ML18038A391

Niagara Mohawk Power Corp Annual Rept 1987

ML18038A391
Person / Time
Site:	Nine Mile Point
Issue date:	12/31/1987
From:	Donlon W, Haehl J, Perkins T NIAGARA MOHAWK POWER CORP.
To:	NRC OFFICE OF ADMINISTRATION & RESOURCES MANAGEMENT (ARM), Office of Nuclear Reactor Regulation
References
NMP32235, NUDOCS 8804200253
Download: ML18038A391 (43)

Text

REGS TORY INFORMATION DISTRIBU N SYSTEM (RIDS)

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ACCESSION NBR: 8804200253 DOC. DATE: 87/12/31 NOTARIZED:

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REC IP. NAME RECIPIENT AFFILIATION

SUBJECT:

"Niagara Mohawk Poeer Corp Annual Rept 1987. " W/880406 lt DISTRIBUTION CODE:

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TITLE:

50. 71 (b ) Annual Financ ial Report NOTES:

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~ g QQH4WK NMP32235 NIAGARAMOHAWKPOWER CORPORATION/301 PLAINFIELDROAD, SYRACUSE, N.Y. 13212/TELEPHONE (315) 474-1511 April 6, 1988 Director Office of Nuclear Reactor Regulations c/o Distribution Services

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

Dear Sir:

As require in i

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T'tie 10 Chapter I Code of Federal Regulations, Section e ten 10 50.71(b),

and compiled in Regulatory Guide 10.1, enclosed are ten

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copies of Niagara Mohawk Power Corporation's 1987 Annual Report.

Sincerely, T.

. Perkins Vice President Nuclear Generation TJP/1n 0892N Enclosures

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Serving upstate New York Niagara Mohawk Power Corp., an investor owned utility,provides energy to the largest customer service area in New York. Our electric system extends from Lake Erie to New England's borders, from Canada to Pennsylvania, and meets the needs ofmore than 1.4 millionresiden-tial, commercial and industrial customers. Power is supplied by hydro-electric, coal, oil, natural gas-fired and nuclear generating units as well as from purchase contracts. Itis transmitted through an integrated operating network that is interconnected with other systems in the Northeast for economic interchange and mutual reliability.

Our natural gas system serves 450,000 residential and business cus-tomers with access to our 6,495-mile system ofpipelines and mains in central, eastern and northern New York. In addition to the purchase, sale and distribution of gas to retail customers, a growing part of our business includes the transportation ofnatural gas.

We also operate subsidiary companies in the United States and Canada. Opinac Investments Ltd. operates an inve'stment company, an energy company and a utilityin Canada. Hydra-Co builds and operates power production facilities. NITECH markets advanced instrumenta-tion systems to the utilityindustry.

Our Corporate Mission Niagara Mohawk willbe an innovative and responsive energy company, satisfying its customers'nergy needs with a diversified line ofquality and price-competitive products and services.

Electricityand gas products and services willcon.

tinue to be the core of the company's business. Niag-ara Mohawk's driving force willbe to make its elec-tricityand gas products the preferred source for the largest possible number of energy users and uses. Dur-ing the next three years, the company willtake action to:

~ Aggressively defend its market share in key markets and applications.

~ Expand business opportunities with existing customers.

~ Develop new markets for existing products and services.

In addition, Niagara Mohawk willexplore and de-velop attractive opportunities in advanced energy-related equipment and in value-added services.

In support of this business focus, the company wilh

~ Maintain a high level ofexpertise in its core business;

~ Selectively utilize resources to ensure high quality, price competitive products; and

~ Substantially increase its capability to under-stand and respond to the customers'pecific needs.

Service Area Ogdensburg eMato e Potsdam Baranac Lake Niagara Falls (

BIrrj o eBat&a es Du klr Qtea O

~

IVa erlown Ro syra P

Cortland~er NEW YORK STATE Oten) tl ol r+vt o~

Mudso Q Electric Service Area

~ Natural Gas Service Area This report was designed, written and produced by Niagara Mohawk people.

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Highlights of 1987 Total operating revenues Income available for(loss to) common stockholders....

Earnings(loss) per common share Earnings per common share (excluding Nine Mile Two write.off)..........

Dividends per common share.......

Common shares outstanding (auerage)

Utilityplant(gross)..

Construction work in progress..

Gross additions to utilityplant Kilowatt-hoursales.............

Electric customers at end ofyear...

Electric peak load(kilowatts)

Natural gas sales(dekaiherms)

Natural gas transported (dekatherms)

Gas customers at end ofyear......

1987 1986 Change

$ 2,623,430,000

$ 2,660,319,000 (1.4)

$1.76

$2.71 (35.1)

$1.64

$2.08 (21.2) 127,435,000 127,076,000

.3

$ 7,691,069,000

$ 8,445,993,000 (8.9)

$ 1,789,562,000

$ 2,820,044,000 (36.5) 44?,230,000 774,062,000 (42.2) 35,684,000,000 34,347,000,000 3.9 1,459,000 1,443,000 1.1 5,780,000 5,724,000 1.0 81,320,000 95,947,000 (15.2) 21,862,000 4,868,000 349.1 450,000 445,000 1.1 (609,231,000) 344,048,000 (277.1)

$(4.78)

$2.71 (276.4)

Contents 2 To our shareholders 4

Adiverseenergybase 7 Adding value through'ncreased efficiency 8 Gettingclosertoour customers 10 Diversification through complementary businesses ll Communicating with investors 12 Management's discussion and analysis of financial condition 17 Consolidated financial statements 21 Notes to consolidated financial statements 32 Report of independent accountants 32 Reportofmanagement 33 Marketpriceofcommon stock 34 Statistics 36 Directors, officers, corporate information Maximum day gas sendout (detatherms) 758,914 786,165 (3.5) 1987 REVENUE DDLLAR Residential customers 39ft Commercial customers 34tf Industrial customers taft Allothers 98 ANDWHERE IT WENT'uel for the production of electricity 25ff and electricity purchased Interest and other costs-net" Iatf Income and other taxes 1

7'ages, salaries. employee benefits 13tf Gas purchased f0'ividends to stockholders 10tf Depreciation 8tf Retained In business Ifr

'exctsnslne the etfecl ot toe wnteon ot Oisesowed Ness tete unit sso. 2 costs.

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES To our shareholders:

Although 1987 was a disappointing year in many respects, our basic strengths remain the same. Niagara Mohawk is a low-cost producer of an indispensable product: energy for homes and businesses. The people, infrastructure and technology we bring to bear in energy delivery are among the most productive in our industry.

What's more, we have always taken a forward-looking approach to managing our business, investing today in tomor-row's needs for the continuing benefit of our customers and shareholders, Niagara Mohawk people and the communities we serve. We are convinced that our long-term strategy is on target, and that our basic strengths willgrow in value despite the setbacks of 1987.

Financial results in 1987 include an $833 millionafter-tax write.offrelated to our Nine MileTwo nuclear unit. The write.offfollows the New YorkPublic Service Commission's decision as to the regulatory treatment of Nine MileTwo con-struction costs that cannot be recovered through the rate.

setting process.

As a consequence ofthe write-offand the resulting reduction in future earnings capability, our board of directors made the difficultdecision to approve a 42 percent reduction in the company's quarterly dividend on common stock to 30 cents per share. The new dividend rate is one that management and the board believes is sustainable and consistent with maintaining adequate financial safeguards.

Earnings declined again in 1987 despite a 3.9 percent in-crease in electric sales. Excluding the impact of the Nine Mile Two write-off, 1987 earnings per share were $1.76 in 1987 compared with $2.71 in 1986, and $2.88 in 1985, our peak earnings year. With the write-off, Niagara Mohawk had a loss per share of $4.78 in 1987. Declining earnings reflect the rate recognition of the Nine MileTwo disallowances and continu-ing reductions in authorized return on equity by the New York Public Service Commission.

Steps to reverse decline We want you to know that we are taking steps to reverse our decline ofrecent years. In 1987, we implemented further cost reduction programs aimed at lowering costs by $100 millionin 1988.

Elements ofthe new effort include the elimination of ap-proximately 600 jobs through early retirement or attrition and a cutback in department budgets to postpone projects deemed desirable but not essential to daily operations. This is in addi-tion to officer salary reductions and the sacrifices made by all our employees.

But cost reduction is only part of our strategy. In 1987, we reorganized our corporate structure along more functional lines and created a new senior management team, fillingposts vacated by retirements of several key executives with individu-als who combine years of experience in our company with a fresh approach to our business.

This team's first initiative has been to re-examine all facets of Niagara Mohawk's business focusing on our strengths to capitalize on and expand the products and services we deliver to the marketplace. Our new mission statement, on the open-ing page of this report, provides a platform for our continuing work in this area.

We are increasing our economic development efforts, recog-nizing that our abilityto grow depends on the vitalityof the i1i 4

'qh WilliamJ. Donlon John G. Haehl, Jr.

Nine MileTwoAcontinued priority Our Nine MileTwo nuclear facility's commercial operation in 1988 willimprove the quality ofour earnings and allow us to devote greater resources to other areas of our business. As this report goes to press, Nine MileTwo is in the final phase of its testing program, producing power at 100 percent of its rated capacity. Our testing program assumes commercial operation this Spring.

Moreover, our continuing program to assess the long-range capabilities ofour generating plant indicates that no major construction projects are necessary through the remainder of this century. This willgive us the freedom to concentrate on what we do best deliver reliable, low-cost electric and gas service to our customers.

We enter 1988 with a high degree of confidence that the plans we have undertaken willmake a positive difference in our business. In January, we brought new expertise to our board with the elections of four new outside directors.

An expanded board Joining our board are WilliamF. Allyn,president and chief executive of Welch Allyn,Inc., a manufacturer of medical and business community we serve. Anew, centralized marketing department in Syracuse willteam up with members ofour research and economic development departments to seek out and work closely with industrial firms injointventures aimed at building capacity through more productive use of electricity and gas. These efforts are described in greater detail in the operating review section ofour annual report.

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES optical instruments; Henry A. Panasci, Jr., chairman and chief executive officerof Fay's Drug Co., a major retailer, Dr. Patti McGillPeterson, president ofSt. Lawrence Univer-sity; and Dr. Steven Browning Sample, president ofSUNY-Buffalo.

We are encouraged by the increases in demand we are seeing in our electric and gas business. On January 14 ofthis year, we experienced record peak demands of 6,167 megawatts of elec-tricityand 847,951 dekatherms of gas a considerable in-crease over prior winter record peaks of 5,862 megawatts of electricity in 1985 and 832,307 dekatherms in 1982. Our 1987 summer peak of 5,691 megawatts on August 17, also set a summer seasonal record.

While these new records are weather related, they also re.

fleet the growth we are experiencing in our base of residential and commercial customers. This signifies the increasing vital-ityof businesses in our service territory.

We also are exceptionally proud ofour people, who have had to work harder than ever before in these recent, lean years. In October, when our Albany region experienced the most devas-tating snowstorm in our company's history our people, with the assistance ofother utilitycrews, businesses and community groups in Albany, worked night and day to restore service, accomplishing the equivalent of a fullyear's maintenance and reconstruction in littlemore than one week.

lohn C. tfaehh Jr.

Chairman ofthe Board and ChiefErcecuttoe Ofttcer FebtUary 26, 1988 Harn J. Bonton Prestdent tChalnnan oftheBoard and ChiefErrecuttoe Ofttoer Btfeettoe June t. 1888)

Our people speak for themselves To characterize our people as merely "dedicated" falls short, so we have asked them to speak for themselves in the pages of this annual report. Their enthusiasm and concern forour business provides a continuing source of inspiration.

Niagara Mohawk derives its strength from the dedication of its people, the loyalty of its customers and shareholders, the vitalityofthe upstate New York business community and the wealth ofoptions itcan deploy in its day.to-day business the provision of electric and gas service. When we reflect on this, we are excited about what we can accomplish in the future.

00 r

o Managing forthe futureIn February 1988, John G. Haehl, Jr. announced his intention to retire, effective June 1, 1988, after 27 years ofservice with Niagara Mohawk, including 15 years as chief executive officer. Our board of directors elected Niagara Mohawk President WilliamJ. Donlon as his successor and Executive Vice President John M. Endries as president of the company, effective June l.

These elections complete a plan endorsed by our board in 1987, to prepare forthe transition and create a more functional, streamlined organizational structure that fillsour top posts withpeople who bring experience, dedication and new ideas to the forefront of our business.

Mr. Haehl (seated center) appears here with the new management team. They are Charles V. Mangan (seated left), senior vice president, Nuclear Division; John M. Endries (seated right), president elect; (standing from left) Anthony J. Baratta, Jr., senior vice president, Corporate Services; John P. Hennessey, senior vice president, Regional Operations; WilliamJ. Donlon, chairman and chief executive officer elect; John W. Powers, senior vice president and treasurer, Michael P. Ranalli, senior vice president, Technical Services.

The realignment extends throughout the company and covers the retirements of a number ofofficers during the year, including John M. Haynes, senior vice president; John H. Terry, senior vice president, general counsel and secretary; Richard F. Torrey, senior vice president; Gerald J. Currier, vice president-Regional Operations; Eugene J. Morel, vice president-Risk Management; James F. Morrell, vice president-Corporate Planning; Kenneth A. Tramutola, vice president-Gas; and Herman B. Noll,assistant general counsel.

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Adiverse energy base Focusing on our strengths "This company has a

'Can Do'pirit.During my 20 years with Niagara Mohawk any problem a customer had was solved through the great techni-cal and financial re-sources of this corpora-tion. Ihave seen small and large customers get the same, good results. Re-cently a neighboring util-ityasked for help with one of its ski resort custom-

,ers. We solved the prob-lem in no time." Edward A. Horgan, Supervisor, Transmission R Distribu-tion, Giens Falls.

"Niagara Mohawk communicates openly and quickly. In good times and in bad times, we believe our employees, customers and shareholders have a right to know." WilliamJ.

Romano, News Director, Syracuse.

"I'mproud of the workI do at Niagara Mohawk as a meter reader. I'm proud to wear the company uni-form and be out among customers. I feel that if customers learn to like me they willalso like Niagara Mohawk. So Itry to be as courteous and helpful as possible on my routes. I feel I am the beginning of the future forNiagara Mohawk." Daniel E.

Wright, Meter Reader, Albany In an increasingly competitive environment forutilities, reliability,price and innovation are the keystone components of Niagara Mohawk's approach to the future. Our serv-ice reliabilitydraws high marks in customer surveys. Our electric rates, which are the lowest in the state, and our gas rates, which are competitive with other regional suppliers, enable us to provide low-cost energy to more than 1.4 millionresidential and business customers in our service terri-tory. The challenge, then, is to build on these strengths by taking the lead in developing flexible and innovative delivery systems to expand our business while protecting the financial strength of our company.

Hydroelectric power: a low cost resource Niagara Mohawk's diverse mix ofpower gen-eration capabilities is a significant factor in our consistent abilityto maintain low elec-tric rates. Hydroelectric power, which is our most economical source of energy, usually accounts for about one-third of our total power mix. This is high by comparison with most other utilitiesa reflection ofour long history ofpioneering, developing, operating and maintaining a productive infrastructure of hydroelectric facilities to harness the abundant natural water resources in our territory.

Niagara Mohawk generates about 29 per-cent of the hydroelectric power we use. We purchase another 62 percent ofour hydro.

electric demand under long.standing con-tracts with the New York Power Authority.

These contracts recently have been extended through August 31, 2007. In 1987, approxi-mately 9 percent ofour hydroelectric use came from small power producers under terms of the Public UtilityRegulatory Policies Actof 1978. (See page 35 for statis-tics relating to electric generating capacity.)

Federal licenses come due on nearly half ofour 77 hydro stations withinthe next five years. Our continuing efforts to relicense these economical generating sources are being challenged by small power producers, who are not subject to economic regulation.

Ifsuccessful in their takeover attempts, these small producers could acquire our property and require us to buy their power at costs that greatly exceed our own, raising the cost of electric service to our customers.

Our plans forsignificant long-term rede-velopment depend on the success ofour competitive relicensing effort and the con-tinued cost-effectiveness ofhydroelectric power. Over the short-term, we can rely on the very economical hydroelectric generating resources at hand.

Fossil-fueled stations The backbone of our system The peaks and valleys of day-to-day energy demand require a generating flexibility primarilysupplied by plants fired with coal, oil and natural gas. Niagara Mohawk typi-cally generates about one-third of its annual production at fossil-fuel generating stations situated in Buffalo, Dunkirk, Albany, Oswego and Newburgh.

These plants serve as a backbone to our power system to ensure reliable energy serv.

ice to our customers under various demand requirements. They provide the flexibilityto increase fossil-fueled plant production to meet additional demand created by seasonal, daily, hourly and minute.to-minute variations in load, or by outages at other generating stations. Similarly, when demand drops off, or more economical generation is available from less expensive hydroelectric, nuclear power or power purchased from other utilities, our fossil units can respond to reduce production.

Our strategy on fossil generation is to optimize the economies of our existing facilities. Four factors contribute signifi-cantly to this strategy:

~ Ahighly trained, involved workforce-Each year we meet with our people to re-emphasize our mission and agree upon near. term goals. This teamwork approach has resulted in measurable savings on sev-eral large maintenance projects in the past year and a great sense ofcompany pride among our people.

~ Performance monitoring and improve-ments Atthe beginning of each year, the department sets availability and efficiency targets for each unit. Subsequently, through continuous monitoring, routine testing and data analysis, actual unit per-

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES formance is compared to targets to iden-tifyareas for improvement. Cost effective action is then taken to maintain and, where possible, improve unit performance.

Careful attention to maintenance and preservation As part ofour continuing life-extension program, we are discovering that cost effective investments willextend the service lives of our plants to delay costly construction of new units while we monitor the latest developments in prom.

ising new technologies such as coal gasification.

o Low costs for fossil fuelThrough com-plex purchasing decisions that balance the benefits of long-term assured supply against the economies of the spot market, we pay the lowest price per BTU for coal of any utilityin the state and have lowered our oil costs by approximately 35 percent since 1981.

Nuclear generation for long-term self-reliance When Nine MilePoint Nuclear UnitTwo goes into commercial operation in 1988, it willmark the culmination of a long effort and substantial investment aimed at assuring that our customers willnever be entirely re-liant on any single source of fuel, whether it is hydro, coal, oil, nuclear or natural gas.

Niagara Mohawk's involvement in nuclear power dates to the 1950s when, withthe en-couragement of the federal government, we joined the Atomic Power Development Associates and assigned staff engineers to the Enrico Fermi atomic power project in Michigan. Our commitment increased in the 1960s when our own engineers planned, de-signed and builtNine MileOne, one ofthe most productive facilities of its kind ever constructed.

