to go on line in our system willbe the S300 millionjointlyowned (see page 7) 850,000-kilow'att Oswego Steam Station Unit No. 6 when it begins commercial operation in 1980.

While Oswego area labor difficul-ties caused a three-month lag in its construction last summer, the unit Richard E. Weegar, a 30-year veteran, is a chief operator in the upper Raquette River area. He looks out over the Adirondack foothills from the 24,000-kilowatt Stark Hydro-electric Station, one of our 81 hydro stations. Hydro power is more economical today than ever compared with oil or coal-fired generation. Dickfollows in the steps of his father, who sewed Niagara Mohawk and predecessor utilitycompanies for nearly 40 years.

is about 757'omplete. The main components, including boiler, tur-bine and generator assemblies, are ~

all in place or being installed. We are also proceeding with plans to deliver oil by rail to a storage facil-ity near the station in addition to the regular seasonally limited barge shipments via the St. Lawrence River to Lake Ontario.

Construction ofthis oil-fired addi-tion began in late 1972, more than a year before the OPEC oil em-bargo. As a vital component ofour diversified generation mix itwill reinforce our ability to meet up-state New York's future needs for dependable electric service.

At the annual meeting last May, in lightofrevised load forecasts, Niagara Mohawk announced the rescheduling oftwo 850,000-kilowatt coal-fired units to be built near Lake Erie, south ofDunkirk, N.Y. These have been deferred until at least the late 1980s with about six years required for their constru'ction. Thus far, the cost of~

environmental and engineering studies and public hearings on this project amount to S15 million.

Extensive data have been submitted the New York State Board ofElec-tric Generation Siting and the En-vironment and a decision is ex-pected in early 1979.

October 1984 is the new scheduled commercial date for Nine Mile Point Nuclear Unit No. 2 on Lake Ontario, jointlyowned by Niagara Mohawk and four other New York State investor-owned utilities. Set-backs in construction, including new, unforeseen regulatory re-quirements and a summer-long work stoppage arising from Oswego area labor problems, are partly responsible for the new completion date. Delays in en-gineering, fabrication and delivery ofmain components also contrib-uted to the postponement.

Con-struction started in 1975 on the 1,080,000-kilowatt unit, which is now about 25go complete.

Despite our best efforts to keep Unit No. 2's cost down, latest pro-

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'ections indicate a new total of 1.35 billion,excluding financing costs, with Niagara Mohawk's share at $ 553.5 million. In addition to spiraling inflation, increases stem from new requirements, largely in-volving reactor and piping systems, imposed by the U.S. Nuclear Reg-ulatory Commission on all nuclear power projects. We are making every effort to contain or reduce costs over which we have some control such as ongoing design re-views, innovative construction techniques, work sampling and productivity analysis programs.

These measures have already saved some $68 millionin the cost ofthe nuclear unit and willbe pursued throughout the remain'der ofthe

. project.

Uranium supply Our uranium subsidiary, N M Uranium, Inc., owns halfofa min-ing facilityin southern Texas with nited States Steel Corp., as perator, owning the other half.

Production capacity was expanded in 1978 to 1,000,000 pounds per

, year. NMU's share ofthe output willbe used to help assure supplies For our Nine Mile Point Nuclear Units No. 1 and 2. Initially,how-ever, sales ofproduction are ex-pected in order to recover more quickly a portion ofour invest-ment, and thus reduce associated costs offinancing (see Note 4 on page 17).

Shared generation Arrangements negotiated by Niag-ara Mohawk and five other New York State utilities to share owner-ship oflarge upstate generating sta-tions received final approval from the PSC in 1978. The stations are Oswego Unit No. 6, Nine Mile Point Nuclear UnitNo. 2, and the 1,150,000-kilowatt Sterling Nu-clear Station proposed near Lake Ontario in the neighboring service ea ofRochester Gas Bc Electric Corp.

Niagara Mohawk has transferred 24% ofownership ofUnit No. 6 to Rochester Gas and Electric, and the agreement calls for its output to be shared on the same basis.

Shares owned by participants in Nine Mile Point Nuclear UnitNo.

2 include Niagara Mohawk 41%,

Long Island Lighting Co. 18%,

, New York State Electric Bc Gas Corp. 18%, Rochester Gas and Electric 14%, and Central Hudson Gas Bc Electric Corp. 9%.

Shares ofthe projected Sterling unit willbe Rochester Gas and Electric 28%, Niagara Mohawk 22%,

Central Hudson 17%, and Orange and Rockland Utilities, Inc. 33%.

Hydro expansion W'e also are moving to expand waterpower capabilities at sites long held by the Company to pro-duce an additional 205,000 kilowatts for the Niagara iVfohawk power grid by the early 1990s. Un-expected regulatory developments particularly environmental regulations are slowing our prog-ress. Early in 1978 we filed with the Federal Energy Regulatory Com-mission for approval to replace the nearly 65-year-old, 2000-kilowatt, Granby Hydro Station on the Os-wego River with a new 10,000-kilowattplant, our firstproject in this hydro expansion.

Before the sudden upturn in oil and coal costs in the 1970s, new hydro power developments were not economically feasible. How-ever, it is now possible to develop formerly uneconomic hydro sites at costs competitive with fossil-fuel generation. More than 70% ofthis new hydro capacity willbe on the Hudson, with the remainder on seven other rivers in northern and central New York.

Key electric transmission lines, to keep pace with customer energy requirements in certain areas and to reinforce the dependability of power supply, were also completed in 1978.

ELECTRICITYGENERATED AND PURCHASED BY TYPE OF FUEL

Decade ofnuclear success In 1979, we willobserve the 10th anniversary ofoperation ofour Nine Mile Point Nuclear Station Unit No.

1 on Lake Ontario.

One ofthe first nuclear power plants to go on line in the U.S. and the first in upstate N.Y., this 610,000-kilowatt power producer has achieved an enviable record for safety, reliabilityand economy. It is also one ofthe first such units de-signed and engineered by a utility with its own engineering staff.

Most nuclear plants operating in the U.S. today were designed by consulting engineering firms.

From commercial startup in De-cember 1969 through 1978, Nine MileNo. 1 generated 29.4 billion kilowatt-hours. Producing this amount ofpower from fossil fuels would have required 48 million barrels ofoil or 12 million tons of coal, resulting in substantially higher costs to consumers.

World record In 1978, the unit was on line and producing electricity more than 95~ye ofthe time, the highest percen-tage ofall boiling ruater reactors in the world. It also achieved a thermal capacity factor (ratio ofactual out-put to the maximum output from continuous plant operation at rated power) of86%, a 1978 U.S. record for boiling water reactors. In 1978 alone, generating equivalent energy at an oil-fueled station would have required about 7.3 millionbarrels ofoil at an added cost ofabout S70 million.

TOTAL GENERATING COSTS:

FOSSIL FUEL VS NUCLEAR Cents per kNr-hr.

Includes fuel, nu arear decommissioning costs and other frxed charges. operation and maintenance for period Jan.~. 1978

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<<e0es0 hatt One ofthe reasons for these ac-complishments was our develop-ment ofoperating philosophies to cut back approximately 50% ofthe "down time" normally needed to refuel the reactor with uranium.

Originally, the unit was designed for refueling yearly, but under new operating procedures, refueling is now required only once every 1V~

to 2 years.

Nuclear information In recent years, misinformation, confusion and unwarranted mis-trust about nuclear-electric energy have become increasingly wide-spread. To counter anti-nuclear ef-forts and to help foster improved public awareness ofthe many ad-vantages nuclear energy offers con-sumers, we have intensified infor-mation activities in the com-munities we serve. In the past year, through our volunteer Speakers Bureau presentations, with a spe-cial team oftrained speakers, we have reached an audience of thousands.

Additionally,our Company rep-resentatives meet frequently with government leaders, and a broad selection ofmaterial on nuclear technology is distributed to schools, various community groups and the news media. Our public Energy Information Center at Nine MilePoint attracts thousands ofvis-itors each year. They see an in-teresting and educational program including varied exhibits on nuclear power.

Stephen J. Domago, chief shift operator at Nine Mile Point Nuclear Unit No. 1

~ began his nuclear career in the U.S. Navy in 1965 and served with the submarine service prior to joining Niagara Mohawk in 1972. Manning control panels at Nine MilePoint, Steve earned his Reactor Operator's License six years ago from the Nuclear Regulatory Commission. Like the 37 other operators who have helped the unit achieve record performance levels, Steve attends periodic training programs in reactor physics and plant operations under NRC auspices.

