ML18038A005

Annual Financial Rept,1984

ML18038A005
Person / Time
Site:	Nine Mile Point
Issue date:	12/31/1984
From:	Donlon W, Haehl J, Lempges T NIAGARA MOHAWK POWER CORP.
To:	Office of Nuclear Reactor Regulation
References
NUDOCS 8503180271
Download: ML18038A005 (48)

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NIAGARA MOHAWKPOWER CORPORATION NIAGARA '~t MOHAWK THOMAS E. LEMPGES VICE PRESCENT~VCLEAA CKNCRATCM 300 ERIE; BOULEVARD WEST SYRACUS 2, H, Y. l3202 March 11, 1985 Director Office of Nuclear Reactor Regulations c/o Distribution Services

Branch, DDC, ADM U.S. Nuclear Regulatory Commission Washington, DC 20555

Dear Sir:

As required in Title 10, Chapter I, Code of Federal Regulations, Section 50.71(b),

and compiled in Regulatory Guide 10.1, enclosed are ten (10) copies of Niagara Mohawk Power Corporation's 1984 Annual Report.

TEL/mrs Enclosures (10)

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8 THE ATTACHEDFILES ARE OFFICIAL RECORDS OF THE INFORMATION&

RECORDS MANAGEMENTBRANCH.

THEY HAVE BEEN CHARGED TO YOU FOR A LIMITEDTIME PERIOD AND MUST BE RETURNED TO THE RECORDS &ARCHIVES SERVICES SECTION, T5 C3. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVALOF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

- NQTICE-

SERVING UPSTATE NEW YORK Ranked as one of the most prominent investor-owned utilities in the United States, Niagara Mohawk Power Corp.

serves an area encompassing more than half the land mass of New York State. Our electric system extends from Lake Erie to New England's borders, to Canada and Pennsylvania, and meets the diversified needs of nearly 1.4 mil-lion customers. Our natural gas system serves 433,000 customers in central, eastern and northern New York, nearly all within our electric territory. Two Canadian companies, St. Lawrence Power Co. and Canadian Niagara Power Company, Ltd. owned by our subsidiary, Opinac Investments, Ltd., provide energy to portions of Ontario. Other subsidiaries are Hydra-Co Enterprises, Inc., N M Uranium, Inc, and Niagara Mohawk Finance, N.V. Our corporate headquarters are 300 Erie Boulevard West, Syracuse, N.Y. 13202.

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CORPORATE MISSION STATEMENT Niagara Mohawk is an energy company with diversified interests and resources committed to providing for the current and future needs of customers through economical products and services of superior quality.

The Company is dedicated to main-taining an efficient, progressive, cost-conscious organization that provides a fair and equitable return to its owners.

Management is committed to retain-ing and motivating talented, productive, effective employees by providing reasonable compensation, incentives and a good working environment.

The Company pursues opportunities to improve the economic climate and well-being of citizens, industry and bus-iness within the markets served. Ap-propriate actions are taken to meet socioeconomic responsibilities, includ-ing seeking necessary improvements in the regulatory and legislative environ-ment that best serve interests of the Company's customers, employees, and owners.

Management maintains high ethical standards and strives foropen com-munications with all its constituencies.

The Company takes an active role in the development of technologies and opportunities advantageous to custom-ers and owners. It is dedicated to main-taining and developing dependable energy resources and delivery systems that are safe and environmentally sound.

Management willactively pursue strategies in support of objectives to accomplish this mission.

CONTENTS 2 To our stockholders 4 Year of enterprise 18 Market price of common stock and related stockholder matters 18 Management's discussion and analysis of financial condition 23 Report of management and independent accountants 24 Consolidated financial statements 27 Notes to consolidated financial statements 39 Statistics 41 Officers, directors, corporate information HIGHLIGHTSOF 1984 1984 1983 Change

$ 2,632,315,000 270,300,000

$2.77

$1.89 97,685,000 5.8 14.0 2.5 4.8 11.3 Utilityplant (gross)

Gross additions to utilit plant..

Kilowatt-hour sales Electric customers at end of year Electric peak load kilowatts.....

$ 6,903,184,000

$ 6,165,711,000 12.0 769,846,000 691,464,000 11.3 37,086,000,000 34,732,000,000 6.8 1,405,000 1,392,000 0.9 5,526,000 5,625,000 1.8)

Natural gas sales(dekatherms)..........

Gas customers at end ofyear............

Maximum day gas sendout(dekatherms 114,960,000 436,000 772,604 103,153,000 11.4 433,000 0.7 754,061 2.5 Total operating revenues

$ 2,785,546,000 Income available for common stockholders... $

308,274,000 Earnings per common share.................

$2.84 Dividends per common share................

$1.98 Common shares outstanding (avera e.......

108,734,000 THE 1984 REVENUE DOLLAR ~..

EARNINGS AND DIVIDENDS PAID PER COMMON SHARE Residential customers 334 Commercial customers 304 Industrial customers 214 Allothers 164

$1.87

$ 1.50

$ 1.61

$1.76

$2.35 Earnings

$2.77

$1.89

$2.84

$1.98 ividend ANDWHERE ITWENT Fuel for the production of electricity 314:

and electricity purchased Gas purchased 16C Incomeandother taxes 154

/

Interest and other costs-net 10C

/ Wages, salaries, employee benefits 104 Dividends to stockholders 104 1980 1961 1982 1983 1964 MARKETPRICE OF COMMON STOCK ATYEAR END

$17%

$>5N

$1574 Depreciation 5C Retained in business 3C

$ 11ys

$12%

1980 1981 1982 1983 1984

We are pleased to report to you our fourth consecutive year ofincreased earnings.

In 1984, we achieved earnings of $2,84 per share ofcommon stock, compared with 42.77 in 1983. This 2.5-percent growth stemmed primarilyfrom a rise in revenues and gross margins from higher electric and gas sales and additional allowance forfunds used dur-ing construction. The increase would have been higher, however, ifwe were not com-pelled at the year-end to record a one-time 10-cent per share offset related to a refund ordered by the N.Y. State Public Service Commission. We take strong exception to this mandate and plan to appeal itin the courts.

The year's electric sales grew nearly seven percent over 1983, including an impressive 23-percent upturn in sales to other utilitiesin the Northeast and increases ranging from three to more than four percent in industrial, commercial and residential categories. Also significant was an ll-percent overall rise in natural gas sales in 1984, withindustrial gas sales alone climbing a dramatic 27 percent.

Commercial and residential gas sales were up nearly fourand six percent, respectively.

During 1984, the Board ofDirectors in-creased the dividend to a rate of 42.00 per share from the previous 41.92, reinforcing our long-standing policyofstriving to make regu-lar increases in our dividend. Quarterly div-idends have been paid every year since the Company's incorporation in 1950, and this represents the 13th consecutive year of increases.

New electric and gas rates to yield addi-tional revenues totaling $95.5 millionper year became effective in March 1984, as approved by the Public Service Commission. The Com-pany is currently requesting further increases to produce approximately 4130 millionannu-ally, including adjustments to improve cash Qow. We anticipate the PSC's decision in March 1985.

Historically, Niagara Mohawk's residential electric rates have been the lowest among major New YorkState utilities and below the national average. Despite general rate in-creases received, the overall costs per kilowatt-hourto our customers during 1984 were lower than in 1983, due to lower fuel costs, economic power purchases, generation station improvements and our superior gen-eration "mix"which emphasizes hydro, nuclear and coal. In addition, we were also able to lower our prices forgas customers in 1984 as we passed along savings from our wholesale gas'supplier. Even withour prop-osed new rates, the prices paid by our cus-tomers are expected to remain vexy competi-tive in 1985.

In February 1984, we expressed concern over Long Island LightingCompany's with-drawal ofits 18-percent share offunding in Nine MilePoint Nuclear UnitTwo. To resolve this matter, and retain LILCOas an 18-

'ercent owner of the plant, an agreement was reached in which Niagara Mohawk will advance up to 4250 millionin funds forthe account ofLILCO,withLILCOissuing general and refunding bonds as security. This arrangement'enables us to continue con-struction activityat Nine MileTwo without interruption, while providing Niagara Mohawk withsecurity forthe funds advanced.

Followinga Nine MileTwo cost re-estimate in March, 1984, the Public Service Commis-sion staff and the N.Y. State Energy Office conducted separate economic re-evaluations ofthe project. Both concluded there are, economic benefits to the plant, and the Gov-ernor also indicated his agreement. Areview by Niagara Mohawk ofthe economics also continues to support completion ofNine Mile

Two, During 1984, to supplement our own nu-clear construction expertise, the Nine Mile Two project team was reinforced with sea-soned veterans from the respected Manage-ment Analysis Company, which holds worldwide nuclear construction credentials.

Primary emphasis on the project has shifted frombulk construction to finishing complex systems needed forpre-operational testin'g priorto actual start-up and power generation.

These and other events of 1984 served to bolster our resolve to finish Nine MileTwo and to bring iton line as rapidly as possible at the lowest possible cost withstrict atten-tion to quality. We believe that the currently scheduled October, 1986 commercial opera-tion date is'difficult,but achievable, Even with the recent projected-cost increase of $250 millionto $5.350 billionmade in Januaxy,

1985; we remain withinthe Public Service Commission's mandated cost "cap" of 45.4 billion.Extensive discussions regarding cost, schedule, regulatory matters and other im-portant factors associated withthe project are covered in Note 10 to our financial statements on page 34.

As an added source ofcapital and to in-crease our financing flexibility,we decided in 1984 to increase our available baiik;revolving credit and term loan agreements to 4445 mil-lion. We completed 4614 millionoffinancing in 1984 and willneed to raise approximately

$670 millionduring 1985, including amounts we willbe advancing to the Nine MileTwo project on behalf ofLILCO.Afterthe project is completed, our capital requirements and ex-ternal financing should decline sharply.

Throughout this Report appear frequent references to our Corporate Strategic Plan, which provides a central theme forNiagara Mohawk management The accomplishments, plans and hopes presented on these pages are all elements in this formula forexcellence.

One far-reaching action by management under the Plan's objectives was the creation ofa new Corporate Development Department to seize whatever opportunities tomorrow may offerin emerging marketing, conserva-tion, economic development and related hori-zons. Our commitment to advancement of technology is self-evident in this Annual Re-port, while our new "ThinkCustomer" and "Care R Share" programs devoted to con-sumer and community assistance also re-sulted from the Strategic Plan.

On behalf ofthe Board ofDirectors and management, we offerour sincerest apprecia-tion to our stockholders and employees for their loyaltyand support in these promising, yet demanding, times.

John G. Haehl Jr.

Chairman ofthe Board and Chief Executive Officer John G. Haehl, Jr. and WilliamJ. Donlon February ll,1985 WilliamJ. Donlon President

Year ofenterprise Constant attention to planning and aggressive decision-making by Niagara Mohawk's man-agement team made 1984 a good year forus, withclearly visible results.

Positive modifications and improvements some ofthese the fruits ofhigh-technology, firstenvisioned or underway since the early 1980s are now yielding marked benefits in productivity and efficiency throughout our operations and day-to-day business, as documented in this Report. Management's singular commitment to the future, in both the long and short-term sense, is directed to-ward our stockholders, consumers and employees as we enter the final halfofthis decade and plan forenergy needs beyond.

Corporate Strategic Plan-a blueprint forthe future The Company has a strategic planning pro-cess in place to effectively employ Niagara Mohawk's human, physical and financial re-sources in an ever-changing future.

Each year, conditions confronting the Company are examined and our Corporate Strategic Plan is modified to provide direction in decision-making forthe next ten years and beyond. The Plan is developed by our entire management team to determine what the Company wants to be and how itintends to get there. The cornerstone is a corporate mis-sion statement, a briefsummaxy ofNiagara Mohawk's philosophy. (See inside front cover.) Growing out ofthe statement are eight corporate objectives statements ofintent and statements ofwhat we "want to happen."

Supporting these are strategies or broad guidelines as a road map toward achieving each objective how to "make ithappen."

The objectives are each aimed at ac-complishing the mission, as follows:

1. Financial Integrity

2. Think Customer

3. EfficiencyThrough People

4. Nuclear Excellence

5. Marketing/Growth/Competition

6. Community Involvement

7. Management ofChange

8. Introspection/Self-appraisal Projects and programs discussed on these pages are all being developed withinthe framework ofthe Corporate Strategic Plan-a working blueprint forour future.

Auditbrings positive marks Toward these objectives, 1985 opened on a positive note followingthe conclusion ofan extensive 14-month audit ofour management and operations by Theodore Barry &Asso-ciates, a nationally known consulting firm.

Mandated by the N.Y. State Public Service Commission and similar to periodic PSC au-dits ofother investor-owned utilities, the as-sessment brought out many favorable find-ings as well as constructive recommenda-tions. Especially significant, however, were comments concerning Niagara Mohawk's leadership structure, speciTically TB&A'sref-erence to our "capable and well-motivated management team." Further, "improvements under way at Niagara Mohawk, in combination withthe near-term implementation ofother study recommendations, willresult in sub-stantial quantitative benefits to both the Company and the ratepayer," TB&Aobserved in its final report. The audit was the second independent review ofthe Company's man-agement in six years. As withthe first, we welcomed the constructive critique.

Nine MileOne nuclear pioneer In 1984, the U.S. Nuclear Regulatoxy Commis-sion awarded the Company generally favora-ble ratings in an annual assessment oflicen-see performance at the 610,000-kilowatt Nine MilePoint Nuclear UnitOne, noting "effec-tive management attention and involvement oriented toward nuclear safety in all func-tional areas" at our firstnuclear station.

The NRC stated Niagara Mohawk has "a large, experienced staff oflicensed operators and senior operators", while fire protection, security and safeguards, refueling, outage management and licensing activities were all at "high level ofperformance with respect to operational safety and construction." The NRC also provided various recommendations in areas needing improvement and these are being implemented to further refine plant performance.

The year 1984 marked Nine MileOne's 15th anniversaxy, especially meaningful as the project is Upstate New York's firstnuclear-electric development, designed and en-gineered solely "in-house" by Niagara Mohawk, a distinction few utilities can claim.

Over its remaining lifetime, Nine MileOne willsave the equivalent ofsome 117 million

barrels ofoilor $3 billion,based on current prices. Ithas already saved 81 millionbarrels since firstgoing on line in 1969.

Nine MileTwo Progress We are continuing to forge ahead at a steady pace on the construction ofNine MilePoint Nuclear UnitTwo. Atthis writing,the 1.08-millionkilowattstation is moving toward the startup and test schedule a primaxy corpo-rate objective.

High-level administrative measures, includ-ing hiring the internationally recognized con-sulting firmofManagement Analysis Com-pany (MAC),were undertaken in 1984 as the massive project advanced into its final con-struction stage.

MACprofessionals, withworldwide experi-ence and expertise in overseeing large nuclear construction, were integrated into top man-agement, engineering and quality assurance responsibilities withinthe project team.

Moreover, the Company initiated new pro-grams and enhanced earlier efforts to insure standards ofexcellence in design, construc-tion, tests and inspections at the construc-tion site. Close cooperation is being main-tained by Niagara Mohawk and project partners withthe NRC and various recom-mendations are being applied from NRC studies over the past year.

Atyear-end, emphasis ofthe construction effortmoved to preliminary testing ofthe many subsystems and finishing the remain-ing electrical and mechanical work Pre-oper-ation testing and fuel loading are scheduled to lead us to startup and commercial service.

Looking ahead, a staff of 100 operating per-sonnel has been assembled at Nine Mile Point. Twenty-seven hold reactor operator licenses and 12 hold senior reactor licenses.

Sixty-one are in training forreactor operator and senior reactor licenses forUnitTwo, with license exams scheduled for 1985 and early 1986. Their instruction willutilize a full-size control room simulator starting in 1985 at the new Nine MilePoint Training Center.

Although we stillface critical construction milestones in early 1985 and are operating in an aggressive schedule, we currently antici-pate loading Nine MileTwo's uranium fuel in Februaxy 1986 a keystone in building this critical major nuclear addition to New York' energy future.

Aerial view of Nine Mile Point on southeastern Lake Ontario shows Nuclear UnitTwo, at left of large cooling tower, nearing final con-struction stages. Adjacent to plant is Unit One, on line since 1969, while Energy Information Center and new Training Center overlook lake from bottom of photo. At top is N.Y. Power Authority's James A.

FitzPatrick Nuclear Power Plant.

Niagara Mohawk experienced nuclear builder Niagara Mohawk enjoys a strong position among U.S. utilities engaged in nuclear plant construction.

Our ownership portion in Nine MileTwo is 41 percent. Thus, the total project cost and financing burden is shared among our co-tenants, in contrast to other companies who may be undertaking such projects alone. Our financial posture is recognized as investment grade and our nuclear experience is securely established. Further, Niagara Mohawk has created a Nine MilePoint Emergency Plan in place, and proven successful. The Plan was formulated jointlywithfederal, state and local government agencies and favorably received by the NRC. Moreover, itis the firstplan with an emergency notification system approved by the Federal Emergency Management Agency in FEMA's Region 2 and the firstin the U.S. to earn FEMAapproval without qualifica-tion a decided advantage, In its lifetime, Nine MileTwo willgenerate electricity equivalent to more than 400 mil-lionbarrels ofimported oil,forsavings ofover

$ 10 billionat current oilprices, Niagara Mohawk is the principal partner and managing agent in construction and opera-tion ofUnitTwo, withLong Island Lighting Company and New YorkState Electric and Gas Corp. holding ownership at 18% each; Rochester Gas and Electric Corp. at 14% and Central Hudson Gas and Electric Corp. at 9%.