Nuclear power is relatively inexpensive to produce. But the changing circumstances and turbulent times surrounding nuclear power generation have made new construc-tion virtuallycost-prohibitive. Nine Mile Two is licensed and capable ofgenerating enough power over its 40-year foreseeable lifetime to replace an estimated 414 million barrels of oil. Because nuclear generation is a more price-predictable source ofpower than oil.firedgeneration, we view Nine MileTwo as an important component in our long-term plan to maintain our position as a low-cost power producer.

In 1987, nuclear power accounted for 14 percent ofour power mix. This includes about 4.8 billionkilowatt hours ofpower generated by Nine MileUnits One and Two and about 700 millionkilowatt hours pur-chased from the New YorkPower Authori-ty's Fitzpatrick facilityin Oswego. When Nine MileTwo goes into commercial opera-tion, our nuclear generation capability will increase by approximately 66 percent.

Nine MileOne sets U.S. record During the year, Nine MileOne set a new U.S. record for continuous operation by a boiling water reactor 415 days non-stop, which was just 42 hours4.861111e-4 days <br />0.0117 hours <br />6.944444e-5 weeks <br />1.5981e-5 months <br /> short of the world record. The plant's average capacity factor (ratio of actual production to maximum capacity forproduction) for the year was 86 percent, compared with an industry average ofapproximately 60 percent. In the 18 years, Nine MileOne has been in operation, ithas generated more than 60 billionkilowatt hours of electricity, which is equal to the output ofapproximately 102 millionbarrels of oil.

Nine MileTwo licensed forfullpower In July 1987, the Nuclear Regulatory Com-mission voted unanimously to approve a full-power license authorizing Nine Mile Two to proceed toward full-service opera-tion. The 1,084 megawatt plant, which is jointlyowned by Niagara Mohawk (41 per-cent), Long Island Lighting Co. (18 percent),

New YorkState Electric and Gas Corp. (18 percent), Rochester Gas and Electric Corp.

(14 percent), and Central Hudson Gas and Electric Corp. (9 percent), immediately ac-celerated its power ascension testing pro-gram. Atits height, Nine MileTwo produced power at 67 percent of its licensed thermal capacity in 1987, supplying more than 335 millionkilowatt-hours ofpower to the New Yorkpower grid throughout the 1987 testing period.

The ascension testing program is an op-portunity to fine.tune the plant's systems in various stages ofpower. The plant willgo into commercial operation when ithas suc-cessfully completed testing and is judged by our operators as available for safe, reliable operation.

"Excellence in our generating stations is a strength at Niagara Mohawk. The progress that our generating per-sonnel have made day-in and day-out shows in our abilityto maintain the economies ofour existing structures. For example, at our 70.year-old Huntley station, we have equipment in service that dates back to 1929. But through our lifeextension maintenance program,'I expect Huntley to be operating productively and economically into the 21st Century." D. Samuel Loquasto, Superinten-dent, Electric Mainte-nance, Huntley Station, Buffalo.

"AtNiagara Mohawk I have a unique opportunity to help preserve the clean environment that makes New Yorksuch a great state in which to live. We workwithcommunity leaders to develop hydro-electric and transmission facilities that provide maximum environmental benefits to their cities, towns and villages. We play a key role withstate and federal regulatory agencies to guide and shape the future environ-mental policies ofour state." Raymond W.

Cummings, Jr, Associate Senior Environmental Analyst, Syracuse.

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES "For years now, a big part of Niagara MohawVs Energy Conservation Service has been helping senior citizens procure grant money forconserva-tion improvements. We help through our 'Care 6 Share'rogram and through the Energy Con-servation Bank. When we can reduce a senior's energy consumption, it means that person can use the money forlife's basics such as food, transporta-tion or even a Christmas giftthat he or she might otherwise not be able to afford." Peter K. Gean-dreau, Energy Conserva-tion Representative, Con-sumer Relations, Batavia.

"Last year, itwas my privilege to work with more than 100 Niagara Mohawk volunteers for the New YorkState Spe-cial Olympics. Itpointed out a significant strength ofour employees is a willingness to help those less fortunate and very often in need ofour assis-tance." David R. Fuller, Service Supervisor, Amsterdam.

"I'mproud to be part of an organization that works to improve upstate New York's economy. Our innovative rate programs have helped to create and retain hUndreds ofjobs."

Timothy E. Spellman, Economic Development Specialist, Buffalo.

Small producers: Anew resource We view small hydroelectric and co-generation power producers as an attractive, alternative-energy resource, so long as they can provide a reliable, cost-effective and necessary source of power. In recent years, we have co-ventured on two successful hy-droelectric generation projects with small producers in New York: a large, new 32,000-kilowatt hydro facilityon the Black River at Glen Park and a smaller, 2,600.kilowatt plant on the Saranac River at Union Falls.

Under these agreements, Niagara Mohawk retains ownership of its federally licensed sites, which were leased to small producers who firstdemonstrated that they would be able to develop these hydroelectric stations more economically than Tve can. We buy the generation from these facilities at a pre-determined price, thereby preserving low-cost hydroelectric power forour customers.

But the interplay of federal and state regu-lation surrounding generation by small pro-ducers threatens to upset the economies of povver generation as they exist today. Current federal and New Yorkstate laws require that we purchase power generation by small producers whether we have a stake in the facilityor not. New Yorkstate law also re-quires at present that we pay the producer a heavy premium over what itwould cost us for alternative sources of power.

These concurrent laws have resulted in a proliferation ofproposals by small unregu-lated producers for construction of new hy-droelectric and co.generation plants in our service area. Moreover, we are receiving pro.

posals from contractors in bordering states to sell us out.of-state generation at the higher New Yorkprice.

Through December 1987, there were 136 small hydroelectric and co-generation pro-ducers on.line in Niagara Mohawk's territory, representing 382 megavvatts ofadditional capacity. Moreover, there are presently 135 ELECTRICITYGENERATEO ANOPURCHASEO YTYPE OF FUEI1987 arious sources 23.0%

Coal 18.0%

Natural gas 4.0Y Oil 11.0%

Nuclsaf 14.0%

proposals by small producers for the con-struction of new hydroelectric and co-generation stations in our territory represent-ing an additional 3,523 megawatts of capacity equal to approximately half ofour total electric capability at the beginning of 1988.

While small power producers provide the benefit ofdeferring future construction of costly central stations, itwillbe important to manage the dynamics of this capacity on a timely basis so that its impact is favorable for all ofour customers.

New opportunities in gas service Natural gas service, a low.cost heating and energy source, accounted for approximately 17 percent ofour total corporate revenue in 1987. The sale and transportation ofnatural gas enables us to meet the energy needs of 450,000 residential and business consumers in communities with access to our 6,495-mile system ofpipelines and mains that stretch from Watertown on Lake Ontario, to Syracuse in the Mohawk Valley, to Albany on the Hudson River.

In recent years, a nationwide surplus of natural gas and changes in federal regulation of gas transmission have provided new op-portunities for Niagara Mohawk. The price of gas has trended downward for more than five years, raising its attractiveness as an energy source for households as well as businesses.

Atthe same time, changes in federal law have opened the nation's gas transmission system to all users, increasing consumer access to sources of gas supply.

Niagara Mohawk is well-positioned to make the best of both of these opportunities.

Since 1986, we have been buying gas on the spot market, purchasing up to 25 percent of our needs competitively from a broad spec-trum ofproducers, thereby assuring a better price forall of our customers. Atthe same time, we have been transporting natural gas for certain customers who have elected to buy low-cost gas, sometimes as a substitute for higher. priced oil.

Expanding gas service Encouraged by the long.term forecast for gas availability, we are mounting a more aggres-sive marketing program aimed at expanding our franchise territory and increasing service penetration in existing franchises. In 1987, we filed with the Public Service Commission

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES to serve fivenew franchise areas. Three of these franchises are in the vicinityof Water-town, where the U.S. Army's expansion of Ft.

Drum is expected to nearly double the area's population to approximately 60,000 by 1990.

Meeting the growing energy needs as-sociated with Ft. Drum willconstitute our largest gas expansion effort in 25 years.

We are also re.evaluating areas withinour service territory where we believe we can add more customers. In 1988, we willintroduce a direct marketing campaign in several areas withinour system where we believe we can expand gas service.

The Gas Energy Management System (GMS), scheduled for implementation in 1989, willuse automated modeling and arti-ficial intelligence techniques to provide rapid and accurate information on optimum sources of gas supply. AGas Energy Man-agement Control Center, located in Syracuse, willserve as a central information point for monitoring the capacity of the company's ex-tensive network ofpipeline and gas regulator stations, The system willemploy the techni-cal resources necessary to provide customers with reliable gas supply, at the lowest avail-able cost under any demand scenario.

Adding value through increased efficiency Power generation is only a part of Niagara Mohawk's business. Efficientdelivery of the requisite power at the best possible price is an equally complex activity. Given the range of supply options available to Niagara Mohawk, operators withinits power control centers combine years ofexperience, long-term planning and the best technology around to take decisive day-to-day action.

Complementing these activities, Niagara Mohawk's research department investigates new ways to produce and deliver power more efficiently.

Transmission capability: Asignificant strength The companies that came together to form Niagara Mohawk brought a sound foundation of electric transmission capability. Through their foresight and our investments to ex-pand and enhance this network, we have the strongest power distribution capability in New Yorkand one ofthe best in the country.

Niagara Mohawk's extensive network of transformer substations, lines and cables provides a direct connection with other util-itysystems in New York, Massachusetts, Vermont, Pennsylvania and the Canadian provinces of Ontario and Quebec. This com-plex interconnected system offers benefits that would be extremely costly to duplicate today.

The strength ofour transmission system allows us to buy power from other utilities to reduce the overall price of our power mix, or sell to utilities where the need exists and our supply is cost-competitive. We generated

$57 millionin transmission revenues during the year, wheeling power among the New Yorkstate utilities and to utilities in adja-cent states. Revenues from sales to other utilities rose 23 percent in 1987.

Optimal productivity through Power Control Niagara Mohawk's Power Control operation, which makes the day.to-day decisions regard-ing the transmission and generation of energy, works much like a commodities ex-change. Future contracts foradditional sup-ply are weighed against the price ofavailable power from internal generation or other sources all in the context offoreseeable demand. The outcome ofthese decisions in.

fluences the price of our product and the productivity of our system.

Niagara Mohawk has made a substantial investment in a computerized Energy Man-agement System (EMS). Information gener-ated through our EMS helps us better utilize our existing transmission system, thereby de-ferring as long as possible the need to con-struct new facilities.

The system was installed at our Power Control Center in 1985 to monitor system-wide transmission and generation facilities.

The firstregional EMS installation, at our Western Regional Power Control Center in Buffalo, was completed in 1986. In 1987, we inaugurated EMS in our Central Region at Syracuse and in our Northern Region at Wa-tertown. Plans call for EMS implementation in Albany in 1989, with all system substa.

tions on line by 1995.

Two areas stand out. The firstis the quality and competence ofour people.

Throughout the ranks their light shines. Next is the quiet confidence of our customers. They have an unspoken good feeling about being served by Niagara Mohawk," John T. Fitzgerald, Line Supervisor, Rome.

"Inthis day and age of ris-ing costs, I am proud to be participating in an effort to save consumers money.

We help low-and middle-income people find the money to weatherize their homes. In the two years I'e been doing this job, it's kept me busy. Let' hope 1988 is even better."

Kathryn M. Sutkowski, Energy Conservation Representative, Buffalo.

"I'mproud to say that we are presently working with 19 people from shel-tered workshops. These men and women are de-veloping skills from how to use public transporta-tion to safe use ofhand tools. They have been an excellent resource in our wire separation program, our paper recycling pro-gram, our hardware rec-

, lamation efforts and in other areas where they can apply a special atten-tion to detail." Terry A.

McHugh, Investment Recovery Director, Syracuse.

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES "Time and time again our customers comment on how lucky they have been not to be without power during bad storms. Those that suffer power outages say it wasn't long before Niagara Mohawk had power back on or was working to restore it promptly. Dependability of service has long been a hallmark ofNiagara Mohawk." Leon Bronson, Customer Representative, Oneida.

"Inthe fieldof Cus-tomer Service, we quickly recognize that our job functions are multi-faceted, running the gamut from financial ad-visor, social worker, fam-ilycounselor and arbi-trator to that of an em-pathetic friend. We rec-ognize that each person' lifetouches so many lives.

And we are continually reminded that a fine line separates their lives from ours." MaryAun Brigan-di, Chief Clerk, Collec-tions Section, Syracuse.

"Mypresent work is to in-vestigate, integrate and transfer new technology for use in the corporation to improve productivity. I know this work is putting Niagara Mohawk,Power Corporation at the lead-iug edge oftechnology application." Sidney K.

Lipton, Corporate Per-formance Services Plan-ner, Syracuse.

Research for practical application Exploring practical application for new and existing technology in the energy business is the essential thrust ofNiagara Mohawk's re-search department. In its 15.year existence, the department has fostered a host of technological innovations resulting in new products and new techniques to improve the production, delivery and end-use ofelectric-ityand natural gas. Arecent independent as-sessment of the department's efforts through 1986, set savings to customers as a direct result of research activities at $490 millionin avoided costs or three times Niagara Mohawk's total investment in the program.

The department continued to devote sub-stantial resources to supporting the com-pany's economic development efforts in 1987, with the conclusion of a major indus-trial technology assessment program.

Through inquiries and visits with more than 100 manufacturing companies in NM's serv-ice territory, we currently are working with several businesses to implement new energy. saving methods and technology.

Based on these and other similar activities conducted over the years, we believe we have ample resources to help companies in our service territory improve their competitive edge through greater productivity.

Bringing new products to market is an-other research objective. In 1987, three prod-ucts resulting from Niagara Mohawk re-search projects were introduced into the marketplace through agreements with inde-pendent manufacturers. These include an in-novative steam turbine packing ring for use by utilities, an efficient new process for eliminating PCB's (polychlorinated biphenyls) from contaminated transformer oil and a mechanical gas tee, that provides a quicker, less costly way to connect homes and businesses to gas mains. Royalties from these products willaccrue to customers and shareholders.

Key to Niagara Mohawk's efforts to use its resources more effectively, its research de-partment has led the utilityindustry in the management of information by satellite. In 1988, the department willcomplete installa-tion on a pilotprogram aimed at forecasting energy demand through the generation of more exact weather information. The Niag-ara Mohawk weather system, which enhances the available capabilities ofthe National Weather Service, willenable the company to better prepare for snow and electrical storms, cold fronts and heat patterns that govern supply requirements in its service territory.

Getting closer to our customers In today's market-oriented business envi-ronment, success requires more than merely reacting to current demand for electricity and natural gas. Anticipating customer de-mand and solving customers'roblems are major strategic thrusts of Economic Development, Consumer Services, and Employee Training activities at Niagara Mohawk. Favorable customer re-sponse encourages us to believe we are grow-ing increasingly sensitive and helpful to their needs through these criticallyimportant ef-forts.

Buildingdemand through Economic Development Niagara Mohawk has long recognized that the strength of our business depends on the vitalityof indusby in our service area. Our Economic Development Department works with state and local agencies to revitalize existing business and attract new industry to the territory we serve.

Since 1984, we have offered discounted energy prices to approximately 90 businesses that have expanded or relocated withinour service area. In addition to offering more favorable rates, we also work with these companies to implement technological advances and other cost. saving systems and techniques aimed at more productive use of energy. Itis to our benefit to help them stay competitive in today's global markets.

Through 1987, this program has contribu-ted to the creation or retention of 5,000 jobs and resulted in an estimated $22 millionin-crease in Niagara Mohawk revenues in our service territory. Encouraged by this success, Niagara Mohawk extended these discounts in 1987 to two additional business categories: 1.) businesses planning to expand or relocate in state-approved economic de-velopment zones; and 2.) financially troubled companies with a viable revitalization strategy.

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Agoal for 1988 is to create a greater aw'areness among our people of the role they play in economic development. To this end, we are inaugurating a special economic de-velopment training program for Niagara Mohawk people.

Enhancing experience through training To encourage employee self.development and promote career growth withinthe com-pany, Niagara Mohawk offers extensive train-ing programs in technical, managerial and safety skills. We are required by federal and state law and by our labor agreement to make certain that employees devote a por-tion of their on-the.job time to training.

Moreover, advances in technology and changes in the way we conduct our business require programs to keep our people up.to.date.

In 1987, approximately 60 percent ofour employees participated in one or more train-ing programs. Arecent thrust has been to help our people improve their supervisory and communications skills. We have been successful in securing college level credit recommendations for many ofour technical training programs. Additional courses are being presented for accreditation.

In an effort to recover some of the costs of training, we are looking at ways to package selected courses for sale outside our com-pany. We are currently marketing an interac-tive video program that trains meter readers to use new hand. held meter-reading devices.

Ithas met with encouraging response from other utilities throughout the country.

Anticipating customer needs Niagara Mohawk has been an industry leader in consumer services, introducing a broad spectrum ofprograms to make power service more accessible to our customers. Asignifi-cant strength has been our willingness to be in the forefront on energy pricing.

We have developed and implemented in-novative rates to meet competition from other energy sources and to be more respon-sive to the specific requirements of indi-vidual user groups. This niche-market ap-proach to energy rate. making is based on ex-tensive research and evaluation of customer needs. Recent developments in time-of-use rates provide an example..

Classic utilitytime.of.use pricing allows the user to take advantage of the lower cost of energy generated during nights, weekends, holidays and other so called "off-peak" periods when our systemwide energy demand is typically low. For years, our largest indus-trial and commercial customers have realized cost savings by scheduling major energy usage during periods of off.peak demand.

In 1988, we willextend this program to a test group of residential users. We are also expanding our industrial program to provide hour-by-hour pricing information on 24-hour notice to a pilot group of 21 industrial firms who have indicated their interest in adapting to this service. The data derived from these test programs willallow us to adapt time-differentiated pricing technique to a broader group of users.

Consumer advocacy While customers appreciate our abilityto provide reliable, cost-effective gas and elec-tricity,they also expect us to show concern for them and for their energy. related needs.

Over the years, we have put our concern to work through a variety ofconsumer-interest programs and services.

Energy conservation activities, health and safety programs and our efforts to improve the readability and information content of our bills work to the benefit ofall consumers.

But increasingly, we are focusing our efforts on specific groups such as the elderly, the disabled and the working poor.

Since its introduction in 1984, our Care &

Share Energy Fund has generated more than

$ 1 millionin donations from customers, shareholders and employees. These funds, which are administered by the American Red Cross, help elderly, disabled or chronically ill consumers cover their energy-related emergencies.