New energy sources constant search Our pursuit ofalternate energy sources and new methods ofpre-ving the environment is expand-g in both scope and diversity. As 1979 began, we were engaged in 51 separate research and development programs. We have been author-ized by the Public Service Commis-sion to spend some $65.3 million as recoverable operating expense on research over the next five years, with most programs linked to con-serving energy and preserving or improving our air, land and water quality.

Fuel cells In a joint research project we have been pursuing for years, fuel cells are showing increasing promise as viable energy producers. Fuel cells are a space-age development on

. which we are working jointlywith United Technologies Corp. and eight electric utilities. We expect to place a 9,600-kilowatt unit on line in our system in 1988, while a 4,800-kilowatt demonstrator is rently scheduled for startup in 0 by Consolidated Edison Company ofNew York, Inc.,

another participant, at a Manhattan generating site.

Wind power Last year also saw the experimental application of a "Darrieus" type windmillto the operation ofan electric generator our third wind study in upstate New York and our fourth overall on a national level.

Resembling a giant eggbeater, the prototype is mounted on a silo to determine the possible use ofthis type ofdevice to produce supple-mental kilowatts on a working farm. Clarkson College, Potsdam, is managing the effort, with joint participation by Niagara Mohawk and seven other private industries.

Solar Niagara Mohawk is also involved in solar research at the State Univer-sity ofNew York Alumni House Conference Center at the Al-any campus. This project com-bines modern heat pumps, monitors and computing equip-ment with the latest in solar technology. During the Center's first year ofoperation, energy from the sun helped substantially to meet heating needs and reduce electric demand, although payback on the solar/heat pump system's in-itial investment willtake many years.

Environmental research A research venture offering long-range environmental gains involves the proposed installation ofa pilot "scrubber" on the stack at our Huntley Steam Station on the Niagara River. Targeted for startup in 1981, this pioneering project's dual objective is to allow large power stations to burn lower-cost Eastern coal while producing com-paratively less pollution. Better control ofsulfur dioxide emissions is a nationwide priorityfor all elec-tric utilities.

Olympic village The Company is project manager ofa forward looking energy study planned in connection with the 1980 Winter Olympic Games at Lake Placid. This research venture holds significant promise for the entire electric utilityindustry.

Under study willbe five identical buildings to house more than 1,000 Olympic athletes and officials. Each ofthe dormitory-type structures willbe equipped with a different thermal energy storage system for comparative space heating tests under similar conditions. Our aim is to collect data for eventual appli-cation to utilitysupply systems in future years.

The test site willeventually be-come the Ray Brook Correctional Facility. It is being built by Con-gressional authorization to serve in-itiallyas the Olympic Village (see back cover). The program willget under way in February 1980 when Winter Games contestants begin occupying the dormitories, and it willcontinue fullscale through 1982. After the Olympics, the vil-lage willbe converted to a minimum security institution oper-ated by the U.S. Bureau ofPrisons.

The experiment, estimated to cost more than $ 2 million, is jointly sponsored by the U.S. Department ofEnergy, N.Y. State Public Ser-vice Commission, N.Y. State Energy Research and Development Authority and the nationwide Elec-tric Power Research Institute.

The equipment behind Dr. Roosevelt A.

Fernandes, associate senior research specialist and program manager, R&D Department, is part of a 4,800-kilowatt fuel cell prototype under laboratory test.

Roosevelt, who earned his Ph.D. in elec-trical engineering at Vanderbilt Universi-ty, holds patents for various electric con-trols he invented. He joined our research staff in 1973 and directs "in-house" proj-ects and joint studies, including this pioneering fuel cell venture.

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Archie Martin, left, consumer relations representative, interviews retired couple in kitchen of their home as he makes computations in our energy audit program for customers. Such informal sessions are helping our consumers cut back on energy costs and upgrading energy efficiency across our service territory. Archie, who joined the Company in 1965, expects to receive his B.S. degree in electrical engineering from the State University of Buffalo in 1979. He has attended evening classes forthe past eight years.

Gas supply The improved natural gas supply outlook enabled us to remove some restrictions on new sales and~

to seek additional gas markets in 1978. The Company has filed an application with the PSC to com-pletely reopen our gas markets.

Increased quantities ofgas, includ-ing liquefied natural gas from Algeria, have become available from Consolidated Gas Supply Corp., our wholesale source. Con-servation efforts by our customers have also contributed to the more favorable supply outlook.

In 1978, 3,582 permits were issued to qualified applicants for gas ser-vice in residential, commercial and industrial categories. Those apply-ing must meet certain insulation and energy-conservation standards.

Commercial and industrial appli-cants requesting more than 25,000 mcfyearly require approval by Consolidated Gas and the Public Service Commission.

The improved supply situation als~

helped stimulate some economic ~

expansion in our service territory, creating 560 new jobs and placing area industries in a more competi-tive position, compared with indus-tries in other states. Although gas costs are certain to go up, in part because ofrecent federal legisla-tion, gas willstill remain competi-tive with other fuels in terms of costs, convenience, and environ-mental benefits.

In October 1978, we filed with the Public Service Commission for ap-proval to change to "therm" mea-surement billingforgas service.

Conversion to a heat-content basis from the customary cubic-feet vol-ume billingis desirable as the Company begins to receive a 10

mixture ofU.S.-produced and Algerian-imported gas from our upplier. The imported gas con-ains about 10'/ more heat energy per cubic foot than the domestic variety, requiring that bills be cal-culated on the number oftherms used instead ofcubic feet con-sumed.

Consumer Advisory Council As we approach the 1980s, one of our most effective contacts with our customers is our Consumer Advisory Council on Energy Af-fairs, a "grass roots" concept initiated in 1977. This all-volunteer group, with 26 members from across our service territory, repre-sents a cross-section ofconsumer interests. Organized to advise us on consumer/utility matters, its pri-

,,mary objective is to provide a

'means oftwo-way communications regarding any ofour operations, procedures and policies.

Meeting each month, the Council ffers us valuable advice and in-ght on consumer relations and public information activities, par-ticularly those affecting consumers directly. The group consists ofre-

'-tired persons and representatives ofindustry, small business, labor unions, consumers and the clergy.

Among the first such groups to be formed in the U.S. by a utility,in only two years the Council's suggestions have produced tangible results in helping us to better un-derstand our customers'equire-ments and respond to their needs.

Guest speakers at Council meet-ings have included the Chairman of the Public Service Commission, leaders ofanti-utilityand anti-nuclear organizations, as well as top Company management all to give Council members a balance ofin-formation on issues and controver-sies.

Energy audits Under the State's newly enacted Home Insulation and Energy Con-servation Act, Company represen-tatives are conducting energy-ef-ficiency audits ofcustomer homes throughout our service area. Our "consumers themselves are also par-ticipating in the audits on a self-help basis by completing question-naires.

In addition to the audits, we pro-vide lists oflocal contractors who willundertake energy-conservation measures such as insulation, weath-erstripping, storm windows and doors and the like. At the same time, consumers are advised how to obtain low-interest loans for financ-ing the work. Loans, ranging from S200 to S3,000 for improvements on one-, two-, and three-family homes, have repayment options ex-tending up to seven years.

Other consumer programs To serve consumers better on an individual, more personal basis and help them solve their own special energy problems, a number ofin-novative programs and activities are under way. These include a winter referral program for hard-ship cases, strengthening interrela-tionships with various social service agencies and maintaining lists of customers requiring electrically operated life-support medical equipment. Also included are a convenient budget payment plan, third-party notification plan for customers who may need help, 24-hour follow-ups where discon-nections occur and testing home energy-conservation devices for safety and efficiency.

MONTHLYRESIDENTIAL ELECTRIC COST 500 KW-HRS.

at/0ra 8-.

'CI dN+..

4" includes /uel and PASHYCredit adjustments as app//cable.

'NMPC Rate Dept. t 2/31/78

-Edison E/ectrlc Institute Survey 10/1/18

Our "backbone"employees, stockholders Employees Our overall work force numbered 9,300 at the end of 1978 and 1977, about the same as 20 years ago, when we had approximately 300,000 fewer customers.

Yearly wage increases of 6.9Q'. and 7.1%, effective June 1, 1978 and 1979, respectively, were part ofa two-year contract signed with 12 locals making up System Council U-11 ofthe International Brother-hood ofElectrical Workers (AFI CIO). The agreement also included improvements in certain employee benefits such as retirement, vaca-tions, life insurance, and changes in health and accident insurance.