(Adetailed discussion ofcost, schedule, reg-ulatory matters and other important factors associated withthe project is presented in Note 10 to financial statements on page 34).

New Coryorate Development Deyarbnent formed Management formed the Corporate Develop-ment Department in 1984 to increase the Company's organizational efficiency and responsiveness to future challenges.

This function integrates all rate-related, conservation, marketing and economic development operations at the corporate level under a vice president, Christopher D.

Turner. Its establishment follows our Corpo-rate Strategic Plan objective aimed at Marketing/Growth/Competition. Respon-sibilities include innovation ofrate design and creating programs to attract new custom-

ers to our service area and to help industrial and commercial customers improve their competitiveness.

ELECTRICITYGENERATED AND PURCHASED BYTYPE OF FUEL, 1984 New economic development rate Niagara Mohawk is seeking to accelerate economic development withintroduction in 1984 ofa special electric rate forqualifying business customers on our lines. This five-year rate-reduction plan encourages con-struction and expansion offacilities and the purchase or leasing ofan existing facility.

The new rate willbe to the advantage ofall customers, as the new revenues willoffset and stabilize fixed electrical costs.

Hydro 30%%d Various sources 25%%d Coal

20M, Nuclear 11%%d Oil 9g Natural gas 55 Generating refinements-a record is set Initiatives to upgrade performance offossil-fueled power facilities were continued in 1984. Much ofthis workcentered upon im-proving heat rate to obtain maximum electric output per unitofcoal or oilfueL Arecord was set at our 715,000-kilowatt Huntley Station (coal-fired) on the Niagara River at Tonawanda. The more than half-century old plant generated more power 41.5 billionkilowatt-hours over the past ten years ending 1984 than in any other decade in its productive life.

Niagara Mohawk is one ofthe firstU.S.

utilities to install a modern computer-based maintenance records and planning system, withprograms and data storage on each fossil power station maintained on a corporate mainframe computer in Syracuse. Each sta-tion inturn has access and inputs to the sys-tem via video display terminals and printers.

I Resembling oversized corks, concrete barriers, upper left photo, weighing tons each are positioned along Nine Mile Point shoreline to protect Unit Two, in distance, from abnormally high Lake Ontario ice and wave conditions.

Technician sights down turbine shell at Nine MileTwo proj-ect. Revolving shaft willbe installed in casing to connect steam turbines to generator and produce 1.08 millionkilo-watts of power when station begins operations.

Brightyear fornahxra1 gas On target withgas Marketing/Growth/

Competition objectives ofour Corporate Strategic Plan forthe year, record sales to in-dustrial customers highlighted 1984 forour natural gas system up 27 percent over the 1983 period.

Gas prices were favorable foranother year, especially forNiagara Mohawk's large cus-tomers who have the capability to burn either oilor natural gas.

Total sales to all customer categories were up llpercent over 1983 due not only to the higher industrial use, but to increased con-sumption by residential and commercial cus-tomers as well.

Natural gas continues to hold its position as the premium fuelclean-burning and lower-priced than heating oiland its popularity willremain high because ofthe abundant future supply picture.

Noting a hydro "first" The dominant hydroelectric development dur-ing the year signalling a shiftin manage-ment strategy was selection ofa firmto con-struct and operate a 15,500-kilowatt plant and to sell the energy exclusively to Niagara Mohawk.

This was the firsttime the Company has sought proposals from outside sources as a vehicle forconstruction of a new hydro proj-ect. Aproposal by Glen Park Associates was selected from submittals from seven compet-ing independent engineering, construction and energy companies fora project at Glen Park on the Black River. The Glen Park pro-posal, including a 42-year lease, was attractive

because itlowers overall project costs, The generation units are targeted forservice as early as 1986.

Under the Glen Park agreement, all power produced willbe sold to Niagara Mohawk at a price considerably below both avoided costs and the development costs estimated at more than 420 millonifthe Company were to build the plant Niagara Mohawk firstbegan planning a hydro plant at Glen Park in the 1970s and has since conducted extensive economic, engineering and environmental studies. We are viewing other future hydro de-velopment plans withan eye toward the Glen Park arrangement and may again seek bids from competing private firms on additional waterpower sites.

Energy management system on schedule Amilestone was noted in the Company's comprehensive, long-range Energy Manage-ment System (EMS), as a new Power Control Center was completed in Syracuse and occupied by technical staff.

The modern structure willbe the nerve center ofour 24,000-square mile power net-work. Itwillmanage and coordinate power generation and transmission in the Niagara Mohawk system besides exchanges with other utilities in the New YorkPower Pool and Eastern regional grids. Replacing the existing Power Control Center, in service since 1961, the modern version willbecome fullyopera-tional in 1985, when the installation and test-ing ofcomputer and communication systems are completed, and willexemplify the latest state-of-the-art in power system operation.

High-tech "donuts" at work Another innovative development was installa-tion in 1984 ofextra-high-voltage overhead transmission line-performance monitoring devices, invented and demonstrated in-house in recent years by personnel from Engineer-ing, Operations and Research with manage-ment encouragement and support. These sophisticated, donut-shaped electronic units are expected to produce significant improve-ments in power transfer capabilities. Atthe same time, they willhelp to reduce customer energy costs by permitting greater utilization oftransmission equipment already in service.

They also allow higher levels ofeconomy ex-changes with Canada, neighboring utilities and power pools. The aluminum-skinned monitors are self-powered and are clamped around power line conductors to monitor temperatures, currents and other operating conditions, transmitting this data to key re-ception points. Thirty-three units were at-tached to lines at a substation and many more are planned across our system. The sensors can be installed in minutes without inteirup-tion ofpower yet another attractive facet of our Niagara Mohawk-created "donuts".

Modern Power Control Center, left, in Syracuse willserve as hub of Niagara Mohawk's upstate power system, coor-dinating electric transmission and deliv-ery within Company's service area and between neighboring utilities and energy networks.

Line mechanic clamps "donut" monitor-ing unit to power line above substation.

Invented in-house by Niagara Mohawk re-search staff, sensors are expected to help reduce costs by allowing increased use of equipment already in service.

Niagara Mohawk crews erecting high-voltage transmission line, right, from Oswego County 65 miles east to Mohawk Valley receive assist from helicopter, while lineman, below, sus-pended in aerial car some 150 feet above countryside, works on cables.

Line willdeliver energy from Nine Mile Nuclear UnitTwo into upstate New York power grids.

New transmission lixdm Progress was also evident in 1984 withthe construction ofnew transmission lines to de-liverpower into the system fromNine Mile Two. Included are a 10-mile, 345,000-volt link from Nine MileTwo to Volney and a similar line some 65 miles southeast fromVolneyto Marcy Substation near Utica Both are pro-ceeding on schedule, as is the rebuilding ofa 115,000-volt line from Massena to Colton in St Lawrence County, to permit increased de-liveryofimported power from Canada.

Subsidiaries post active gains The year was an eventful one forHydra-Co En-terprises, Inc. and the Canadian-based Opinac Investments, Ltd., both whollyowned inde-pendent subsidiaries ofNiagara Mohawk.

The firstofsix small hydro sites reclaimed and redeveloped by Hydra-Co went into ser-vice in the spring of 1984 at Port Leyden on the Black River north ofUtica, while the re-maining projects were all on line by the year-end. The six willproduce a total estimated annual 51 millionkilowatt-hours forNiagara Mohawk In addition, Hydra-Co began con-struction oftwo sites withan estimated capacity of 19,000 kilowatts overall, while the firmalso seeks out other waterpower pos-sibilities and fossil-fueled cogeneration ven-tures. Hydra-Co, a Syracuse-based sub-sidiary, was formed in 1981 to participate in development, ownership and operation of cogeneration, alternate energy and small power-production facilities.

Expansion in Canada Operation ofNiagara Mohawk's Canadian subsidiaries underwent signiTicant expansion in 1984 withthe advent ofthe Qrst multi-million-dollaroiland gas-drilling programs in western Canada.

Opinac Investments, Ltd. ofToronto is the holding company forCanadian Niagara Power Company Ltd. and St. Lawrence Power Com-pany, which distribute electricity to two On-tario communities, and forOpinac Energy Ltd., an oiland gas exploration and develop-ment company operating from Calgary, Al-berta, since late 1983.

Byyear-end 1984, Opinac Energy controlled about four-billioncubic feet ofnatural gas re-sexves and more than 250,000 barrels of proven crude-oil reserves valued at more than

$5 million(US). Production was stillin the very early stages.

Milestone at Niagara Falls Canadian Niagara's historic 74,600-kilowatt Rankine Hydroelectric Station, operating above the Canadian Horseshoe Falls at Niag-ara Falls, Ontario, has obsexved its 80th birth-day, having firstproduced electricity on New Years Day in 1905.

New research quests Another eminent year was posted by the Re-search and Development Department in 1984.

Interfaced withmanagement's strategic goals, RRD continues to innovate high-technology advances withavoided costs forconsumers and practical improvements in Company operations. Such savings are estimated at 430 millionfor 1985, withconsumers already benefitting from conservation research alone by energy savings ofan additional 47 million.

FGD demonstration a success Followingfouryears ofresearch, an advanced Que gas desulfurization (FGD) project at the Company's Huntley Steam Station concluded successfully late in 1984, proving that low-cost, high-sulfur coal can be burned whilevir-tuallyeliminating sulfur emissions. The ex-perimental FGD demonstration Qrst went into operation inJune 1982 and soundly accom-plished its original research aims, despite serious, but correctable, technical and equipment problems that shortened the planned test period. The FGD venture showed conclusively that more than 90 percent ofsul-furdioxide gas can be extracted from stack emissions oflarge power stations and con-verted into pure marketable sulfur, valued for hundreds ofagricultural and industrial uses.

The FGD unit also achieves this aim with plentiful,high-sulfur Eastern coal, less costly and cheaper to transport than the low-sulfur Western variety. Unlike desulfurization units currently in use elsewhere, its aqueous car-bonate process produces no troublesome wastes to be transported and disposed ofin huge quantities at landfillsites.

Niagara Mohawk was host utilityand man-aging agent in the FGD venture since its in-ception in the late 1970s. Sponsors were the Empire State Electric Energy Research Corp.

(ESEERCO), the U.S. Environmental Protec-tionAgency, N.Y. State Energy Research and Development Authority,Electric Power Re-search Institute, and Rockwell International Corp., developer ofthe FGD-aqueous carbo-nate concept

Engineer inspects new Lyonsdale hydro generating unit, left, completed in 1984 by Hydra-Co Enterprises, Inc., a Niagara Mohawk subsidiary. Six new water-power projects reclaimed or redeveloped by Hydra-Co in 1984 willproduce 51 million kilowatt-hours annually.

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S Drillingrig, above, is etched against northern sky in joint exploration venture by Opinac Energy Ltd., a Canadian subsidiary. Opinac controls about 4 billioncubic feet of natural gas reserves and over 250,000 barrels of proven crude oil reserves valued at more than $5 million. Oil and gas sites are indicated on map of western provinces.

Scientists conducting acid rain studies adjust instruments measuring cloud chemistry from weather station on Whiteface Mountain peak in Adirondacks. Niagara Mohawk is actively involved in extensive acid rain study programs in cooperation with N.Y. State Department of Environmental Conservation, Electric Power Research Institute and Empire State Electric Energy Research Corp.

ROD projects at a glance Asampling ofother significant 1984 RRD programs by Niagara Mohawk, independently or in partnership withother utilities and energy interests, follows. Most projects offer combined advantages ofeconomy, eQiciency and environmental merits:

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~ Integrated coal gasiTier and combined-cycle generation system has strong likelihoodof becoming most attractive forcoal-fired power plants by mid-l990s.

~ Nuclear reactor coolant system decon-tamination initialefforts have already yielded benefits to Niiagara Mohawk consum-ers exceeding 46 million.

~ Advanced communications employ high-capacity fiberoptics, space satellites for long-distance relaying, improved integration ofgeneration, transmission and distribution forEnergy Management System currently in service.

~ Advanced seismic analysis can be applied to nuclear power plants should NRC require modification in seismic design requirements.

~ Low-temperature fuel cell power plant firstcomplete new form ofbulkgeneration to emerge in decades.

~ Earth-coupled heat pump has abilityto increase residential space-heating perfor-mance by 65% and reduce peak demand on electric distribution systems by 60%.

The year ended withthe retirement of Howard D. Philipp, the Company's founding Director ofResearch and Development, after 36 years ofservice, His successor is Richard H. Ryczek, previously Manager of Nuclear Engineering, who joined Niagara Mohawk in 1964.

Economy looking brighter Across the "State ofNiagara Mohawk" service territory, welcome news ofcontinuing econo-mic recovexy appeared in 1984 with new plant locations, expansions and rejuvenations, Our Economic Development Department broadened its role ofattracting new busi-nesses to the area and assisting in the expan-sion ofbusinesses and industrial firms al-ready here, Directed toward the entire U.S. financial and business community, a widespread promo-

tional campaign was conducted in 1984 to spotlight Upstate New York's energy re-sources, labor force, renowned environmental and cultural assets, profitpotential and de-velopment opportunities. As a result ofthis drive, professionals on the Economic De-velopment staff directly assisted business and industrial firms and local communities with development and growth activities.

In planning for 1985, Economic Develop-ment willpursue an aggressive media pro-gram ofnational and regional advertising, targeted marketing and direct mail. Atthe same time, the staffwillworkwith Niagara Mohawk regional representatives and com-munity leaders to help them attract new businesses and to help existing firms expand.

Sharing human concerns Two major new programs entitled "Think Customer" and "Care &Share" evolved in 1984 from Niagara Mohawk's Strategic Plan and surveys ofconsumer attitudes and needs.

"Thixda Customer" "ThinkCustomer" is the theme ofan employee awareness campaign to underscore the necessity ofhigh-quality sexvice through-out our business.

This internal program began withletters fromthe Chairman and President urging each employee to make a more conscientious effort to improve rapport withcustomers. To rein-force this goal, a series ofseminars, displays and written materials is planned forthe entire Company workforce through 1985. "Think Customer" is also a two-way information channel intended to bring greater customer understanding and support ofNiagara Mohawk's policies and actions in view ofcriti-cal issues affecting the Company's abilityto serve.

Early in 1985, Gerald J. Currier was elected to the newly created position of Vice President-Consumer Sexvices.

"Care &Share" The Care &Share Energy Fund was initiated by the Company in cooperation withthe American Red Cross to provide direct finan-cial assistance to residents requiring help in paying fortheir basic energy needs. The pro-gram is Qnanced byvoluntary contributions from Niagara Mohawk customers and ad-ministered by the Red Cross invarious localities. Aninitialgrant of 4250,000 from Niagara Mohawk stockholders was made to start the Fund, and the Company began so-licitingcontributions from customers through a special billinsert late in the year.

The Company willmatch each 42.00 given with $1.00 up to another $250,000. Bythe year end, a total ofmore than $70,000 in cus-tomer donations was received.

"Care &Share" is designed to enable recip-ients to use this money to insure a continued energy supply by having their heating bills paid, regardless oftype ofenergy used, and to repair heating equipment or install home weatherization materials on an emergency basis. Anindependent advisoxy board com-prised ofrepresentatives from social services, religious and community action organiza-tions was organized to provide overall gui-dance, make periodic audits and determine eligibilityofthe recipients. Those who qualify for"Care &Share" mustbe 60years or older, (withenergy emergencies) or handicapped, or disabled, or have a medical emergency.

Customer' "end use" of household appliances is recorded on tape in one of 230 typical homes taking part in research for improving home energy conservation.

Monitored in load survey are household refrigerators, ranges and water heaters.

New electronic meter-reading device, below, quickly re-cords energy usage, meter conditions and customer infor-mation fortransmittal to central bill-processing computers.

Replacing manual meter-reading methods, compact units willbe employed throughout service area in 1985 to reduce costs and improve efficiency.

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1 Consumer services offered Throughout 1984, the followingservices and supportive programs were again offered by Niagara Mohawk to consumers:

~ Home Insulation and Energy Conservation Audits12,800 consumers received free cus-tomized home energy inspections, withfinan-cial assistance and low-interest loans from lending institutions totaling $1.7 forqualified applications to make energy conservation im-provements.

~ Energy Conservation Bankforthe needy and elderly in cooperation withcounty offices ofthe aging and State Energy OfQce.

~ Home Energy Level Payment Plan to help consumers manage winter's higher energy costs. More than 128,000 customers now have their annual energy costs divided into 12 level payments.

~ Deferred Payment Plan forthose withse-vere financial hardships. Provides fora com-bination ofdown payments and as many as 48 monthly payments to clear remaining balance.

~ Summer Community Conservation Program produced jobs forinner-cityyouths and senior citizens specially trained to make homes ofthe elderly and disadvantaged more energy efficient. Sponsored by Niagara Mohawk withlocal United Way agencies.

MONTHLYRESIDENTIALELECTRIC COST FOR 500 KILOWATT-HOURS

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~ g1 New YorkCity NYState Avg. (not including NM)'oston, MA Philadelphia, PA

$59.29

$55.99

$53.99

$83.16 Supporting the Special Olympics In 1984, Niagara Mohawk became an official sponsor ofthe New YorkState Special Olym-pics. The Summer Games willbe in Syracuse in 1985, withfinancial support and volunteer time by Niagara Mohawk people.

The annual Games, in which thousands of handicapped adults and children compete, are widelysupported and recognized. Competition willinclude track, field, swimming and other events, withopening and closing ceremonies and award presentations, much like the actual Olympics.

Newark, NJ Hartford, CT Cleveland, OH

$43.47

$51.97

$51.70 National Average**

$4032 Los Angeles, CA

$40.16 Portland, ME

$38.09 Niagara Mohawk

$36.34 Includes fuel and PASNV credit adjustment as appllcabfe.