Our new Consumer Advocate Program puts customers in touch withthe appropriate Niagara Mohawk service or with programs and services provided by a variety ofcivilor religious human services agencies, health and safety departments and businesses throughout our service territory. Staffed by Niagara Mohawk people with backgrounds in human services, our Consumer Advocate program serves as an outreach arm for the company and as another means of extending valuable energy. related information and services to the community.

"I'mproud because line mechanic is an honorable profession and one that not everyone is able to do.

Mywork brings me in di-rect contact with the pub-licevery day, allowing me to meet people and help them in a variety of ways.

I'e pulled cars out of snow banks, provided di-rections to lost travelers and advised people on the proper procedures forget-ting an energy audit or other help from the company.

I like my co-workers and enjoy knowing that besides being excellent line mechanics, many ofthem are involved in politics, scouting, labor, charita-ble agencies and many other causes that enrich our lives." Dennis Jones, Hot Stick Line Mechanic, Utica.

"I'mproud of the work I do because we care about the people we serve.

't shows in the many help-ful and often heroic deeds what Niagara Mohawk people have done to help people in their com-munities, Itshows in our annual participation in the United Way and other charitable organizations.

IYsone thing to know yourself that you'e done a good job, but it's even better to know that the customer is pleased with the effort."WilliamP.

Conley, Jr., Gas Mechanic, Troy.

10 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES "Niagara Mohawk's materials engineers are specialists in their fields.

They are ready to do whatever it takes to insure a quality product, or solve a problem. This often in-volves long hours and out-of-town travel. But they are believers in the old adage 'ifyou want your job to take care of you, you have to take care ofyourjob.'iagara Mohawk people are in-terested in their work.

That's a strength." Robert O. Norrix, Supervisor, Quality Materials En-gineering, Syracuse.

"In22 years with Niag-ara Mohawk, I have traveled around our sys-tem from Port Henry to Stow to every crew loca-tion, service center and generating plant and found one common characteristic: our people believe in their com-pany... Tobeabieto maintain that attitude is a great strength." David L.

Shapiro, Assistant Super-visor, Materials Manage-ment, Glens Falls.

NI sincerely believe that I am no prouder of myjob than each and every employee should be. Just stop and think ofit.

Without Niagara Mohawk, the people in our territory would have no electricity, no gas.

These are life's neces-sities." Joan L. Savage, Fuel Clerk, Syracuse.

Diversification through complementary businesses Niagara Mohawk's diversification approach has been to build a portfolioof energy-related businesses. Through a Canadian sub-sidiary, Opinac Investments Ltd., we operate an investment company, an energy company, and a utilityin Canada. A New York sub-sidiary, Hydra.Co., builds and operates power production facilities. NITECH, which is 50 percent-owned by Niagara Mohawk, was de-veloped to market to the utilityindustry ad.

vanced instrumentation systems resulting from our Research and Development program.

Allof Niagara Mohawk's subsidiaries are fullyindependent and not subsidized by cus-tomers of the parent corporation. Our focus in each of these ventures is primarilyon long-range returns. In 1987, net earnings from subsidiary operations were approxi-mately $22 million.

Opinac's energy expansion In 1987, Opinac Investments sold St. Law-rence Power Co.one of two utilities in its operating portfolioto a municipally-owned power company in Ontario for $12.5 million (Canadian) and acquired ANRProduction Co., a Canadian oil and gas developer for $25 million(Canadian). The acquisition extends Opinac's involvement in oil and gas explora-tion and represents a continuation of our pol-icy to invest Opinac's earnings in Canada.

In Niagara Mohawk's four years of experi-ence in oil and gas exploration, Opinac Energy has registered a 65 percent success rate, participating in more than 280 explora-tion and development wells with a wide vari-ety of partners. During this time, Opinac has realized $7.3 million(Canadian) from the production of crude oil and natural gas.

Atyear.end 1987, Opinac had discovered and developed or acquired more than 138 billioncubic feet ofnatural gas and 1.4 mil-lion barrels ofcrude-oil proven reserves with a combined value of$76 million(Canadian).

This compares with 50 billioncubic feet of natural gas and 1.2 millionbarrels of crude-oilproven reserves in 1986 with a combined value of$29 million(Canadian). The ANR acquisition added 57 billioncubic feet of natural gas and 117,000 barrels of crude-oil reserves in 1987.

Opinac Investments Ltd. also operates Canadian Niagara Power Co. Ltd., which generates electricity at Niagara Falls, Ont.

for customers in the Niagara peninsula.

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NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Hydra-Co: Apresence in co-generation Hydra-Co Enterprises, Inc., was formed in 1981 to apply Niagara Mohawk's extensive experience to the development, ownership and operation ofco-generation, alternate-energy and small power-production installa-tions. Hydra.Co's costs are competitive with other independent power producers and like other independent producers itderives earn-ings primarilyfrom power generation and thermal sales.

Through 1987, Hydra.Co was responsible forbringing more than 130,000 kilowatts of small power and co.generation projects on line: In 1987 alone, 34,500 kilowatts were brought on line: a 30,000 kilowattwood.fired plant at Fort Fairfield, Me. and a 4,500 kilowatthydroelectric plant in Benton, Me.

Asecond wood.fired plant with a capacity of 40,000 kilowatts is under construction in Stratton, Me.

Hydra-Co gives Niagara Mohawk flexibil-ityto operate in a changing environment for energy production. Plans call forredevelop-ment ofthe AlliedChemical Co. power generating plant in Solvay, near Syracuse.

When completed, this coal-fired facilitywill have a capacity of 80,000 kilowatts. Other projects, totalling more than 100,000 kilowatts of energy, are under development in Massachusetts, Connecticut, California and Vermont. Niagara Mohawk is looking at opportunities to expand Hydra-Co's charter and increase its capabilities.

NITECHAmarketing company NITECHwas established in 1986 as a 50-50 jointventure between Niagara Mohawk and a product development services firmto pro-duce and market the Power-Donut (tm) Sen-sor Line Monitoring System, originally a Niagara Mohawk research project. Developed for the utilityindustry, the Power-Donut (tm)

System can be installed on power lines, without service interruption, to measure vital conditions affecting load carrying capability.

The information delivered by NITECH's system is crucial to both short-term opera-tional and long-range decisions governing the utilization, maintenance or replacement ofcostly transmission systems. Itis being marketed as a versatile, practical tool to help utilities span the estimated 15 to 25 year gap betiwen existing transmission technology and future superc'onductivity based systems.

In 1987, NITECH increased its marketing and administrative staff to 10 professonals and commissioned a nationwide sales net-work of 28 manufacturing representatives with 36 regional offices. To date, the com-pany has made presentations to 250 utilities and generated an encouraging response.

NITECH is Niagara Mohawk's firsteffort to market a product developed through its research department. Accelerated sales will generate royalties to our customers. Our growing marketing experience can be applied to other Niagara Mohawk ventures.

Communicating with investors Niagara Mohawk maintains an active pro-gram ofregular communication with its shareholders. In addition to annual and quar-terly reports, we send the "InThe Know,"

quarterly newsletter to shareholders who have requested additional information on the company. We meet regularly with security analysts and portfolio managers, who are in contact with a broad range ofretail and in-stitutional clients. Atyear.end 1987, institu-tional holdings accounted for approximately 23 percent ofour common shares outstand-ing.

. In 1987, our Investor Relations and Shareholder Services Departments re-sponded to an estimated 100 telephone in-quiries per day from security analysts and shareholders. To handle the growing volume of calls, the department expanded its tele-phone capabilities in 1987 (numbers on in-side back cover).

Dividend Reinvestment Plan Atyear-end 1987, some 64,900 dividend reinvestment plan participants held approx-imately 19 millionshares ofthe company's stock, representing about 15 percent of the company's outstanding common shares. This participation resulted in the reinvestment ofmore than $30 millionin dividends in Niagara Mohawk stock during the year.

Aprospectus describing the plan and an authorization form to join may be obtained by writingto Niagara Mohawk's Dividend Reinvestment Plan, P.O. Box 7058,.

Syracuse, New York 13261.

After40 years in De-sign Engineering, my most memorable task was as an original piping de-signer forNine MileUnit One. That unit's recent record run proves what people outside the com-pany have said for years-Nine MileOne is one of the best-designed, best-built nuclear facilities in the country."

Norman Keilerman, Senior Project Designer (retired), Syracuse "Our power dispatch-ers, system operators and shift supervisors in Power Operations are among our greatest strengths. These people work around the clock, every day ofthe year to provide service."

Joseph S. Wieczorek, Associate Senior Engineer-Power Con-trol (retired), Syracuse.

"We'e always believed in maintaining a diverse mix ofgenerating sources and we have seen the benefits time and time again. I admire our com-mitment to this strategy and our determination to add nuclear as a hedge against forces beyond our control. Coal, oil, gas, hydroelectric and nuclear generation have helped steady the cost ofour product and willcontmue to do so." Douglas W.

Peckham, Display Specialist, Syracuse.

12 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Management's Discussion and Analysis of Financial Condition and Results of Operations.

EARNED RATE OF RETURN ON COMMON EQUITY 15.17/o 14.P/o 15AP%%d 13.P/o RESULTS OF OPERATIONS During 1987, the Company adopted Statement of Financial Accounting Standards No. 90, "Regulated Enter-prises-Accounting for Abandonments and Disallowances ofPlant Costs" (SFAS No. 90) as it relates to disallowed costs of construction of Nine Mile Point Nuc-lear Station Unit No. 2 (Unit) which re-sulted in the recognition of a loss in the amount of $833 million, net of Federal income taxes. $615 million of this loss represents the cumulative effect through December 31, 1986 of adopting SFAS No. 90 and the remaining $218 million represents the 1987 impact. See Note 10 of Notes to Consolidated Fi-nancial Statements.

Annual earnings per share, excluding the impact of the loss of $833 million

($6.54 per share),

decreased 35% to

$1.76 compared to $2.71 for 1986. The sharp decrease in the Company's earn-ings per share for 1987 results primarily from the reduction in the Company's earnings base as a result of the above described write-off coupled with a further decrease in the Company's au-thorized return on common equity.

Excluding the impact of the write-off, the Company achieved a 12.7% rate of return on equity in 1987 as compared with 13.6% in 1986 and 15.0% in 1985.

The PSC-approved rate of return on equity, which is currently 13.0% as compared to 13.5% authorized at De-cember 31, 1986 and 15.5% at De-cember 31, 1985, averaged 13.1% for 1987, 14.0% for 1986 and 15.6% for 1985. The 1987 earnings excluding the write-off represent decreases of 39%

and 38% from 1985 and 1984 earnings per share, respectively.

The average number of shares outstanding has in-creased approximately 17% over the three-year period.

The followingdiscussion and analysis highlights items having a significant ef-fect on operations during the three-year period ended December 31, 1987. It may not be indicative of future operations or earnings. It should be read in conjunc-tion with the Notes to Consolidated Fi-nancial Statements and other financial and statistical information appearing elsewhere in this report.

Electric revenues Increase in base rates Fuel and purchased power cost revenues Sales to ultimate consumers.............

Sales to other electric systems...........

Miscellaneous operating revenues.......

1987 1986 1985 Total

$ 49.7

$ 52.3

$ 61.1

$163.1 (53.8) 12.6 (4.5)

(45.7) 43.4 61.5 16.7 121.6 22.2 (100.3)

(107.9)

(186.0)

(23.1) 9.3 (3.5)

(17.3)

$ 38.4

$ 35.4

$(38.1)

$ 35.7 Electric revenues increased $35.7 millionor 1.7% over the three-year period. The increase is attributabie to increased base rates and increased sales to ultimate consumers, offset by decreased sales to other electric systems, decreased rev-enues attributabie to fuel and purchased power cost recoveries and the decrease in miscellaneous operating revenues as indicated in the table below:

Increase (decrease) from prior year, In millions of dollars 1983 1984 1985 1986 12.7/o 1987 Changes in fuel and purchase power cost revenues are generally margin-neutral while sales to other utilities generally produce a low margin. Thus, fluctuations in these revenue components do not have a significant impact on net operating income.

Electric kilowatt-hour sales were 35.7 billion in 1987, an increase of 3.9% from 1986 and 1.1% from 1985. The 1987 increase reflects increased sales in all customer classifications, particularly in sales to other electric systems (see Electric and Gas Statistics Electric Sales appearing on page 35).

Details of the changes in electric revenues and kilowatt-hour sales by customer group are highlighted in the table below:

1987

%Increase (decrease) from prior year

%of Electric 1987 1986 1985 Class of service Revenues Revenues Sales Revenues Sales Revenues Sales 34,732 37.086 35,296 35,684 ELECTRIC SALES Millionsof Kwhr@.

ReSidential...........

34.Plo 5.2/o 3.2/o 8.5o/o 4.3o/o 6.6o/o 0.4%

Commercial..........

36.1 2.1 3.3 8.2 4.7 5.0 1.7 Industrial.............

20.1 (3.0) 1.1 2.6 (0.8)

(0.4)

(2.8)

Municipal service.....

1.9 (1.0) 0.4 4.6 (2.9) 3.7 (1.6)

Total to ultimate consumers.........

92.1 2.0 2.5 6.9 2.5 4.2 (0.4)

Other electric systems 5.4 23.2 16.1 (51.1)

(32.3)

(35.5)

(24.1)

Miscellaneous........

2.5 (30.0)

13.7

(5.0)

Total..

.. 100.0o/o 1.8/o 3.9/o 1.7/o (2.7)%

(1.8)%

(4.8)%

1983 1984 1985 1986 1987 On March 12, 1986, the PSC approved a 2.1% electric rate increase to provide the Company additional annual revenues of $39,974,000, based on (i) forecast sales for the twelve months ended March 31,1987, (ii) a13.5% return on common equity and (iii)the inclusion of $680 million of Construction Work in Progress (CWIP) in elec-tric rate base. The new rates were put into effect on March 17, 1986. On August 23, 1986, in connection with a second-stage filinginvolving this rate decision, the PSC approved additional annual electric revenues of $7,475,000 for items which were not considered in the March 1986 decision.

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 13 On March 13, 1987, the PSC approved a 4.0% electric. rate increase to provide the Company additional annual revenues of $74,898,000 based on (i) forecast sales for the twelve months ended March 31, 1988, (ii) a 13.0o/o return on equity, and (lii)the inclusion of $1.625 billion of CWIP in electric rate base ($1.5 billion relating to the Unit). The new rates, put into effect on March 16,1987, reflect tax law changes of the Tax Reform Act of 1986 and a reduction to 13.0% from the 14.0/o return on equity requested by the Company. No adjustment to gas rates was requested by the Company in connection with either of these rate decisions.

Rate action, initiated in August 1987 and adjusted in November 1987, presently seeks $119.5 million (5.8%) additional electric revenues based upon forecast oper-ations for the rate year ending June 30, 1989 and a 14.25% return on equity. The Company has agreed to an extension of up to 75 days of the eleven-month rate proceeding while proposals to settle the rate request are being considered by interested parties. Initial proposals have established the allowed return on equity and sales forecasts as the major settlement differences. The, Company is unable to predict what rate relief will ultimately be granted and over what period such rate relief will be granted.

Gas revenues decreased

$197.8 million or 30% over the three-year period. As shown by the table below, this decrease is attributable to lower costs for purchased gas coupled with certain large commercial and industrial customers now purchas-ing gas directly from producers and only having the Company transport the gas to them, offset partly by higher base rates. Rates for transported gas generally yield margins similar to margins on gas sold directly by the Company. As a result, sub-stantial decreases in gas revenues caused by the migration of customers to the transported gas classification are not expected to have a significant impact on earnings from gas operations.

GAS SALES 103.2 115.0 1983 1984 108.4 1985 100.8 103.2 81.3 1S86 1987 Mdlions of de kath arms Gas revenues Increase (decrease) from prior year, In millions of dollars 1987 1986 1985 Total Increase in base rates.............

Purchased gas adjustment clause revenues Increase (decrease) in residential sales................

Increase (decrease) in commercial and industrial sales.............

Transportation of customer-owned gas.

Miscellaneous operating revenues

$ 3.0

$ 8.2

$ 11.2 (12.0)

(20.0)

(21.6)

(53.6)

(8.8) 13.2 (13.5)

(9.1)

(61.9)

(68.6)

(25.2)

(155.7) 9.3 2.2

11.5 (1.8) 0.2 (0.5)

(2.1)

$ (75.2)

$ (70.0)

=-

$ (52.6)

$ (197.8) 52,695 52.786 52.660 S2,623 TOTALELECTRIC ANDGAS OPERATING REVENUES Millionaof dollars 1987

% Increase (decrease) from prior year

'/e of Gas 1987 1986 1985 Class of service Revenues Revenues Sales Revenues Sales Revenues Sales Residential..

Commercial..

Industrial....

Total to ultimate consumers.......

Other gas systems..

Transportation of customer-owned gas..............

Miscellaneous.....

61.8o/o (5.6)%

(2.8)%

0.6o/o 4.4%

(5.9)%

(4.4)%

26.7 (15.2)

(13.6)

(3.3) 0.8 (6.2)

(3.2) 6.6 (56.6)

(53.5)

(48.7)

(46.7)

(14.6)

(10.8) 95.1 (15.2)

(14.5)

(11.8)

(10.9)

(8.1)

(6 0) 1.9 (38.4)

(32.8)

(23.5)

(23.6)

(5.2) 1.6 2.6 414.8 349.1

.4 (49.7)

68.6

(11.5)

Total

.. 100.ly/o (14.2)%

2.3/o (11.7)% (1,1.5)%

(8.1)%

(5.7)%

Gas sales, excluding transportation of customer-owned gas, were 81.3 million dekatherms in 1987, a 15.2% decrease from 1986 (see Electric and Gas Statistics Gas Sales appearing on page 35). The decrease for 1987 reflects a 13.6% and 53.5% decrease in sales in the commercial and industrial classes, re-spectively, because of competition from oil and the ability of customers to pur-chase gas directly from producers.

The Company transported 21.9 million dek-atherms for customers purchasing gas directly from producers and expects a con-tinued increase in such transportation activities with corresponding reductions in gas revenues.

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

1S83 1984 1985 1986 1987 In January 1988, the PSC approved a gas rate settlement proposed by the Company and interested parties, which will maintain current gas base rates through June 1990 while refunding over twelve months approximately $5.7 mill-ion to gas customers to reflect changes resulting principally from the Tax Re-form Act of 1986. In accordance with this settlement, the Company willbe al-lowed to retain all earnings up to a 13.0% return on equity and 30o/o of any earnings in excess of 13.0%.

