ML18038A472

Niagara Mohawk Power Corp Annual Rept,1988. W/890526 Ltr

ML18038A472
Person / Time
Site:	Nine Mile Point
Issue date:	12/31/1988
From:	Donlon W, Endries J, Terry C NIAGARA MOHAWK POWER CORP.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
NMP1L-0402, NMP1L-402, NUDOCS 8906050055
Download: ML18038A472 (45)

Text

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ACCESSION NBR:8906050055 DOC.DATE: 88/12/31 NOTARIZED: NO DOCKET I FACIL:50-220 Nine Mile Point Nuclear Station, Unit 1, Niagara Powe 05000220 AUTH. NAME AUTHOR AFFILIATION DONLONPW.J. Niagara Mohawk Power Corp.

ENDRIES,J.M. Niagara Mohawk Power Corp.

TERRY,C.D. Niagara Mohawk Power Corp.

RECIP.NAME ~ RECIPIENT AFFILIATION

SUBJECT:

"Niagara Mohawk Power Corp Annual Rept,1988." W/890526 ltr.

DISTRIBUTION CODE: M004D COPIES RECEIVED:LTR 50.71(b) Annual Financial Report L ENCL I SIZE'ITLE:

NOTES:

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KS Y NIASAR m ~ vmawK NIAGARAMOHAWKPOWER CORPORATION/301 PLAINFIELDROAD, SYRACUSE. N.Y. 13212/TELEPHONE (315) 474-1511 May 26, l989 NMPlL 0402 U.S. Nuclear Regulatory Commission Attn: Document Control Desk Washington, D.C. 20555 Re: Nine Mile Point Unit 1 Docket No. 50-220 DPR-63 Gentlemen:

In accordance with Section 50.71(b) of the Commission's Regulations, enclosed is a copy of Niagara Mohawk Power Corporation's 1988 Annual Report.

Very truly yours, N IAGARA MOHAWK PO ER ORPORATION C. D. Terry Vice President Nuclear Engineering and Licensing PEF/mlf 7127G Enclosures xc: Regional Administrator, Region I (w/attachment)

Hr. R. AD Capra, Director (w/attachment)

Hs. H. H. Slosson, Project Manager (w/attachment)

Mr. W. A. Cook, Resident Inspector (w/attachment)

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~'gK, Power Corporation TIP A Salance of Interests Niagara Mohawk has an extensive con-stituency of electric and gas customers, shareholders, employees, pensioners and suppliers, whose well-being is interrelated.

In New York, our ability to provide reliable, affordable energy has a direct impact on the upstate economy of S1 billion annually in wages and salaries, taxes, shareholder dividends and payments for New York goods and services. This $ 1 billion doesn' begin to approach the multiplier effect of Serving our Customers service industry jobs that have flourished in the wake of our contributions to state and local economies. in Upstate New York In managing our company we strive to maintain a balance of interests among Niagara Mohawk Power Corporation, an investor-these constituencies in a complex and owned utility,provides energy to the largest customer changing regulatory and economic envi- service area in New York State. Our electric system ronment.

In the pages that follow, you will read extends from Lake Erie to New England's borders, about our very difficult nuclear outages from Canada to Pennsylvania, and meets the needs of and our intensive efforts to remedy nuclear nearly 1.5 million residential, commercial and indus-operations; our campaign to sensitize our trial customers. Power is supplied by hydroelectric, employees to the changing customer envi-ronment; Iong-term energy procurement coaloil, natural gas-fired and nuclear generating strategies designed to provide customers units as well as through purchase contracts. Electric-all the energy they need at competitive ity is transmitted through an integrated operating prices; energy conservation and varied network that is linked to other systems in the North-pricing programs; economic development east for economic exchange and mutual reliability.

initiatives; customer outreach strategies; research and development activities; and Our natural gas system serves approximately other programs which we believe will work 458,000 residential and business customers with ac-to the mutual, long-term benefit of all our cess to our 6,500-mile system of pipelines and mains constituents. l3 in central, eastern and northern New York. In addi-tion to the purchase, sale and distribution of gas to retail customers, a growing part of our business in-Q Gas Service cludes the transportation of natural gas for those cus-Area tomers who are large users and have arranged their own supply.