'NM Rate Department as of 12/1/84 "E E I. Report withrateseffectlve 7/I/84 Allothers supplied by utilitywhich serves city,with rates and fuel effective 12/I/84 15

Our worhforce-our primary resource Atthe year-end, Niagara Mohawk's workforce totalled 10,800. About 8,200 or 76 percent of employees are members of 12 locals ofthe International Brotherhood ofElectrical Work-ers (AFL-CIO)constituting System Council U-11. Anew two-year collective bargaining agreement was reached on May 31, which in-cluded wage increases of5.25 percent effec-tive June 1, 1984and 5.5percenton June 1, 1985. Other provisions entailed health, den-tal, lifeinsurance and pension plans.

Savings Plan participation increasing Some 8,113 employees are participating in the Company's Employee Savings Fund Plans.

This constitutes 82/o ofthe total eligible employees. In early 1984, the Plan for non-represented employees was revised to take advantage ofInternal Revenue Service (401-K) provisions which encourage saving to achieve retirement and other long-term financial goals. Beginning Januaxy 1985, represented employees also became eligible to take advantage ofthese same Savings Plan improvements.

New inroads created by Investor Relations Highlightingthe Company's 1984 Investor Re-lations Program was an informative presenta-tion by our officers to the New YorkSociety of Security Analysts, which includes the most influential members ofthe WallStreet finan-cial community. In addition, Company oQi-cers, including the Chairman and President, supported programs forsome 20 other group meetings withstockholders, security analysts, institution investors and stock-brokers in 17 cities, including major U.S. fi-nancial centers.

The Investor and Financial Relations De-partment strives to keep stockholders and the financial community continually informed through periodic reports and forecasts, a se-curityanalyst visitation program and Nine MileTwo construction tours.

Keeping "In-the-Know" Maintaining a free Qow ofuseful information to investors and the financial community helps to ensure that a fairvalue is placed on all Niagara Mohawk securities. To this end, stockholders who wish to supplement quar-terly and annual reports withmore detailed information are encouraged tojoinour "In-the-Know" program by calling the toll-free number listed on the inside back cover or by writingthe Investor and Financial Relations Department in Syracuse.

Dividend Reinvestment Plan increasingly popular Confidence in Niagara Mohawk also continues to be strongly evidenced from the Company's owners participating in the popular Dividend Reinvestment and Common Stock Purchase Plan. Not only did 35 percent ofNiagara Mohawk stockholders purchase 445 million in additional stock by reinvesting their divi-dends, but 16,300 shareholders sent $9 mil-lioninvoluntaxy cash contributions forthe purchase ofadditional common stock.

Stock purchased withreinvested dividends continues to qualifyfortax-deferred treat-ment under existing tax laws. While the number ofqualified plans in the industry has diminished during 1984, participants in the Niagara Mohawk Plan may stillexclude up to 4750 ($1500 forajointreturn) ofdividend in-come forfederal income tax purposes on rein-vested dividends untilthe shares are sold.

This Plan, while attractive to shareholders from an investment perspective, also helps in raising required capital forconstruction of electric and gas facilities. Since its inception in 1973, more than 4230 millionwas gener-ated from the Plan with 454 millioninvested in 1984alone.

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Array of lighted instruments and switches forms photog-rapher's impression, top photo, of control room simulator at new Nine Mile Point Training Center, while instructor at simulator's console, above, conducts exercise for operators. Equipped with computers and video terminals, replica is identical to actual nuclear station control room. At right, scale model of reactor assembly serves as training aid at Nine Mile Point Nuclear Unit Two.

MARKETPRICE OF COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock and cer-tain of its preferred series are listed on the New York Stock Exchange.

The common stock is also traded on the Boston, Cincinnati, Midwest, Pacific and Philadelphia stock exchanges.

The ticker symbol is "NMK".

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

1984 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1983 Dividend paid Price range per share High Low

$.48

$16e/e

$12

.50 14e/e 12

.50 15e/4 1 3t/z

.50 17e/4 15

$1.98 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

$.45

.48

.48

.48

$17'/e

$15e/e 177/e 16'/e 17e/e 16 18'/z 15'/4

$1.89 Preferred and common stock div-idends were paid on March 31, June 30, September 30 and December 31. During recent years certain percentages of the dividends paid on the common stock were not subject to federal income tax as ordinary income to the recipient, but constituted a return of capital reducing the tax basis of the applicable shares.

However, the Company estimates that none of the 1984 common or preferred stock dividends will constitute a return of capital and therefore are taxable as ordinary income.

While the Company intends to con-tinue the practice of paying cash div-idends quarterly, declarations of future dividends are necessarily dependent upon future earnings, finanical re-quirements and other factors, including restrictions in governing instruments.

The holders of Common Stock are en-titled to one vote per share and may cumulate their votes for the election of Directors. Whenever dividends of Pre-ferred Stock are in default in an amount equivalent to four full quarterly div-idends and thereafter until all dividends thereon are paid or declared and set aside for payment, the holders of such stock can elect a majority of the Board of Directors. Whenever dividends on any issued Preference Stock are in de-fault in an amount equivalent to six full quarterly dividends and thereafter until all dividends thereon are paid or de-clared and set apart for payment, the holders of such stock can elect two members of the Board of Directors. No such dividends are now in arrears.

Upon any dissolution, liquidation or winding up of the Company's business, the holders of Common Stock are enti-tled to receive pro rata all of the Com-pany's assets remaining and available for distribution after the full amounts to which holders of Preferred and Prefer-ence Stock are entitled have been satis-fied.

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

At year end, about 200,000 stockhold-ers owned common shares of Niagara Mohawk and about 9,100 held preferred and preference stock. The chart below summarizes common stockholder ownership by size of holding:

Size of holding Total Total shares (Shares) stockholders held 1 to 99 55,607 1,818,893 100 to 999 134,504 32,857,070 1,000 or more 9,669 82,173,011 199,780 116,848,974 MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIALCONDITION AND RESULTS OF OPERATIONS Results of operations.

For 1984, earn-ings per share increased 2.5% to $2.84 against

$2.77 for 1983. The 1984 earn-ings represent 7.6% and 20.9% in-creases over 1982 and 1981 earnings per share, respectively, even though the number of shares outstanding grew steadily over the three-year period.

The improvement in the Company's earnings per share for 1984 over 1983 resulted primarily from higher electric and gas sales, improved margins on sales and higher allowance for other funds used during construction.

Elec-tric and gas revenues increased 5.5%

and 7.0%, respectively, from the prior year. The increase in electric revenues is principally due to increased rates and increased sales to ultimate consumers and other electric systems.

Gas rev-enues increased primarily from in-creased sales offset by decreased re-coveriegof purchased gas costs through the purchase gas adjustment clause.

However, Federal income and other taxes increased 21% and interest charges were 17% higher, reducing the impact of the increase in revenues.

Further, a $20 million refund to custom-ers ordered by the New York State Pub-lic Service Commission (PSC) resulted in a $.10 per share charge against 1984 income (see Note 11 of Notes to Con-solidated Financial Statements).

The Company achieved a 14.9% rate of return on common equity in 1984 as compared with 15.0% in 1983 and 14.7%

in 1982. The decrease in the Company's achieved return was primarily the result of the $20 million refund referred to previously. Absent such charge to in-come, the Company's achieved return would have continued to improve, re-flecting the Company's continued abil-ity to more closely achieve the return on equity approved by the PSC. The PSC approved rate of return on equity is cur-rently 16%.

The followingdiscussion and analysis highlights items having a significant ef-fect on operations during the three-year period ended December 31, 1984, but may not be indicative of future opera-tions or earnings.

It should be read in conjunction with the Notes to Consoli-dated Financial Statements and other financial and statistical information ap-pearing elsewhere in this report.

EARNED RATE OF RETURN ON COMMON EQUITY 15.0/o 14.9/,

0 13.5%

10.8%

1980 1981 1982 1983 1984

Increase in base rates

. $ 69.1 68.5

$128.8

$266.4 Fuel and purchased power cost revenues...

(86.3) 2.6 (1.9)

(85.6)

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

56.1 21.0 (21.9) 55.2 Sales to other electric systems..............

68.7 63.7 34.2 166.6 Miscellaneous operating revenues..........

3.1 7.3 1.5 11.9

$110.7

$163.1

$140.7

$414.5 Electric kilowatt-hour sales were 37.1 billion in 1984, an increase of 6.8% from 1983, reflecting the effects of the improved economy in the Company's service area and increased sales to other electric systems (see Electric and Gas Statistics Electric Sales appearing on page 40). Details of the changes in electric revenues and kilowatt-hour sales by customer group are highlighted in the table below:

1984

% Increase (decrease) from prior year

%of Electric 1984 1983 1982 Revenues Revenues Sales Revenues Sales Revenues Sales Class of service Electric revenues increased

$414.5 million or 24.1% over the three-year period.

This increase is largely attributable to increased base rates and increased sales to ultimate consumers and other electric systems, offset somewhat by decreased revenues attributable to fuel and purchased power cost recoveries as indicated in the table below:

Increase (decrease) from prior year In millions ofdollars Electric revenues 1984 1983 1982 Total ELECTRIC SALES Millionsof Kw.-hrs.

37,086 32,890 32,640 34,732 109.8 109.7 101,3I, 103.2 1980 1981 1982 1983 1984 GAS SALES Millionsof dettatherms Residential.......

Commercial......

Industrial.........

Municipal service Total to ultimate consumers..........

Other electric systems..

Miscellaneous.........

28 5%

4 1%

4 3%

8.2%

1.2%

11 5%

0.2%

31.6 2.4 3.7 4.8 0.6 8.7 (0.9) 20.5 (0.5) 3.1 3.7 4.8 (1.1)

(10.9) 1.8 3.8 (2.4) 4.5 (2.3) 11.6 (3.4) 82.4 2.3 3.6 5.7 2.3 6.9 (4.5) 14.3 29.2 23.1 37.1 34.3 24.9 35.4 3.3 4.5

12.0

2.5 1984

$ 10.3

$ 17.8

$ 36.8 79.2 74.1 130.0 (14.0) 10.4 53.5

$ 75.5

$102.3

$220.3 Gas sales were 115.0 million dekatherms in 1984, an 11.4% increase from 1983 (see Electric and Gas Statistics-Gas Sales appearing on page 40). The increase for 1984 reflects increased sales in all classes of service, particularly in the indus-trial class where the improving economy together with lower gas prices and favor-able gas prices in relation to oil for dual-fueled customers, resulted in a 27%

increase in sales.

Changes in gas revenues and dekatherm sales by customer group are detailed in the table below:

1984

% Increase (decrease) from prioryear

%of Gas 1984 1983 1982 Class of service Revenues Revenues Sales Revenues Sales Revenues Sales Increase in base rates......

Purchased gas cost increases Gas sales To'tal................

~

100.0%

5.5%

6.8%

8.8%

6.4%

8.2%

(0.8)%

Gas revenues increased

$220.3 million or 51.1% over the three-year period. As shown by the table below, over half of this rise is attributable to higher costs for purchased gas which were recovered from customers during 1983 and 1982 through the purchased gas adjustment clause, the remainder of the increase being attributable to higher sales and base rates.

Increase (decrease) from prior year In millionsoldollars 1983 1982 Total 2,151 2,394 2,632 2,786 1,777 1980 1981 1982 1983 1984 In summary, total operating revenues increased $634.8 million, or 29.5% over the three-year period, largely represent-ing increased rates and increased sales to ultimate customers and to other elec-tric systems.

TOTALELECTRIC ANDGAS OPERATING REVENUES Millionsof dollars Residential Commercial..

Industrial....

Total to ultimate consumers......

Other gas systems Miscellaneous....

Total 48.2%

3.1%

5.7/o 14 9%

(8.1)% 19.1%

(1.3)%

24.2 1.0 3.6 13.7 (6.1) 33.5 8.8 24.0 21.1 27.3 14.6 (1.1) 26.0 (3.0) 96.4 6.5 10.7 14.5 (5.9) 24.2 0.8 3.0 24.9 32.0 2.4 (8.7) 11.8 (18.7) 0.6 8.7

14.2

23.6

'1PQ.P%

7.Q%

11.4%

14.2%

(6 Q)% 23.8%

(Q 1)%

1980 1981 1982 1983 1984 On March 21

~ 1984, the PSC approved rate increases to provide the Company additional annual revenues of

$86,350,000 (4.9%) for electric and

$9,144,000 (1.4%) for natural gas. These 19

new rates became effective March 27, 1984 and represent 58/o of the rate relief requested by the Company.

In March 1983, the PSC had approved rate in-creases providing additional annual revenues of $56,383,000 (3.3/o) for elec-tric and $11,009,000 (1.6/o) for natural gas.

Further rate action, initiated in April 1984, presently seeks an annual in-crease of $ 132.9 million, including

$113.5 million (6.1%%d) electric and $19.4 million (2.9'/o) gas.

In December

1984, PSC Administrative Law Judges rec-ommended rate increases of $42.4 mil-lion (2.3/o) electric and $13.1 million (1.9/o) gas or about 42%%d of the request.

The Company and other parties have filed exceptions to many of the Judges'ecommendations.

The PSC's opinion is expected in March 1985 with new rates to be effective promptly thereafter.

Recent rate awards have not fully provided for increasing costs and the Company expects to continue filing an-nual petitions for rate increases.

Also, the Company's Nine Mile Point Nuclear Station Unit No. 2 is currently scheduled to achieve commerical operation in Oc-tober 1986, thus necessitating a petition for a rate increase to recognize the Company's 41 /o share in this generating station in base rates (see Note 10 of Notes to Consolidated Financial State-ments).

In 1984, electric fuel and purchased power costs decreased 3.4%%d to $853 million from $883 million in 1983, after having increased from $815 million in 1982. The decrease is the result of a $64 million decrease in fuel and purchased power costs deferred and recovered through operation of the fuel adjust-ment clause. This decrease was partially offset by a $34 million increase in costs relating to the additional generation and purchased power required to meet growing customer demand. The reduc-tion in costs billed through the fuel ad-justment clause was made possible by increased generation from Nine Mile Point Nuclear Station Unit No.1 (which was out of service from March 1982 until June 1983), increased hydro gen-eration and increased relatively lower cost purchases from Canada and the New York Power Authority (see Electric and Gas Statistics Electricity Gener-ated and Purchased appearing on Page 40).

The total cost of gas purchased rose 5'/o in 1984, 15% in 1983, and 29'/o in 1982. The increase for 1984 is primarily the result of a 7.2/o increase in dek-atherms purchased to meet customer demand, partially offset by a decrease in rates charged by the Company's supplier and an increase in amounts re-funded by suppliers. The Company's net cost per dekatherm purchased de-creased to $3.96 in 1984 from $4.08 in 1983, but remains above the $3.39 per dekatherm for 1982.

Through the energy and purchased gas adjustment

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

The Company has implemented revisions to its fuel ad-justment clause consistent with PSC di-rectives, which essentially provide for partial pass-through of fuel and pur-chased power cost fluctuations from those forecast in rate proceedings, with the Company absorbing a specific por-tion of increases or retaining a portion of decreases to a maximum of $15 mil-lion per rate year (see Note 1 of Notes to Consolidated Financial Statements).

Other operation and maintenance ex-penses increased 7.0/a in 1984, 10.4% in 410 317 342 211 243 1983, and 11.3/o in 1982, primarily as a result of increases in wages and as-sociated benefits and higher costs charged by suppliers. Effective June 1,

1984, the Company entered a two-year labor agreement providing for in-creased wages of 5.25/o in the first year and 5.50/o in the second year. The in-crease in other operation and mainte-nance expenses in 1984 also included costs relating to the refueling of Nine Mile Point Nuclear Station Unit No. 1 in the spring of 1984. The next refueling outage for this unit is presently scheduled for 1986.

Depreciation and amortization ex-pense for 1984 increased 10.8/o over 1983, principally from normal plant growth and increases in depreciation rates applied to certain classes of as-sets.

Federal and foreign income taxes rose 73.3% in 1984 as a result of in-creased taxable income and an increase in amounts on which deferred taxes were provided. The increase in taxes other than income taxes in the three year period is due principally to higher property taxes resulting from property additions and higher state and local gross income taxes resulting from in-creased revenues.

TOTALTAXES INCLUDING INCOMETAXES Millionsot dollars 20

$41.95

$47.44

$50.88 50.76 nofcoa

$50,68

$23.72 30.84

$29.67 rret of

$30.67

$33.35 1980 1981 1982 1983 1984 AVERAGECOST OF ATON OF COAL ANDA BARRELOF OILBURNED 376.4 258.1 462.4 418.9 326.1 290.1 353.6 221.9 Ot r opera ton 100.4 118.3 M

128.8 ntenan 136.3 141.0 1980 1981 1982 1983 1984 MAINTENANCEANDOTHER OPERATION EXPENSE Mllllonsofdollars 494.6 1980 1981 1982 1983 1984 The $43.7 and $23.1 million increases in total Allowance for Funds Used Dur-ing Construction (AFC) for 1984 and 1983, respectively, result from in-creased overall levels of plant under construction, principally Nine Mile Point Nuclear Unit No. 2, and higher AFC rates.

Interest expense and preferred stock dividend requirements increased as a result of new issuances at higher rates to raise the capital necessary to fund the Company's construction program.

While the rate of increase moderated

in 1984, the Company's revenues and costs of operation over the past three years have increased in several re-

spects, due generally to the effects of inflation. The Company is especially sensitive to inflation because of the large amount of capital it must raise to finance its construction program and because its prices are regulated using a rate base that reflects the historical cost of utility plant. Inflation information in Note 13 of the Notes to Consolidated Financial Statements indicates the ap-proximate effect of inflation on certain aspects of the Company's operations and financial position.