In 1987, electric fuel and purchased power costs decreased slightly to $666 million from $672 million in 1986 and

$759 million in 1985. The decrease in 1987 is the result of a $15.2 million in-crease in fuel and purchased power

14 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES AVERAGECOST OF ATON OF COAL ANDA BARRELOF OILBURNED MAINTENANCEANDOTHER OPERATION EXPENSE Millionsof dollars TOTALTAXESINCLUDING INCOMETAXES Millionsof dolrsrs

$30.67

$50.68

$33.35

$49.16

$31.16

$45.84

$40.60 462.4 326,1 494.6 353.6 508.3 364.0 546.8 397.7 542.8 383.9 342 410 424 482 437

$20.39

$18.00 os CC rrr 138.3 141.0 144.3 1

9.1 1 8.

1985 1986 1987 1983 1984 1985 1986 1987 1983 1984 1985 1986 1987 costs incurred as a result of increased customer demand during the year offset by a $21.7 million net decrease in costs deferred and recovered through the op-eration of the fuel adjustment clause. As the result of an 18% increase in produc-tion, fuel costs incurred at the Com-pany's steam generating stations in 1987 increased

$22.0 million in spite of a shift in the generation mix by source of fuel from oil to coal and natural gas to take advantage of favorable coal and natural gas prices in the spot market.

The cost of purchased power decreased

$6.8 million in 1987 as a result of a 1.0%

decrease in both kilowatt-hour purch-ases and average unit price (see Electric and Gas Statistics-Electricity Gener-ated and Purchased appearing on Page 35).

The total cost of gas purchased de-creased 20.8% in 1987, 17.8% in 1986, and 9.1% in 1985. The decrease for 1987 is the result of a 14.8% decrease in dek-atherms purchased to meet customer

demand, combined with lower rates charged by the Company's principal supplier and favorable spot market purchases.

In 1987, the Company purchased 37% of its gas supply re-quirements on the spot market, the maximum allowable under its contract with its principal supplier. The Com-pany's net cost per dekatherm pur-chased decreased to $3.27 in 1987 from

$3.52 in1986 and $3.68 in 1985.

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's electric fuel adjustment clause provides for partial pass-through of fuel and purchased 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 mill-ion per rate year. In December 1987, the PSC established a proceeding to inves-tigate the fossil fuel procurement prac-tices of the Company and examine the operation of the existing fuel adjust-ment clause.

See Note 11 on Notes to Consolidated Financial Statements.

Other operation and maintenance ex-penses decreased slightly in 1987, after having increased 7.6% in 1986 and 2.8%

in 1985. In late 1986, the Company im-plemented certain cost reduction mea-sures which have reduced other opera-tion expenses but these reductions have been offset somewhat by the rec-ognition in 1987 of early retirement in-centive costs and increases in wages and associated benefits which became effective in June 1986 and 1987 in ac-cordance with a union labor agreement.

Increases in 1985 and 1986 are primarily the result of increases in maintenance costs associated with the Company's electric distribution system and, in 1986, scheduled costs coincident with the refueling of the Nine Mile Point Nu-clear Station Unit No. 1. Nine Mile Unit No. 1 is presently shutdown for a refuel-ing and maintenance outage and Unit No. 2 is scheduled for a mid-cycle maintenance outage in late 1988.

Depreciation and amortization ex-pense for 1987 increased 1.5% over 1986 and 4.6% over 1985, principally from normal plant growth and increases in depreciation rates applied to certain classes of assets.

Net Federal and foreign income taxes for 1987, other than those associated with the write-off of the Unit's disal-lowed costs, increased slightly as a re-sult of an increase in taxable income offset by the decrease in the statutory tax rate. Federal income taxes included in other income decreased as a result of the reduction in the amount of allow-ance for funds used during construc-tion (AFC), net of tax, resulting substan-tially from the inclusion of Unit No. 2 CWIP costs in rate base and the termi-nation of taxable interest income as-sociated with the advances made on behalf of Long Island Lighting Company (LILCO)which were repaid in 1986. The increase in taxes other than income taxes in the three year period is due principally to higher property taxes re-sulting from property additions.

Other income and deductions, excluding Federal income taxes, de-creased

$346 million from 1986. This decrease is primarily the result of the recognition of $218 million of disal-lowed plant costs (net of tax) and a

$101.3 million decrease in AFC. The de-cease in AFC is attributable to lower AFC rates, lower interest bearing plant balances as a result of the write-off of disallowed plant costs, increased CWIP in rate base and the completion and sale in 1986 of the Volney -Marcy trans-mission line. Other items (net) de-creased

$26.6 million, primarily the re-sult of the $13.0 million write-off of a portion of the Company's investment in NM Uranium, Inc. (see Note 3 of Notes to Consolidated Financial Statements),

the termination in 1986 of interest earned on advances made for LILCO and the operating practices refund, par-tially offset by income of $15.8 million realized during 1987 by Opinac Invest-ments Ltd. primarily from the sale of the St. Lawrence Power Company and cer-tain other investments.

Net interest charges increased

$23.6 million in 1987, primarily the result of a

$33.5 million decrease in the credit for the borrowed funds component of AFC.

Dividends on preferred stock decreased

$1.8 million in 1987 as a result of net reductions in amounts outstanding. The weighted average long-term debt in-terest rate and preferred dividend rate paid decreased from 9.82% and 8.20%,

respectively, in 1986, to 8.99% and 7.93%, respectively, in 1987, as a result of the Company's refinancing effort.

Effects of Changing Prices. The rate of inflation continued to be moderate in

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 15 1987. The Company is especially sensi-tive to inflation because of the 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.

The Company's consolidated finan-cial statements are based on historical events and transactions when the pur-chasing power of the dollar was sub-stantially different from the present. The effects of inflation on most utilities, in-cluding the Company, are most sig-nificant in the areas of depreciation and utilityplant. The Company could not re-place its utilityplant and equipment for the historical cost value at which they are recorded on the books. In addition, the Company would probably not re-place these assets with identical ones due to technological advances and reg-ulatory changes which have occurred.

In light of these considerations, the de-preciation charges in operating ex-penses do not reflect the current cost of providing service. The Company, how-ever, will seek additional revenue to cover the costs of maintaining service as assets are replaced.

During a period of inflation, holders of monetary assets suffer a loss of gen-eral purchasing 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 utilityplant is limited to the recovery of historical costs, the Company does not have the opportunity to realize a hold-ing gain on debt and is limited to recov-ery only of the embedded cost of debt capital. The above right table presents selected financial data restated for the effects of changing prices in average 1987 dollars.

FINANCIALPOSITION, LIQUIDITY AND CAPITALRESOURCES Financial Position. During recent years internal funds from operations have been insufficient to meet the Com-pany's capital requirements and, there-fore, large amounts of new capital from external sources have been necessary.

This trend began reversing in 1987 as the Unit approached completion, and with cutbacks in budgeted construction expenditures and operating expenses.

During 1988, it is expected that most of the Company's construction needs will be funded with internally generated funds. This improved cash flowis due to the anticipated completion of the Unit and the associated increase in cash flow resulting from the inclusion of the Unit in rate base which is improving the Company's quality of earnings, decreas-Operating Revenues

($000's)....

Gain from decline in purchasing power on net amounts owed ($000's).......

Per Common Share:

Cash dividends declared......

Marketpriceatyearend......

Average Consumer Price Index..

ing the non-cash portion of earnings to a relatively small percentage.

The Company's overall requirements consist of amounts for the Company's construction program, working capital

needs, maturing debt issues and sink-ing fund provisions on outstanding debt and preferred stock and are affected by the Company's efforts to lower capital costs through refinancings. Sources of funds to meet these requirements dur-ing the past three years are reported in the Consolidated Statement of Changes in Financial Position on page 20.

The Company's capital structure has been weakened by the write-off of the Unit's disallowed costs.

Capital struc-ture at December 31, 1987 was 54.9%

long-term debt, 12.0% preferred stock and 33.1% common equity as compared to 47.0%,

10.5% and 42.5%, respec-tively, at December 31, 1986. Book value of the common stock decreased to

$13.82 per share at December 31, 1987 from $20.23 at December 31, 1986. The ratio of earnings to fixed charges, excluding the cumulative effect of the adoption of SFAS No. 90, fell to 1.65 from 2.98 at December 31, 1986. How-ever, the ratio of earnings to fixed

charges, excluding the current year' impact of the write-off of disallowed Unit costs ($218 million), was 2.59. De-spite the Company's cost reduction program, the Company's earnings were impaired by the negative impact of the lowering of the Company's authorized return on common equity by the PSC, the write-off of disallowed Unit costs and the PSC's adoption of their Staff's position on various Settlement im-plementation issues for rate-setting

purposes, thus necessitating a reduc-tion in the dividend rate. Attheir July 23, 1987 meeting, the Board of Directors approved a third quarter 1987 common stock dividend of $.30 per share or an indicated annual level of $ 1.20 per share. This was a reduction of $.22 per share (42%) from the previous quarterly dividend level. The Company intends to gradually increase its common equity base through the retention of earnings and the issuance of new common stock under the Dividend Reinvestment and Employee Stock Plans. This approach 1987 1986 1985

$2)623,430

$2,757,529

$2,847,168 147,426 37,749 112,763 1.64 2.16 2.18 12.00 17.36 21.66 340.4 328.4 322.2 5.3'6.50 45 IP 47' 54.9%

E I

Qm AO 12.6'/o 11.5%

11.5%

10.5%

12 rplo 33.1%

Og OO 1983 1984 1985 1986 1987 to building equity provides steady, con-trolled growth in common equity with the added benefit of averaging the is-suance price throughout the year, thereby avoiding the market price risk associated with public sales on a single day.

The impact of the write-off of disal-lowed Unit costs will, for a period ex-pected to extend throughout most of 1988, prevent issuance by the Company of Preferred Stock under its charter (other than in connection with refund-ings) and may restrict the Company's issuance of First Mortgage Bonds under its indenture on the basis of additional property. Notwithstanding these possi-ble limitations on the Company's financ-ing capability and flexibility, the Com-pany believes that available sources of financing will be sufficient to satisfy the Company's external financing needs during this period, especially when considering the substantial reduction in construction-related capital needs an-ticipated in the years 1988 and beyond.

As discussed below, the financing needs of the Company over the next several years are greatly reduced from those requirements of the recent past when the Unit was under construction.

As of January 1, 1988, the available sources of financing include $835 mill-ion aggregate principal amount of First Mortgage Bonds issuabie on the basis of retired bonds (to the extent not re-quired for certain agreements, in the aggregate principal amount of approx-CAPITALIZATIONRATIOS

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES imately $346 million,as of December 31, 1987, which contain representations and covenants that, if not met or re-negotiated, require the Company to provide security in the form of First Mortgage Bonds), certain revolving credit and long-term loan agreements totaling $382 million, which were re-negotiated to include liberalizing amendments effective June 1987, and

$100 million aggregate par value of Preference Stock.

On April 1, 1987, Moody's Investors Service, Inc. lowered its ratings on the Company's secured debt, unsecured debt and preferred stock to Baa2, Baa3, and baa3, respectively, in response to the increase in March 1987 in the cost estimate of the Unit and the decision of the PSC in the Company's rate proceed-ing decided in March 1987. Any further reductions of the credit ratings on the Company's First Mortgage Bonds, un-secured debt and Preferred Stock, with the possible adverse effect on the in-terest or dividend rates that may be re-quired in future issues of such secu-rities, may also reduce the Company's tinancing flexibilityand adversely affect its capital structure and financial posi-tion. 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 financ-ing. The nature, amount and timing of the Company's future financings will depend, it part, on construction expen-ditures (which are expected,to decrease significantly during 1988 and beyond due to the completion of the Unit), re-tirement of securities, timeliness and adequacy of rate relief, the level of in-ternally generated funds, the availability and cost of capital, and the ability of the Company to meet its interest and pre-ferred stock dividend coverage re-quirements, to satisfy restrictions in governing instruments and to maintain an adequate credit rating.

Construction and Other Capital Re-quirements.

Annual expenditures for the years 1985-1987 for construction and nuclear fuel, including related AFC and overheads capitalized, were $771.1 million, $774.1 million and $447.2 mill-ion, respectively. The principal project included in these expenditures is the Unit. Expenditures for construction of the Unit have averaged approximately 41% of total construction requirements during the period 1985 to 1987. Total capital needs in 1987 decreased as con-struction of the Unit neared completion and as a result of the implementation ot the austerity program which eliminated or delayed certain less essential con-struction projects. Capital needs and the amount of financing would have ANNVALEXTEANAL FINANCINGBYTYPE Millionsofdollars 780.5 700.9

.1 291.8 614.3 374.7 584.1 323.8 I

Cl Cl oo rr.

co 120.0 71.3 50.0 189.6 75.0 185.3 75.0 346.5 297.0 25.0 1983 1984 1985 1986 1987 Liquidity and Resources.

During 1987, the Company raised approximately

$346.5 million through external sources, consisting of $370.1 million of been signiticantly lower if the Company had not made the determination to purchase $45 million of preferred stock and continued a financial restructuring program in which over $200 million of debt was refinanced in 1987 at lower costs.

The 1988 estimate for construction additions and nuclear fuel, including AFC and overheads capitalized, is ap-proximately $393 million. Approxi-mately 7% of this estimate is for the Unit. Mandatory and optional debt and preferred stock retirements, the $ 171 million due under the Cotenant Agree-ment and other requirements are ex-pected to add approximately another

$278 millionto the Company's 1988 cap-ital requirements for a total of $671 mill-ion. Approximately 89% of the 1988 construction requirements are ex-pected to be obtained from internal sources.

Complete estimates of the Company's capital requirements and resources for the years 1988 through 1992 are being reviewed by the Company to take into consideration, among other things, the impact of austerity budget measures and the Tax Reform Act of 1986. The Tax Reform Act of 1986, when consid-

~ered in the rate setting process, gener-ally results in a reduction in internal generation of cash.

However, reduc-tions in the Company's cash generation and coverage ratios were addressed in the Company's March 1987 rate deci-sion. To the extent any such further negative impacts are not adequately considered in rates, a corresponding loss of cash flow, if experienced, could be expected to increase the Company's external financing requirements and possibly lower credit ratings and could further impact the common stock dividend rate.

debt, $25.0 million of preferred stock,

$24.4 millionof common stock from the issuance of 1,812,430 shares, offset by net reductions of $22.8 million under in-termediate term bank revolving credit obligations and $50.2 million in short-term debt. The Company also com-pleted approximately $19.3.million of capital lease financing. In addition to sinking fund and scheduled retire-ments, during 1987 the Company retired prior to maturity $214 million of high-coupon long-term debt and $40 million of preferred stock. These early retire-ments of high coupon securities contributed to a reduction in the year-end average cost of capital. Using the maximum rates payable on variable rate securities the year-end average cost of long-term debt decreased from 9.76% to 9.72% and the preferred dividend rate decreased from 9.43% to 9.26%.

During 1987 funds needed to pay for the Company's overall construction re-quirements amounted to $447.2 million, including AFC, and were provided 60%

from internal sources and 40% from ex-ternal financing.

External financing for 1988 to 1991 is currently estimated to total $508 million, reflecting a reduction in forecast con-struction expenditures coupled with forecast improvement in internal gener-ation of capital. Set forth by year, the external financing amounts are cur-rently estimated to be $321 million,$125 million, $36 million and $26 million, re-spectively.

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

Bank credit arrangements, which total $555 million (including $432 million of revolving credit and'term loan agreements,

$23 million in lines of cred-it and a $100 million Bankers Accept-ance Facility Agreement), are used by the Company to enhance flexibilityas to the type and timing of its permanent security sales.

Certain of these agree-ments, as well as other agreements ot the Company, contain representations and covenants which, if not met or re-negotiated, require the Company to provide security in the form of First Mortgage Bonds or prevent the Com-pany from making new borrowings under such agreements (see Notes 4 and 11 of Notes to Consolidated Finan-cial Statements).

Any security provided in the form of First Mortgage Bonds may diminish the amount of First Mortgage Bonds available for issuance on the basis of retired bonds. The un-secured debt limitation imposed by the Company's Charter is $700 million de-clining to 10% of capitalization plus $50 million after 1988. The Company will be re-evaluating its short-term borrowing agreements later in 1988.

ffI'AG A R A M 0 H A W K P 0 W E R C 0 R P 0 R A T I 0 N AND SUBSIDIARY COMPANIES Consolidated Statement of Income and Retained Earnings Operating revenues:

Electric Gas For the year ended December 31, 1987

$2,170,191 453,239 2,623,430 ln thousands ofdollars 1986

$2,131,833 528,486 2,660,319 1985

$2,096,404 598,536 2,694,940 Operating expenses:

Operation:

Fuel forelectric generation Electricity purchased Gas purchased Other operation expenses Maintenance Depreciation and amortization Federal and foreign income taxes Othertaxes Operating income Other income and deductions:

Allowance forother funds used during construction.....

Federal income taxes Current year effect of adoption of SFAS No. 90(Note 10):

Disallowed plant costs Related income taxes Other items (net)

Income before interest charges Interest charges:

Interest on long-term debt.

Other interest Allowance for borrowed funds used during construction Income before cumulative effect of accounting change Cumulative effect on prior years of adoption of SFAS No.90(Note10)

Net Income (loss)

Dividends on preferred stock Balance available forcommon stock Dividends on common stock Retained earnings at beginning of year..

Retained earnings at end of year Average number of shares of common stock outstanding (in thousands)

Per average share of common stock:

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

Cumulative effect on prior years of adoption of SFAS No. 90 (Note 10)

Balance available for common stock Dividends paid Proforma amounts assuming effects of adoption of SFAS No. 90 applied retroactively:

Balance available forcommon stock..............

Balance available per share of common stock......

() Denotes deduction 339,382 326,152 268,099 383,874 158,939 157,631 195,472 308,483 2,138,032 485,398 20,563 17,622 (268,400) 50,400 10,947 (168,868) 316,530 264,472 4,587 (10,315) 258,744 57,786 (615,000)

(557,214) 52,017 (609,231) 208,881 (818,112) 921,851 103,739 127,435

.05 (4.83)

(4.78) 1.64

$ 5,769

.05 319,834 352,126 338,634 397,714 149,124 155,311 211,237 295,165 2,219,145 441,174 121,932 32,293 37,539 191,764 632,938 264,054 14,880 (43,861) 235,073 397,865 397,865 53,817 344,048 264,312 79,736 842,115 921,851 127,076 2.71 2.71 2.08

$16,048

.13 391,382 367,406 411,801 364,010 144,312 150,627 173,471 280,643 2,283,652 411,288 141,320 26,708 53,110 221,138 632,426 260,271 6,721 (45,996) 220,996 411,430 411,430 59,559 351,871 252,218 99,653 742,462 842,115 122,215 2.88 2.88 2.06

$64,871

.53

18 NIAGARA NOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Consolidated Balance Sheets AtDecember 31, In thousands ofdollars 1S87 1986 ASSETS Utilityplant, at original cost (Note 1):

Electric plant Nuclear fuel (Note 3)

Gas plant Common plant Construction work in progress(Note10)

Total utilityplant Less accumulated depreciation and amortization Net utilityplant Other property and investments Current assets:

Cash, including time deposits of $9,017 and $78,389, respectively.....