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NEW YORK STATE HYDRA-CO Enterprises Inc. builds and operates power production facilities. NITECH Inc. markets a

advanced instrumentation systems to the utilityin-OaaaeAaaaao dustry.H Electric Q Service Area This report was designed, written and produced by N!agara Mohawk Peopfe.

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'NIAGARA MOIIAWKPOWI~IR CORPORATION aml SUIISII)IARYCOhlPANII~IS I FinancialHi hli htsof 988 Contents 1988 1987 Change 2 To our stockholders Total operating revenues ....... $ 2,800,453,000 $ 2,623,430,000 6.7 4 A balance of interests Income available for (loss to) 6 Emphasis on partnership common stockholders ........ $ 159;65?,000 $ (609,231,000) 8 Cultivating the highest Earnings (loss) per common standards share $ 1.21 $ (4.78) 10 Exerting special care 12 Management's discussion Earnings per common share (excluding the impact of the and analysis of financial Nine Mile Two disallowance) .. $ 1.21 $ 1.76 (31.3) condition Dividends per common share 18 Consolidated financial

$ 1.20 $ 1.64 (26.8) statements Common shares outstanding 22 Notes to consolidated (average) 131,853,000 127,435,000 3.5 financial statements Utilityplant (gross) .. $ ?,967,625,000 $ 7,691,069,000 3.6 35 Report of management Construction work in progress... $ 315,644,000 $ 1,789,562,000 (82.4) 35 Report of independent accountants Gross additions to utilityplant .. $ 353,859,000 $ 447,230,000 (20.9) 36 Selected financial data Public kilowatt-hour sales ...... 33,263,000,000 31,530,000,000 5.5 37 Market price of common Total kilowatt-hour sales ....... 34,995,000,000 35,684,000,000 (1.9) stock Electriccustomersatendofyear . 38 Statistics 1,482,000 1,459,000 1.6 39 Directors, officers Electric peak load (kiloivatts) .... ',220,000 5,780,000 7.6 40 Corporate information Natural gas sales (dekatherms) ... 81,448,000 81,320,000 .2 Natural gas transported (dekatherms) 27,244,000 21,862,000 24.6 Gas customers at end of year 458,000 450,000 1.8 Maximum day gas sendout (dekatherms) 818,128 758,914 7.8 Onr Corporate Mission Niagara Mohawk willbe an innovative and respon- o Expand business opportunities with existing sive energy company, satisfying its customers'nergy customers.

needs with a diversified line of quality and price- o Develop new markets for existing products and competitive products and services. services.

Electricity and gas products and services willcon-tinue to be the core of the company's business. Niag- In addition, Niagara Mohawk willexplore and de-ara Mohawk's driving force willbe to make its elec- velop attractive opportunities in advanced energy-tricity and gas products the preferred energy source related equipment and in value-added services.

for the largest possible number. of energy users and In support of this business focus, the company will:

uses. During the next three years, the company will o Maintain a high level of expertise in its core take action to: business; o Promote efficiency in the supply, demand and end- o Selectively utilize resources to ensure high quality, use application of energy. price competitive products; and o Aggressively manage its market share in key o Substantially increase its capability to understand markets. and respond to the customers'pecific needs.G

"'"'c o mrs As we progress through the year, declaratiort of fu-,

ture dividends and levels of payment are necessarily dependent upon a variety of factors, including future earnings; cash flow; financial requirements; the dura-tion of, and cost associated with, the outage of Nine Mile One; the adequacy and timeliness of rate relief; and the level of retained earnings. Restrictions under

~

eliability is the essence of a utility.'Our custom- our charter and indenture and under federal and state ers trust us to maintain the financial strength law may also become a governing factor.

necessary to provide dependable, low-cost Early in 1989, the company agreed with the Public energy for their homes and businesses. Our share- Service Commission that we would suspend collec-holders look to us to produce a steady stream of earn- tion from ratepayers of $ 225,000 a day in replacement ings, ensuring a fair return on their investment. Our power costs attributable to the outage.

hard-working and dedicated employees want assur- The temporary resolution of the replacement power ance that their investment in learning our business cost issue allows us to focus our efforts on completing willbe rewarded with satisfying careers. the work necessary to return Nine Mile One to service.