Financial position, liquidity and capital resources.

Financial resources pro-vided from operations consist of net in-come adjusted for non-cash expenses, such as depreciation, amortization of nuclear fuel and deferred income taxes, and non-cash income, such as AFC.

AFC represents the financing costs of the Company's construction program and is added to the cost of construction until such time as a capital project is completed, and is then recovered through depreciation included in rates charged to customers.

Internal funds from operations are insufficient to meet the Company's capital requirements, therefore, large amounts of new capital from external sources are necessary.

Generally, external capital needs are first met through utilization of short-term borrowing arrangements, includ-ing bank credit agreements and com-mercial paper. These short-term bor-rowings are refinanced on a continuing basis through the issuance of se-curities, consisting of intermediate and long-term debt, preferred and prefer-ence stock and common stock.

Capital resources consisting of both internal and external sources are used to pay for the Company's construction program, working capital needs, matur-ing debt issues and sinking fund provi-sions on outstanding debt and pre-ferred stocks. Sources and uses of funds during the past three years are reported in the Consolidated Statement of Changes in Financial Position on page 26.

Capital needs.

During the period 1982-84, expenditures for construction and nuclear fuel, including related AFC and overheads capitalized, have in-creased from $594.5 million to $691.5 million to $769.8 million. Total capital requirements, including debt and pre-ferred stock redemptions and working capital, have also increased particularly in 1984 as the Company made advances to the Nine Mile Point Nuclear Unit No. 2 Project on behalf of the Long Island Lighting Company (see discussion be-low). The 1985 estimate for construction additions and nuclear fuel, including AFC and overheads capitalized, is $793 million. In addition, the Company ex-pects to make additional advances of approximately

$153 million, including interest, on behalf of the Long Island Lighting Company (see below). Debt and preferred stock retirements and other requirements will add approxi-mately another

$ 102 million to the Company's capital requirements for a total of $1,048 million.

This upward trend in capital require-ments is a result of increasing construc-tion expenditures, relatively high capital costs and the advances to the Nine Mile Point Nuclear Unit No. 2 Project (the Unit or Project) on behalf of Long Island Lighting Company. The principal proj-ect presently under construction is the Unit, currently scheduled for commer-cial operation in October 1986. The Company is a 41'/o owner and had in-vested about $1.5 billion, including AFC and overheads capitalized, in the Proj-ect through December 31, 1984.

Expenditures for construction of this Unit have averaged approximately 47%%d of total construction requirements dur-ing the period 1982 to 1984. During 1984, such expenditures were approxi-mately 54% of total requirements.

On February 9, 1984, the Long Island Light-ing Company (LILCO),an 18/o owner of the Unit, notified the Company and the other cotenants of LILCO's intention to cease participation in the funding of the construction costs of the Unit and failed to make required payments. On August 30, 1984, the Company and LILCO en-tered into an agreement providing for the issuance by LILCO of up to $250 million in General and Refunding Bonds as security for current and future funds advanced to the Project on behalf of LILCO. During 1984, the Company ad-vanced approximately

$129 million on behalf of LILCO. The agreement also provides that LILCO may issue unse-cured notes in lieu of making quarterly supplemental payments and interest thereon (see Note 10 of Notes to Con-solidated Financial Statements for a further discussion of the LILCO agree-ment).

Subsequent to LILCO's cessation of payments on the Project and the March 1984 re-estimate of the Unit's cost, four major rating agencies reviewed the Company's securities ratings. Two of 48 6/o 46.4'/o Lo 47 5'/o 45.3'/0

-term bt 46 5/0 12 5oj 12.9/o 38 PYo 40 7/o 11 5/o referre 41,tPo 12.6/o 42.1o/o 11.5/o 42.0'o Co oneq ify 1980 1981 1982 1983 1984 Liquidity and resources.

The Com-pany's long-term financial plan is de-signed to improve the percentage of in-ternal cash generation and to strengthen its capital structure. With regard to the latter, the proportion of long-term debt to total capitalization has decreased over the past several years while common equity as a percent of total capitalization has increased dur-ing the same period. The trend in the percentage of internally generated cash, however, has been less controlla-ble. The PSC has not provided the necessary increases in cash flow to the agencies reaffirmed their ratings cit-ing, in part, the Company's continued financial strength and management's ability to effectively complete the Nine Mile 2 project. The other agencies downgraded their ratings citing LILCO's withdrawal, the March 1984 cost re-estimate and regulatory and political uncertainties. These re-ratings still con-sider the Company's securities as in-vestment grade. The Company is unable to predict whether the continuation of concerns surrounding the Unit will further affect the securities ratings.

However, the Company does not believe these matters will impair its ability to complete its intended construction and external financing programs, including the funding of LILCO'sshare in the Unit.

The nature, amount and timing of the Company's future financings will de-pend in part on construction expendi-tures, retirement of securities, timeli-ness and adequacy of rate relief, the timing and methodology of rate recog-nition of the Unit, the level of internally generated funds, the availability and cost of capital, and the ability of the Company to meet its interest and pre-ferred and preference stock dividend coverage requirements and to maintain an adequate credit rating.

CAPITALIZATIONRATIOS percent 21

stabilize and enhance the ratio of inter-nally generated funds. Thus, while overall levels of earnings have in-creased, a substantial portion of this in-crease represents non-cash earnings in the form of AFC. AFC for the year 1984 amounted to 52.4% of the balance available for common stock as com-pared with 43.6% in 1983. The Company has attempted to control costs where possible and has adopted stringent budgets for 1985 and beyond and will continue to file for appropriate rate im-provements, including in particular those which will increase cash flow in a timely and adequate manner.

For the period 1982 to 1984, the Com-pany generated $573,000,000 (34% of its construction requirements, excluding AFC) from internal sources, the remain-der being funded through a mix of se-curity issuances and bank and commer-cial paper borrowings. In 1984, the Company generated

$205,000,000 (34%

of construction requirements, exclud-ing AFC) from internal sources.

SOURCE OF CAPITAL FOR CONSTRUCTION PROGRAM Millionsot dollars 319.7 40%

385.5 38oo 499.7 37%

Interna 63'o 573.7 32%

68%

608.4 34%

66'o 62%

xterna 1980 1981 1982 1983 1984 During 1984, the Company raised ap-proximately $614,000,000 through ex-ternal

sources, consisting of

$319,250,000 of mortgage

bonds,

$50,000,000 of preferred stock

$5,060,000 of intermediate term bank revolving credit obligations,

$50,000,000 of unsecured notes payable and $ 189,626,000 of common stock

~Debt

~Common

~ Preferred 583.1 291.8 614.3 374.7 306.9 187.6 346.0 186.7 424.9 259.7 171.3 189.6 93.8 101.3 145.2, 120.0 25;5 58.0 20.0 50.0 1980 1981 1982 1983 1984 External financing for 1985 is ex-pected to approximate

$670 million, excluding capital lease financing but including the amount the Company ex-pects to advance to the Project on be-half of LILCO.The Company expects to secure the majority of its capital needs from traditional financing sources.

However, it willcontinue to explore and utilize, as appropriate, other methods of financing. At December 31, 1984, con-struction related short-term debt was

$ 11,516,000 and obligations under bankers acceptances for fuel oil inven-tory financing were $42,000,000 for a total of $53,516,000.

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

Bank credit arrangements, which total $566 million (including $445 million of committed multi-year revolv-ing credit and term loan agreements and a $100 million Bankers Acceptance from the issuance of 12,838,971 shares through a combination of public sales and its Dividend Reinvestment, Employee Savings Fund and Employee Stock Ownership Plans. The Company also completed approximately

$32,000,000 of capital lease financing.

Approximately $78 million of the total 1984 external financing was used for debt and preferred stock refunding and retirement and reductions of short-term debt.

ANNUALEXTERNALFINANCING BYTYPE Millionsof dollars Facility Agreement) are used by the Company to enhance flexibilityas to the type and timing of its security sales.

Overall, these amounts were increased by $ 121 million in 1984 and in addition,

$83 million of lines of credit were con-verted to revolving credit agreements.

During 1983, the unsecured debt limi-tation imposed by the Company's Pre-ferred Stock Charter was increased to

$700 million. Earnings coverage of in-terest charges has been well in excess of mortgage indenture restrictions for the issuance of first mortgage bonds and over $1.1 billion of property is avail-able to support the issuance of first mortgage bonds.

In general, the Company has a strong capital structure, an increased degree of short and intermediate term bank borrowing capability and continues to access the permanent capital markets with flexibility.

During the past year, several utilities have made announcements that un-finished plants would be cancelled or abandoned; others have reported de-lays. Phase-in and other rate modera-tion plans are being either implemented or seriously considered in many reg-ulatory jurisdictions. Also, retroactive prudency disallowances and expendi-ture limitations or caps have been or-dered. A number of utilities have been forced to eliminate or reduce dividends, and the general level of flexibilitywith which many companies are able to ac-cess the financial and bank credit mar-kets has diminished. During 1984, these factors, together with the higher cost of the Nine Mile Unit No. 2 construction project, created additional risk and un-certainty for the Company's securities in the financial markets.

In the future, the cost and availability of external sources of funds will continue to be af-fected by these factors, the mainte-nance of adequate credit ratings and by general conditions in the financial mar-kets. Further adverse developments in any of these conditions could have an effect on the Company's ability to fully implement its intended construction and financing programs.

22

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

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

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

This system includes communication through written policies and procedures, an organizational structure that pro-vides for appropriate division of responsibility and the training of personnel. This system is also tested by a comprehensive internal audit program. In addition, the Company has a Code of Conduct which requires all employees to maintain the highest level of ethical standards and requires key management employees to formally affirm their compliance with the Code.

The financial statements have been examined by Price Waterhouse, the Company's independent accountants, in ac-cordance with generally accepted auditing standards.

As part of their examination, they made a study and evaluation of the Company's system of internal accounting control. The purpose of such study was to establish a basis for reliance thereon in determining the nature, timing and extent of other auditing procedures that were necessary for expressing an opinion as to whether the financial statements are presented fairly. Their examination resulted in the expression of their opinion which follows this report. The independent accountants'xamination does not limit in any way management's responsibility for the fair presentation of the financial statements and all other in-formation, whether audited or unaudited, in this Annual Report.

The Audit Committee of the Board of Directors, consisting ot three directors who are not employees, meets regularly with management, internal auditors and Price Waterhouse to review and discuss internal accounting controls, audit examinations and financial reporting matters.

Price Waterhouse and the Company's internal auditors have free access to meet indi-vidually with the Audit Committee at any time, without man-agement present.

REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and the Board of Directors of Niagara Mohawk Power Corporation We have examined the consolidated balance sheets of Niag-ara Mohawk Power Corporation and its subsidiaries as of De-cember 31, 1984 and 1983 and the related consolidated state-ments of income and retained earnings and of changes in fi-nancial position for each of the three years in the period ended December 31, 1984. Our examinations were made in accord-ance with generally accepted auditing standards and accord-ingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

The Company is a 41% participant in the construction of the Nine Mile Point Nuclear Station Unit No. 2 (Unit). As a result of the uncertainties discussed more fullyin Note 10, management is unable to predict whether regulatory actions by the New York State Public Service Commission with respect to its in-vestment in the Unit will have, in the aggregate, a material effect on its financial position or results of operations.

In our opinion, subject to the effects on the 1984 financial statements of such adjustments, if any, that might have been required had the outcome of the uncertainties discussed in the preceding paragraph been known, the consolidated financial statements examined by us present fairlythe financial position of Niagara Mohawk Power Corporation and its subsidiaries as of December 31, 1984 and 1983 and the results of their opera-tions for each of the three years in the period ended December 31, 1984 in conformity with generally accepted accounting principles consistently applied.

Syracuse, New York January 23, 1985 23

CONSOLIDATED STATEMENTOF INCOME AND RETAINED EARNINGS NIAGARAMOHAWKPOWER CORPORATION ANDSUBSIDIARYCOMPANIES For the year ended December 31, Operating revenues:

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

Gas Operating expenses:

Operation:

Fuel for electric generation Electricity purchased Gas purchased Other operation expenses Maintenance Depreciation and amortization (Note 2).....

Federal and foreign income taxes (Note 9)..

Othertaxes Operating income Other income and deductions:

Allowance forother funds used during construction (Note t)

Federal income tax credits (Note 1)

Other items (net) (Note 11)

Income before interest charges Interest charges:

interest on long-term debt Other interest Allowance for borrowed funds used during construction (Note 1)

Net income Dividends on preferred stock Balance available for common stock Dividends on common stock Retained earnings forthe year Retained earnings at beginning of year..

Retained earnings at end of year 1984

$2,134,470 651)076 2,785,546 476,040 377,052 452,960 353,660 140,987 141,150 181,767 269,204 2,392)820 392,726 122,354 33,460 8,591 164,405 5571131 224,099 12,440 (39,142) 197,397 359,734 51,460 308,274 216,493 91,781 650,681 S

742,462 ln thousands ofdollars 1983

$2,023,728 608,587 2,632,315 501,328 381,703 432,898 326,057 136,338 127,390 117,089 254,797 2,277,600 354,715 85,350 31,511 9,994 126,855 481,570 189,006 12,598 (32,443) 169,161 312,409 42,109 270,300 185,642 84,658 566,023 650,681 1982

$1,860,649 533,122 2,393,771 502,491 312,451 377,596 290,091 128,801 121,422 109,519 235,615 2,077,986 315,785 69,195 26,390 10,557 106,142 421,927 156,133 22,801 (25,541) 153,393 268,534 37,586 230,948 153,681 77,267 488,756 566,023 Average number of shares of common stock outstanding (in thousands)

Balance available per average share of common stock Dividends per share of common stock

() Denotes deduction 108,734 S

2.84 1.98 97,685 2.77 1.89 87,340 2.64 1.76 24

CONSOLIDATED BALANCESHEET NIAGARAMOHAWKPOWER CORPORATION ANDSUBSIDIARYCOMPANIES At December 31, ln thousands ol dollars 1984 1983 ASSETS Utilityplant, at original cost (Notes 1, 3 and 10)

Less accumulated depreciation and amortization (Note 2)

Net utilityplant Other property and investments (Note 7)

Advances on behalf of Nine Mile Point Nuclear Unit No.2cotenant(Note10)

Current assets:

Cash, including temporary cash investments of $7,367 and $4,521, respectively Accounts receivable (less allowance fordoubtful accounts of $3,600)

Materials and supplies, at average cost:

Coal and oil for production of electricity Other Pre payments Deferred debits:

Unamortized debt expense Deferred recoverable energy costs.

Extraordinary property losses Other

$6,903,184 1,501,282 5,401,902 112,730 130,881 32,639 282,232 96,474 62,018 13,874 487,237 52)658 16,253 10,838 20,902 1001651

$6,233,401

$6,165,711 1,486,196 4,679,515 85,602 31,199 274,076 95,910 56,254 17,498 474,937 44,530 25,733 14,875 32,380 117,518

$5,357,572 CAPITALIZATIONAND LIABILITIES Capitalization (Note 7):

Common stockholders'quity:

Common stock, issued 116,848,974 and 104,010,003 shares, respectively Capital stock premium and expense Retained earnings Non-redeemable preferred stock Redeemable preferred stock Long-term debt Total capitalization Current liabilities:

Short-term debt (Note 4)

Long-term debt due within one year Sinking fund requirements on redeemable preferred and preference stock (Note 7).

Accounts payable Payable on outstanding bank checks Customers'eposits Accrued taxes Accrued interest Accrued vacation pay Gas supplier refunds payable to customers Other Deferred credits:

Mandated refunds to customers (Notes 9 and 11)

Accumulated deferred Federal income taxes (Note 9)

Other Commitments and contingencies (Notes 3, 10 and 11) 116,849 1)347,806 742,462 2,207,117 210,000 397,900 21395,471 5,210,488 53,516 63,83?

19,601 183,039 59,352 6,640 23,446 66,261 24,555 6,244 30,903 537)394 90,191 374,364 20,964 485,519

$ 612335401 104,010 1,174,382 650,681 1,929,073 210,000 368,474 2,048,548 4,556,095 84,763 30,152 11,950 185,252 76,471 5,727 15,773 46,494 22,657 15,233 22,905 517,377 3,244 259,816 21,040 284,100

$5,357,572 25

CONSOLIDATED STATEMENT OF CHANGES IN FINANCIALPOSITION NIAGARAMOHAWKPOWER CORPORATION AND SUBSIDIARYCOMPANIES For the year ended December 31 ~

FINANCIALRESOURCES WERE PROVIDED BY:

Operations:

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

Allowance for funds used during construction....

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

OtheI'utside financing:

Sale of common stock Sale of preferred stock Sale of mortgage bonds Issuance of other long-term debt Net borrowings under revolving credit facilities (Note 7)

Increase (decrease) in short-term debt.................

Other sources:

Deferred recoverable energy costs Mandated refunds to customers (Notes 9 and 11)..

Unamortized debt reacquisition expense.........

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

Miscellaneous (net)

Total resources provided FINANCIALRESOURCES WERE USED FOR:

Construction additions, including capital leases Nuclear fuel Allowance forfunds used during construction...

Net additions.

Advances on behalf of Nine Mile Point Nuclear Unit No. 2 cotenant Reduction of long-term debt Reduction of preferred and preference stock.......

Dividends.

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

Cash Accounts receivable...

Coal and oil for production of electricity..

Other materials and supplies Long-term debt due within one year Accounts payable Payable on outstanding bank che'cks.....