Accounts receivable (less allowance fordoubtful accounts of $3,600)..

Materials and supplies, at average cost:

Coal and oilforproduction of electricity Other Prepayments:

Taxes Other Deferred debits:

Unamortized debt expense.

Deferred recoverable energy costs.

Deferred finance charges (Note 1)

Other

$4)777,519 408,427 577,201 138,360 1,789,562 7,691,069 1,913,687 5,777,382 115,076 29,791 305>028 47,863 71,336 30,971 21,624 506,613 125,108 8,436 202,044 59,439 395,027

$6,794,098

$4,559,389 392,662 544,447 129,451 2,820,044 8,445,993 1,763,443 6,682,550 76,504 175,979 289,350 43,504 73,015 7,106 14,003 602,957 118,209 9,935 83,951 37,097 249,192

$7,611,203

$'IAGARA MOHAWK POWER CORPORATION AND SVBSI DIARY COMPANIES C.)

CAPITALIZATIONANDLIABILITIES AtDecember 31, In thousands ofdollars 1987 1986 Capitalization (Note 7):

Common stockholders'quity:

Common stock, issued 128,953,424 and 127,140,994 shares, respectively'apital 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 Redemption and sinking fund requirements on redeemable preferred stock (Note 7)................

Accounts payable Payable on outstanding bank checks Customers'eposits Accrued taxes Accrued interest Accrued vacation pay.

Due to cotenants under Cotenant Agreement (Note 10)..

Other Deferred credits:

Mandated refunds to customers Accumulated deferred Federal income taxes Deferred finance charges(Note 1)

Other Commitments and contingencies (Notes 3, 10 and 11) 128,953 1,548,826 103,739 1,781,518 290,000 355,490 2,903,921 5,330,929 50,005 77,508 14,980 164>350 48,253 9,680 19,761 70,411 29,862 171,100 44,418 700,328 36,167 476,768 202,044 47,862 762,841

$6,794,098 127,141 1,522,499 921,851 2,571,491 290,000 347,470 2,799,605 6,008,566 100,212 93,914 60,380 141,338 59,512 8,645 10,232 68,759 28,234 171,100 28,173 770,499 63,229 648,641 83,951 36,317 832,138

$7,611,203

20 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIEP Consolidated Statement of Changes in Financial Position For the year ended December 31, FINANCIALRESOURCES WERE PROVIDED BY:

Operations:

'et income (loss)

Charges (credits) to income not requiring (not providing) working capital-Cumulative effect on prior years of adoption of SFAS No. 90 Disallowed plant costs Depreciation and amortization.

Allowance for funds used during construction.....

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

Other,. >>.

Outside 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.........

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

Other sources:

Deferred recoverable energy costs.........

Sale of LILCOGeneral and Refunding Bonds Repayment of construction advances........

Sale/leaseback of transmission facility.......

Other investments (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 Amounts accrued under Cotenant Agreement...

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

Reduction of preferred stock Dividends.

Mandated refunds to customers Unamortized debt expense 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 Prepayments Long-term debt due within one year...................

Redemption and sinking fund requirements on redeemable preferred stock Accounts payable Payable on outstanding bank checks..................

Accrued taxes and interest Cotenant prepayments to Nine Mile Point Nuclear Unit No. 2 project fund Due to cotenants under Cotenant Agreement..........

Other (net) 1987

$ (557,214) 615>000 268,400 157,631 (30,878) 28>748 97,934 13,000 592,621 24>459 25,000 100,000 270,060 (22,780)

(50,207) 346,532 1,499 (35,823) 76,380 3,581 45>637 984,790 418,465 28,765 (30,878) 416,352 256,599 16,980 260>898 27,062 6,899 984,790

$ 146,188 (15>678)

(4>359) 1,679 (31>486)

(16,406)

(45,400) 23,012 (11>259) 11,181 (331) 19,239 76,380 In rhovsands or dollars

'1 986

, 397,865 155,311 (165,793) 18,257 133,743 539,383 4,603 75,000 500,000 98,900 8,959 93,017 780,479 22,585 140,000 92,847 128,000 72,596 (21,395)

(11,133) 423,500

$ 1,743,362 750,526 23,536 (165,793) 608,269 171,100 467,764 107,380 318,129 16,771 53,949

$1,743,362

$ (131,046)

(5,388) 20,950 (7,565)

(178) 28,449 47,330 (45,549)

(3,828)

(4,726)

(83,808) 171,100 (7,136)

(21,395) 411,430 150,627 (187,316) 25,448 141,206 (4,707) 536,688 185,270 75,000 175,000 225,000 (29,880)

(46,321) 584,069 (16,267) 38,481 (32,775) 92,084 (9,331) 72,192

$1,192,949 718,903 52,217 (187,316) 583,804 135,808 126,717 13,050 311,777 10,191 11,602

$1,192,949 (12,294)

(1,730) 32,020 (3,432)

(7,057) 1,628 (6,551) 3,848 3,988 (5,990) 84,594 3,060 92,084

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 21 Notes to Consolidated Financial. Statements Note 1 ~ Summary of Significant Accounting Policies The Company is subject to regulation by the New York State Public Service Commission (PSC) and the Federal Energy Regulatory Commission (FERC) with respect to its rates for, service and the maintenance of its accounting 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.

In December 1986, Statement of Financial Accounting Stan-dards No. 90, "Regulated Enterprises-Accounting for Aban-donments and Disallowances of Plant Costs" was issued by the Financial Accounting Standards Board (FASB). The Company adopted this new accounting principle in June 1987 and earn-ings for the first quarter of 1987 were restated. See Note 10-Nine Mile Point Nuclear Station Unit No. 2 for a detailed dis-cussion of the effects of the adoption of this statement.

Principles of Consolidation: The consolidated financial state-ments include the Company and its wholly-owned subsidiaries.

All significant intercompany balances and transactions 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 com-ponent of equity and do not have a significant impact on finan-cial 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). The cost of current re-pairs and maintenance is charged to expense. Whenever utility plant is retired, its original cost, together with the cost of re-moval, less salvage, is charged to accumulated depreciation.

Allowance forFunds Used During Construction: The Company capitalizes AFC in amounts equivalent to the cost of funds devoted to plant under construction. AFC rates are determined 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 utilityplant except certain property addi-tions afforded the gross AFC rate under the provisions of the Tax Reform Act 1986. The AFC rates in effect December 31, 1987 were 10.13% and, net of tax at the statutory rate, 8.20%.

AFC is segregated into its two components, borrowed funds and other funds, and is reflected in the Interest Charges sec-tion and the Other Income and Deductions section, respec-tively, of the Consolidated Statement of Income.

Effective April 1985, pursuant to a PSC authorization, the Company discontinued accruing AFC on $320 million of con-struction work in progress (CWIP) for which a cash return was being allowed through inclusion in rate base of that portion of the investment in the Nine Mile Point Nuclear Station Unit No. 2 (Unit). This amount was increased to $680 million in April 1986 and $1,625 million (including $125 million of other CWIP) in April 1987.Amounts equal to the Unit's AFC which is no longer accrued on the CWIP included in rate base are being accumu-lated in deferred debit and credit accounts and, at the time the Unit commences commercial operation and is placed in rate

base, the balance in the deferred credit account could be available to reduce future revenue requirements over a period potentially shorter than the life of the Unit. It is currently ex-pected that the balance in the deferred debit account will be amortized and recovered in rates over the life of the Unit.

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) were amortized over shorter periods as approved by the PSC. For Federal income tax pur-poses, the Company computes depreciation using accelerated 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 being recovered in rates through an annual allowance and charged to operations through de-preciation charges.

Based on a study completed in 1986, the cost of decommissioning Nine Mile Point Nuclear Station Unit No. 1, which is expected to begin in the year 2005, is estimated by the Company to be approximately $442,000,000 at that time

($220,200,000 in 1987 dollars).Through December 31, 1987, the Company has recovered

$27,000,000 of decommissioning costs in rates. The Company's 41% share of costs to decom-mission Nine Mile Point Nuclear Station Unit No. 2, which is expected to begin in the year 2027, is estimated by the Com-pany to be approximately $565,000,000 ($112,400,000 in 1987 dollars). The current annual allowances for recovery are based on the PSC's estimated decommissioning costs over the life of these units amounting to $195,300,000 and $273,700,000, re-spectively. The Company continues to review the estimated requirements for decommissioning and plans to seek rate ad-justments when appropriate. There is no assurance that the decommissioning allowance recovered in rates will ultimately aggregate a sufficient amount to decommission the units. The Company believes that decommissioning costs, if higher than currently estimated, will ultimately be recovered in the rate process, although no such assurance can be given.

Amortization of Nuclear Fuel: Amortization of the cost of nu-clear 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 net generation, is based upon a contract with the U.S.

Department of Energy. These costs are charged to operating expense and recovered from customers through base rates or through the fuel adjustment clause.

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 or may be overrecovered under the normal opera-tion of the electric adjustment clause. However, the Company has been permitted to amortize and bill or credit such portions to customers, through the electric adjustment clause, over 36 months from the effective date of each change. The Company's electric fuel adjustment clause provides for partial pass-through of fuel cost fluctuations from those forecast in rate proceedings with the Company absorbing a specific portion of increases or retaining a portion of decreases to a maximum of

$15 million per rate year.

22 NIAGARA NOH A WK POWER CORPORATION AND SUBSIDIARY COMP ANI~QS

~

~

Federal income Taxes: In accordance with PSC requirements, 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 8). In conformity with ratemaking practices of the PSC, the Company has not provided deferred taxes on approxi-mately $1.6 billion of other tax deductions which include cer-tain depreciation differences and various construction over-heads deductible currently fortax purposes and capitalized for accounting and ratemaking purposes.

The Company has claimed investment tax credit and deferred the benefits of such credits as realized in accordance with PSC directives. For pur-poses of computing capital cost recovery deductions and nor-malization, the asset basis is reduced by all or a portion of the credit claimed consistent with current tax laws. The imputed tax benefit of the borrowed funds component of AFC on transi-tional property is recorded in Other Income And Deductions.

In December 1987, the FASB issued Statement of Financial Accounting Standards No. 96 (SFAS No. 96) "Accounting for Income Taxes" effective for fiscal years after 1988. The pro-nouncement continues the present comprehensive inter-period tax allocation rules, but shifts to the use of the liability method for accounting for deferred taxes rather than the de-ferred method required under APB Opinion No. 11.

Regulated utilities are not exempt from the provisions of SFAS No. 96, which specifically prohibits net-of-tax accounting and reporting and requires (i) recognition of a deferred tax liabilityfor tax benefits that are flowed through to customers when temporary differences originate and (ii) adjustment of a deferred tax liabilityor asset for an enacted change in tax laws or rates. However, any impact of the pronouncement must be considered within the ratesetting environment. The adoption of the requirements of this statement are not expected to sig-nificantly impact the Company's financial condition or results of operations.

Amortization of Debt issue Costs: The premium or discount and debt expenses on long-term debt issues and on certain debt retirements prior to maturity, are amortized ratably over the lives of the related issues and included in interest on long-term debt (see Note 7).

~

Note 2. Depreciation and Amortization The total provision for depreciation and amortization, includ-ing amounts charged to clearing accounts, was $158,761,000 for 1987, $156,494,000 for 1986 and $151,817,000 for 1985. The 1986 and 1985 provisions include approximately $2,800,000 and $9,500,000, respectively, resulting from the PSC allowed recovery of the amortization of costs associated with the dis-continued Sterling Nuclear Station. The percentage relation-ship between the total provision for depreciation and average

,depreciable property was 3.0% in 1987, 1986 and 1985. The Company makes depreciation studies on a continuing basis and, upon approval by the PSC, periodically adjusts the rates of its various classes of depreciable property.

Note 3. NM Uranium, Inc.

During 1976, through a wholly-owned subsidiary, NM 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.

Acquisition of this interest was made primarily to provide a more assured future supply of nuclear fuel. Mining operations are now complete and site restoration activities are underway.

The investment in the subsidiary, which includes costs in-curred since acquisition and AFC accrued through March 31, 1981, has been reduced by the proceeds from the sale of uranium, net of tax, transfers of uranium to the Company and a write-off in 1987 of a portion of the Company's investment, and is included in the consolidated financial statements as part of the nuclear fuel component of utility plant. Such investment totaled $52,500,000 at December 31, 1987 and $82,200,000 at December 31, 1986.

In connection with the Company's rate decisions in March 1984 and March 1986 the PSC has allowed, as the cost of ap-proximately 790,000 lbs. of NMU uranium utilized in the 1984 and 1986 reloads of the Company's Nine Mile Point Nuclear Unit No. 1 and approximately 107,000 lbs. utilized for a portion of the initial core at Nine Mile Point Nuclear Unit No. 2, a price which represents the average United States delivery price for the year, as reported by the U.S. Department of Energy (DOE).

The total allowed value of these transfers using DOE prices is approximately $30.5 million while the Company's cost is ap-proximately $39.4 million. The differential between the Com-pany's cost of this NMU uranium and that amount allowed to be recovered in rates charged to customers has been deferred subject to the PSC approval of the comparison of cost to mar-ket on an aggregate basis over the life of the project. In May 1987, NMU transferred approximately 523,000 lbs. of uranium to the Company (with a cost of approximately $23.5 million)to be used in the 1988 refueling of Nine Mile Point Nuclear Unit No. 1. The allowable value for this material is being reviewed in the current rate proceeding. Approximately 1,141,000 pounds of uranium remain to be transferred, with the final transfer scheduled for 1991.

Based upon a recent DOE forecast which reflects a decline in average delivery prices from previous forecasts and the antici-pated further decline in average delivery prices, the Company expects that a minimum of $13 millionof its investment in NMU may not be recoverable in rates. Accordingly, the Company has reduced the carrying value of such investment by $13 million.

The Company can provide no assurance that all of its remain-ing investment in NMU will ultimately be recovered.

Note 4. Bank Credit Arrangements At December 31, 1987, the Company had $555 million of bank credit arrangements, including the Oswego Facilities Trust, with 31 banks. These credit arrangements consisted of

$432 million in commitments under Revolving Credit and Term Loan Agreements,

$ 10 million in short-term commitments under Credit Agreements,

$13 million in lines of credit and

$100 million under a Bankers Acceptance Facility Agreement.

The Revolving Credit and Term Loan Agreements extend into 1990 and 1991 although the revolving credit periods under the agreements for $332 million of the $432 million expire in 1988.

At the option of the Company, the interest rate applicable to borrowings under these Agreements is based on the prime rate or at specified increments over the rates applicable to certifi-cates of deposit or, in certain Agreements, Eurodollar deposits.

Allof 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 outstanding, including amounts currently issued in connection with Interest Rate Exchange Agreements (see Note 7). $382 million of the Revolving Credit and Term Loan Agreements contain representations and covenants which were renegotiated in 1987 to include liberalizing amendments and which, if not met or further re-negotiated, would prevent the Company from making new borrowings under such agreements and require the Company to begin scheduled repayment over three years of amounts outstand-ing. The Company is presently in compliance with these cove-nants and restrictions.

N,I'AG A R A M 0 H A N K P 0 W E R C 0 R P 0 R AT I 0 N A N D S U B S I D I A R Y C 0 M P A N I E S C

AtDecember 31:

In thousands ofdollars 1987 1986 The Company pays fees for substantially all of its bank credit arrangements.

The Bankers Acceptance Facility Agreement, which is used to finance the fuel inventory for the Company's generating stations, provides for the payment of fees only at the time of issuance of each acceptance. Additional bank cred-it arrangments in connection with the Company's guarantee of certain obligations of LILCO are discussed in Note 11.

Amounts outstanding under Interest Rate Exchange Agree-ments and Revolving Credit and Term Loan Agreements to-taled $75 million at December 31, 1987 and are recorded as long-term debt.

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

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, deferred finance charges and deferred recoverable energy costs. Corporate assets consist of other property and investments, cash, accounts receivable, prepayments, unamor-tized debt expense and other deferred debits.

Short-term debt:

Commercial paper....

Notes payable Bankers acce tances Weighted average interest rate(a)..

..4 27,000 5

23,000

$ 50,005 7 46%

$ 72,000 212 28,000

$100,212 8.33%

Operating revenues:

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

Gas Total In thousands ofdollars 1987 1986 1985

$2)170~191

$2 131 833

$2 096 404 453,239 528,486 598,536

$2,623,430

$2,660,319

$2,694,940 For earendedDecember31:

Dailyaverage outstanding.......

Dailyweighted average interest rate(a).

Maximum amount outstanding..

(a) Excluding fees.

..4 51,256 6.63%

...$ 154,000

$197,557 6.60%

$396,115 Operating Income before taxes:

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

637,120 596,864 529,659 Gas 43,750 55,547 55,100 Total 680,870 652,411 584,759 Pretax operating Income, Including AFC:

Electric 667,610 762,362 716,719 Gas 44,138 55,842 55,356 Note 5. Jointly-Owned Generating Facilities The following table reflects the Company's share of jointly-owned generating facilities at December 31, 1987. 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 is 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 Roseton Steam Station Units No. 1 and 2(a)...

25

$ 84,175

$29,835 163 Oswego Steam Station Unit No.6(b)..........

76

$260,688

$56,521 939 Nine Mile Point Nuclear Station UnitNo.2(c)(d).

41

$1,439,006 Total...................

Income taxes................

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

Cumulative effect of accountln chan e........

711,748 195,472 (189,431) 269,059 615,000) 818,204 211,237 69,832 278,934 772,075 173,471 79,818 266,992 Net income loss 557,214 397,865 411,430 Depreciation:

Electric.....

Gas Total 143,508 141,663 137,630 14,123 13,648 12,997 157,631 155,311 150,627 Total 447,230 774.062 771,120 Construction expenditures (including nuclear fuel):

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

408,008 734,348 749,912 Gas 39,222 39,714 21,208 (a) The remaining ownership interests are Central Hudson Gas and Electric Corporation, the operator of the plant (35%) and Consoli-dated Edison Company of New York, Inc. (40%).

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

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

Rochester Gas and Electric Corporation (14%), and Central Hud-son Gas and Electric Corporation (9%).

(d) Alterwritewtfof disallowed Unit costs and also excludes amounts spent for nuclear fuel (see Note 10).

Identifiable assets:

Electric..........

Gas Total..........