Some 7,400 represented employees are covered by the contract.

Employee orientation, manage-ment development, technical in-struction and consumer services training are provided by our Train-ing Department, centralized in Helping our telephone contact personnel brushup on their customer relations skills, briefing new employees on how the Com-pany functions, instructing newly pro-moted supervisors on management techniques such varied teaching as-signments are all part of Ann Branigan's day as training specialist. Ann began her career with the Company as a steno-clerk in 1969. Upon expanding her qualifications through studies at Syracuse area colleges, she shifted to instruction when the Training Department was formed in 1974.

1976 and now performing more functions than ever. During 1978, new formal training programs were introduced at our fossil-fueled generating stations and in our gas operations. We continue to emphasize training in all operations to further upgrade the quality of our service as well as employee performance and productivity.

Company contributions to the Employee Savings Fund Plan amounted to S2,994,000 during 1978. Some 6,500 or 74go ofall eligible employees are subscribers, allocating from 2t7r to6'ftheir wages (matched 50gr by the Com-pany) toward the purchase ofNiag-ara Mohawk common st'ock or U.S.

Government securities. The Plan holds 5,062,000 shares or 8t7r'f the outstanding common stock.

Employees may also make addi-tional, unmatched contributions of up to 4% oftheir wages.

ln 1978, we renewed insurance providing coverage for Niagara Mohawk and subsidiaries against obligations incurred as a result of indemnification ofofficers and di-rectors. The coverage also insures the officers and directors for liabil-ity against which they may not be indemnified by the Company or its subsidiaries. This insurance obvi-ously does not protect against a dishonest act or breach oftrust.

The insurance, authorized by the Business Corporation Law ofNew York, was purchased from Na-tional Union Fire Insurance Co. for a term fromJanuary 1, 1.979 to January 1, 1982 at an annual pre-mium ofS65,000.

We sadly note the death on February 7, 1979 ofEdmund H.

Fallon, distinguished member of our Board ofDirectors since June 1965. Mr. Fallon was retired executive vice president and chief executive officer of Agway, Inc. and a leader in national and state agricultural affairs.

Stockholders Our stockholders now number about 216,000 with 204,000 hold ing common shares and 12,000 owning preferred and preference stock. As shown by the chart be-low, many stockholders own less than 100 shares.

Size olholding Total Total shares (Shares) stockholders held 1 to 99 61,100 100 to 999 136,500 1,000 or more 6,400 204,000 2,081,282 30,842,736 29,256,259 62,180,277 NMPC Dividend Reinvestment Plan P.Q. Box 131 t

Syracuse, N.Y. 13201 Dividend Reinvestment Plan Another year ofgrowth was noted for our Dividend Reinvestment and Stock Purchase Plan. The Plan purchases newly issued stock di-rectly from the Company without incurring brokerage commissions or service charges. These purchases are made from the reinvestment of dividends and optional cash pay-t ments from participants.

Some ofthe funds the Company requires to meet its financing needs are provided by the Plan. In 1978, about 25,000 participants, repre-senting 12~pc ofall common stock-holders, invested S10,139,000 in new common shares.

Starting January 1, 1979, the Com-pany assumed the responsibility for administration ofthe Plan. At the same time, preferred and prefer-ence stockholders became eligible to participate and optional cash contributions were increased to

$ 5,000 quarterly. Initiated in 1973, this Plan was previously adminis-tered by the Morgan Guaranty Trust Company ofNew York. We willbe glad to provide application forms and literature describing the Plan on request. Correspondence should now be addressed to:

Conso1idated Statement ofIncome and Retained Earnings NIAGARAMOHAWKPOWER CORPORATION AND SUBSIDIARIES For the year ended December 31, 1978 1977 fn thousands of dollars 1976 1975 1974 Operating revenues:

Electric,......,......

Gas.

S1,020,313

~

S 987,760 259,935 238,072 S

863,012 214,218

$795,917

$671,246 176,289 159,564 1,280,248 1,225,832 1,077,230 972,206 830,810 Operating expenses:

Operation:

Fuel for electric generation................

Electricity purchased Gas purchased Other operation expenses Maintenance Depreciation (Note 2)

Federai and Canadian income taxes (Note 9)..

Other taxes 311,000 99,536 158,229 181,995 80,759 80,683 31,123 152,550 311,185 93,019 142,071 166,297 84,536 77,113 22,124 148,989 241,040 99,297 124,811 152,759 66,171 77,629 17,896 131,817 223,095 86,533 94,960 136,470 58,724 69,228 14,630 113,997 136,983 122,476 86,900 127,100 59,753 63,055 (4,050) 102,248 Operating income 1,095,875 1,045,334 184,373 180,498 911,420 165,810 797,637 174,569 694,465 136,345 Other Income (net):

Allowance forother funds (total funds 1976 and prior) used during construction (Note 1).

Income tax refunds(Note 9)

Income tax and other items (net) (Note 9)......

281971 13,235 21,660 3,645 20,711 8,986 1,251 29,376 2,153 27.373 528 42,206 25,305 30,948, 31,529 27,901 Income before interest charges 226,579 205,803 196,758 206,098 164,246 Interest charges:

Interest on long-term debt..........

Other interest Ilowance for borrowed funds used during construction(Note 1)......

99,874 1,573 (16,030) 91,563 2,892 (12,484) 87,270 1,039 84,018 7,285 66,080 11,659 85,417 81,971 88,309 91,303 77,739 Income before cumulative effect of accounting change Cumulative effect of accounting change (Note 3).

Net income(Note 3)

Dividends on preferred stock Balance available forcommon stock Dividends on common stock Retained earnings for the year.........

Miscellaneous charges (Note 7)........

Retained earnings at beginning of year 141,162 141,162 28,660 112,502 81,261 31,241 (1,180) 337,834 123,832 123,832 25,705 98,127 74,033 24,094 313,740 108,449 108,449 23,546 84,903 65,642 19,261 294,479 114,795 114,795 19,430 95,365 56,590 38,775 255,704 86,507 9,406 95,913 15,082 80,831 49,444 31,387 224,317 Retained earnings at end of year S

367,895 337,834 S

313,740

$294,479

$255,704 Average number of shares of common stock outstanding (in thousands).....

59,661 56,279 52,731 47,089 42,032 Per average share of common stock:

Balance available for common stock before cumulative effect of accounting change.......

Cumulative effect of accounting change (Note 3).

Balance available for common stock(Note 3)....

Dividends paid

() Denotes deduction.

S 1.89 S

1.74 1.61 S

2.03 S

1.89 S

1.74 S '.61 S

2.03 1.36'h 1.31'/z S

1.24 1.21 S

1.70 S

.22 1.92 S

1.18 13

Consolidated Balance Sheet NIAGARAMOHAWI)iPOWER CORPORATION AND SUBSIDIARIES ASSETS Utilityplant, at original cost (Note 4 and Page 21)

Less accumulated depreciation and amortization (Note 2)

Other property and Investments Current assets:

Cash, including time deposits of $5,595 and $1,275, respectively Accounts receivable (less allowance fordoubtful accounts of $2,000 and $1,500, respectively)

Income tax refund claims(Note 9)

Materials and supplies, at average cost:

Coal and oilfor production of electricity Other Prepayments Deferred debits:

Unamortized debt expense Deferred recoverable energy costs (Note 3)

Other At December 31, tn thousands 1978

$3,905,374 1,021,417 2,883,957 14,535 101786 127,219 70,232 29,736 4,383 242,356 13)848 27,966 6,450 48,264

$3,189,112 of dollars 1977

$3,647,274 935,212 2,712,062 15,584 6,579 121,855 8,391 79,942 26,367 5,152 248,286 14,375 24,951 3,796 43,122

$3,019,054 LIABILITIES Capitalization (Note 7):

Common stockholders'quity:

Common stock$ 1 par value; authorized 85,000,000 (65,000,000 in 1977) shares; issued 62,180,277 shares and 57,122,641 shares, respectively..................

Premium on capital stock Capital stock expense Retained earnings (Page 13)

Preferred stock (Page 22).

Long-term debt (Page 21)

Total capitalization Current liabilities:

Short-term debt (Note 5)

Long-term debt due within one year (Page 21)

Sinking fund requirements on preferred stock (Page 22)

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

Income tax refunds (Note 9)...