Accrued taxes and interest Gas supplier refunds due customers Other (net) 1984 359,734 141,150 (161,496) 17,612 116,265 473,265 189,626 50,000 319,250 81,618 5,060 (31,247) 614,307 9,480 (9,273)

(27,495)

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

$1,094,763

$746,910 22,936 (161,496) 608,350 130,881 67,005 20,574 267,953

$1,094,763 (1,440)

(8,156)

(564)

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

(17,119) 27, 440 (8,989) 22,084 38,964 ln thousands of dollars 1983

$312,409 127,390 (117,793) 11,856 80,850 (4,972) 409,740 171,269 120,000 200,000 15,135 83,900 (7,237) 583,067 47,560 (5,793)

(22,421)

(22,670) 159 (29,455)

(13,618)

(46,238)

$946,569

$677,155 14,309 (117,793) 573,671 130,829 14,318 227,751

$946,569

$ (11,816)

(44,827) 46,243 (2,148)

(39,348) 7,501 15,556 (7,362) 1,934 4,812

$ (29,455) 1982

$268,534 121,422 (94,736) 12,967 68,900 377,087 145,194 20,000 330,000 (55,330)

(15,000) 424,864 (22,816)

(8,416)

(19,999) 13,316 (6,239) 29,693 (28,016)

(42,477)

$759,474

$562,749 31,720 (94,736) 499,733 56,518 11,956 191,267

$759,474

$ (11,124)

(33,292) 6,949 (2,364) 43,920 12,397 10,557 9,946 (20,781) 13,485

$ 29,693 26

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS NOTE 1. Summary of Significant Accounting Policies The Company is subject to regulation by the New York State Public Service Commission (PSC) and the Federal Energy Regulatory Commission (FERC) with respect to its rates for service and the maintenance of its accounting records. The Company's accounting policies conform to generally accepted accounting principles, as applied to regulated public utilities, and are in accordance with the accounting requirements and ratemaking practices of the regulatory authorities.

Principles of Consolidation:

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

UtilityPlant: The cost of additions to utility plant and of re-placements of retirement units of property is capitalized. Cost includes direct material, labor, overhead and an allowance for funds used during construction (AFC). In accordance with Statement of Financial Accounting Standards No. 71, capital leases executed since 1983 have been capitalized and in ac-cordance with the transition rules included therein, leases executed prior to 1983, amounting to approximately

$16,000,000 at December 31, 1984, have not been capitalized.

The cost of current repairs and maintenance is charged to expense. Whenever utility plant is retired, its original cost, to-gether with the cost of removal, less salvage, is charged to accumulated depreciation. The followingtable summarizes the components of UtilityPlant:

At December 31 ~

in thousands of dollars 1984

/o 1983 Electric plant...............

Nuclear fuel (Note 3)........

Gas plant...................

Common plant..............

Construction work in progress

$4,083,042 316,909 4941628 130,916 1,877,689 59

$3,636,374 5

293,973 7

473,757 2

106,144 27 1,455,463 Total utilityplant..

$6,903,184 100

$6,165,711 Allowance for Funds Used During Construction: The Com-pany capitalizes AFC in amounts equivalent to the cost of funds devoted to plant under construction. AFC rates are de-termined in accordance with FERC and PSC regulations. The Company computes AFC at a rate which is reduced to reflect the income tax effect of the borrowed funds component of AFC for all additions to electric utility plant, including N M Uranium, Inc. The AFC rates in effect December 31, 1984 were 12.59'/o and, net of tax, 10.45/o. AFC is segregated into its two components, borrowed funds and other funds, and is re-flected in the Interest Charges section and the Other Income and Deductions section, respectively, of the Consolidated Statement of Income.

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

Estimated decommissioning costs (costs to remove the plant from service in the future) of the Company's Nine Mile Point Nuclear Station Unit No.

1 are recovered in rates through an annual allowance and charged to operations through deprecia-tion charges. Based on a study performed in 1979, the cost of decommissioning, which is expected to begin in the year 2005, is estimated to be approximately $278,000,000 at that time

($75,200,000 in 1984 dollars). Through December 31, 1984, the Company has recovered

$15,700,000 of decommissioning costs in rates. The Company continues to review the estimate and requirements for decommissioning and plans to seek rate adjustments when appropriate. There is no assurance that the decommissioning allowance will ultimately aggregate a suffi-cient amount to decommission the plant. The Company be-lieves'that decommissioning costs, if higher than currently provided, will ultimately be recovered in the rate process, al-though no such assurance can be given.

Amortization of Nuclear Fuel: Amortization of the cost of nuclear fuel is determined on the basis of the quantity of heat produced for the generation of electric energy. The cost of disposal of nuclear fuel, which presently is $.001 per kilowatt-hour of generation, is based upon a contract with the Depart-ment of Energy (DOE). These costs, which are associated with generation at Nine Mile Point Unit No. 1, are charged to operat-ing expense and recovered from customers through base rates or through the fuel adjustment clause (see Note 11).

Revenues:

Revenues are based on cycle billings rendered to certain customers monthly and others bi-monthly. The Com-pany does not accrue revenues for energy consumed and not billed at the end of any fiscal period. The Company's tariffs include electric and gas adjustment clauses under which energy and purchased gas costs, respectively, above or below the levels allowed in approved rate schedules, are billed or credited to customers.

The Company, as authorized by the PSC, charges operations for energy and purchased gas cost increases in the period of recovery. The PSC has periodically authorized the Company to make changes in the level of al-lowed energy and purchased gas costs included in approved rate schedules. As a result of such periodic changes, a portion of energy costs deferred at the time of change would not be recovered under the normal operation of the electric adjust-ment clause.

However, the Company has been permitted to amortize and billsuch portions to customers, through the elec-tric adjustment clause, over 36 months from the effective date of each change. The Company has implemented, beginning April 1984, revisions to its fuel adjustment clause consistent with the PSC's Opinion in a proceeding which reviewed the Company's electric fuel adjustment clause. The revisions es-sentially provide for partial pass-through'of fuel cost fluctua-tions from those forecast in rate proceedings with the Com-pany absorbing a specific portion of increases or retaining a portion of decreases to a maximum of $15 millionper rate year.

Federal income Taxes:

In accordance with PSC require-ments, the tax effect of book and tax timing differences is flowed through unless authorized by the PSC to be deferred.

The Company provides deferred taxes on certain benefits realized from depreciation, on deferred energy and purchased gas costs, on nuclear fuel disposal costs accrued prior to April 7, 1983, on nuclear generating plant decommissioning

costs, on certain construction overheads and on certain other items (see Note 9). In conformity with ratemaking practices of the 27

PSC, the Company has not provided deferred taxes on approx-imately $1.4 billion of other tax deductions which include cer-tain depreciation differences and various construction over-heads deductible currently for tax purposes and capitalized for accounting and ratemaking purposes. The Company claims 10 percent investment tax credit and defers the benefits of such credits as realized. For purposes of computing capital cost recovery deductions and nor'malization, the asset basis is re-duced by one-half of the credit claimed for expenditures made subsequent to 1982. For projects specified in the AFC section above, the imputed tax benefit of the borrowed funds compo-nent of AFC has been credited to Other Income and Deduc-tions. The tax effect of General and Refunding Bond interest and supplemental payments is recorded in Other Income and Deductions (see Note 10).

Amortization of Debt issue Costs: The premium or discount on long-term debt issues is amortized ratably over the lives of the issues (see Note 7).

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

The Company's policy is to fund pension costs accrued (see Note 8).

NOTE 2. Depreciation and Amortization The total provision for depreciation and amortization, includ-ing amounts charged to clearing accounts, was $142,427,000 for 1984, $128,976,000 for 1983 and $123,104,000 for 1982. The provisions include approximately $10,200,000, $9,200,000 and

$6,700,000, respectively, resulting from the PSC allowed re-covery of the amortization of costs associated with the discon-tinued Sterling Nuclear Station. The 1982 provision also in-cludes approximately

$6,400,000 resulting from the PSC al-lowed accelerated recovery of the costs to modify the Com-pany's Albany Steam Station to burn natural gas as a fuel. The percentage relationship between the total provision for depre-ciation and average depreciable property was 2.9% in 1984, 2.8% in 1983 and 2.9% in 1982. The Company makes deprecia-tion studies on a continuing basis and, upon approval by the PSC, periodically adjusts the rates of its various classes of depreciable property.

NOTE 3. N M Uranium, Inc.

During 1976, through a wholly-owned subsidiary, N M Uranium, Inc. (NMU), the Company purchased a 50 percent undivided interest in uranium deposits and associated mining equipment to be held by a jointly-owned mining venture. Ac-quisition of this interest was made primarily to provide a more assured future supply of nuclear fuel. The investment in the subsidiary, which includes costs incurred since acquisition and AFC accrued through March 31, 1981, has been reduced by the proceeds from the sale of uranium, net of tax, and trans-fers to the Company and is included in the consolidated finan-cial statements as part of the nuclear fuel component of utility plant (see Note 1). Such investment (including inventory with a spot market value of approximately

$22,600,000 and

$28,300,000 at January 1, 1985 and 1984, respectively) totaled

$87,500,000 at December 31, 1984 and $86,300,000 at De-cember 31, 1983.

In 1978, the PSC issued an order approving the Company's investment in NMU.This approval was subject to the condition that rates which the PSC willapprove in the future will reflect the cost of NMU uranium at the lower of cost or the market price. The PSC also stated that the reasonableness of the Company's future uranium costs will be judged with reference 28 to costs of uranium under "currently" available long-term con-tracts and in the spot market. Subject to PSC approval, the comparison of cost to market will be on an aggregate basis over the life of the project.

In connection with the Company's March 1984 rate decision, the PSC allowed $38.37 per lb. as the cost of approximately 300,000 lbs. of NMU uranium utilized in the 1984 reload of the Company's Nine Mile Point Nuclear Unit No.1. This price rep-resents the average United States delivery price, as reported by the Department of Energy, for all uranium during 1982 includ-ing long-term contracts and spot market price settlements. The Company's cost of this NMU uranium was $42.14 per lb., inclu-sive of AFC prior to April 1, 1981. The differential between the Company's cost of this NMU uranium and that amount allowed to be recovered in rates charged to customers has been de-ferred subject to the PSC approval of the comparison of cost to market on an aggregate basis over the life of the project.

Because of unsettled conditions in the uranium industry, the spot market price of uranium continues to be depressed below levels anticipated by the Company at the time of its investment.

The spot market price of uranium was $15.25 per lb. at January 1, 1985 and $22.00 per lb. at January 1, 1984 as compared to approximately $43.00 per lb. during 1979. Due to regulatory restrictions on the extent to which the costs of uranium pro-duced by this mining operation may be allowed in future rates and considering current market price levels, a portion of the Company's investment may not be recoverable. Due to the un-certainty of the future allowable cost of uranium during the period of utilization of the mine's output and of operating costs over the remaining productive life of the mine, the potential unrecoverable portion of the Company's investment, if any, cannot be reasonably estimated.

Management is continually evaluating the status of this mining operation to assure maximum recovery of the Company's investment. Based upon current forecasts of market prices and the Company's uranium requirements through 1991, it is presently anticipated that the mining process will be completed and all production utilized.

NOTE 4. Bank Credit Arrangements At December 31, 1984, the Company had $566 million of bank credit arrangements, including the Oswego Facilities Trust, with 38 banks. These credit arrangements consisted of

$445 million in long-term commitments under Revolving Credit and Term Loan Agreements,

$10 million in short-term com-mitments under Credit Agreements, $11 millionin lines of cred-it and $100 million under a Bankers Acceptance Facility Agreement. The Revolving Credit and Term Loan Agreements extend through 1990. At the option of the Company, the in-terest rate applicable to borrowings under these agreements is based on the prime rate or at specified increments over the rates applicable to certificates of deposit or, in certain agree-ments, eurodollar deposits.

All of the other bank credit arrangements are subject to review on an ongoing basis with interest rates negotiated at the time of use. The Company also issues commercial paper.

Unused bank credit facilities are held available to support the amount of commercial paper out-standing, including amounts currently issued in connection with Interest Rate Exchange Agreements (see Note 7.)

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

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

Amounts outstanding under Interest Rate Exchange Agree-ments and Revolving Credit and Term Loan Agreements to-

AtDecember 31:

Short-term debt:

Commercial paper....

Notes payable Bankers acceptances Weighted average interest rate(a)..

S 8,000 S 37,100 3,516 4,663 42,000 43,000

$ 53,516 S 84,763 9.67o/o 9.60/o taled $75 million at December 31, 1984 and are recorded as Iong-term debt.

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

In thousands ofdollars 1984 1983 NOTE 6. Information Regarding the Electric and Gas Businesses The Company is engaged in the electric and natural gas util-ity businesses.

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

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

For year ended December 31:

Dailyaverage outstanding......

Dailyweighted average interest rate(a).

Maximum amount outstanding

$ 87,271

$119,981 1 0.48o/o 9.00o/o

$228,893

$232,160 (a) Excluding compensating balances and fees.

Operating revenues:

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

Gas In thousands ofdollars 1984 1983 1982

$2,134,470

$2,023,728

$1,860,649 651,076 608,587 533,122 NOTE 5. Jointly-Owned Generating Facilities The following table reflects the Company's share of jointly-owned generating facilities at December 31, 1984. The Com-pany is required to provide financing for the unit in process of construction and for any additions to the units in service. The Company's share of expenses associated with the Roseton units and Oswego Steam Station Unit No. 6 are included in the appropriate operating expenses in the Consolidated Statement of Income.

In thousands ofdollars Percentage Construction owner-Utility Accumulated work in ship plant depreciation progress Rosoton Steam Station Units No.1 and 2(a)... 25

$ 82,558

$23,358 456 Oswego Steam Station UnitNo.6(b)..........

76

$264,117

$33,497 137 Nine Mile Point Nuclear Station UnitNo. 2(c)(d). 41

$1,503,515 (a) The remaining ownership interests are Central Hudson Gas and Electric Corporation, the operator ol the plant (35'/o) and Consoli-dated Edison Company of New York, Inc. (40o/o).

(b) The Company is the operator. The remaining ownership interest is Rochester Gas and Electric Corporation (24'/o).

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

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

(d) Excludes amounts spent for nuclear fuel.

Total

$2,785,546

$2,632,315

$2,393,771 Total 574,493 471,804 425,304 Pretax operating Income, Including AFC:

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

S 672,964 538,097 476,006 Gas 63,025 51,500 44,034 Total...................

Income taxes............."-

Other income and deductions Interest charges.............

735>989 181>767 42,051 236,539 589,597 520,040 117,089 109,519 41,505 36,947 201,604 178,934 Net income...

Depreciation:

Electric.....

Gas Total Construction expenditures (including nuclear fuel):

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

Gas Total Identifiable assets:

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

Gas Total........

Corporate assets Total assets S

359,734 312,409 268,534 S

128,521 115,075 109,215 12,629 12,315 12,207 S

141,150 127,390 121,422 734,706 654,020 562,047 35,140 37,444 32,422 S

769,846 691,464 594,469

$5,155,372

$4,443,154

$4,011,265 432,113 429,133 406,940 5,587,485 4,872,287 4,418,205 645,916 485,285 363,562

$6,233,401

$5,357,572

$4,781,767 Operating Income before taxes:

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

511,842 420,600 381,378 Gas 62,651 51,204 43,926 NOTE 7. Capitalization CAPITALSTOCK The following table summarizes the shares of capital stock authorized, issued and outstanding:

At December 31, 1984 1983 1982 Common stock, $ 1 par value:

Authorized...................

Issued &outstanding..........

Preferred stock, $100 par value:

Authorized...................

Issued &outstanding..........

Preferred stock, $25 par value:

Authorized...................

Issued &outstanding..........

Preference stock, $25 par value:

Authorized...................

Issued &outstanding..........

150,000,000(a) 116,848,974 3,400,000 3,342,510 19,600,000(a) 11,210,000 4,000,000 520,000 125,000,000 104,010,003 3,400,000 3,370,240 9,600,000 9,376,000 4,000,000 760,000 125,000,000 93,832,151 3,400,000 3,161,920 9,600,000 5,742,000 4,000,000 920,000 (a) Increased authorizations approved by shareholders.

29

The table below summarizes changes in capital accounts for 1982, 1983 and 1984:

Common stock

($ 1 par value)

Non-redeemable preferred stock

($100 par value)

Redeemable preferred stock

($100 par vafue)

Redeemable preferred stock

($25 par value)

Capital stock premium and expense (net)

Balance January 1, 1982 Sales in1982............

Issued to stock purchase plans in1982...........

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

Shares Amount'hares Amount'hares Amount*

Shares Amount'mount*

83,973,252

$83,973 2,100,000

$210,000 1,099,980

$109,998(a) 6,088,000

$152,200(a)

$885,205 5,000,000 5,000 800,000 20,000 70,705 4,858,899 4,859 64,285 (38,060)

(3,806)

(226,000)

(5,650) 600 Balance December 31,1982 Sales in1983.............

Issued to stock purchase plans in 1983............

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

Foreign currency translation adjustment...

93,832,151 5,000,000 5,177,852 5,178 (41,680)

(4,168)

(326,000)

(8,150) 80,465 607 (6,114) 93,832 2,100,000 210,000 1,061,920 106,192(e) 6,662,000 166,550(e) 1,020,795 5,000 250,000 25,000 3,800,000 95,000 78,629 Balance December 31,1983 104,010,003 Sales in 1984.............

6,534,400 Issued to stock purchase plans in 1984............

6,304,571 Redemptions.............

Foreign currency translation adjustment....