Cor orate assets Total assets

$5,626,117

$6,424,656

$5,756,586 491,315 468,299 444,070 6,117,432 6,892,955 6,200,656 676,666 718,248 813,181

$6,794,098

$7,611,203

$7,013,837

NIAGARA MOHAWK. POWER CORPORATION AND SUBSIDIARY COMPANI'4S

~ >

NOTE 7. Capitalization CAPITALSTOCK The following table summarizes the shares of capital stock authorized, issued and outstanding:

At December 31 ~

1987 1986 1985 Common stock, $ 1 par value:

Authorized Issued &outstandin 150,000,000 150,000,000 150,000,000 128,953,424 127,140,994 126,928,340 Preferred stock, $100 par value:

Authorized Issued &outstandin Preferred stock, $25 par value:

Authorized Issued &outstandin Preference stock, $25 par value:

Authorized Issued &outstandin 3,400>000 2,927,000 19>600,000 14,710,801 4,000,000 0

3,400,000 3.260,000 19,600,000 14,874,000 4,000,000 0

3,400,000 3,318,000 19,600,000 14,044,000 4,000,000 0

The table below summarizes changes in capital accounts for 1985, 1986 and 1987:

Preferred Stock

$ 100 arvalue Non-Redeem-Redeem-able'ble*

Shares

$25 r value Capital Stock Non-Premiumand Redeem-Redeem-Expense able able'Net)'alance January 1, 1985 Sales in1985.............

Issued to stock purchase plans in 1985............

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

Foreign currency translation ad ustment...

Balance December 31,1985 Sales in1986.............

Issued to stock purchase plansin1986............

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

Foreign currency translation adjustment...

116,848,974 $116,849 3,342,510

$210,000 4,465,600 4,465 5,613,766 5,614 (24,510) 126,928,340 126,928 3,318,000 210,000 60,354 61 152,300 152 (58,000)

$ 124,251(a) 11,730,000 3,000,000

$30,000

$263,25+a)

$1,347,806 50,000 25,000 74,216 (2,451)

(686,000)

(17,150) 99,535 442 2,422) 121,800(e) 14,044,000 3,000,000 80,000 271,10Q'e) 1,519,577 75,000 (939) 2,821 437 (5,800)

(2,170,000)

(54,250)

Balance December 31,1986 Salesin1987.............

Issued to stock purchase plans In 1987............

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

Foreign currency translation ad'ustment....

80,000 291,85Q'e) 1,522,499 25,000 (423) 1,812,430 1,812 (333,000)

(33,300)

(1,163,199)

(29,080) 22,442 577 3,731 127,140,994 127,141 3,260,000 210,000 116,000(e) 14,874,000 1,000,000 Balance December31,1987 128,953,424 $128,953 2,927,000

$210,000

$82,700(e) 14,710,801

$80,000

$287,77a)

$1,548,826

'ln thousands ofdollars (a) Includes sinking fund requirements due withinone year

KI'AGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES t.

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) ln thousands of dollars Eventual 1987 1986 1985 December 31, 1987 minimum Preferred $100 par value:

3.40% Series; 200,000 shares...

3.60% Series; 350,000 shares...

3.90% Series; 240,000 shares...

4.10% Series; 210,000 shares...

4.85% Series; 250,000 shares...

5.25% Series; 200,000 shares...

6.10% Series; 250,000 shares...

7.72% Series; 400,000 shares...

Preferred $25 par value:

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

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

$ 20I000 35,000 24,000 21,000 25,000 20,000 25,000 40,000 30,000 50,000

$ 20,000 35,000 24,000 21,000 25,000 20,000 25,000 40,000 30,000 50,000

$ 20,000 35,000 24,000 21,000 25,000 20,000 25,000 40,000 30,000 50,000

$103.50 104.85 106.00 102.00 102.00 102.00 101.00 103.51 (a)

(b)

$103.50 104.85 106.00 102.00 102.00 102.00 101.00 102.36 25.00 25.00 (a) Not redeemable until 1988.

(b) Not redeemable until 1990.

$290,000

$290,000

$290,000 MANDATORILYREDEEMABLE PREFERRED STOCK The Company has certain issues of preferred stock which provide for mandatory and optional redemption as follows:

Redemption price per share (Before adding accumulated dividends) ln thousands of dollars Eventual At December 31, 1987 1986 1985 December 31, 1987 minimum Preferred $100 par value:

7.45% Series; 402,000, 420,000, and 438,000 shares...

10.13% Series; 225,000 and 250,000 shares............

10.60% Series; 200,000, 240,000 and 280,000 shares..

12.75% Series; none and 250,000 shares..............

Preferred $25 par value:

8.375% Series; 1,100,000, 1,200,000 and 1,300,000 shares 8.70/o Series; 1,000,000 shares 8.75% Series; 3,000,000 shares 9.75%Series; 672,000,738,000, and 804,000shares....

9.75% Series (second); none, 816,000 and 1,020,000 shares 10.13% Series; 900,000 and 1,000,000 shares..........

10.75% Series; 1,600,000 shares 12.25% Series; 656,940 and 700,000 shares............

12.50'/o Series; 581,861 and 620,000 shares............

12.75% Series; none and 1,000,000 shares.............

15.00'/o Series; none and 800,000 shares..............

Ad ustable Rate Series B; 2,000 000 shares.............

27,500 25,000 75,000 16,800 22,500 40,000 16,423 14,547 30,000 75,000 18,450 20,400 25,000 40,000 17,500 15,500 50,000 50,000

$ 40I200

$ 42,000 22,500 25,000 20,000 24,000 25,000

$ 43,800 25,000 28,000 25,000 32,500 20,100 25,500 25,000 40,000 17,500 15,500 25,000 20,000 50,000

$104.09 (a) 107.95 26.10 (b)

(b) 26.035 (a)

(a)

(c)

(c)

(d)

$100.00 100.00 102.65 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 Lesssinkln fundandredem tionre uirements (a) Not redeemable until 1988.

(b) Not redeemable until 1992.

(c) Not redeemable until 1991.

(d) Not redeemable until 1989.

370,470 407,850 392,900 14,980 60,380 13,050

$355,490

$347,470

$379,850

26 NIAGARA NOH A WK POWER CORPORATION AND SUBSIDIARY COMP ANIF5S 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% 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 stock are as follows:

No. of shares In thousands oIdollars Commencing 1988 1989 1990 1991 1992 Preferred $100 par value:

7.45%Series..........

10.13% Series.......

~

~

~

10.6(P/o Series..........

Preferred $25 par value:

8.375% Series..........

8.70%Series...........

8.75%Series...........

9.75% Series...........

10.13% Series...........

10.75% Series...........

12.25%Series.......

~

~

~

~

12.5(y/o Series...........

Ad ustable Rate Series B.

18,000 25,000 20,000 100,000 200,000 600,000 66,000 100,000 320,000 43,060 38,139 50,000 6/30/77 12/31/87 3/31/80 4/1/83 6/30/93 12/31/92 10/1/80 12/31/87 6/30/89 3/31/87 3/31/87 9/30/93

$1,800 2,500 2,000 2,500 1,650 2,500 1,077 953

$ 1,800 1,875 2,000 2,500 1,650 1,875 8,000 1,077 953 S 1,800 2,500 2,000 2,500 1,650 2,500 8,000 1,077 953

$ 1,800 2,500 2,000 2,500 1,650 2,500 8,000 1,077 953

$ 1,800 8,125 2,000 2,500 15,000 1,650 8,125 8,000 1,077 953

$14,980

$21,730

$22,980

$22,980

$49,230 LONG-TERM DEBT Long-term debt and long-term debt due within one year consisted of the following:

In thousands ofdollars At December 31 ~

1987 1986 In thousands ofdollars At December 31 ~

1987 1986 First mortgage bonds:

4~/s% Series due September 1, 1987...

3Vs%Seriesdue June1,1988........

14~/s% Series due August 11

~ 1988.....

12% Series due March 1, 1989.........

'Vs% Series due October 1, 1989.....

4s/4% Series due April 1> 1990........

4Vs% Series due November 1 ~ 1991...

12.73% Series due February 1, 1992....

13.06% Series due February 1, 1992....

12.73% Series due February 20, 1992...

12.68% Series due February 28, 1992...

15Vs% Series due March 1, 1992.......

15s/4%Seriesdue June1,1992........

11%Seriesdue May1,1993........,..

Br/s% Series due August 1, 1994......

4Vs%Seriesdue December1,1994 9Vs%SeriesdueOctober1,1996 5r/s% Series due November 1 ~ 1996...

gs/s% Series due July 1, 1997.........

6V4%SeriesdueAugust1>1997 6Vs% Series due August 1, 1998......

9Vs%Seriesdue December1,1999 12.95% Series due October 1, 2000 7%% Series due February 1, 2001.....

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

774%SeriesdueAugust 1,2002......

8V4%Series due December1,2003 9Vs% Series due December 1, 2003...

9.95% Series due September 1, 2004..

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

8.35%SeriesdueAugust1,2007 8Vs% Series due December 1,2007...

'13Vs% Series due April1, 2012.........

16% Series due August 1, 2012........

50,000 20,000 13>000 50,000 40>000 20,000 50,000 10,000 20,000 50,000 150>000 40,000 100,000 45>000 100,000 40,000 60,000 75,000 58,668 65,000 80,000 80>000 80,000 47,059 85,000 31)578 66,640 40,000

$ 50,000 50,000 34,000 20,000 13,000 50,000 40,000 20,000 50,000 10,000 20,000 25,045 23,346 50,000 150,000 40,000 100,000 45,000 40,000 60,000 75,000 69,334 65,000 80,000 80,000 80,000 50,000 90,000 35,000 71,050 42,000 25,760 3,016 12~/s% Series due November 1 ~ 2012 12r/s% Series due March 1, 2013.....

• 11V4%Seriesdue July1

~ 2014.......

• 11%%SeriesdueOctober1,2014 10/oSeriesdue June1,2016........

10'/o Series due November 1, 2016...

8r/s% Series due November 1, 2025 Total First Mortgage Bonds.........

Promissory notes:

'%SeriesAdue June1,2004.......

'Adjustable Rate Series due July 1, 2015 December 1, 2025 December 1, 2026.

March 1 ~ 2027 July 1, 2027 Unsecured notes payable:

Medium Term Notes, Various rates, due 1989-1994 Swiss Franc Bonds due December 15, 1995..

15.02/o Unsecured Notes due 1990.........

Notes, Interest Rate Exchange Agreement...

Revolving credit and loan agreements Revolving credit agreement, Oswego Facilities Trust.................

Other Unamortized remlum discount TOTALLONG-TERM DEBT.............

Lesslon -termdebtduewithinone ear 65,486 75,690 40,015 150,000 100,000 75,000 79,355 69,530 75,690 40,015 150,000 100,000 75,000 2,073,136 2,246,141 46,600 46,600 100,000 75,000 50,000 25,760 93,200 100,000 75,000 50,000 200,000 50,000 50,000 50,000 36,259 131,180 294 48,900 50,000 50,000 50,000 25,000 34,039 117,906 6

2,981,429 2,893,519 77,508 93,914

$2,903,921

$2,799,605 Taxwxempt pollution control related issues

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES 27 Several series of First Mortgage Bonds and Notes were is-sued 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). Approximately $344,000,000 bear interest at a daily adjustable interest rate (with a Company option to convert to a fixed interest rate) which averaged 4.51%

for 1987 and are supported by bank direct pay letters of credit.

Pursuant to agreements between NYSERDA and the Company, proceeds from such issues were used for the purpose of con-structing certain pollution control facilities at the Company's generating facilities.

Notes Payable include a ten-year Swiss franc bond issue equivalent to $50,000,000 in U.S. funds. Simultaneously with the sale of these bonds, the Company entered into a currency exchange agreement to fullyhedge against currency exchange rate fluctuations.

The Company has Interest Rate Exchange Agreements ex-tending into 1991 for $75,000,000, including $25,000,000 for Oswego Facilities Trust (Trust). The agreements require the Company to make fixed rate payments which, calculated on a semi-annual bond basis, are equivalent to 7.53% and, in ex-

change, receive a LIBOR based floating rate payment from a bank. The Company generally 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 construction of a new energy management system. The Trust has a $50,000,000 Direct Pay Letter of Credit Facility and Re-volving Credit Agreement, $25,000,000 of which is subject to an Interest Rate Exchange Agreement 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 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 in 1987 consists of obligations under capital leases of $65,578,000 (see Note 11) and a liabilityto the U.S. Department of Energy for nuclear fuel disposal of

$65,602,000.

Certain of the Company's debt securities provide for a mandatory sinking fund for annual redemption. The Company's five-year mandatory sinking fund redemption requirements are as follows:

Principal amount Commencing 1988 In thousands ofdollars 1989 1990 1991 1992 First Mortgage Bonds:

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

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

8%% Series due December 1, 2007...

~ 9.95% Series due September 1, 2004 12.95% Series due October 1, 2000....

9V~% Series due December 1 ~ 2003...

Promissory Notes:

8% Series Adue June1

~ 2004........

$1,500 750 2,000 5,000 5,333 2,941 500 3/1/78 8/1/82 12/1/83 9/1/85 10/1/86 12/1/87 6/1/90

$ 1,078(a)

(a) 2,000 5,000 5,333 2,941

$ 1,500 (a) 2,000 5,000 5,333 2,941

$ 1,500 (a) 2,000 5,000 5,333 2,941 500

$ 1,500 (a) 2,000 5,000 5,333 2,941 500

$ 1,500 (a) 2,000 5,000 5,333 2,941 600

$16,352

$16,774

$17,274

$17,274

$17,374 (a) Requirements, or a portion thereof, have been met by advance purchases.

Additionally, certain other series of mortgage bonds provide for a debt retirement fund whereby payment requirements may be met, in lieu of cash, by certification of additional property, the waiver of the issuance of additional bonds or the retirement of outstanding bonds. The 1987 requirements for these series were satisfied by the certification of additional property. The Com-pany anticipates that the 1988 requirements for these series will be satisfied by other than payment in cash. Total annual debt retirement fund requirements for these series, based upon mortgage bonds outstanding December 31, 1987, are $6,550,000.

NOTE 8. Federal and Foreign Income Taxes Income Tax Reform: In October 1986, the Tax Reform Act of 1986 (Act) was signed into law. One of the provisions of the Act lowered the statutory corporate Federal income tax rate from 46% to 34% effective July 1, 1987. The deferred Federal income taxes below relating to book/tax timing differences have been provided at the blended statutory rate of approximately.40% for 1987 and at 46% in prior years.

United States..............

Foreign Consolidating eliminations

$180,213 28,594 (23,571

$570,113

$551,907 14,311 17,516 7,61 11,230 Income before income taxes and the cumulative effect of the accounting change..

$185,236

$576,809

$558,193 Components of United States and foreign income before in-come taxes:

In thousands oldollars 1987 1986 1985

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Following is a summary of the components of Federal and foreign income tax and a reconciliation 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:

In thousands oldollars 1987 1986 1985 Components of Federal and foreign Income taxes:

Current tax expense: Federal Foreign Deferred Federal income tax expense..

Income taxes included in Operating Expenses Federal income tax expense included in Other Income and Deductions Federal tax credits associated with disallowed plant depreciation......

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

$ 39>574 9,012 48>586 146,886 195,472 (19,070)

(48,952)

$ 24,959 6,767 31,726 179,511 211,237 13,475 45,76

$ (21,329) 7,746 (13,583) 187,054 173,471 19,140 (45,848 Total

$127,450

$ 178,944

$ 146,763 Components of deferred Federal Income taxes (Note 1):

Depreciation.

Investment tax credit Benefit associated with disallowed plant costs.

Construction overheads Recoverable energy and purchased gas costs Unbilled revenues Gain on disposition of property Nuclear fuel disposal cost Reacquisition of bonds Sterling abandonment.

Other Deferred Federal income taxes net

$ 96,812 49,303 (50>400) 14,492 (3,858)

(15,181) 3,299 3,467

$ 97,934

$ 50,399 48,252 26,111 (9,309)

(15,374) 15,700 (1,243) 19,207

$133,743

$ 38,822 36,507 17,973 6,472 41,148 4,601 (3,769) 54

$ 141,206 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 for funds used during construction Taxes, pensions and employee benefits capitalized foraccounting purposes..

Real estate taxes on an assessment date basis Deferred taxes provided at other than the statutory rate.

Tax adjustments associated with disallowed plant costs Other Federal and forei n income taxes

$ 74,002 (24>160) 12,336 (798) 859 10,439 (56,826) 4,702 (53,448)

$127,450

$265,332 (18,235) 76,266 1,645 4,074 7,210 15,428 86,388

$178,944

$256,769 (16,274) 86,166 5,113 6,062 13,855 15,084 110,006

$ 146,763 Note 9. Pension and Other Retirement Plans The Company and its subsidiaries have non-contributory, defined-benefit pension plans covering substantially all their employees.

Benefits are based on years of service and the employee's compensation level. The pension cost was

$30,200,000 for 1987, $41,400,000 for 1986 and $39,500,000 for 1985 (of which $11,400,000 for 1987, $15,600,000 for 1986 and

$13,400,000 for 1985 was related to construction labor and, accordingly, was charged to construction projects). The adop-tion of Statement of Financial Accounting Standards No. 87, "Employers'ccounting for Pensions" has had the effect of reducing the 1987 pension cost by about $9.2 million. The Company's general policy is to fund the pension costs accrued with consideration given the maximum amount that can be deducted for Federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.

Net pension costs for 1987 included the following compo-nents:

In thousands ol dollars Service cost-benefits earned during the period Interest cost on projected benefit obligation Return on Plan assets......................

Amortization of net obli ation Net pension cost

$ 26,900 53,900 (53,400) 2,800

$ 30,200 The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 8.0% and 5% (plus merit increases),

respectively.

The expected long-term rate of return on plan assets is 8%.

The following table sets forth the plan's funded status and amounts recognized in the Company's Consolidated Balance Sheet at December 31, 1987:

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Actuarial present value of accumulated benefit obligations:

Vested benefits Non-vested benefits Accumulated benefit obligations..

Additional amounts related to pro ected a

increases Projected benefits obligation for service rendered to date.

Plan assets at fair value, consisting primarily of listed stocks, bonds, other fixed income obligations and insurance contracts ln thousands of dollars

. $493,625 37,362 530,987 201,415 732,402 739,219 ously, the Company had expected a commercial operation date of January 1988. However, as a result of delays incurred princi-pally in connection with the replacement of feedwater cou-plings, repairs to the condensors and feedwater control valves and modifications to certain drain lines, the Company now ex-pects a March 1988 commercial operation date.

Delays have previously occurred with respect to the Unit and the Company can provide no assurance as to the precise date commercial operation will be accomplished.