Other Accumulated deferred Federal Income taxes (Note 9)

Commitments (Note 11)

( ) Denotes deduction.

S 62,180 646,878 (10,977) 367,895 1,065,976 408,600 1,414,997 2,889,573 24,000 10,450 1,800 86)854 4,902 22,184 28,605 13)228 8,385 200,408 21,606 10,945 32,551 66,580

$3,189,112 57,123 581,473 (8,194) 337,834 968,236 366,400 1,394,387 2,729,023 39,200 10,250 1,800 79,031 4,734 18,680 27,760 11,757 6,320 199,532 19,721 9,106 28,827 61,672

$3,019,05 14

Consolidated Statement ofChanges in Financial Position NIAGARAMOHAWKPOWER CORPORATION AND SUBSIDIARIES For the year ended December 31, inancial resources were provided by:

Operations:

Income before cumulative effect of accounting change Charges (credits) to income not requir-ing (not providing) working capital Depreciation Allowance forfunds used during.

construction Amortization of nuclear fuel.............

Provision for deferred Federal income taxes (net).

1978

$141,162 80,683 (45,001) 27,107 7,955 1977

$123,832 77,113 (34,144) 21,458 13,333

$108,449

$ 114,795 77,629 (20,711) 22,555 14,628 69,228 (29,376) 11,481 11,800 ln thousands ol dollars 1976 1975 1974

$ 86,507 63,055 (27,373) 10,665 (280)

Total 574,745 367,708 (156,605) 93,266 47,436 Cumulative effect of accounting change...

Outside financing:

Sale of common stock Sale of preferred stock..

Sale of mortgage bonds...............

Sale of promissory note (net)..........

Issuance of long-term notes payable...

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

Sale of utilityplant (Note 6)............

Deferred recoverable energy costs.....

Income tax refunds Increase) decrease in working capital other than short-term debt..........

Miscellaneous (net).

Totalresources provided 211,906 70,462 74,000 31,500 (15,200) 160,762 34,955 (3,015) 1,885 22,006 (5,049) 50,782

$423,450 201,592 21,522 125,000 2,338 15,000 (1,550) 162,310 4,654 300 1,667 52 6,673

$370,575 202,550 70,105 30,000 5,671 18,000 (8,114) 115,662 8,785 (8,686) 30,465 4,203 34,767

$352,979 177,928 72,557 70,000 100,000 10,839 (117,786) 135,610 53,366 (591) 1,241 (122,388) 7,592 (60,780) 252,758 132,574 9,406 29,964 125,000 27,752 129,300 312,016 (37,799) 26,866 (12,727) 6,031 (17,629)

$436,367 926,550 9,406 264,610 174,000 381,500 46,600 33,000 (13,350) 886,360 88,321 (27,966) 21,606 (80,977) 12,829 13,813

$1,836,129 Financial resources were used for:

Construction additions.............

Nuclear fuel Allowance forfunds used during construction Net additions Reduction of long-term debt.........

Reduction of preferred stock (Note 7).

Dividends.

Total resources used

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

$423,450

$264,913 25,018 (34,144) 255,787 13,250 1,800 99,738

$370,575

$195,676 87,026 (20,711) 261,991 1,800 89,188

$352,979 194,155 11,959 (29,376) 176,738 76,020 S

252,758

$283,844 11,503 (27,373) 267,974 103,867 64,526

$436,367

$1,216,346 174,028 (156,605) 1,233,769 127,567 35,400 439,393

$1,836,129 (Increase) decrease In working capital other than short-term debt:

Cash Accounts receivable Receivable from plant sharing...........

Income tax refund claims...............

Coal and oil for production of electricity..

Other materials and supplies............

Long-term debt due within one year......

Accounts payable Accrued taxes and interest..............

ther (net)

S (4,207)

(5,364) 8,391 9,710 (3,369) 200 7,823 4,349 4,473 S 22,006 475 (5,250)

(1,353)

(13,017)

(1,490)

'I0,250 1,001 9,317 1,734 1,667

$ 13,620 (11,041) 12,402 (300)

(15,433) 1,193 18,982 6,205 4,837

$ 30,465 (3,067)

(16,310)

(12,402) 15,639 (626) 1,213 (103,867)

(855) 2,435 (4,548)

$(122,388)

(4,431)

(19,505)

(16,977)

(33,483)

(10,124) 55,867 9,644 4,609 1,673

$ (12,727) 2,390 (57,470) 5,400 (52,849)

(12,577)

(37,550) 36,595 26,915 8,169 (80,977)

Notes to Consolidated Financial Statements NOTE 1. Summary of Significant Accounting Policies The Company is subject to regulation by the New York State Public Service Commission (PSC) and the Federal Energy Regulatory Commission (FERC) with respect to its rates for service and the maintenance of its accounting rec-ords. The Company's accounting policies conform to gener-ally accepted accounting principles, as applied to regulated public utilities, and are in accordance with the accounting requirements and ratemaking practices of the regulatory au-thorities.

Utility Plant: The cost of additions to utility plant and of replacements of retirement units of property is capitalized.

Cost includes direct material, labor, overhead and an allow-ance for funds used during construction (AFC). The cost of current repairs and maintenance is charged to expense.

Whenever utility plant is retired, its original cost, together with the cost of removal, less salvage, is charged to accumu-lated depreciation.

Allowance for Funds Used During Construction: The Com-pany capitalizes AFC in amounts equivalent to the cost of funds devoted to plant under construction (8'/o for the period January 1, 1974 through June 30, 1976 and 9'/o effective July 1 ~ 1976). As a result of rate proceedings, effective December 1, 1976 for its Oswego Steam Station Unit ¹6 and Nine Mile

.i<r Point Nuclear Station Unit ¹2 and July 1, 1978 for capitalized costs associated with its investment in N M Uranium, Inc. (see Note 4), the Company began computing AFC at a rate which is reduced to reflect the income tax effect of the borrowed funds component of AFC.

Effective January 1, 1977, FERC revised its accounting pro-cedures for determining the AFC rate and required segrega-tion of AFC into its two component parts, borrowed funds and other funds. The revision had no effect on income in 1977. The Company, since January 1, 1977, has reflected the

'orrowed funds component in the Interest Charges section of the income statement. The Company has not reclassified AFC into its borrowed and other funds components for periods prior to January 1, 1977.

Depreciation and Nuclear Generating Plant Decommis-sioning Costs:

For accounting

purposes, depreciation is computed on the straight-line basis using the estimated use-ful lives by classes of depreciable property. For Federal in-come tax purposes, the Company computes depreciation using accelerated methods and shorter allowable depreci-abie lives.

As a result of a recent PSC proceeding, estimated decom-missioning costs (costs to take the plant out of service in the future) of the Company's Nine Mile Point Nuclear Station Unit

¹1 began to be recovered in rates and charged to operations in July 1978 through revised depreciation charges.

The change in the annual nuclear plant depreciation rate, from 4.00/o to 4.33'/o, reflects an increase in the estimated service life of the plant from 25 to 30 years and the establishment of an allowance for decommissioning costs, to be recognized at the annual rate of 1/o of the plant's cost. Prior to July 1978, decommissioning costs were not charged to current opera-tions and were not recognized in rates charged to customers.

Because of uncertainties, there is no assurance that the addi-tional revenues provided by the decommissioning allowance will ultimately aggregate a sufficient amount to decommis-sion the plant. The Company believes that decommissioning costs, if higher than currently provided, will ultimately be re-covered in the rate process, although no such assurance can be given.

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

The Company has assumed that spent nuclear fuel will be disposed of by reprocessing and that uranium recovered through such reprocessing will have value. However, recent events and proposed Federal action could result in the aban-donment of reprocessing plans since there is no reprocess-ing facility presently in operation and it has been proposed that reprocessing be deferred indefinitely. The Company be-lieves that under either its reprocessing assumption or an alternative permanent storage assumption similar to that proposed by the Department of Energy, costs would be ap-proximately equal. The Company believes that nuclear fuel disposal costs, which may be higher than presently esti-mated, willcontinue to be recovered in the rate process, al-though no such assurance can be given.

Prior to 1978, estimated nuclear fuel disposal costs were deducted currently for Federal income tax purposes.

Due to the uncertainties concerning disposal cost alternatives and attendant cost estimation criteria, in 1978 the Company has assumed that nuclear fuel disposal costs are not currently deductible for Federal income tax purposes.