104,010 6,534 6,305 (27,730)

(2,773)

(406,000)

(10,150) 87,117 555 (2,126) 2,100,000 210,000 1,270,240 127,024(a)10,136,000 253,400(e) 1,174,382 2,000,000 50,000 87,878 Balance December31,1984 116,848,974

$116,849 2,100,000

$210,000 1,242,510

$124,251(a)11,730,000

$293,250(e)

$1,347,806

'In thousands of dollars (a) Includes sinking fund requirements due withinono year MANDATORILYREDEEMABLE PREFERRED STOCK The Company has certain issues of preferred and preference stock which provide for mandatory and optional redemption as follows:

Redemption price per share (Before adding accumulated dividends) ln thousands ol dollars Eventual At December 31, 1984 1983 1982 December 31, 1984 minimum Preferred $100 par value:

7.45% Series; 456,000, 474,000, and 492,000 shares..

10.13% Series; 250,000 shares.

10.60% Series; 286,510, 296,240 and 319,920 shares 12.75% Series; 250,000 shares.

Preferred $25 par value:

8.375% Series; 1,400,000, 1,500,000 and 1,600,000 shares 9.75%Series;870,000,936,000and1,002,000shares 9.75% Series (second); 1,020,000 shares............

10.13% Series; 1,000,000 shares 10.75% Series; 1,600,000 shares 12.25% Series; 700,000 shares.

12.50% Series; 620,000 shares.

15.00% Series; 800,000 shares.

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

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

Preference $25 par value:

7.75% Series; 520,000, 760,000 and 920,000 shares...

$ 45>600 25,000 28,651 25,000 35,000 21,750 25,500 25,000 40,000 17,500 15,500 20,000 30,000 50,000 13,000 37,500 23,400 25,500 25,000 40,000 17,500 15,500 20,000 30,000 40,000 25,050 25,500 17,500 15,500 20,000 26.43 26.4175 27.03 (a)

(a)

(c)

(c) 28.44 (a)

(d) 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 19,000 23,000 25.00 25.00

$ 47,400

$ 49,200

$104.81

$100.00 25,000 (a) 100.00 29,624 31,992 110.60 102.65 25,000 25,000 (b)

(b)

Less sinking fund requirements 417,501 19,601 380,424 11,950 272,742 9,950 30 (a) Not redeemable until 1988.

(b) Entire issue to be redeemed at par value June 30, 1991.

(c) Not redeemablo until 1991.

(d) Not redeemable until 1989.

$397,900

$368,474

$262,792

These series require mandatory sinking funds for annual redemption and provide optional sinking funds through which the Company may redeem, at par, a like amount of additional shares (limited to 120,000 shares of the 7.45'/o series and 300,000 shares of the 9.75% series). The option to redeem additional amounts is not cumulative.

The Company's five-year mandatory sinking fund redemption requirements for preferred and preference stock are as follows:

In thousands ofdollars No. of shares Commencing 1985 1986 1987 1988 1989 Preferred $100 par value:

7.45/o Series..........

10.60'/o Series..........

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

18,000 20,000 25,000 6/30/77 3/31/80 12/31/87

$1,800

$ 1,800 651(a) 2,000

$ 1,800 2,000 2,500

$ 1,800

$ 1,800 2,000 2,000 2,500 ',875 Preferred $25 par value:

8.375/o Series ~... ~...

9.75/o Series.........

9.75/o Second Series 10.13/o Series.........

10.75/o Series ~...

~

~

~

~.

12.25/o Series......

~

~

~

12.50/o Series.........

15.00%%d Series.........

'reference $25 par value:

7.75/o Series...........

100,000 66,000 204,000 100,000 320,000 43,060 38,139 40,000 520,000 4/1/83 10/1/80 4/1/86 12/31/87 6/30/89 3/31/87 3/31/87 3/31/87 9/30/80 2,500 1,650 13,000 2,500 1,650 5,100 2,500 1,650 5,100 2,500 1,077 953 1,000 2,500 1,650 5,100 2,500 1,077 953 1,000 2,500 1,650 5,100 1,875 8,000 1,077 953 1,000 (a) A portion of the requirements has been met by advance purchases.

$19,601

$13,050

$21,080

$21,080

$27,830 NON-REDEEMABLE PREFERRED STOCK (Optionally Redeemable)

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

At December 31, Redemption price per share (Before adding accumulated dividends)

In thousands ol dollars Eventual 1984 1983 1982 December 31, 1984 minimum Preferred $100 par value:

3.40/o Series; 200,000 shares...

3.60/o Series; 350,000 shares...

3.90/o Series; 240,000 shares...

4.10/o Series; 21 0,000 shares...

4.85'/o Series; 250,000 shares...

5.25/o Series; 200,000 shares...

6.10/o Series; 250,000 shares...

7.72/o Series; 400,000 shares...

$ 20>000 35,000 24,000 21,000 25,000 20,000 25>000 40,000

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

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

$103.50 104.85 106.00 102.00 102.00 102.00 101.00 105.44

$103.50 104.85 106.00 102.00 102.00 102.00 101.00 102.36

$210,000

$210,000

$210,000 LONG-TERM DEBT Long-term debt and long-term debt due within one year are detailed in the table on the following page.

Several series of First Mortgage Bonds and Notes were issued to secure a like amount of tax-exempt revenue bonds and notes issued by the New York State Energy Research and De-velopment Authority (NYSERDA). Pursuant to agreements be-tween NYSERDA and the Company, trust funds have been es-tablished with the proceeds from the bond and note issues.

Such proceeds are to be used for the purpose of constructing certain pollution control facilities at the Company's generating facilities. Unexpended proceeds in the trust funds amounted to

$50,403,000 at December 31, 1984 and are recorded in Other Property and Investments.

Notes Payable include $46,705,000 Eurodollar Guaranteed Notes issued by the Company's subsidiary Niagara Mohawk Finance, N.V. and guaranteed by Credit Lyonnais. In connec-tion with the formation and capitalization of this subsidiary, the Company also issued a $17,000,000 note payable which bears interest at the London Interbank Offered Rate (LIBOR), cur-rently fixed at 9.00/o through March 15, 1985.

During 1984, the Company entered into seven-year Interest Rate Exchange Agreements for $75,000,000, of which

$25,000,000 was for Oswego Facilities Trust (Trust). The agreements require the Company to make fixed rate payments which, on a semi-annual bond basis, are equivalent to 12.25/o, and in exchange, receive a LIBOR based floating rate payment from a bank. The Company uses its own commercial paper notes as the source of funding for $50,000,000 and Trust notes for $25,000,000. The related interest expense is recorded on a net basis.

The arrangements with the Trust provide financing for the first construction phase of a new energy management system.

The Trust has a $40,000,000 Direct Pay Letter of Credit Facility and Revolving Credit Agreement, $25,000,000 of which is sub-ject to an Interest Rate Exchange Agreement, which is availa-ble through December 31, 1990, and is used to support its commercial paper obligations. All such obligations are se-cured by certain assets held by the Trust. The Company is required to purchase, or otherwise arrange for, the disposition of the Trust assets upon the termination of the Trust. The Letter 31

of Credit Facility and Revolving Credit Agreement of the Trust require payment of fees which are based upon the amount of commercial paper outstanding.

Other long-term debt consists of obligations under capital leases of $43,741,000 and the liabilityfor nuclear fuel disposal of $53,354,000 (see Note 11).

During 1983, the Company reacquired $98,004,000 of its out-standing long-term debt prior to maturity. In connection therewith, the Company incurred refunding premiums, com-missions and expenses amounting to $22.4 million. The PSC has allowed the Company to amortize these costs over the remaining term of the debt issued to replace the refunded debt.

In thousands ofdollars At December 31 ~

1984 1983 In thousands ofdollars At December 31, 1984 1983 First mortgage bonds:

3V>>%Series duoAugust1,1984...........

10V>>% Series duo September 1, 1985........

3rtf>% Series duo May 1,1986..............

47/8% Series duo September 1, 1987........

3>/s%Soriesduo Juno1,1988.....,.......

14V8% Series duo August 11,1988..........

12/o Seriesdue March 1,1989............

9Vs%SoriesduoOctobor1,1989 43/4% Series duo April 1, 1990..............

15%

Series duo March 1, 1991............

14V4%Soriosduo May1,1991..............

4>/2% Series duo November 1, 1991........

15>/2% Series duo March 1, 1992............

15V4%Soriosduo Juno1,1992.............

11%

Series duo May1,1993..............

12Vz% Series duo March 1, 1994............

4%% Soriosduo Decomber1,1994........

5Vs% Series duo Novombor1, 1996........

6>/4% Series duo August 1,1997...........

6Vz% Series duo August 1, 1998...........

12%%Soriosduo March1,1999............

9Vs%Soriosduo Docombor1,1999........

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

7%% Series duo February 1, 2001.......,..

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

774% Series due August 1,2002...........

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

9>h%Soriosduo Docomber1,2003........

9.95% Series duo September 1, 2004.......

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

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

8V>>%SeriesduoDocombor1

~ 2007........

47>000 30,000 50,000 50,000 50,000 20,000 13,000 50,000 38,650 100>000 40,000 50>000 62,500 50>000 13>000 40,000 45,000 40>000 60>000 17,000 75,000 80,000 65,000 80,000 80>000 80,000 50,000 100,000 36>500 71>600 46,000 25,000 47,000 30,000 50,000 50,000 50,000 50,000 38,650 40,000 50,000 62,500 50,000 40,000 45,000 40,000 60,000 75,000 80,000 65,000 80,000 80,000 80,000 50,000 100,000 37,887 71,800 48,000

'13'%eries duo April 1

~ 2012..............

16%

Series duo August 1,2012.;.........

12Vs% Series duo November 1,2012........

12~/8% Series duo March 1 ~ 2013............

12>h%Soriesduo June15,2013............

11V4% Series duo July 1 ~ 2014..............

11%% Series duo October 1,2014..........

Paul Smith's Electric Light&Power &

Railroad Company first mortgage bonds:

SV2%Soriosdue May1,1985..............

Total First Mortgage Bonds............

Promissory Notes:

8% Series Aduo June 1 ~ 2004............

Notes payablo:

Variable Rate Pollution Control Notes.....

17% Eurodollar Guaranteed Notes duo Septombor15,1989...............

9.0/o Adjustabfo London Interbank Offered Rate duo September 15, 1989...

15.02/o Unsecured Notes duo 1990.......

Prime rate plus Vz% (not to exceed 7>/~%)..

Commercial Paper Notes................

Revolving credit and term loan agroomonts Revolving credit agreement, Oswego Facilltlos Trust...............

Other Unamortized premium TOTALLONG-TERM DEBT.:...........

Less long-term debt due within ono year Tax-exempt pollution control related issues 30,000 3,046 100,000 100,000 50,000 100>000 56,250 30,000 3,046 100,000 100,000 50,000 450 450 2,069,996 1,779,333 46,600 46.600 54,950 56,000 46 705 47 800 17,000 50,000 50>000 17,000 625 50,000 25,010 97,095 1,952 18,900 60,607 1,835 2,459,308 2,078,700 63,837 30,152

$2,395,471

$2,048,548 Certain of the Company's Mortgage Bonds provide for a mandatory sinking fund for annual redemption. The Company's five-year mandatory sinking fund redemption requirements for First Mortgage Bonds are as follows:

Principal In thousands ofdollars amount Commencing 1985 1986 1987 1988 1989 10.20% Sorios duo March 1, 2005......

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

8%%SoriosduoDocombor1,2007 9.95% Series duo September 1, 2004 147/>>% Series duo August 11, 1988.....

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

9Vz% Series dua December 1, 2003...

$1,500 750 2,000 5,000 16,000 5,333 2,941 3/1/78 8/1/82 12/1/83 9/1/85 8/11/86 10/1/86 12/1/87

$ (e)

(o) 2,000 5,000

$ 1,500 350(a) 2,000 5,000 16,000 5,333

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

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

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

$ 7,000

$30,183

$34,524

$34,524

$17,524 (a) Requirements, or a portion thereof, have been met by advance purchases.

Additionally, certain other series o'f mortgage bonds provide for a debt retirement fund whereby payment requirements may be met, in lieu of cash, by the certification of additional prop-erty, the waiver of the issuance of additional bonds or the re-tirement of outstanding bonds. The 1984 requirements for these series were satisfied by the certification of additional 32 property. The Company anticipates that the 1985 requirements for these series willbe satisfied by other than payment in cash.

Total annual debt retirement fund requirements for these series, based upon mortgage bonds outstanding December 31, 1984, are $7,850,000.

Total

$382,000

$348,000 Net assets available for plan benefits.....

$455,000

$408,000 The weighted average assumed rate of return used in deter-NOTE 8. Pension and Other Retirement Plans The Company and its subsidiaries have non-contributory pension plans covering substantially all their employees. The total pension cost was $42,100,000 for 1984, $40,000,000 for 1983 and $38,000,000 for 1982 (of which $11,400,000 for 1984,

$12,200,000 for 1983 and $11,000,000 for 1982 was related to construction labor and, accordingly, was charged to construc-tion projects).

Studies indicate that the accumulated plan benefits, as de-termined by consulting actuaries, and plan net assets for the Company's plans at December 31, 1984 and 1983 are as fol-lows:

In thousands ofdollars 1984 1983 Actuarial present value of accumulated benefits:

Vested

$361,000

$328,000 Non-vested 21,000 20,000 mining the actuarial present value of accumulated plan ben-efits was 7% in each year.

The table at left summarizes accumulated plan benefits at-tributable to employee wage levels and service rendered through December 31, 1984 and 1983. These amounts do not take into consideration expected future service, wage in-creases and associated actuarial assumptions.

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

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

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

These benefits are provided through an insurance company whose premiums are based on the benefits paid during the year. The cost (insurance premiums) of providing these ben-efits amounted to approximately $6,000,000 for 1984.

NOTE 9. Federal and Foreign Income Taxes Following is a summary of the components of Federal and foreign income tax and a reconcilation between the amount of Federal income tax expense reported in the Consolidated Statement of Income and the computed amount at the statutory tax rate:

Summary Analysis:

1984 In thousands ofdollars 1983 1982 Components of Federal and foreign Income taxes:

Current tax expense: Federal.

Foreign

$ 17,713 8,498 (4,566) 4,860 9,294 9,369 Deferred Federal income tax expense Income taxes included in Operating Expenses........................

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

26i211 155,556 181,767 51831 39,291) 4,728 112,361 117,089 (31,511) 14,229 95,290 109,519 (26,390)

Total

$148,307

$ 85 578

$ 83 129 Components of deferred Federal Income taxes(Note 1)r Depreciation Cost of removal of property Investment tax credit Construction overheads Recoverable energy and purchased gas costs Necessity certificates Nuclear fuel disposal cost.

Sterling abandonment Other Deferred Federal income taxes (net)

$ 52,130 870 54,900 6,756 (2,458)

(700) 3,100 (1,566) 3 233

$116,265

$22,185 2,479 51,163 (22,523)

(700) 20,746 188 7,312

$80,850

$26,842 5,930 21,859 24,307 (700)

(9,940)

(908) 1,510

$68,900 Reconciliation between Federal and foreign Income taxes and the tax computed at prevailing U.S. statutory rate on Income before income taxes:

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

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

Real estate taxes on an assessment date basis..................

Investment tax credit Deferred taxes provided at other than the statutory rate Other Federal and foreign income taxes

$233,699 (141926) 74I288 11 1896 (406) 12,143 2,397 85,392

$148,307

$183,074 (6,431) 54,185 22,376 3,590 10,457 13,319 97,496

$ 85,578

$161,765 796 43,579 19,092 4,282 7,861 1,598 1,428 78,636

$ 83,129 33

Components of United States and foreign income before in-come taxes:

ln thousands ofdollars 1984 1983 1982 United States..............

Foreign Consolldatln eliminations

$499,285 18,326 9,570

$388,051

$341,962 19,989 20,908 10,053 11,207 Income before income taxes

$508,041

$397,987

$351,663 Income Tax Refund:

In September 1981, the Company re-ceived a refund of Federal income tax, including interest there-on, amounting to $9,943,000, net of Federal income taxes on the interest portion of the refund. The refund resulted from the allowance of certain deductions for the loss of water rights at Niagara Falls in connection with the redevelopment of Niagara power by the Power Authorityof the State of New York. As part of the Company's March, 1983 rate decision, the PSC ordered that one-half of the refund be passed on to ratepayers over a two-year period and the remaining one-half be retained by the Company. Accordingly, one-half of the amount has been re-corded in "Deferred Credits: Mandated refunds to customers",

and the remaining one-half is included in the Consolidated Statement of Income for 1983. In July 1983, the Company filed a suit seeking to annul the PSC's decision to share the refund with ratepayers.

In May 1984, the Appellate Division of the State Supreme Court annulled the determination of the PSC but re-manded the matter to the PSC for further proceedings.

The Company has petitioned the Court of Appeals to overturn the decision of the Appellate Division seeking the relief requested in the original suit. The PSC has also petitioned the Court of Appeals to overturn the Appellate Division's remand of the PSC's original decision.

In December 1984, the Court of Ap-peals agreed to hear the appeals of both the Company and the PSC. The Company is unable to predict the outcome of this proceeding.

NOTE 10. Nine Mlle Point Nuclear Station Unit No. 2 Nine Mile Point Nuclear Station Unit No. 2 (the Unit), a nu-clear power plant being constructed and to be operated by the Company and shared with other utilities, is the only major generating facility currently under construction by the Com-pany. Ownership of the Unit is shared by the Company (41%),

Long Island Lighting Company (LILCO) (18%), New York State Electric & Gas Corporation (18%), Rochester Gas and Electric Corporation (14%), and Central Hudson Gas 8 Electric Corpo-ration (9%). Output of the Unit, which will have a projected capability of 1,084,000 kw., is to be shared in the same propor-tions as the cotenants'espective ownership interest.