Any costs in-curred as a result of a delay in achieving the commercial opera-tion date, which are estimated to be approximately $17 million before tax per month for the Company's 41% share, would not be recoverable through rates and would be written off when it is determined that a delay is probable. See "Ratemaking and Cost Settlement" below.

Plan assets in excess of projected benefit obligations Unrecognized net obligation at January 1, 1987 being recognized over approximately 19 years Unrecognized net gain from past experience different from that assumed

~ and effects of chan es In assum tions..

6,817 49,146 49,565 Prepaid pension costs included in Other current assets 6,398 In addition to providing pension benefits, the Company and its subsidiaries provide certain health care and life insurance benefits for retired employees.

Substantially all of the Com-pany'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 of providing these benefits amounted to approx-imately $8,800,000 for 1987, $7,900,000 for 1986 and $7,500,000 for 1985.

Construction Status and Schedule:

On July 2, 1987, the Com-pany obtained a fullpower license forthe Unit from the Nuclear Regulatory Commission (NRC), authorizing the facility to pro-ceed toward commercial operation. The Unit was synchronized with the statewide electric power grid in August and is nearing completion of the power ascension and test program. Previ-NOTE 10. Nine Mile Point Nuclear Station Unit No. 2

'ine Mile Point Nuclear Station Unit No. 2 (Unit), a nuclear power plant to be operated by the Company and shared with other utilities, is the only major generating facility currently under construction by the Company. Ownership is shared by the Company (41%), Long Island Lighting Company (18%),

New York State Electric and Gas Corporation (18%), Rochester Gas and Electric Corporation (14%), and Central Hudson Gas &

Electric Corporation (9%). Output of the Unit, which has a pro-jected capability of 1,084,000 kw., is to be shared in the same proportions as the cotenants'espective ownership interests.

The recovery of costs associated with the Unit has been af-fected by the Cost Settlement Agreement and the implementa-tion of such agreement for ratemaking purposes as discussed below. Also, changes in generally accepted accounting princi-ples have required the recognition of the loss associated with disallowed plant costs. Under the terms of the Cost Settlement Agreement and its implementation, the loss recorded in the year 1987 by the Company is approximately $833 million, net of Federal income taxes, and is described more fully under "Ratemaking and Cost Settlement" and "Financial Accounting Recognition" below.

Ratemaking and Cost Settlement: In connection with an ex-tensive 1982 PSC proceeding, the PSC stated that it would apply a strict standard of prudence for all costs incurred in completing the Unit and established a cost incentive program which, as amended, caps the Unit's allowable cost at $5.4 bill-ion and provides for a portion of the costs in excess of $4.6 billion to be borne by cotenant shareholders.

In July 1985, the PSC ordered the establishment of a pro-ceeding (Case No. 29124) to investigate the prudence of costs incurred for the construction of the Unit. In September

1986, the PSC approved an agreement entitled "Specifications of Terms and Conditions of Offer of Settlement" (the Settlement) that constitutes a complete disposition of Case No. 29124 and renders the cost incentive program and cost cap inoperative.

The Settlement contains, among other stipulations, the fol-lowing key terms and conditions:

The maximum amount of the Unit's expenditures to be included in the cotenants'ate bases would be $4.16 bill-ion. The allowed cost of $4.16 billion will be reduced by the financing costs "prepaid" by ratepayers as a result of rate base inclusion of a portion of the Unit's cost prior to completion.

The cotenants may request from the PSC an upward adjustment of the $4.16 billion cap based only on the occurrence of an "extraordinary event" as contemplated in prior PSC orders concerning the Unit. At the time the agreement was entered into, the cotenants stipulated that they were not then aware of any basis for such a claim.

Appropriate income tax deductions and credits appli-cable to the Unit's completion cost will be allocated to the disallowed costs and reserved for shareholders.

Each cotenant would waive any and all claims it may have against any other cotenant concernigg the design, engineering or construction of the Unit.

In order to induce concurrence among the cotenants while the Settlement was being negotiated, the Company entered into an agreement with the other cotenant companies (Coten-ant Agreement) whereby it will reimburse the cotenant com-panies, upon commercial operation of the Unit, for$ 171 million representing the cotenants respective ownership shares of a

$290 million incremental disallowance between the Settle-ment's originally proposed allowed cost of $4.450 billion and the approved settlement value of $4.160 billion.This obligation willnot cause a reallocation of ownership interests in the Unit.

In connection with the Company's rate case decided in March 1987, the PSC adopted their Staff's position on Settle-ment implementation issues, which includes, for ratesetting

purposes, the recognition of tax benefits at primarily a 34%

rate rather than preservation at a 46% rate, the recording of deferred Federal income.tax benefits in present value dollars, exclusion from rate base of unrealized tax benefits, the disal-

30 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES

~

V'owance of certain plant-related costs, such as common facilities and a write-off of disallowed costs, net of Federal income taxes, entirely against common equity. These require-ments have had and willcontinue to have a detrimental impact on the financial condition and results of operations of the Company. The Company believes that the implementation re-quirements ordered by the PSC are contrary to the terms and intent of the Settlement and, on July 10, 1987, appealed the PSC's decision to the State of New York Supreme Court Albany County. The Company is unable to predict the results of such action.

Several intervening parties petitioned the PSC for rehearing of the Settlement and such petitions were denied. On April 16, 1987, the Consumer Protection Board and the Attorney Gen-eral of the State of New Yorkfiled a lawsuit asking that the PSC opinion in connection with the Settlement discussed above be annulled and that the PSC be directed to conduct a full pru-dence investigation with respect to the Unit. The Company is unable to predict the ultimate outcome of this proceeding.

Based upon the Settlement as implemented by the PSC, the presently forecasted commercial operation date of March 1988, the $ 171 million payment to the cotenants and the disal-lowance of certain plant related costs,

$1.147 billion of the Company's share of project costs will not be recoverable in rates. Absent the occurrence of an "extraordinary event," the disallowance to the Company would increase by its propor-tionate share of the cost of any further delays in the commer-cial operation of the Unit. See "Financial Accounting Recogni-tion" below.

Financial Accounting Recognition:

In December 1986, the FASB issued Statement of Financial Accounting Standards No.

90, "Regulated Enterprises-Accounting for Abandonments and Disallowances'f Plant Costs," an amendment of FASB Statement No. 71 (SFAS No. 90). Among other things, SFAS No.

90 requires that when it becomes probable that part of the cost of a generating facility will be disallowed for ratemaking pur-poses and a reasonable estimate of the amount of the dis-allowance can be made, the estimated amount of the probable disallowance shall be deducted from the reported cost of the plant and recognized as a loss.

The Company adopted SFAS No. 90 in June 1987 and recog-nized as a loss for financial accounting purposes the disallow-ance of Unit costs, including the cost of disallowed plant re-lated facilities, of $1,055 million, reduced to $755 million ($5.92 per share) net of Federal income taxes. Principally, as a result of the revision in the commercial operation date to March 1988, the Company has recognized an additional $92 million in disal-lowed costs, reduced to $78 million ($.61 per share) net of Federal Income tax. Included in such amounts is the cumula-tive effect of this change in accounting principle prior to January 1, 1987 which amounted to $946 million, reduced to

$615 million ($4.83 per share) net of Federal income tax at 46%.

The effect of the adoption of SFAS 90 on earnings for 1987 is to decrease income before the cumulative effect of change in accounting principle by $218 million ($1.71 per share), net of Federal income tax, representing the impact of the delay in commercial operation to March 1988 and adverse Settlement implementation decisions rendered by the PSC concerning the scope of items includible under the Settlement and appro-priate Federal income tax rates. In addition to the $833 million

($6.54 per share) loss and in accordance with the implementa-tion requirements of SFAS No. 90, $25 million ($.20 per share) related to AFC previously computed on disallowed Unit costs and included in net income forthe first five months of 1987 was reversed.

Contractor Litigation: In connection with problems encoun-tered with the Unit's original Main Steam Isolation Valves (MSIV's), which caused a seven month delay in the completion of the Unit, the Company and the cotenant companies have initiated a lawsuit in the Supreme Court of the State of New York-Onondaga County seeking damages of approximately

$500 million against Gulf & Western, Inc., Crosby Valve and Gage Company and Wickes Manufacturing Company, the companies having contractual responsibility forthe design and fabrication of the Unit's original MSIV's. The defendants have filed their answer which disagrees with the Company's claim.

The Company is unable to predict the ultimate outcome of the lawsuit.

NOTE 11. Commitments and Contingencies Construction Program: The Company is committed to an ongo-ing construction program to assure reliable delivery of its elec-tric and gas services. The Company presently estimates that the construction program for the years 1988 through 1992 will require approximately $1,328 million, excluding AFC, nuclear fuel and certain overheads capitalized. By years the estimates are $285 million, $250 million, $250 million, $250 million and

$293 million, respectively.

Long-term Contracts for the Purchase of Electric Power: At January 1, 1988, the Company had long-term contracts to purchase electric power from the following generating facilities owned by the New York Power Authority (NYPA):

Expiration Purchased Estimated date of capacity annual contract in kw.

capacity cost Facility Niagara-hydroelectric project..

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

FitzPatrick-nuclear plant.........

1990 1,076,000

$14,010,000 2002 year-to-ear basis 270,000 6,156,000 59,000 (a) 6,485,000 1,405,000

$26,651,000 (a) 24,000 kw for summer of 1988; 52,000 kw, for winter of 1988-89.

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. Total cost of purchases under these contracts amounted to $57.2 million, $68.5 million and $67.8 million for the years 1987, 1986 and 1985, respectively. The Company and NYPA have reached an agreement in principle to extend the Niagara project contract into 2007. This extension is currently in the approval process.

Under the requirements of the Federal Public Utility Reg-ulatory Policy Act, the Company is required to purchase power generated by independent power producers.

Through De-cember 31, 1987, the Company has entered into agreements with numerous current and prospective independent pro-ducers which may substantially increase its future purchase power commitments.

Lease Commitments: The Company leases certain property and equipment which meet the accounting criteria for capitali-zation. Such leases, having a net book value of $65.6 million and $56.2 millionat December 31, 1987 and 1986, respectively, are included in the accompanying Consolidated Balance Sheet. Since current rate-making practice treats all leases as operating leases, the capitalization of these leases has no im-pact on the Company's Consolidated Statement of Income.

The Company recognizes as a charge against income an amount equal to the rental expense allowed for rate purposes.

The Company's future minimum rental commitments under these capital leases and non-cancellable operating leases aggregate approximately $660 million, a substantial portion of which relates to a 41-year operating lease of a transmission

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES t

31 line facility. Annual future minimum rental commitments for the period 1988-1992 range between

$24 million and $32 million.

Mandated Refunds to Customers:

As part of the Company's March 1984 rate decision, the PSC ordered the refund of ap-proximately $96 million of previously collected nuclear fuel disposal costs over a five-year period. The Company had col-lected in rates approximately $146 million for the disposal of nuclear fuel irradiated prior to 1983. The refund represents the amount by which these previously collected costs are in excess of the Company's liability as of March 31, 1984 to the U.S.

Department of Energy for nuclear fuel disposal under the Nu-clear Waste Policy Act. At December 31, 1987, $36.2 million remains to be refunded by March 31, 1989 and is recorded in Deferred Credits.

Litigation: The Board of Trustees of the Town of Brookhaven (Long Island) instituted a lawsuit of March 3, 1987 against the Company, General Electric Company and Monsanto Company in the United States District Court for the Eastern District of New York alleging damages in the amount of $300,000,000 as a result of the disposal of polychlorinated biphenyls (PCB's) in the Hudson River which is alleged to have impacted the striped bass and other commercial fisheries offof eastern Long Island.

A further allegation in the complaint against the Company is that the removal of its Fort Edward Dam, located in the Hudson River, in the Village of Fort Edward, Washington County, New York, caused PCB's which had previously been impounded to be transported downstream to the detriment of such fisheries.

The Company is assessing the allegations and is unable at this time to predict what action it willtake in response to the com-plaint and the ultimate results thereof. However, the plaintiffs have indicated they are prepared to discontinue the lawsuit and the appropriate documentation of such discontinuance is in process.

Guarantee of Nine Mile Point Nuclear Unit No. 2 Cotenant's Debt: Under the terms of an agreement (Capital Funds Agree-ment ) with Long Island Lighting Company (LILCO), the Com-pany provided,its guarantee for a period of approximately three years through March 31, 1989, of up to $165 million of LILCO's reimbursement obligations in connection with $150 million principal amount of tax-exempt pollution control bonds issued by LILCO on December 31, 1985. The guarantee of the Com-pany contains certain continuing representations

which, should they cease to be true, would require the Company to provide security in the form of First Mortgage Bonds. The Company expects LILCOto honor its obligations in connection with the LILCO tax-exempt bonds throughout the period while the guarantee is in effect, although no such assurance can be provided. The Company had arranged for four-year term loans to fund its guarantee obligations, if needed. The Company has an interest of $85 million in LILCO's third mortgage, which serves as partial security in the event its guarantee is required to be honored. LILCOis required to pay fees to the Company in connection with the guarantee.

Fuel Procurement Proceeding: In December 1987, the PSC es-tablished a proceeding to investigate the fossil fuel procure-ment practices of the Company. The proceeding ordered is the culmination of a Staff review of the Company's fuel procure-ment procedures. The Staff review focused on activities dating from January 1979 through October 1987 and resulted in the issuance of a report by the Staff which challenged various as-pects of the Company's fuel procurement efforts and detailed extensive recommendations

designed, in the Staff's view, to improve fuel procurement procedures.

The initiation of the PSC proceeding was accompanied by allegations that ratepayers may have paid excessive fuel costs of $100 million over that period. The Company has not been provided the basis for such allegations and does not believe fuel costs during the period of review, were excessive. The proceeding seeks to de-termine whether and to what extent ratepayers may have been required to pay unreasonable fuel costs as a result of impru-dence. The Company is unable to predict whether a refund may be ordered and, if ordered, to what extent such refund may materially impact the Company's financial condition and the results of operations.

The proceeding will also examine the operation of the existing fuel adjustment clause and, consider alternatives and incentive mechanisms which, if ordered, may increase the Company's financial exposure under the clause.

NOTE 12. Quarterly Financial Data (Unaudited)

Operating revenues, operating income, net income and earn-ings per common share by quarters for 1987, 1986 and 1985 are shown in the following table. The Company, in its opinion, has 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. The proforma amounts for Net Income (loss) and Earnings per common share presented in the table below reflect the retroactive appli-cation for SFAS No. 90 for comparative purposes.

in thousands ofdollars Proforma Amounts Quarter ended Operating revenues Oper'sting income Net income loss)

Earnings Net Earnings per common income per common share (loss) share Dec. 31, 1987 1986 1985

$653,906 637,896 661,237

$ 1 14y509

$ (32i649)

$ ( 36)

$ (32>649)

$ ( 36) 104,633 84,698

.57 (4,302)

(.13) 84,791 91,724

.61 195,27 1.6 Sept. 30, 1987 1986 1985

$556,845 554,546 554,779

$ 98,958 92,640 73,095 44,829

.25 44,829

.25 74,909

.49 33,909

.17 79,503

.52 79,503

.52 June 30, 1987

$624,628

$102,810 1986 636,859 97,585 1985 637,724 100,036 48,711

.29 48,711

.29 85,535

.56 (100,465)

(.90) 96,758

.67 96,758

.67 March 31, 1987

$788,051

$169,121

$(618,105)'(4.96)'

(3,105)

$ (.13) 1986 831,018 146,316 152,723 1.08 140,723

.99 1985 841,200 153,366 143,445 1.11 143,445 1.11 See Note 3 regarding a fourth quarter 1987 adjustment in the valuation ofthe Company's investment in NM Uranium, lnc. and Note 10 regarding first and fourth quarter 1987 adjustments relating to the adoption of SFAS No. 90.

32 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Report of Independent Accountants Price ffaterhouse To the Stockholders and Board of Directors of Niagara Mohawk Power Corporation We have examined the consolidated balance sheets of Niagara Mohawk Power Corporation and its subsidiaries as of December 31, 1987 and 1986, and the related consoli-dated statements of income and retained earnings and of changes in financial position for each of the three years in the period ended December 31, 1987. Our examinations were made in accordance with generally accepted auditing standards and accordingly included such tests of the ac-counting records and such other auditing procedures as we considered necessary in the circumstances.

As described in Note 10, the Company adopted Statement of Financial Accounting Standards No. 90, "Regulated Enterprises-Accounting for Abandonments and Disallow-ances of Plant Costs." The adoption of this Statement has resulted in the disallowed portion of the Company's invest-ment in the Nine Mile Point Nuclear Station No. 2 (Unit) being recognized as a loss in the 1987 financial statements.

As a result of continuing uncertainties with respect to the Unit discussed in Note 10, management is unable to predict whether additional cost increases willoccur and/or whether further regulatory actions by the New York State Public Ser-vice Commission (PSC) with respect to its investment in the Unit will have, in the aggregate, a material effect on its financial position or results of operations.

As discussed in Note 11, in December 1987, the PSC es-tablished a proceeding to investigate the fossil fuel pro-curement practices of the Company. Management is unable to predict whether the result of this proceeding will have a material effect on the financial position or results of opera-tions of the Company.

In our opinion, subject to the effects on, (1) the 1987, 1986 and 1985 financial statements with respect to the uncertain-ties discussed in the'third paragraph of this report and (2) the 1987 financial statements with respect to the uncertainty discussed in the fourth paragraph of this report, of such adjustments, if any, that might have been required had the outcome of these uncertainties been known, the consoli-dated financial statements examined by us present fairlythe financial position of Niagara Mohawk Power Corporation and its subsidiaries as of December 31, 1987 and 1986 and the results of their operations and changes in their financial position for each of the three years in the period ended December 31, 1987 in conformity with generally accepted accounting principles consistently applied during the period except for the change, with which we concur, referred to in the second paragraph of this report.

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 infor-mation contained elsewhere in this Annual Report is consis-tent with that in the financial statements.

To meet its responsibilities with respect to financial in-formation, 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, objectivity and reliability of the financial records and protection of assets. This system includes communica-tion through written policies and procedures, an organiza-tional structure that provides for appropriate division of re-sponsibility 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 re-quires all employees to maintain the highest level of ethical standards and requires key management employees to for-mally affirm their compliance with the Code.

The financial statements have been examined by Price Waterhouse, the Company's independent accountants, in accordance 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 re-liance thereon in determining the nature, timing and extent of other auditing procedures that were necessary for ex-pressing an opinion as to whether the financial statements are presented fairly. Their examination resulted in the ex-pression of their opinion which appears on this page. The independent accountants'xamination does not limitin any way management's responsibility for the fair presentation of the financial statements and all other information, whether audited or unaudited, in this Annual Report.