Prior years'ax liabilities were not materially affected by such change in as-sumption. In December 1978, the PSC granted the Company permission to provide deferred taxes on the accounting-ta timing differences of current and prior period nuclear fuel disposal costs.

Revenues:

Revenues are based on cycle billings rendered to certain customers monthly and others bi-monthly. The Company does not accrue revenues at the end of any fiscal period for energy sold but not billed at that date. The Com-pany's tariffs include electric and gas adjustment clauses under which energy and purchased gas costs, respectively, above or below the levels allowed in approved rate schedules are billed or credited to customers. Effective January 1, 1974, the Company adopted the policy of charging operations for energy cost increases in the period of recovery (see Note 3).

Effective September 1, 1975, the Company began deferring similar purchased gas costs as directed by the PSC, which change did not have a material effect on income.

Federal Income Taxes: The general policy, in accordance with PSC requirements, is to flow through the tax effect of timing differences between book and taxable income; that is, record only income taxes currently payable.

However, de-ferred taxes are provided oh benefits realized from the class life system of depreciation permitted under the Revenue Act of 1971 (shorter depreciable lives, repair allowance and cost of removal), on energy and purchased gas costs, on nuclear fuel disposal costs and on certain other items, as approved by the PSC (see Note 9). No deferred taxes are provided for other depreciation differences (including accelerated methods of depreciation),

except under necessity certificates in prior~

years, or for other items (such as taxes, a portion of AFC~

16

pensions and certain other employee benefits) which are de-ducted currently fortax purposes but capitalized for account-ing purposes.

Effective January 1, 1975, the benefits resulting from an crease in the investment tax credit from 4/o to 10% and m the change in the limitation on the amount of credit which may be claimed in any year has been deferred.

One-half of the 4'/o investment tax credits realized have been allo-cated to Other Income (Net) for the year 1978, consistent with PSC directives. For the major projects specified in the AFC section above, the imputed tax benefit of the borrowed funds component of AFC has been credited to Other Income (Net).

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

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

NOTE 3. Deferred Recoverable Energy Costs Effective January 1, 1974, as permitted by a PSC policy statement, the Company changed its accounting for in-creased energy costs above or below the levels allowed in rate schedules to defer those costs until the time they are billed to customers, thus achieving a better matching of rev-enue and expense. This accounting change, net of deferred income taxes of $3,170,000, resulted in an increase in net income for 1974 of $34,629,000

($.82 per share), of which

$25,223,000 ($.60 per share) was credited to income before cumulative effect of accounting change and $9,406,000 ($.22 per share),

net of deferred income taxes of $400,000, rep-resented the cumulative effect to January 1, 1974 of the ac-counting change. While the results of operations for all years since 1974 have been reported on the basis of the new method, the results of operations on a pro forma basis for 1974 would have been as follows:

Per average Balance share of available for common stock common stock As reported ro forma amounts reflecting the nsistent application of the change o energy deferral accounting

$1.70

$1.92

$80,831

$71,425 NOTE 2. Depreciation The percentage relationship between the total provision for

'depreciation and average depreciable property was 2.7/o in 1978 and 1977 and 2.8'/o in 1976, 1975 and 1974. The Com-pany makes depreciation studies on a continuing basis and adjusts the rates of its various classes of depreciable proper-ty, subject to PSC approval, when considered appropriate.

~

~

~

fective December 1, 1976, consistent with a PSC rate deci-n, electric depreciation provisions were modified resulting in a reduction in depreciation expense of $4,300,000 for the year 1977. As a result of the rate decision which became effective July 1, 1978, the electric depreciation provision for

. '1978 was increased approximately $1.100,000.

Effective March 1, 1975 and July 1, 1978, the PSC author-ized the Company to make changes in its electric adjustment clause.

As a result, approximately

$31,000,000 and

$8,800,000, respectively, of deferred energy costs would not have been recovered under the normal operation of the elec-tric adjustment clause, but the Company was permitted to amortize and bill such amounts to customers, through the electric adjustment clause, over 36 months from the effective date of each change.'OTE

4. N M Uranium, Inc.

During 1976, through a wholly-owned subsidiary, N M Uranium, Inc. (NMU), the Company purchased a 50 percent undivided interest in uranium deposits and associated min-ing equipment for approximately $52,500,000 consisting of

$34,500,000 in cash and $18,000,000 in 7%4/o notes payabie guaranteed by the Company (see page 21). Although acquisi-tion of this interest was made primarily to provide a more assured future supply of nuclear fuel for the Nine Mile Point Nuclear Station Units 0'1 and 2, the Company expects to sell a portion of the output to reduce net assets and associated carrying charges.

The net assets, including costs incurred since acquisition, of the subsidiary totaling $87,564,000, have been included in Utility Plant in the consolidated financial statements.

On September 8, 1978, the PSC issued an order approving the Company's investment in NMU, its guaranty of the NMU notes and permitting, with prior approval, such subsequent advances as may be necessary to finance the uranium proj-ect. Further, effective July 1, 1978, all benefits associated with NMU accounting-tax timing differences have been deferred.

The approval was subject to the condition that ratttS the PSC will approve in the future will reflect the cost of NMU uranium at the lower of cost or the market price. Subject to, PSC approval, the comparison of cost or market willbe on an aggregate basis over the life of the project. While manage-ment believes that such aggregate costs willbe less than the aggregate market price of the uranium produced over the life of the project, no such assurance can be given.

NOTE 5. Short-Term Debt and Compensating Balances The Board of Directors has authorized the Company to ob-tain short-term unsecured loans of up to $250,000,000, in-cluding the issuance of commercial paper up to a maximum of $125,000,000. Unused lines of credit and unused amounts under the Credit Agreement generally are held available to support commercial paper outstanding at any time.

At December 31, 1978, the Company had available

$174,500,000 of bank credit arrangements consisting of a

$55,000,000 contractual commitment with several banks under a Credit Agreement, lines of credit of $69,500,000 and a Bankers Acceptance Facility Agreement of $50,000,000. Allof these arrangements are renewable on an annual basis.

The Credit Agreement and most of the lines of credit re-quire the Company to maintain compensating balances which are averaged over time. Net of "float," approximately

$2,700,000 of cash at December 31

~ 1978, represented com-pensating balances. The Company has elected to pay fees in lieu of maintaining compensating balances on its other lines.

The Bankers Acceptance Facility Agreement provides for the payment of fees only upon the issuance of each acceptance.

Acceptances are used to finance the fuel oil inventory at one of the Company's generating stations.

17

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

In thousands ofdollars 1978 1977 At December 37I Short-term debt:

Notes payable........

Commercial paper....

Bankers Acceptances

$21,000 3,000 S

24,200 15,000 Weighted average interest rate...

For year ended December 3tl Daily average outstanding.....

Dailyweighted average interest rate................

Maximum amount outstanding

$24,000

$39,200 10.59%*

6.82%'10,744

$40,344 8.17%'.81%

$39,200

$85,650 Excluding compensating balances and fees.

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

$100,861

$11,396 2,145 Oswego Steam Station Unit ¹6 (b) 76

175,693 Nine Mile Point Nuclear Station Unit ¹2 (b) 41 Sterling Nuclear Station (c) 22

14,680 224,135 (a)

The Company sold to Central Hudson Gas and Electric Corporation Vi of its original 40% ownership for book value of approximately

$30,400,000 in December 1978. Central Hudson is obligated from time to time to acquire additional portions of the Company's in-terest.

(b)

During 1975, the Company sold a 24% interest in the ownership of Unit ¹6 and a 59% interest in the ownership of Unit ¹2 for book value of approximately $53,366.000 and, in 1978, sold certain ad-ditional property associated with these units, for book value of ap-proximately $4,600,000.

(c)

Duririg 1975. the Company purchased a 22% interest in the owner-ship of Rochester Gas & Electric Corporation's Sterling Nuclear Station for an initial investment of approximately $4.337,000.

NOTE 7. Capital Stock On May 7, 1976, by an amendment to the Certificate of Incorporation, each authorized but unissued share of pre-ferred stock and preference stock was changed into four shares with a par value of $25 each. In 1978, the authorized shares of common stock were increased. Premium on capital stock increased @65,405,000 in 1978 and $20,150,000 in 1977 from the sale of 5,057,636 and 1,371,311 shares of common stock, respectively. As a result of the foregoing and the 1978 issuance of 1,600,000 shares of S25 par value preferred stock, NOTE 6. Jointly-Owned Generating Facilities The following table reflects the Company's share of jointly-owned generating facilities at December 31, 1978. The Company is required to provide financing for the units in process of construction and for any additions to the Roseton units. The Company's share of expenses associated with the Roseton units are included in the appropriate operating ex-penses in the consolidated statement of income.