Beginning in late 1984 the primary emphasis of the construc-tion effort has shifted from bulk construction to that work re-quired to support the start-up and test schedule. The Company recognizes that its current construction schedule is a difficult one, but believes it to be achievable. Consultants retained by the PSC have, however, expressed concerns about the Com-pany's ability to meet the currently scheduled commercial op-eration date of October 1986. Construction activities scheduled for early 1985 include key milestones which, if not met, could have an unfavorable impact on the currently scheduled commercial operation date.

Construction costs for the Unit for 1984 were, exclusive of AFC, approximately $675 million, the amount forecast in the March 1984 cost estimate. Although spending levels approxi-mated planned amounts, the physical work accomplished fell short of what was planned. As a result, total Unit construction 34 costs for 1985 and 1986, exclusive of AFC, have been re-estimated to be $637 million and $273 million, respectively, compared to the $541 million and $162 million yearly amounts previously estimated. The $207 million increase for these two years is required in order to accomplish work not completed in 1984 and takes into consideration production rates historicaily achieved. Based upon revised 1985 and 1986 capital spending, current projections of financing costs, and assuming achieve-ment of an October 1986 commercial operation date, the com-pletion cost of the Unit is currently estimated to total approxi-mately $5.350 billion (comprised of construction costs of

$3.577 billion and AFC of $1.773 billion), compared to $5.106 billion (comprised of construction costs of $3.370 billion and AFC of $1.736 billion)estimated in March 1984. The Company's 41% share of the total estimate is approximately $2.2 billion.

Any delay in achieving the commercial operation date would result in an increase of approximately $60 million per month in the Unit's total completion cost (approximately $25 millionwith respect to the Company's 41% share), the major portion of which would be attributable to financing costs.

On April 16, 1982, the PSC, after an extensive proceeding, issued an opinion and order which stated that completion of the Unit is warranted and indicated the PSC's intention to closely monitor construction activities. Full time PSC Staff are resident on site and, along with PSC retained consultants, monitor the Unit's construction progress and issue periodic reports. The PSC, in 1982, also adopted an incentive rate of return (IROR) program in connection with the remaining con-struction costs of the Unit which willbe implemented as part of the first rate proceeding involving each cotenant that consid-ers rate recognition of the Unit's completion cost. On July 18, 1984, the PSC issued an opinion and order which amended the IROR program to also include a $5.4 billion ceiling on the Unit's final allowable cost. Under the amended IROR Program, costs incurred in excess of $4.6 billion, but less than $5.4 bill-ion, are required to be borne by cotenant shareholders to the extent of 20% of the variation in revenue requirements, with costs in excess of $5.4 billion to be borne in total by the coten-ant shareholders.

Although it currently appears, assuming a

completion cost of $5.350 billion as currently projected, that the imposition of an IROR induced penalty over the expected life of the Unit willnot have a material effect on the Company's financial position or results of operations, no such assurance can be provided.

In connection with the PSC proceeding which concluded that completion of the Unit is warranted, the PSC stated that it willapply a strict standard of prudence for all costs incurred in completing the project. It is currently anticipated that a pru-dency review will be formally initiated by the PSC in 1985. AI-though the Company believes it has acted prudently in the construction of the Unit, a prudency review by the PSC could result in denial of recovery of a portion of the Unit's total cost in rates, including AFC which is currently accruing and re-flected in income.

In accordance with current generally ac-cepted accounting principles, a disallowance of a portion of the Unit's costs would not, in itself, require an immediate charge to income. However, the accounting recognition of such disallowances is currently being reviewed by the Finan-cial Accounting Standards Board. At this time, the Company is unable to predict the extent, ifany, of a disallowance of Project cost or the impact thereof on the financial condition or results of operations of the Company.

Based upon the current high cost of large, base-load generating facilities, legislators, regulatory commissions and utilitycompanies nationwide are considering phasing in these

costs over a period of years. When the Unit is recognized for rate setting purposes, the Company anticipates that, rather than recognition of the entire cost of the plant in rates at one time in accordance with conventional rate making principles, the cost of the Unit may be phased into rates over a period of years. In accordance with current generally accepted account-ing principles, Unit operating and financing costs may be de-ferrable under a phase-in plan for recovery in the future. How-ever, the Financial Accounting Standards Board is currently reviewing the accounting for phase-in plans and changes in accounting requirements may evolve from this review. AI-though it is likely that a phase-in plan would be required or proposed, the Company is unable to predict at this time over what period of time it would ultimately be ordered and the impact, if any, it would have on the financial condition or re-sults of operations of the Company.

The Company's share of the total Unit cost set forth above does not include amounts currently being advanced by the Company to cover construction payments not made since Feb-ruary 9, 1984 by LILCOwith respect to its 18'/o payment obliga-tion relating to the Unit. On August 30, 1984, the Company and LILCO entered into an agreement (the Agreement or LILCO Agreement) providing for the issuance by LILCO of up to $250 million in General and Refunding Bonds (the LILCO Bonds) to evidence and secure LILCO's repayment obligation for funds advanced by the Company through November 20, 1984, includ-ing interest charges thereon, and any future advances relating to the Unit made by the Company on behalf of LILCO (up to a maximum of $250 million in the aggregate).

Through De-cember 31, 1984, the Company has received approximately

$129 million in LILCO Bonds. Construction cost requirements in excess of the currently authorized LILCO Bonds, which would total approximately $43 million under the revised cost estimate, would continue to be an obligation of LILCO under the Basic Agreement entered into in September 1975. The Company cannot, at this time, predict whether or not LILCO will meet its obligation under the Basic Agreement or what arrangements will be made if LILCO fails to meet these or any of its other obligations under the Basic Agreement.

The LILCO Bonds mature on August 1, 1993, with mandatory quarterly sinking fund payments beginning November 1, 1989, and carry a stated interest rate of.5'/o. The Agreement also requires supplemental payments at the rate of 18.5/o on the LILCO Bonds issued to the Company. Although interest and supplemental payments are due quarterly, the Agreement pro-vides that supplemental payments may be deferred and evi-denced by the issuance of unsecured notes equivalent to such deferred supplemental payments.

The unsecured notes will bear interest at 19/o, which may also be deferred and added to the principal of the unsecured notes. Subsequent to the earlier of (i) commencement of commercial operation of the Unit, (ii)

August 1, 1987, or (iii) assignment by LILCO of any of its in-terest in the Unit to a third party, the supplemental payments and interest payments on the unsecured notes will be due and payable currently and the principal of the unsecured notes will be payable in equal quarterly installments over a maximum period of four years. If all supplemental payments were de-ferred by LILCO, the outstanding unsecured note balance would be approximately $90.0 million at the currently sched-uled commerical operating date of the Unit. The acquisition of the LILCO Bonds and up to $150 million in unsecured notes was approved by the PSC and FERC in October 1984. Irrespec-tive of the LILCOAgreement, under certain circumstances it is possible that the Company would be unable to recover in full the advances made on behalf of LILCO, whether secured, un-secured or otherwise. However, the Company believes that the LILCO Agreement provides the best security available at this time and the ultimate recoverability of the LILCOadvances has been and will be substantially enhanced by the LILCO Bonds.

The LILCO Agreement does not in any way modify LILCO's obligations associated with its 18/o ownership interest in the Unit, pursuant to the Basic Agreement entered into in Sep-tember 1975, which remains in full force and effect. Also, neither the LILCO Agreement nor the Basic Agreement pre-ciudes participation in the Unit by another party.

The PSC Staff and the New York State Energy Office in 1984 conducted separate re-evaluations of the economic benefits of completion of the Unit. These studies considered the impacts of costs in excess of the then current estimate as well as the present estimate of $5.35 billion. Each concluded that there is an economic benefit to be derived from the completion of the Unit. A review of the economics of the Unit by the Company also continues to support its completion.

The Governor of the State of New York in January1985, in hi's annual message to the State, indicated he was committed to enacting legislation to, among other things, phase in prudent costs of the Unit, clarify the applicability of the "used and use-ful" principle, affirm the PSC's authority to set a cap on total construction expenditures and provide incentive rate of return programs. The Company is unable to predict whether or not the Governor's proposals will ultimately be enacted, and, if enacted, to what extent they may be subject to legal challenge.

Likewise, the overall impact on the Company's financial condi-tion and results of operations of the adoption of any such proposals cannot be predicted.

In 1983, the Staff of the NRC, in accordance with its proce-dures for regular review, conducted assessments of the Unit's overall construction program.

In connection with these as-sessments, the NRC informed the Company, that, in its opinion, management's attention to certain aspects of the Unit's con-struction program should be increased. The Company's review of NRC-identified deficiencies associated with the Unit has been completed along with action plans to correct these de-ficiencies. Most of the corrective actions have been im-plemented.

In March 1984, the NRC ordered, among other things, that the Company submit a plan, subject to its approval, for an independent review of the NRC findings and past and current Company and contractor-identified deficiencies and corrective actions taken. In July 1984, the NRC approved a plan which provided for the independent verification of actions taken by the Company to address and correct both the recent NRC-identified deficiencies and previously identified and cor-rected nonconformance to specification and procedural re-quirements reported by the Company and contractors from January 1981 through March 1984. The independent review has been completed and the final report was issued in De-cember 1984. The Company does not presently expect that the implementation of the recommendations included in the report willadversely impact the present cost estimate or the currently scheduled completion date of the Unit.

Unlike other nuclear plants which have encountered widely publicized local resistance with respect to the development of evacuation plans in the event of a nuclear incident, the Unit is located between two currently operating nuclear plants and the Company has received substantial cooperation from local authorities in connection with the continuing development of its own evacuation plan.

A number of nuclear power plant construction projects in the United States have encountered substantial delays, licensing difficulties and cost escalation due to a variety of factors. Also, 35

Facility Expiration Purchased Estimated date of capacity annual contract in kw.

capacity cost NYPA Nlagara-hydroelectric project....

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

FitzPatrick-nuclear plan 1990 1,118,332

$13,420,000 2002 550,000 12,540,000 t..

year-to-136,000'2,114,000 year basis 1966 400,000 39,200.000 Ontario Hydro 2,206,332

$77,274,000

• 14,000 kw. for winter of 1965-86.

The purchase capacities shown above are based on the con-tracts currently in effect. The estimated annual capacity costs are subject to price escalation and are exclusive of applicable energy charges.

Litigation: In 1978, several electric customers brought suit against the Company and NYPA requesting that certain power purcha ed from NYPA be allocated exclusively for their benefit and asking monetary damages for the difference between rates charged by the Company and rates that would otherwise have been charged if this power had been furnished to them since the initiation of the suit in 1978 and for the six years prior thereto. A settlement was reached in January 1982 wherein these electric customers will receive an initial allocation of power and thereafter an increased allocation (through De-36 completion of the Unit consistent with its present schedule and cost estimate and the issuance of an operating license could be adversely affected by a wide variety of industry and plant specific construction, operating, regulatory, legislative, economic and other factors. Although the outcome of the re-maining regulatory licensing proceedings relating to the com-pletion of the Unit cannot be predicted with certainty, the Company believes an operating license will be issued upon completion of construction since the Unit is being designed and constructed to meet applicable regulatory requirements.

Not withstanding the Company's belief that an operating license will be issued, if statutory or regulatory restrictions or prohibitions as to the use of nuclear power develop which af-fect the Unit, the Company believes that it would be permitted to amortize its investment in this project and any related can-cellation charges against income and to recover such total investment and related carrying costs through rates over a period of years, although no such assurance can be given. The Company's 41'/o investment in the Unit, including AFC and overheads capitalized, amounted to $1.50 billion at December 31, 1984.

NOTE 11. Commitments and Contingencies Construction Program: At December 31, 1984, substantial construction commitments existed, including those for the Company's share of Unit No. 2 at the Nine Mile Point Nuclear Station. The Company presently estimates that the construc-tion program for the years 1985 through 1989 will require ap-proximately $1,789 million, excluding AFC, nuclear fuel and certain overheads capitalized. By years the estimates are $464 million, $373 million, $285 million, $320 million and $347 mil-lion, respectively.

Long-term Contracts for the Purchase of Electric Power: At January 1, 1985 the Company had contracts to purchase elec-tric power from the following generating facilities owned by the New York Power Authority (NYPA) and from Ontario Hydro of Canada:

cember 31, 1987) when their proposed plant expansion ac-tivities are completed. No monetary damages were awarded. In February 1982, certain other parties that did not join in the original litigation commenced litigation which sought to set aside the January 1982 settlement. This litigation is continuing and the Company is unable at this time to predict the ultimate outcome of these proceedings.

In the opinion of managment, the ultimate disposition of this matter willnot materially affect the Company's financial condition or results of operation.

In October 1982, the Consumer Protection Board (CPB) petitioned the PSC to exclude the Nine Mile Point Nuclear Sta-tion Unit No. 1 from rate base for the duration of the outage which occurred from March 1982 through June 1983. In addi-tion, the CPB requested evidentiary hearings to determine whether imprudence played a role in either the cause or the duration of the outage. In November 1982, the PSC rejected the CPB petition, but did announce it would conduct a formal in-vestigation into the cause and duration of the outage after completion of repairs to the unit. Accordingly, in July 1983 the PSC issued an order instituting such a proceeding. The pro-ceeding was concluded in November 1984 and the PSC con-cluded that the Company acted prudently and that no adjust-ment to fuel adjustment clause collections during the period of the outage is warranted. The CPB has petitioned the PSC for rehearing of such decision. The Company does not believe the PSC will grant the rehearing request, although no such assur-ance can be provided.

In August 1983, the PSC instituted a proceeding to investi-gate the Company's operating practices and certain other mat-ters that it is alleged may have resulted, among other things, in excessive fuel adjustment charges in previous periods; and, further, to determine whether and to what extent remedial ac-tion with respect to any such matters is proper under the PSC's regulations or otherwise. The PSC Staff recommended a re-fund to customers of approximately $80 million, plus interest.

Evidentiary hearings were completed in January 1984 and a decision was issued by the administrative law judges in April 1984 which recommended a total refund of approximately $ 1 million. In January 1985, in an open session the PSC indicated it willorder the Company to refund approximately $20 million of revenues collected during the years 1977 through 1982 over a 12 month period. The Company has charged 1984 income for the amount of the refund, net of taxes, amounting to approxi-mately $.10 per share. The net of tax amount of the refund is reflected in Other Income and Deductions: Other Items (net) in the Consolidated Statement of Income. The Company is con-sidering an appeal of this decision.

FERC Audit: As a result of an audit conducted by the Federal Energy Regulatory Commission (FERC) for the years 1973 through 1978, the FERC proposed certain adjustments con-cerning the base cost of nuclear fuel on which AFC should be applied. Resolution of this matter has been deferred by FERC pending their development of generic rulemakings concerning accounting for nuclear fuel. If these recommended adjust-ments are sustained by FERC, the resulting reduction in re-tained earnings would approximate $26,000,000 through 1984.

The Company believes that the adjustments are not justified and is contesting them. The Company is unable to predict the outcome of this matter.

Nuclear Fuel Disposal Cost: In 1983, the Nuclear Waste Pol-icy Act (Act) was enacted. Among other things, the Act pro-vided for a determination of the liabilityto the Department of Energy (DOE) for the disposal of nuclear fuel irradiated prior to 1983, and three payment options for liquidating such liability.

The Company's liabilityto the DOE associated with generation

at its Nine Mile Point Unit No. 1 prior to 1983, is approximately

$45,500,000. Based upon an option to make payment in 1998, the year in which the Company first plans to ship irradiated fuel to an approved DOE disposal facility, it is estimated that the cost of such disposal will be approximately $177,000,000, in-cluding interest charges as prescribed in the Act.

The Company, through ratemaking methodology approved by the PSC, had collected in rates approximately $145,800,000 for the disposal of nuclear fuel irradiated prior to 1983. As part of the Company's March 1984 rate decision, the PSC ordered the refund of approximately

$96,000,000 over a five-year period, representing that portion of previously collected costs which are in excess of the Company's liabilityto the DOE as of March 31, 1984. The amount to be refunded is included in "Deferred Credits: Mandated refunds to customers."

In the March 1984 rate decision, the PSC ordered 10 ro of this amount to be refunded in each of the first two rate years in the five-year period, with additional refund amounts to be determined in future PSC proceedings.

The liability to the DOE, including interest charges thereon, is included in long-term debt.

NOTE 12. Quarterly Financial Data (Unaudited)

Operating revenues, operating income, net income and earn-ings per common share by quarters for 1984, 1983 and 1982 are shown in the following table. The Company, in its opinion, has Quarterended In thousands ofdollars Operating Operating Net Earnings per revenues income income common share December 31, 1984 1983 1982 September 30, 1984 1983 1982

$675,089 658,733 608,939

$606,437 562,707 510,983

$81,185 76,824 66,325

$86,421 72,309 63,981

$591708

.39'4,081.52 54,621

.49

$84,636

$.66 62,376

.52 52,699

.50 June 30, 1984 1983 1982 March 31, 1984 1983 1982

• See Note 11.

$696,325

$101,319 651,487 92,286 587,350 85,745

$807,695

$123,801 759,388 113,296 686,499 99,734

$94,197

$.77 79,027

.72 73,271

.75

$121,193

$1.04 106,925 1.03 87,943

.94 included all adjustments necessary for a fair presentation of the results of operations for the quarters. Due to the seasonal nature of the utilitybusiness, the annual amounts are not gen-erated evenly by quarter during the year.