The Audit Committee of the Board of Directors, consisting of four directors who are not employees, meet regularly with management, internal auditors and Price Waterhouse to re-view and discuss internal accounting controls, audit exami-nations and financial reporting matters. Price Waterhouse and the Company's internal auditors have free access to meet individually with the Audit Committee at any time, without management present.

Syracuse, New York February 15, 1988

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPA'NIES Market Price of Common Stock and Related Stockholder Matters Dividend paid Price range 1987 per share Migh LotN 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

$.52

$19'/s

$157/a

.52 17t/4 147/s

.30 17 14

.30 14a/a 11'/s

$1.64 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

$.52

$247/s

$195/a

.52 25'/2 19a/4 52 24rls 19'/4

.52 19'/s 15'/z

$2.08 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, Cin-cinnati, Midwest, Pacific and Philadelphia stock exchanges.

The ticker symbol is "NMK".

Preferred and common stock dividends were paid on March 31, June 30, Sep-tember 30 and December 31. The Com-pany presently estimates that none of the 1987 common or preferred stock div-idends will constitute a return of capital and therefore they are subject to Federal income,tax as ordinary income.

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

Although the common dividend rate was reduced effective the third quarter of 1987, the Company intends to con-tinue the practice of paying cash div-idends quarterly. Declarations of future dividends are necessarily dependent upon future earnings, cash flow and fi-nancial requirements none of which the Company can predict with certainty and which could be adversely affected by uncertainties as more fullydiscussed in the Management's Discussion and Analysis of Financial Condition and Re-sults of Operations and in Notes 10 and 11 of Notes to Consolidated Financial Statements. Also, restrictions in govern-ing instruments may affect the declara-tion and payment of future dividends.

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 on 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 Preference Stock are in default in an amount equivalent to six full quar-terly dividends and thereafter until all dividends thereon are paid or declared and set apart for payment, the holders of such stock can elect two members to the Board of Directors. No dividends on Preferred Stock are now in arrears and no Preference Stock is now outstand-ing.

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 166,000 stock-holders owned common shares of Niagara Mohawk and about 6,900 held preferred stock. The chart below sum-marizes common stockholder owner-ship by size of holding:

Size olholding Total Total shares (Shares) stockholders held 1 to 99 48,390 1,511,339 100 to 999 106,402 26,986,740 1,000 or more 10,926 100,455,345 165,718 128,953,424 EARNINGS ANDDIVIDENDS PAID PER COMMONSHARE MARKET PRICE OF COMMONSTOCK

$1.89

$1.98

$2.84

$2.06

$2.88

$2.71

$1.64 DIVIDENDS EARNINGS

$ 15Ye

$17%

16'1.76'12 1983 1984 1985 1986 1987 1983 1984 1985 1986 1987

'exchtdlntt the etfeel ot the wrlteottot d ttettoned ldne MilaUntt No. a costa

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANiIfS Selected Financial Data As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements, certain of the followingselected financial data may not be indicative of the Company's future financial condition or results of operations. Certain 1987 data is not presented since it is either not meaningful or not applicable in light of the adoption of SFAS No. 90 which required the write-offof disallowed Unit costs and resulted in a net loss for the year.

1987 1986 1985 1984 Operations: (000's)

Operating revenues.

Income before cumulative effect of accounting change Cumulative effect on prior years of adoption of SFAS No. 90 Net income (loss)

Proforma balance available forcommon stock

-giving effect to the retroactive application of SFAS No. 90 5,769 16,048 64,871 359,734 312,409

$2,623,430

$2,660,319

$2,694,940

$2,785,546

$2,632,315 57,786 397,865 411,430 359,734 312,409 (615,000)

(557,214) 397,865 411,430 359,734 312,409 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 before cumulative effect of accounting change......

Cumulative effect on prior years of adoption of SFAS No. 90 per average common share......

Earnings per average common share...........

Proforma earnings per average common share

-giving effect to the retroactive application of SFAS No. 90.

Rate of return on common equity..............

Dividends paid per common share.............

Dividend payout ratio

$13.82 12 86.P/o 10.IP/o

.05 (4.83)

(4.78)

.05 12.7/o'1.64

$20.23 1674 82.8o/o 12.4%

S 2.71 2.71

.13 13.6o/o

$ 2.08 76.8%

$19.61 20yz 104 5%

10.1%

$18.89 17%

92.(P/o 11.5o/o

$18.55 1574 84.9/o 12.P/o

$ 2.88 S 2.84 S 2.77 2.88 2.84 2.77

.53 2.84 2.77 15.IP/o 14.F/o 15.IP/o S 2.06

$ 1.98

$ 1.89 71.5%

69.7o/o 68.2/o Capitalization: (000's)

Common equity Non-redeemable preferred stock..

Redeemable preferred stock Long-term debt

$1,781,518

$2,571,491

$2,488,620

$2,207,117

$ 1,929,073 290,000 290,000 290,000 240,000 240,000 355,490 347,470 379,850 367,900 338,474 2,903,921 2,799,605 2,643,094 2,395,471 2,048,548 Total First mortgage bonds maturing within one year 5,330,929 6,008,566 50,000 50,000 5,801,564 5,210,488 4,556,095 30,000 47,450 25,000 Total

$5,380,929

$6,058,566

$5,831,564

$5,257,938

$4,581,095 Capitalization ratios: (inciuding firstmortgage bonds maturing within one year):

Common stock equity.

Preferred stock Long-term debt 33.1%

12.0 54.9 42 5%

10.5 47.0 42.7o/o 11.5 45.8 42 IP/o 42.1%

11.5 12.6 46.5 45.3 Rnanclal ratios:

Ratio of earnings to fixed charges...................

Ratio of earnings to fixed charges withoutAFC.......

Ratio of AFC to balance available for common stock..

Ratio of earnings to fixed charges and preferred stock dividends Proforma Ratios-giving effect to the retroactive application of SFAS No. 90:

Earnings to fixed charges..

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 forcommon stock..............

1.65" 1 54 1.04" 1.65 1.04 35.6o/o 12.1 16.7 18.5 2.98 2.42 48.2o/o 3.07 2.37 53.2'/o 3.11 2.43 52.4%

2.98 2.40 43.6o/o 2.35 2.36 2.39 2.35 38 IP/o 11.4 18.1 16.6 12.9 43.4%

10.9 15.7 15.3 13.1 46.9'/o 50.0o/o 10.1 10.0 14.7 13.0 14.1 13.5 11.1 10.3 1.28 1.40 3.11 2.98 1.05 1.17 2.39 2.35 Miscellaneous: (000's)

Gross additions to utilityplant Total utilityplant Accumulated depreciation and amortization..

Total assets S

447,230 S

774,062 S

771,120 S

769,846 S

691,464 7,691,069 8,445,993 7,640,905 6,903,184 6,165,711 11913,687 1,763,443 1,629,437 1,501,282 1,486,196 6,794,098 7,611,203 7,013,837 6,233,401 5,357,572

'Excludes the effect of the adoption of SFAS No. 90 amounting to $833 million.

-Excludes the cumulative effect of the adoption of SFAS No. 90 amounting to $615 million.

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Thermal:

Coal fuel Huntley, Niagara River..

Dunkirk, Lake Erie.....

715 11 715 715 560 8

555 555 Electric and Gas Statistics ELECTRIC CAPABILITY Thousands ofkiiowaits AtJanuary 1, 1988 1987 1986 ELECTRIC STATISTICS Electric sales (Miiiionsofkw-hrs.)

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

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

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

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

Other electric s stems......

1987 9,655 10,718 10,922 235 4,154 1986 9,359 10,374 10,801 234 3,579 1985 8,976 9,907 10,886 241 5,286 Total coal fuel..

1,275 19 1,270 1,270 35,684 34,347 35,296 Residual oiifuel Albany, Hudson River" Oswego, Lake Ontario..

Roseton, Hudson River.

Middle distillate oiifuei 16 Combustion turbine and diesel units........

Total oiifuel Nuclear fuei Nine MilePoint, Lake Ontario Purchased-firm contract Power Authority-FitzPatrick. Lake Ontario...

Totainuciear fuei..

Total thermal sources..

400 6

400 400 11572 23 1,563 1,736 300 4

299 300 237 3

237 310 2,509 36 2,499 2;746 610 9

610 610 59 1

153 167 669 10 763 777 4,453 65 4,532 4,793 702,309 766,815 448,855 41,031 95,809 77,014 647,507 708,517 437,292 39,238 196,104 67,746

$2)170~191

$2 131 833

$2 096 404 Electric customers (Average)

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

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

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

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

1,307,946 138,193 2,374 3,400 1,451,913 1,291,111 1,273,969 136,304 134,787 2,481 2,490 3,282 3,315 1,433,178 1,414,561 Electric revenues (Thousands ofdollars)

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

739,034 Commercial...............

783,103 Industrial..................

435,518 Municipal service..........

40,603 Other electric systems......

118,021 Miscellaneous.............

53,912 10 684 695 16 1 ~111 1,111 270 4

285 4

270 550 262 209 Hydro:

Owned and leased hydro stations (77).

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

1,076 Power Authority-Blenheim-Gllboa Pumped Storage Plant...........

Other Residential (Average)

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

Cost to customer per kw-hr..

Annual revenue er customer............

7,382 7.65it

$565.03 7,249 7.50II

$543.96 7,046 7.21tt

$508.26 Total h dro sources..

Other urchases..

Total capability*

2,326 34 2,327 2,565 97 1

80 445 6>876 100 6,939 7,803 Electric peak load during year..

1987 5,780 1986 1985 5,724 5,682 ELECTRICITYGENERATED AND PURCHASED Millionsofkw-hrs.

1987 1986 1985 Thermal:

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

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

Nuclear........

Natural gas.....

Purchased-Nuclear from Power Authorit Total thermal Hydro:

Generated.........

Purchased from Power Authority..

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

Totaih dro 7,185 18 6,140 16 7,409 19 4,256 11 5,811 16 2,866 7

4,753 12 3,147 8

4,932 13 1,785 4

177 1

1,624 4

700 2

1,284 3

825 2

18,679 47 16.559 44 17,656 45 3,396 8

4,140 11 3,496 9

7,378 19 7,683 20 7,815 20 1 017 3

565 2

231 11,791 30 12,388 33 11,542 29 Other purchased power-varlous sources......

8,942 23 8.692 23 10,015 26 Total generated and urchased 39,412 100 37,639 100 39,213 100

• 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.

The Nine Mile Point Unit No. 2, expected to achieve commercial operating status in 1988, will increase capability by 444,000 KW.

GAS STATISTICS 1987 1986 1985 Gas sales(Thousands ofdekatherms)

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

48,054 Commercial...............

23,520 Industrial..................

7,242 Other ass stems..........

2,504 49,430 27,218 15,575 3,724 47,328 27,006 29,213 4,873 Totaisaies..........

Transportation of customer-owned as..

81,320 21,862 95,947 4,868 108,420 Gas revenues (Thousands ofdollars)

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

$280,092 Commercial...............

121,145 Industrial..................

29,733 Other gas systems..........

8,802 Revenue from transportation of customer-owned gas...

11,551 Miscellaneous.............

1,916

$296,853 142,807 68,476 14,300 2,244 3,806

$295,060 147,751 133,446 18,691 3,588

$453,239

$528,486

$598,536 Gas customers (Average)

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

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

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

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

Residential (Average)

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

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

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

Maximum day gas sendout dekaiherms 411,566 33,974 395 2

445,937 116.8

$5.83

$680.55 758,914 407,546 33,248 465 2

441,261 121.3

$6.01

$728.39 786,165 404,116 32,603 485 2

437,206 117.1

$6.23

$730.14 774,033 Total gas delivered.....

103,182 100,815 108,420

NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES Directors WilliamF. Al lyn(Elecled 1/28/88)

President, Welch AllynInc., Skaneateles Falls James Bartlett Former Executive Vice president, Syracuse Edmund M. Davis(A, B, E)

Partner, Hiscock Es Barclay, attorneys-at.law, Syracuse WilliamJ. Donlon President (Chairman ofthe Board and ChiefErecutive Officer, EffccliveJune 1, 1988)

Edward W. Duffy(A,B C)

Former Chairman of the Board and Chief Executive Officer, Marine Midland Banks, Inc., a bank holding company, Buffa!o John M. Endries(Elected2/25/88)

Executive Vice President (Pmsident, EffecliveJune 1, 1988)

John G. Haehl, Jr. (A)

Chairman of the Board and Chief Executive Officer, Syracuse Lauman Martin Consultant (formerly Senior Vice President and General Counsel), Syracuse Baldwin Maull(A,B)

Corporate Director, New York Martha Hancock Northrup(C, D)

Homemaker, former President, Crouse IrvingMemorial Hospital Board, Syracuse Henry A. PanaSCi, Jr. (Elecled 1/28/88)

Chairman and Chief Executive Officer, Fay's Drug Co. Inc.,

Syracuse Patti McGillPeterson(E(ected 1/28/88)

President, St. La~rcnce University, Canton Frank P. Piskor(A, C, Dj President Emeritus, St. Lawrence University, Canton Donald B. Riefler(E)

Chairman, Sources and Uses of Funds Committee, O'Iorgan Guaranty Trust Company of New York,New York Steven Browning Sample(Elected 1/28/88)

President, State University of New Yorkat Buffalo Lewis A. Swyer(B, C, D)

Chairman, LA.Swyer Co., Inc., builders and construction managers, Albany John G. Wick(D, E)

Partner, Falk 8r Siemer, attorneys at.law, Buffalo A. Member ofthe Executive Committee B. Member of the Compensation Committee C Member of the AuditCommittee D. Member of the Committee on Corporate Public Policy E. Member of the Finance Committee Officers John G. Haehl, Jr.

Chairman of the Board and Chief Executive Officer WilliamJ. Donlon President (Chairman ofthe Boant and ChiefExecutive Ofhcer, EffectiveJune 1, 1988)

John M. Endries Executive Vice President (President, Effective June I, 1988)

Anthony J. Baratta, Jr.

Senior Vice President John M. Haynes Senior Vice President (Retired January 1, 1988)

John P. Hennessey Senior Vice President Charles V. Mangan Senior Vice President James J. Miller Senior Vice President (Retired January 81, 1987)

John W. Powers Senior Vice President. Treasurer Michael P. Ranalli Senior Vice President John H. Terry Senior Vice President, General Counsel and Secretary (RelircdtVovembcr 1, 1987)

Richard F. Torrey Senior Vice President (RelimdJanuary 1, 1988)

Thomas H. Baron Vice President-Fossil Generation Michael J. Cahill Vice President. Regional Operations Robert M. Cleary, Jr.

Vice President. Regional Operations Gerald J. Currier Vice President-Regional Operations (Retired January 1, 1988)

Richard E.A. Duffy Vice President. Public Affairs and Corporate Communications Gerald D. Garcy Vice President. Power Contracts James P. Gorman Vice President-Corporate Audits (EffectivJanuary 1, 1988)

Edward F. Hoffman Vice President.Non Nuclear Engineering Gary J. Lavine Vice President, General Counsel and Secretary Thomas E. Lempges Vice President Nuclear Generation Samuel F. Manno Vice President Purchasing Eugene J. Morel Vice President. Risk Management (Relired October 1, 1987)

James F. Morrell Vice PresidcntMrporate Planning (RelimdNay 1, 1987)

James A. Perry Vice President. Quality Assurance Nicholas L. Prioletti, Jr.

Controller Richard H. Ryczek Vice President Gas Jack R. Swartz Vice President. Regional Operations Kenneth A.Tramutola Vice President-Gas (Relired April1, 1987)

Christopher D. Turner Vice President (Resigned February 1, 1988)

Perry B. Woods, Jr.

Vice President Human Resources Harold J. Bogan Assistant Secretary Joseph F. Cleary Assistant Secretary John J. Hennigan Assistant Secretary John W. Keib Assistant General Counsel Frederick C. McCall, Jr.

Assistant Secretary Herman B. Noll Assistant General Counsel (Relimd September 1, 1987)

ArthurW. Roos Assistant Treasurer ArthurA. Salvetti Assistant Controller Adam F. Shaffer Assistant Controller Richard N. Wescott Assistant Treasurer Heruy B. Wightman, Jr.

Assistant Controller

Corporate Information Annual Meeting The annual meeting ofshareholders willbe held in the auditorium ofthe

ompany's main office in Syracuse, N.Y. at 10:30 a.m. Tuesday, May 3, 1988. Anotice of the meeting, proxy statement and form of proxy willbe sent to holders ofcommon stock in early ApriL Shareholder Inquiries Questions regarding ownership of Niagara Mohawk stock or the status of an account may be directed to the Company's Shareholder Services Department, (315) 428 6750 (Syracuse) 1.800.962.3236 (New YorkState) 1.800 448.5450 (elsewhere in continental U.S.)

Analyst Inquiries Analyst inquiries should be directed to Leon T. Mazur, Manager. Investor Relations, (315) 428.3134.

Dividend Reinvestment Plan Shareholders and customers interested in purchasing common stock through the Dividend Reinvestment and Common Stock Purchase Plan should call or write the Shareholder Services Department at P.O. Box 7058, Syracuse, N.Y. 13261.

SEC Form 10-K Report Acopy of the Company's Form 10.K Report filedannually withthe Securities

'nd Exchange Commission is available without charge after March 31, 1988, by writingthe Investor Relations Department at 300 Erie Boulevard West, Syracuse, N.Y. 13202.

Disbursing Agent Preferred and Common Siocks:

Niagara Mohawk Pohver Corporation 300 Erie Boulevard West, Syracuse, N.Y. 13202 Bonds:

Marine Midland Bank, NA.,

140 Broadway, New York, N.Y. 10015 Transfer Agents and Registrars Preferred and Common Siocks:

Morgan Shareholder Services Trust Company of New York 30 West Broadway, New York, N.Y. 10015 Bonds:

Marine Midland Bank, N.A.

140 Broadway, New York, N.Y. 10015 Stock Exchanges Common Siock and Certain Preferred Series:

Listed and traded on the New YorkStock Exhange.

Common Siock Also traded on the Boston, Cincinnati, Midwest, Pacific and Philadelphia stock exchanges.

Bonds: Traded on the New YorkStock Exchange.

Ticker Symbol: NMK Corporate Headquarters 300 Erie Boulevard West Syracuse, New York 13202 (315) 474-1511 rH The Information In this report Is not Iflven In connection withthe sale of, or offerto buy, any security.

Printed In U.SA,

T NIAGARA 0 MOHAWK 300 Erie Blvd. West Syracuse, NY 13202 pW Bulk Rate

~

.U.S. Postage PAID

'iagara Mohawk Power Corporation 4

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