8.375% series, and 1,360,000 shares of $25 par value prefer-ence stock, 7.75% series, capital stock expense increased

$615,000 in 1978 and $115,000 in 1977.

In August 1978, $30,000,000 (300,000 shares) of 11.75%

series preferred stock was redeemed.

In accordance with a PSC directive, the $3,525,000 call premium on the redem~

tion was charged to capital stock expense and is being amo~

tized over the life of the 7.75% preference series. Expenses of issuing the 11.75% preferred stock of $ 1,180,000 were charged to retained earnings.

NOTE 8. Pension Plans The Company and its subsidiaries have non-contributory pension plans covering substantially all their employees. The total pension cost was $25,694,000 for 1978, $22,489,000 for

1977,

$20,762,000 for 1976,

$ 18,825,000 for 1975, and

$ 15,589,000 for 1974 (of which

$5,754,000 for 1978,

$4,668,000 for 1977, $3,878,000 for 1976, $3,344,000 for 1975, and $3,755,000 for 1974, was included in construction costs).

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

Preliminary studies indicate that the estimated amount of vested benefits at December 31, 1978 exceeded the net assets of the plans by approximately $100,000,000.

NOTE 9. Federal and Canadian Income Taxes Income Tax Refunds: Operations for the year 1974 include a credit of $4,700,000 attributable to the carryback benefit of a net operating tax loss.

The Company received refunds in 1974 and 1975 totaling

$21,400,000, including interest, as a result of the retroactive adoption of "guideline" lives in computing tax depreciation forthe years 1966 through 1968. In an Opinion and Order on a Company's rate proceeding, dated November 16, 1976, t~

PSC directed that $12,400,000 of the amounts received ~

the years 1966 through 1968 be treated as a reduction in rate base.

The PSC, however, reserved the right to treat such amount differently in future rate proceedings contingent on the then prevailing circumstances.

The Company appealed this treatment to various Courts and on June 19, 1978, the Supreme Court of the United States dismissed, for want of jurisdiction, the Appeal filed by the Company, thus terminat-ing the litigation. The portion of the refunds and interest for the years 1966 through 1968, previously included in Deferred Credits totaling approximately S9.000,000

($.17 per share),

that was no longer subject to a future contingency, was cred-ited to Other Income (Net) in 1976.

In 1978, the Company received a refund of $9,200,000 in-cluding interest net of tax, resulting from the settlement of all audit issues for the year 1969, including the adoption of the "guideline" method of depreciation.

The PSC is currently considering the proper accounting and ratemaking treatment of the 1969 refund.

The total tax refunds and interest recorded in Deferred Credits at December 31, 1978 approximated $21,600,000.

Net Operating Loss: During 1977, 1976 and 1975, the Com-pany utilized $300,000, $20,100,000 and $22,600,000, respec-tively, of net operating tax loss carryforwards.

Investment Tax Credits: The Company has deferred the net benefit of investment tax credits approximating

$6,900,000

($.12 per share), S6,100,000 ($.11 per share), $4,800,000 (S.09 per share) and $12,500,000

($.27 per share) for the ye~

ended December 31, 1978, 1977, 1976 and 1975, respective~

18

in accordance with the general policy as stated in Note 1.

The investment tax credit carryforward previously consid-ered available as of December 31, 1977 was applied as a re-sult of a change in assumption concerning the current de-ctibility of nuclear fuel disposal costs (see Note 1). The mpany has no investment tax credit carryforward at De-cember 31, 1978.

Income Tax Assessment:

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

Summary Analysis:

Components of Federal and Canadian income taxes Current tax expense:

Federal Canadian In thousands of dollars 1978 1977 1976 1975 1974 S 7,608 434

$ (5,500) 3,870 3,314 S 2,550

$ 2,830 1,730 Deterred Federal income tax expense 11,478 3,748 19,645 18,376 2,550 2,830 (3,770) 15,346 11,800 (280)

Income taxes included in operating expenses Deferred Federal income taxes included in Other Income (Net) 31,123 (11,690) 22,124 17,896 14,630 (4,050)

(5,043)

(718)

Total

$19,433

$17,081

$17,178

$14,630 S (4,050)

Timing ditferences resulting in deterred Federal income taxes (see Note 1)

Depreciation Cost ot removal of property Investment tax credit

,.,;., Recoverable energy and purchased gas costs Necessity certificates Nuclear tuel disposal cost Gain on Roseton sale

~ Pension costs under the age retirement allowance plan......

Other..

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

(28,411)

(3,962) 2i054

$ 7,146 245 6,077 69 (700) 496 S 6,223 566 4,847 3,650 (700) 42 S 1,313 (899) 12,523 (477)

(700) 40 985 (750) 2,770 (700)

I (2,585)

Deferred Federal income taxes (net).

Reconciliation between Federal and Canadian income taxes and the tax computed at prevailing U.S. statutory rate (48%) on income before income taxes and cumulative effect of accounting change Computed tax S 7,955

$13,333

$14,628

$11,800 S

(280)

$77,086

$67,638

$60,301

$62,124

$39,579 Reduction attributable to flow-through ot certain tax adjustments:

Depreciation Allowance tor funds used during construction..................

Taxes, pensions and employee benefits capitalized for accounting purposes Real estate taxes on an assessment date basis..................

Investment tax credit.

Income tax retunds Other 13,931 21,601 8,537 560 13,165 (141) 19,703 16,389 7,071 1,042 619 5,733 19,741 9,942.

5,731 2,813 4,313 583 20,123 14,100 7,920 3,035 2,316 16,602 13,426 7,112 4,415 2,074 Federal and Canadian income taxes.

57,653 50,557 43,123 47,494 43,629

$19,433

$17,081

$17,178

$14,630 S (4,050)

NOTE 10. Information Regarding the Electric and Gas Businesses The Company is engaged in the electric and gas utility businesses.

Certain information regarding these segments for the years ended December 31, 1978 and 1977 is set forth on the following page. General corporate expenses, property common to both segments and depreciation of such com-mon property have been allocated to the segments in accor-ce with practices established for regulatory purposes.

porate assets consist of other property and investments, cash, accounts receivable, income tax refund claims, pre-payments, unamortized debt expense and other deferred de-bits.

The Company provides electric and gas service to approx-imately 15,000 Federal, state and local governmental agency locations. During the years ended December 31, 1978 and 1977, approximately $134,000,000 and $122,000,000, respec-tively, of revenue was received from these agencies.

Pretax operating income, including AFC, was $180,077,000 electric. $24,340,000 gas for 1976; $197,788,000

electric,

$20,787,000 gas for 1975 and

$ 143,974,000

electric,

$15,721,000 gas for 1974.

19

In thousands of dollars Electric 1978 Gas Total Electric 1977 Gas Total Operating revenues

$1,020,313

$259,935

$1,280,248 987,760

$238,072

$1,225,832 Operating expenses Depreciation Other, excluding income taxes 71,750 760,327 8,933 223,742 80,683 984,069 68,400 742,541

~

8,713 203,556 77,1 1~

946,0~

Total 832,077 232,675 1,064,752 810,941 212,269 1,023,210 Operating income before taxes AFC.

188,236 44,770 27,260 231 215,496 45,001 176,819 33,991 25,803 153 202,622 34,144 Pretax operating income, includpg AFC...

Income taxes Other income (net)

Interest charges Net income S

233,006 S 27,491 260,497 31,123 13,235 101,447 S

141,162 6

210,510 5 25,056 236,766 22,124 3,645 94,455 123,832 Construction expenditures (including nuclear fuel)...

301,583 S 14,697 316,280 277,828 S 12,103 S

289,931 Identifiable assets:

Utilityplant, net Materials and supplies.............

Deferred recoverable energy costs..

Corporate assets Total assets

$2,595,298

$288,659 98,058 1,910 23,868 4,098

$2,883,957 99,968 27,966 177,221

$3,189,112

$2,428,623 104,653 19,170

$283,439

$2,712,062 1,656 106,309 5,781 24,951" 175,732

$3,019,054 NOTE,11. Commitments The Company presently estimates that the construction program for the years 1979 through 1981 will require over

$635,000,000, excluding AFC and certain overheads capitalized. At December 31, 1978, substantial construction commitments exist, including those for the Company's share of Unit k2 at Nine Mile Point Nuclear Station, Unit P6 at Oswego Steam Station and the Sterling Nuclear Station.