In light of these facts, last year was very disappoint- New York's attorney general, among others, had ing. The company's performance in 1988 failed to pressed hard for the PSC to begin hearings at the ear-meet our expectations and causes us considerable liest possible time.

concern for the future. The suspension began in January and willcontinue Earnings were $ 159.7 million or $ 1.21 per share, until June 30, 1989, or the restart of the unit, compared to $ 223.8 million or $ 1.76 last year, exclud- whichever happens first. The possibility of the PSC ing the effect of the after-tax write-offof disallowed mandating the same level of relief or undertaking Nine Mile Unit Two costs of $ 833 million or $ 6.54 per even more stringent steps was very real, had we not share taken in 1987. With the write-off, the company entered into the agreement.

reported a net loss of $ 609.2 million or $ 4.78 per share While the agreement with the PSC intentionally in 1987. does not assign responsibility for the outage, the sus-Many of the factors that contributed to our 1988 pension of replacement power costs willreduce earn-earnings decline extend into the present year. These ings by about 3 cents per share a month for the dura-include: tion of the agreement. Our ability to recover this

~ the continuing impact of a reduction in the com- money in rates and our ability to avoid refunding pany's earnings base as a result of the 1987 write-off about $ 76 million of purchased-power costs collected of disallowed costs of Nine Mile Unit Two, which from customers in 1988 is subject to a PSC began operations last spring; decision expected after restart of the unit on the

~ electric and gas rate agreements with the New York causes of the outage. Meanwhile, we have been Public Service Commission (PSC) and other state spending and willcontinue to spend substantial agencies that, because of changed conditions, did amounts for operation and maintenance work related not account for the costs of programs the company to restart activities.

is now incurring; (Over the past several years, nearly every major utility in New York State has agreed to reduce or freeze rates.) A Plan of Action

~ the lengthy outage of Nine Mile Unit One, which In December, we provided the Nuclear Regulatory began in December 1987 and continues, with Nu- Commission with a comprehensive plan for restarting clear Regulatory Commission (NRC) involvement, Nine Mile One. We are striving to return the plant to into 1989; service as soon as possible, although our current as-the extension of a planned outage at Nine Mile Two, sessment indicates restart is unlikely to occur before which began in October and continues into the mid-1989. Ultimately, we must gain the approval of early months of 1989; and the NRC before we can restart the unit.

+ increased expenses largely related to our efforts to To strengthen leadership and provide new perspec-remedy our nuclear problems and improve nuclear tive, we sought retired Rear Adm. Lawrence operations. Both units are receiving increased Burkhardt, a 32-year U.S. Navy nuclear veteran, to monitoring by the NRC. join the company as executive vice president of nu-clear operations and as a member of our board of The Year Ahead directors.

Return on common equity dropped to 8.7 percent in Burkhardt, whose career covered a range of highly 1988, compared with 12.7 percent in 1987, excluding responsible nuclear and overall fleet and administra-the write-offof disallowed Nine Mile Two costs. This tive posts, served as assistant deputy chief of Naval deterioration is expected to deepen in 1989 as a con- operations with responsibility for 900,000 military sequence of the uncertainties surrounding the Nine and civilian personnel upon his retirement in 1986.

Mile One outage and the increased level of expense Before joining Niagara Mohawk, he was a consultant related to nuclear operations. to the nuclear power industry.

The outlook for further earnings decline places con- Although he has only been with the company since siderable pressure on our dividend in 1989. The com- mid-November, in our view his presence already has pany announced a first quarter common stock divi- begun to make a positive difference in employee per-dend of 30 cents a share, which is the level we have formance. While we can expect a very challenging been paying since the dividend was reduced 42 per- time ahead, the most recent regulatory inspections at cent in the third quarter of 1987. our nuclear facilities have been more favorable.