NOTE 13. Supplementary Information to Disclose the Effects of Changing Prices (Unaudited)

While much reduced from levels experienced in 1980-81, in-In recognition of the fact that users of financial reports need flation, resulting in a decline in the purchasing power of the to have an understanding of the effects of inflation on a busi-dollar, remains one of our nation's concerns. With increasing ness enterprise, the following supplementary information is governmental deficit spending, the threat of inflation and its supplied for the purpose of providing certain information negative impact on all sectors of the economy continues.

about the effects of both changes in specific prices and gen-The Company's consolidated financial statements are based eral inflation. It should be viewed as an estimate of the approx-on historical events and transactions when the purchasing imate effect of inflation, rather than as a precise measure.

power of the dollar was substantially different from the pre-Current cost amounts reflect the changes in specific prices sent. The effects of inflation on most utilities, including of plant from the date the plant was acquired to the present.

Niagara Mohawk, are most significant in the areas of deprecia-The current cost of utilityplant, net of accumulated deprecia-tion and utilityplant and amounts owed on borrowed funds.

tion and amortization, represents the estimated cost of replac-Statement ofincome from continuing operations adjusted forchanging prices for the year ended December 31, 1984 In thousands ofdollars Conventional Current cost historical cost average 1984 dollars Operating revenues Fuel forelectric generation Electricity purchased Gas purchased Depreciation and amortization Other operating and maintenance expenses Federal and foreign income taxes Interest charges Other income and deductions net Income from continuing operations (excluding adjustment to net recoverable cost)

Increase in specific prices of utilityplant held during year*

Adjustment to net recoverable cost Effect of increase in general price level.

Excess ot increase in specific prices over increase ln general price level after adjustment to net recoverablo cost.

Gain from decline in purchasing power of net amounts owed Net

$2,785,546 476,040 377,052 452,960 141,150 763,851 181,767 197,397 (164,405) 2,425,812 359,734

$2,785,546 476,040 377,052 452,96 0 408,311 763,851 181,767 197,397 (164,405) 2,692,973 92,573 469,352 145,249 (574,831) 39,770 109,763 149,533

• At December 31, 1984, current cost of utility plant, net of accumulated depreciation, was $ 10,297,148 while historical cost or net cost recoverable through depreciation was $5,401,902.

37

ing existing plant assets in kind. Since existing utility plant is not expected to be replaced precisely in kind due to technolog-ical changes, current cost does not necessarily represent the replacement cost of the Company's utilityplant. The portion of the accumulated amortization relating to disposal costs of nu-clear fuel was not used in the calculation of current costs but rather reclassified to a monetary liability. In most cases, cur-rent costs were determined by indexing surviving plant dollars by the Handy-Whitman Index of Public Utility Construction Costs. However, when an account could not be indexed by Handy-Whitman, other appropriate indices were used. The cur-rent year's provision for depreciation and amortization on the current cost amount of utilityplant was determined by applying the Company's average annual depreciation rates to the in-dexed plant amount.

Fuel inventories, the cost of fuel used in generation, and electricity and gas purchased have not been restated from their historical cost in nominal dollars. The recovery of energy and purchased gas costs, in base rates or through the operation of the Company's electric and gas adjustment clauses, is limited to historical costs.

For this reason fuel inventories and de-ferred recoverable energy costs are effectively monetary assets.

Income taxes have not been adjusted.

The Company is subject to the jurisdiction of regulatory commissions in the determination of a fair rate of return on its investment. Current ratemaking policy provides for the recov-ery of historical costs. Therefore, any difference between the historical cost of utilityplant stated in terms of current cost not presently includible in rates as depreciation, is reflected as an increase (reduction) to net recoverable cost. While the ratemaking process gives no recognition to the current cost of replacing utility plant, based on past practices, the Company believes it will be allowed to earn on the increased cost of its net investment when replacement of facilities actually occurs.

To properly reflect the economics of rate regulation in the Statement of Income from Continuing Operations, the increase (reduction) of net utilityplant to net recoverable cost should be adjusted by the gain from the decline in purchasing power of net amounts owed on borrowed funds. During a period of infla-tion, holders of monetary assets suffer a loss of general pur-chasing power while holders of monetary liabilities experience a gain. The gain from the decline in purchasing power of net amounts owed is primarily attributable to the substantial amount of debt which has been used to finance utility plant.

Since the depreciation on this plant is limited to the recovery of historical costs, the Company does not have the opportunity to realize a holding gain on debt and is limited to recovery only of the embedded cost of debt capital.

Five year comparison of selected supplementary financial data adjusted for effects of changing prices.

Operating revenues ln thousands ol average 1984 dollars For the year ended December 31

~

1984 1983 1982 1981 1980

$2,785,546

$2,745,241

$2,576,655

$2,456,980

$2,240,764 21,867 (38,937)

(.22)

(1.07)

S (39,770)

(56,866)

S (38,378) 146,312 252,742

$2,377,392

$2,239,978

$2,012,126

$1,843,850

$1,820,307 Current cost information:

Income (loss) from continuing operations (excluding adjustment to net recoverable cost)

S 92,573 83,219 83,746 Income (loss) per common share (after dividend requirements on preferred stock and excluding adjustment to net recoverable cost)..

S

.38

.40

.50 Excess (deficiency) of Increase in general price level over increase in specific prices after adjustment to net recoverable cost..........

Net assets at year end at net recoverable cost General Information:

Gain from decline in purchasing power of net amounts owed..

Cash dividends declared per common share Market price per common share at year end Average consumer price index S

109,763 S

92,310 S

86,707 197,371 264,217 S

1.98 1.97 S

1.89 1.84 S

1.89 17.38 16.43 S

16.82 14.14 14.03 311.2 298.4 289.1 272.4 246.8 38

SELECTED FINANCIALDATA 1984 1983 1982 1981 1980 Operations: (000's)

Operating revenues Net income

$2,785,546

$2,632,315

$2,393,771

$2,150,718

$1,777,115 359,734 312,409 268,534 220,643 162,639 Common stock data:

Book value per share at year end Market price at year end.

Ratio of market price to book value at year end Dividend yield at year end Earnings per average common share..

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

Dividend payout ratio

$18.89 17%

92.0o/o 11.5o/o S 2.84 14.P/o S 1.98 69.T/o

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

$ 2.77 15.P/o S 1.89 68.2o/o

$17.91 15%

87.2o/o 11.5o/o

$ 2.64 14.7o/o

$ 1.76 66.T/o

$17.36 12%

71.P/o 13.3o/o S 2.35 13 5o/o

$ 1.61 68.5%

$17.25 11'/8 64 5%

13.T/o

$ 1.87 10.P/o S 1.50 80.PYo Capitalization: (000's)

Common equity Non-redeemable preferred stock Redeemable preferred stock Long-term debt

$2,207,117

$1,929,073

$1,680,650

$1,457,934

$1,298,001 210,000 210,000 210,000 210,000 210,000 397,900 368,474 262,792 254,748 205,924 2,395,471 2,048,548 1,881,441 1,663,671 1,484,535 Total First mortgage bonds maturing within one year 5,210,488 4,556,095 4,034,883 47,450

25,000 65,000 3,586,353 3,198,460 140,000 Total

$5,257,938

$4,581,095

$4,099,883

$3,586,353

$3,338,460 Capitalization ratios: (including first mortgage bonds maturing within one year):

Common stock equity.

Preferred stock Long-term debt 42.P/o 11.5 46.5 42.1%

12.6 45.3 41.tP/o 11.5 47.5 40.T/o 38.P/o 12.9 12.5 46.4 48.6 Financial ratios:

Ratio of earnings to fixed charges.

Ratio of earnings to fixed charges without AFC...

Ratio of AFC to balance available for common stock Ratio of earnings to fixed charges and preferred stock dividends Other ratios-% of operating revenues:

Fuel, purchased power and purchased gas Maintenance and depreciation Total taxes Operating income Balance available for common stock..........

3.11 2.43 52.4%

2.39 46.P/o 10.1 15.0 14.1 11.1 2.98 2.40 43.6o/o 2.35 50.(P/o 10.0 13.0 13.5 10.3 2.95 2.63 2.43 2.42 2.16 1.99 41.(P/o 2.32 38.6o/o 2.10 44.2Yo 1.93 49.8o/o 52.T/o 51.P/o 10.5 10.3 10.8 13.2 11.2 11.9 13.2 12.6 11.9 9.6 8.7

7.5 Miscellaneous

(000's)

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

769,846 691,464 594,469 457,415 378,503 6,903,184 6,165,711 5,516,532 4,985,315 4,563,309 1,501,282 1,486,196 1,389,112 1,304,436 1,191,747 6,233,401 5,357,572 4,781,767 4,220,234 3,849,747 39

ELECTRIC AND GAS STATISTICS ELECTRIC CAPABILITY Thousands olkilowatts AtJanuary I, 1985

'/o 1984 1983 ELECTRIC STATISTICS 1984 1983 1982 Thermal:

Coal fuel Huntley, Niagara River..

Dunkirk, Lake Erie.....

Total coal luei...

Residual oiifuei Albany, Hudson River*'

Oswego, Lake Ontario..

Roseton; Hudson River.

Middle distillate oilfuel 20 Combustion turbine and diesel units........

Total oiffuel Nuclear fuel Nine Mile Point, Lake Ontario....

Purchased-firmcontract Power Authority FitzPatrick, Lake Ontario......

Total nuciear fuel..

Total thermal sources..

Hydro:

Owned and leased hydro stations (83).

Purchased-firm contracts Power Authority-Niagara River....

Power Authority-St. Lawrence River..............

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

Other Total hydro sources...

Other purchases...

Total capability'15 9

715 705 555 7

550 540 1,270 16 1,265 1,245 400 5

400 400 1,736 23 1,736 1,723 300 4

300 300 310 4

310 310 2,746 36 2,746 2,733 610 8

610 610 138 2

139 118 748 10 749 728 4,764 62 4,760 4,706 695 9

695 685 1,118 15 1,118 1,122 115 1

115 115 550 7

550 550 63 1

63 64 2,541 33 ',541 2,536 400 5

400 400 7,705 100 7,701 7,642 Electric sales (Miiiionsofkw-hrs.)

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

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

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

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

Other electric systems......

8>944 9,739 11,194 245 6,964 37,086 Electric customers (Average)

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

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

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

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

Residential (Average)

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

Cost to customer per kw-hr..

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

1,259,077 133>234 2,522 3,279 1,398,112 7,104 6.794

$482.52 GAS STATISTICS Electric revenues (Thousands ofdollars)

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

607,527 Commercial...............

674,929 Industrial..................

438,920 Municipal service..........

37,846 Other electric systems......

303,968 Miscellaneous.............

71,280

$2,134,470 8,578 9,387 10,860 251 5,656 34,732 583,645 658,960 441,219 36,466 235,257 68,181

$2,023,728 1,245,590 131,803 2,594 3,257 1,383,244 6,887 6.80II

$468.57 8,475 9,330 10,366 257 4,212 32,640 539,317 628,601 425,331 34,907 171,597 60,896

$1,860,649 1,232,164 130,872 2,686 3,260 1,368,982 6,878 6.36 II

$437.70.

Electric peak load during year 1984 5,526 1983 1982 5,625 5,512

• Available capability can be increased during heavy load periods by purchases from neighboring interconnected systems.

Hydro station capability is based on average December stream-flow conditions.

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

1982 1983 1984 51,019 28,672 26,026 3,976 46,865 26,921 25,736 3,631 114,960 103,153 109,693 Gas sales(Thousands ofdekatherms)

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

49,519 Commercial...............

27,892 Industrial..................

32,755 Other gas systems..........

4,794 Thermal:

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

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

Nuclear..........

Natural gas.......

Purchased-Nuclear from Power Authority...

7,863 20 7,873 21 7,897 22 3,754 9

4,313 11 4,892 14 3,635 9

2,802 7

1,135 3

2,103 5

1,839 5

1,999 6

878 2'90 2

768 2

ELECTRICITYGENERATED ANDPURCHASED Millionsofkw-hrs.

1 984

/o 1 983

/o 1 982

/o Gas customers (Average)

Residential.;.............

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

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

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

400>878 32,106 502 2

433,488 Gas revenues(Thousands ofdollars)

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

$313,536 Commercial...............

157,469 Industrial..................

156,307 Other gas systems..........

19,708 Miscellaneous.............

4,056

$651,076

$304,157 155,858 129,056 15,783 3.733

$608,587 398,597 31,697 524 2

430,820

$264,747 137,105 112,582 15,418 3,270

$533,122 396,729 31,188 534 2

428,453 Total thermal Hydro:

Generated..........

Purchased from Power Authority...

18,233 45 17,617 46 16,691 47 3,803 9

3,527 9

3,575 10 8,312 21 7,587 20 8,000 22 Totaihydro.........

12,115 30 11,114 29 11,575 32 Other purchased power various sources......

10,240 25 9,621 25 7,621 21 Total generated and purchased.......

40,588 100 38,352 100 35,887 100 Residential (Average)

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

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

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

Maximum day gas send out (dekaiherms)..

123.5 117.6 128.6

$6.33

$6.49

$5.19

$782.12

$763.07

$667.32 772,604 754,061 832,307 40

OFFICERS John G. Haehl, Jr.

Chairman of the Board and Chief Executive Officer WilliamJ. Donlon President Richard C. Clancy Senior Vice President (Retired January 31, 1985)

John M. Endries Senior Vice President John M. Haynes Senior Vice President John P. Hennessey Senior Vice President James J. Miller Senior Vice President Gerald K. Rhode Senior Vice President (Retired August 31, 1984)

John H. Terry Senior Vice President General Counsel and Secretary Richard F. Torrey Senior Vice President James F. Aldrich Vice President-Power Control Anthony J. Baratta, Jr.

Vice President-Controller Robert M. Cleary Vice President-Regional Operations Gerald J. Currier Vice President-Consumer Services Donald P. Disc Vice President-Quality Assurance (Retired September 30, 1984)

WilliamC. Franklin Vice President-Purchasing (Retired June 30, 1984)

'ermit E. Hill Vice President Public Affairs and Corporate Communications Edward F. Hoffman Vice President Management Systems and Services Raymond Kolarz Vice President-Regional Operations Thomas E. Lempges Vice President-Nuclear Operations Donald L. MacVlttie Vice President-Fossil Generation Charles V. Mangan Vice President-Nuclear Engineering and Licensing Samuel F. Manno Vice President-Purchasing and Materials Management Eugene J. Morel Vice President Risk Management James F. Morrell Vice President Corporate Planning John W. Powers Vice President-Treasurer Michael P. Ranalll Vice President-Engineering (Non nuclear)

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

Vice President-Employee Relations Edward P. Gueth, Jr.

Assistant General Counsel (Resigned June 30, 1984)

Herman B. Noll Assistant General Counsel Nicholas L. Prlolettl, Jr.

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

Assistant Controller Harold J. Bogan Assistant Secretary Joseph F. Cleary Assistant Secretary Frederick C. McCall, Jr.

Assistant Secretary Richard N. Wescott Assistant Treasurer DIRECTORS James Bartlett Formerly Executive Vice President, Syracuse Edmund M. Davis (A,B,E)

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

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

Chairman of the Board and Chief Executive Officer, Syracuse Edwin F. Jaeckte (A, B,)

Senior Partner, Jaeckle, Fleischmann & Mugel ~

attorneys-at-law, Buffalo Lauman Martin Consultant (formerly Senior Vice President and General Counsel), Syracuse Baldwin, Maull (A, B)

Corporate Director, New York Martha Hancock Northrup (D)

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

President Emeritus, St. Lawrence University, Canton Donald B. Rlefler(E)

Chairman, Sources and Uses of Funds Committee, Morgan Guaranty Trust Company of New York, New York Lewis A. Swyer (B, c, D)

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

Partner, Falk &Siemer, attorneys-at-law, Buffalo A. Member of the Executive Committee B. Member of the Compensation Committee C. Member of the Audit Committee D. Member of the Committee on Corporate Public Policy E. Member of the Finance Committee CORPORATE INFORMATION Dividend Reinvestment Plan Stockholders participating in our Dividend Reinvestment and Stock Purchase Plan enjoy its tax-deferral and convenience features, while new capital is generated forthe Company. See page 16 for details.

Telephone Inquiries We maintain a toll-free telephone inquiry service forstock-holders. Callers from outside New YorkState may dial 1 + 800 + 448-5450. The number for New York residents is 1 + 800+ 962-3236.

Annual Meeting The annual meeting of stockholders willbe held May 7, 1985 at the Company's main office in Syracuse. Anotice of meeting, proxy statement and form of proxy willbe sent to holders of common stock in early April.

Disbursing Agent Preferred, Preference and Common Stocks:

Niagara Mohawk Power Corporation 300 Erie Boulevard West, Syracuse, N.Y. 13202 Transfer Agents Preferred Stock and Preference Stock:

Marine Midland Bank, N.A.

140 Broadway, New York, N.Y.10015 Common Stock:

Morgan Guaranty Trust Company of New York 30 W. Broadway, New York, N.Y. 10015 StockExchanges Common and Certain Preferred Series:

Listed on New YorkStock Exchange Common Stock: Also traded on Boston, Cincinnati, Midwest, Pacific and Philadelphia stock exchanges.

Bonds: Traded on New Yorkand Luxembourg stock exchanges.

Ticker symbol: NMK Form 10-K Report Acopy of the Company's Form 10-K report filed annually with the Securities and Exchange Commission is available after March 31, 1985 by writingJohn W. Powers, Vice President-Treasurer, at 300 Erie Boulevard West, Syracuse, N.Y. 13202.

The tntormation in this report is not given in connection with the saic of, or otter to buy, any security.

printed inusA.

41

300 Erie Boulevard West Syracuse, New York 13202 Sagamore Hotel, Adirondack landmark, is undergoing expansion into modern resort and conference center on Lake George. New electric requirements willamount to equivalent of community of 6,000.

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