NOTE 12. Replacement Cost (Unaudited)

Because of inflation, the cost of replacing the Company's plant in service today would exceed the amounts actually spent for such facilities and reported in the Company's finan-cial statements.

The Company believes that any higher re-placement costs it may experience willbe recovered through the normal regulatory process. The Company has computed the replacement cost data in accordance with Securities and Exchange Commission requirements and such data are re-ported in its Form 10-K.

December 31 1978 1977 September 30 1978 1977 June 30 1978 1977 March 31 1978 1977

$321,788

$309,348

$276,442

$282,209

$309,666

$281,762

$372,352

$352,513

$33,881

$38,100

$37,571

$35,488

$47,976

$42,647

$64,945

$64,263

$26,977

$.32

$24,001

$.31

$27,273

$.32

$21,409

$.27

$35,527

$.49

$28,902

$.40

$51,385

$.78

$49,520

$.77 NOTE 13. Quarterly Financial Data (Unaudited)

Operating

revenues, operating income, net income and earnings per common share by quarters for 1978 and 1977 are shown in the followingtable. The Company, in its opinio~

has included all adjustments (consisting only of normal r~

curring accruals) necessary for a fair statement of the results of operation for the quarters.

Due to the seasonal nature of the utility business, the annual amounts are not generated evenly by quarter during the year.

In thousands of dollars Operating Operating Net Earnings per Quarters ended revenues income income common share 20

Summary ofElectric and Gas UtilityPlant At December 31 ~

In thousands of dollars 1978 1977 Utilityplant:

Electric plant Nuclear fuel (Note 4)

Gas plant Common plant Construction work in progress

$2,680,999 215,207 3505029 59,726 599,413 69 6

9 1

15

$2,625,797 175,884 341,010 57,584 446,999 Total utilityplant

$3,905,374 100

$3,647,274 Long-Term Debt In lhousends of dollars At December 31 ~

1978 1977 firstMortgage Bonds:

2e/4% Series due January 1, 1980 2r/e% Series due October 1, 1980 12.6% Series due October 1, 1981 3%% Series due December 1, 1981 3~/e% Series due February 1, 1983 3t/4% Series due October 1, 1983 3t/e% Series due August1, 1984.

10%% Series due September 1, 1985 3'%eries due May 1, 1986 47/e% Series due September 1, 1987....

3r/e% Series due June 1, 1988 4e/4% Series due April 1, 1990 4'/e% Series due November 1, 1991 4e/e% Series due December 1, 1994.

5~/e% Series due November 1, 1996.

6t/4% Series due August 1, 1997.

61e% Series due August 1, 1998.

9t/e% Series due December 1, 1999 7e/e% Series due February 1, 2001 7'%eries due February 1, 2002 7e/4% Series due August 1, 2002.

St/4% Series due December 1, 2003.

9t/e% Series due December 1, 2003 10.2% Series due March 1, 2005 8.35% Series due August 1, 2007.

8%% Series due December 1, 2007 Paul Smith's Electric Light & Power &

Railroad Company firstMortgage Bonds:

4~/e% Series due July 1, 1979 5t/e% Series due May 1, 1985 Promissory Note, 8% Series Adue June 1, 2004.............

Notes payable:

7e/4% due in equal installments, November 1, 1978, 1979 and 1980 (Note 4).............

Prime rate plus t/e% (not to exceed 7t/e%) due in 24 equal quarterly installments commencing July 1, 1978.......

Unamortized premium Total long-term debt Less long-term debt due within one year 40,000 40,000 125,000 15,000 25,000 40,000 25,000 47,000 30,000 50,000 50,000 50,000 40,000 40)000 451000 40,000 601000 75)000 65,000 80,000 80,000 80,000 31,500 47,000 75,000 50,000 450 450 46,600 12,000 13,750 6,697 1,425,447 10,450 40,000 40,000 125,000 15,000 25,000 40,000 25,000 47,000 30,000 50,000 50,000 50,000 40,000 40,000 45,000 40,000 60,000 75,000 65,000 80,000 80,000 80,000 50,000 75,000 50,000 450 450 46,600 18,000 15,000 7,137 1,404,637 10,250

$1,414,997

$1,394,387 21

Preferred Stock Preferred $100 par value 3.40% Series; 200,000 shares.....

3.60% Series; 350,000 shares.....

3.90% Series; 240,000 shares.....

4.10% Series; 210,000 shares.....

4.85% Series; 250,000 shares.....

5.25% Series; 200,000 shares.....

6.10% Series; 250,000 shares.....

7.45% Series; 564,000 and 582,00 7.72% Series; 400,000 shares.....

10.60% Series; 400,000 shares.....

11.75% Series (Note 7)

Preferred $25 par value 8.375% Series; 1,600,000 shares 9.75% Series; 1,200,000 shares...

Preference

$25 par value 7.75% Series; 1,360,000 shares...

. $ 20,000 35,000 24,000 21,000 25,000 20,000 25,000 56,400 40,000 40,000

$ 20,000 35,000 24,000 21,000 25,000 20,000 25,000 58,200 40,000 40,000 30,000

$103.50 104.85 106.00 102.00 102.00 102.00 103.00 106.25 107.37 110.60 0 shares 27.09 25.00 27.1825 25.00 25.00 40,000 30,000 30,000 34,000 Cumulative preferred stock, authorized 3,400,000 shares, $100 par value and 9,600,000 shares, $25 par value Cumulative preference stock, authorized 4,000,000shares,

$25 par value Redemption price per share ln thousands of dollars (Before adding accumulated dividends)

At December 31 ~

1978 1977 December 31, 1978 Eventual Minimum

$103.50 104.85 106.00 102.00 102.00 102.00 101.00 100.00 102.36 102.65 Total preferred and preference stock Less sinking fund requirements.....

410,400

~ ~ ~ ~ ~ ~ ~

~ ~

1 y800

$408,600 368,200 1,800 "Notredeemable until October 1, 1981.

$366,400 Certain of the Company's preferred stock series provide for a mandatory sinking fund for the annual redemption, at par, as follows:

Number of shares Beginning Preferred $100 par value 7.45% Series 18,000 June 30, 1977 10.60% Series 20,000 March 31, 1980 Preferred $25 par value

. 8.375% Series 100,000 April 1, 1983 9.75% Series 66,000 October 1, 1980 Preference $25 par value 7.75% Series 140,000 September 30, 1980 These series also have optional sinking funds through which the Company may redeem, at par, a like amount of additional shares (limited to 120,000 shares of the 7.45% Series and 300,000 shares of the 9.75% Series). The mandatory sinking fund for the 7.75%

Series increases by 20,000 shares and 80,000 shares beginning September 30, 1982 and 1984, respectively.

Report ofIndependent Accountants PRICE WATERHOUSE 8 CO.

To the Stockholders and the Board of Directors of Niagara Mohawk Power Corporation We have examined the consolidated balance sheets of Niagara Mohawk Power Corporation and its subsidiaries as of December 31, 1978 and 1977, and the related consolidated statements of income and retained earnings and of changes in financial position for the five years ended December 31, 1978, appearing on pages 13 through 22. Our examinations of these statements were made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing pro-cedures as we considered necessary in the circumstance's.

In our report dated January 25, 1978, our opinion on the financial statements was qualified as being subject to the effect, if any, on the financial statements of the ultimate res-olution of certain litigation relating to "guideline refund claims." As explained in Note 9, the litigation was terminated in June 1978 with no resulting effect on the financial state-

Syracuse, New York I

January 24, 1979 ments. Accordingly, our present opinion on the financial statements, as presented herein, is no longer qualified with respect to this matter.

In our opinion, the consolidated financial statements exam-ined by us present fairly the financial position of Niagara Mohawk Power Corporation and its subsidiaries at December 31, 1978 and 1977, and the results of their operations and the changes in their financial position for each of the five years in the period ended December 31, 1978, in conformity with gen-erally accepted accounting principles consistently applied during the period subsequent to the change, with which we concur, in the method of accounting for increased energy costs made as of January 1, 1974, as described in Notes 1

and 3.

K>O

I'inancial Statistics Capitalization ratios:

Common stock equity.

Preferred stock........

Long-term debt Ratio of earnings to fixed charges Ratio of earnings to fixed charges and preferred stock dividends..

Other ratios

% of operating revenues:

Maintenance and depreciation Taxes Operating income Balance available for common stock Ratio of depreciation and amortization reserve to gross utilityplant..

Ratio of mortgage bonds to net utilityplant 1978 1977 36.9%

35 5%

14.1 13.4 49.0 51.1 2.58 2.49 1.95 1.90 12.6 13.2 14.3 14.0 14.4 14.7 8.8 8.0 26.2%

25.6%

46.7/o 48.6%

Electric Capability Thermal Coal fuel Huntley, Niagara River Dunkirk, I ake Erie Total coal fuel Residual oil fuel Albany, Hudson River Oswego, Lake Ontario Roseton, Hudson River Middle distillate oil fuel 20 Combustion turbine and diesel units Total oil fuel Nuclear fuel Nine Mile Point. Lake Ontario Purchased firm contract Power AuthorityFitzPatrick, Lake Ontario Total nuclear fuel Total thermal sources Thousands of Kilowatts At January l, 1979 1978 785 11 831 585 8

640 1,370 19 1,471 400 6

400 1,190 17 1,225 360 5

480 354 5

354 2,304 33 2,459 610 9

610 176 2

184 786 11 794 4,460 63 4,724 Hydro Owned and leased hydro stations (81 in 1978).................

Purchased firm contracts Power AuthorityNiagara River Power AuthoritySt. Lawrence River Power AuthorityBlenheim-Gilboa Pumped Storage Plant...

Other.

Total hydro sources Total capability*

733 10 737 1,122 115 550 76 16 1,161 2

115 8

550 1

74 2,596 37 2,637 7,056 100 7,361 Electric peak load during year 1978 5,485 1977 5,405

'Available capability can be increased during heavy load periods by purchases from neighboring intercon-nected systems. Hydro station capability is based on average December stream-flow conditions.

23

Electric and Gas Statistics Electricity generated and purchased:

(Millionsofkw-hrs.)

Thermal:

Generated Coal OII Nuclear Purchased Nuclear from Power Authority 1978 7,016 20 8,691 25 4,467 13 886 2

1977 7,579 22 8,293 24 2,946 8

911 3

Total thermal.

Hydro:

Generated Purchased from Power Authority Total hydro Other purchased powervarious sources Total generated and purchased 21,060 60 19,729 57 3,472 10 3,782 11 8,563 24 8,851 26 12,035 34 12,633 37 2118 6

1 926 6

35,213 100 34,288 100 Electric sales:

(Millions ofkw.hrs.)

Residential Commercial Industrial Municipal service......

Other electric systems 1978 8,127 9,117 12,187 276 2,675 1977 7,895 8,770 11,878 276 2,548 Gas sales:

(Millionsofcubic feet)

Residential Commercial Industrial Other gas systems...

1978 53,301 23,088 15,204 3,740 1977 52,684 20,305 14,528 3,310 95,333 90,827 Electric revenues:

(Thousands ofdollars)

Residential Commercial Industrial Municipal service......

Other electric systems Miscellaneous Electric customers:

(Average)

Residential Commercial Industrial Other Residential:

(Average)

Annual kw-hr. use per customer...

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

Annual revenue per customer.....

32,382 31,367 S

319,667

$304,229 333,862 325,985 258,649 253,690 21,515 20,905 59,445 58,601 27,175 24,350

$1,020,313

$987,760 1,197,060 1,187,318 128,481 128,070 2,873 2,876 2,257 2,235 1,330,671 1,320,499 6)790 6,649 3.934 3.85lt

$267.04

$256.23 Gas revenues:

(Thousands ofdollars)

Residential Commercial Industrial Other gas systems....

Miscellaneous Gas customers:

(Average)

Residential Commercial.

Industrial Other.

Residential:

(Average)

Annual use per customer (Thousands ofcubicfeet)..

Cost to customer(per thousand cubic feet)

Annual revenue per customer.......

Maximum day gas sendout (Thousandsofcubicfeet)............

S158,599 60,794 32,422 6,858 1,262

$150,51 51,512 29,336 5,595 1,119 382,691 384,197 28,451 28,632 522 540 2

2 411,666 413,371 139.3 137.1

$2.98

$2.86

$414.43

$391.75 637,556 660,974

$259,935

$238,072 24

Officers Directors John G. Haohl, Jr.

President and Chief Executive Officer amos Bartlett ecutive Vice President WilliamJ. Donlon Senior Vice President James J. Miller Senior Vice President John H. Terry Senior Vice President. General Counsel and Secretary Richard F. Torrey Senior Vice President Richard C. Clancy Vice President Research and Environmental Affairs Donald P. Disc Vice President Engineering John J. Ehllnger Vice President Employee Relations John M. Endrles Vice President and Controller William C. Franklin Vice President Purchasing John M. Haynes Vice President and Treasurer John P.Hennessey Vice President Management Systems and Services Eugene J. Morel Vice President Employee Services and Risk Management James F. Morrell Vice President-Corporate Planning erald K. Rhode ice President System Project Management Rudolph R. Schnelder Vice President Electric Production Kenneth A.Tramutola Vice President Rates Robert M. Cleary, Jr.

Vice President and General Manager Western Division Raymond Kolarz Vice President and General Manager-Central Division Richard H. Kukuk Vice President and General Manager-Eastern Division Edward P. Gueth, Jr.

Assistant General Counsel Herman B. Noll Assistant General Counsel Anthony J. Baratta, Jr.

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

Assistant Controller John W. Powers Assistant Treasurer Harold J. Bogan Assistant Secretary Joseph F. Cleary Assistant Secretary Eastern Division rederlck C. McCall Assistant Secretary Western Division James Bartlett Executive Vice President. Syracuse Thomas J. Brosnan Consultant (formerlyVice President Research and Development, Environmental Matters), Syracuse Lauman Martin Consultant (formerly Senior Vice President and General Counsel), Syracuse Baldwin Maull Director ofvarious corporations, New York Edmund M. Davis Partner, Hiscock. Lee. Rogers, Henley &

Barclay, attorneys-at-taw, Syracuse Martha Hancock Northrup Housewife, former President, Grouse-Irving Memorial Hospital Board, Syracuse Edward W. Duffy Chairman of the Board and Chief Executive Otficer, Marine Midland Banks, Inc. ~ a bank holding company, Buffalo Edmund H.

Fallen'xecutive Consultant. Agway, Inc., purchasing and marketing organization, Syracuse Frank P. Piskor President, St. Lawrence University, Canton Donald B. Rlefter Chairman, Sources and Uses of Funds Committee, Morgan Guaranty Trust Company of New York. commercial bank, New York John G. Haehl, Jr.

President and Chief Executive Officer, Syracuse Lewis A. Swyer President, LA. Swyer Company, Inc., builders and construction managers, Albany Edwin F. Jaeckle Senior Partner, Jaeckle. Fleischmann 6 Mugel, attorneys-at-law. Buffalo John G. Wick President and Chief Executive Officer, Merchants Insurance Group, Buffafo Board committees Executive Committee John G. Haehl, Jr., Chairman Edmund H.

Fallon'dwin F. Jaeckle Frank P. Piskor Baldwin Maull John H. Terry, Secretary Pension Committee Edmund H. Faffon, Chairman Edmund M. Davis Bafdwin Maul l

~ I\\'I Salary Committee Baldwin Mauff~ Chairman Edwin F. Jaeckle Edmund M. Davis AuditCommittee Edward W. Duffy, Chairman Lewis A. Swyer Frank P. Piskor Committee on Corporate Public Policy Frank P. Piskor, Chairman Martha H, Northrup Edmund H. Faffon Finance Committee Donald B. Rieller John G. Wick Edmund M. Davis Niagara Mohawk position paper is reviewed by Directors at periodic meeting of Committee on Corporate Public Policy, with chairman Frank P. Piskor, lett. Edmund H. Fallon'nd Martha Hancock Northrup.

'(Deceased February 7, 1979) 25

7 NlAGARA U MOHAWK 300 ERIE BOULEVARD WEST SYRACUSE. NEW YORK 13202 Buildings near Lake Placid to house athletes for 1980 Winter Olympic Games willbe scene of onmf-a-kind energy research project by Niagara Mohawk. (See page 9 inside.)