NIAGARA MOIIAWKPOWER CORPORATION Iul SUBSIDIARY COMPANIES 2-3 Preserving Reliability We are concerned that a balance of interests is not Nevertheless, there is no question that 1989 willbe achieved iF the regulatory process tends only to iden-a difficultyear. Our areas of exposure are clear, and tify and penalize weaknesses, while strengths brought we are taking steps to mitigate the potential impact. about through shareholder investment go largely un-Specifically, we have asked supervisors throughout recognized and unrewarded.

our company to reassess their operating plans in 1989 We believe it is not equitable for our shareholders for additional cost-saving measures. While we have to suffer a significantly reduced return on investment no intention of cutting costs beyond our ability to while our customers have received and willcontinue provide reliable service, we willbe taking aggressive to receive the benefits of our shareholders'nvestment steps to effect reductions. -low-cost nuclear power. There should be a balance Niagara Mohawk operates an extensive infrastruc- ofinterests.

ture of generating, transmission and distribution The key to 1989 willbe our ability to meet our Nine facilities that are subject to the ravages of time and Mile One restart schedule and win NRC approval to weather and which require a continuing program of bring this unit back to productive service. We are preventive maintenance. To reduce vigilance would concentrating significant resources on this effort spe-be a disservice to shareholders and customers alike. cifically and on nuclear operations in general.

We also intend to pursue the possibilities of relief to cover costs associated with our nuclear program. Our Inherent Strengths Nine Mile One has offered an excellent value to our Longer term,,there are forces at work to help us bring customers, providing more than $ 800 million in fuel about a gradual improvement in financial returns for savings during its 19 years of operations. our company. Our electric prices are relatively low compared with other regional suppliers. We believe this is an important factor in the renewed economic vitality we are experiencing in our service territory a revitalization that contributed the bulk of a nearly 6 percent increase in electric usage in 1988.

Gas sales for the year also increased by more than 5 percent. To reduce costs and increase natural gas supply throughout our system, we announced plans in 1989 to participate in the development of a pipeline link to Canadian gas sources.

Our subsidiaries, Opinac Energy Corp. and HYDRA-CO Enterprises Inc., while small parts of our business, continue to register growth.

Without detracting from the gravity or seriousness of these times, we also believe we should never lose sight of our strengths. We are encouraged that the strength and importance to society of our core energy business, the growing vitality of our service territory and the validity of our strategic plan willprovide the basis for us to move through this challenging period.

During 1988, we lost two members of our board of directors. We will miss the contributions of Lauman Martin, who served our company since the days of its incorporation as an officer and a director, and Lewis A. Swyer, who lent his entrepreneurial know-how and community perspective to many of our decisions.

We have always been fortunate in the talent and dedication of the people we'e attracted to our busi-A Balance of Interests ness and in the loyalty shown by our customers and Niagara Mohawk's dilemma is that our very source of shareholders.Q strength our uniquely diverse generating mix and our extensive distribution system also presents a significant challenge in the current regulatory envi-ronment. Our size and diversity help to keep our costs low. They guard against the possibility that any single event willsubstantially increase prices. But the diver-sity and associated complexity of Niagara Mohawk's 1VilliarnJ. Doulorr Jolur M. Errdries business heightens the likelihood that future condi- Cirainuau ofthe Board aud Presideur tions could vary from expense forecasts so closely ClriefExecrrrive Officer scrutinized in the ratemaking process and to which we are so strictly held. March 8, 1989

o neress edefining our concept of customer service has o Enrich our portfolio of consumer outreach pro-been a major strategic initiative for Niagara grams that emphasize one-on-one assistance.

Mohawk in 1988 and willcontinue to be a o Get the best of energy through targeted research critical planning factor in years to come. and development.

We are facing increasing competition in all areas of our business. Programs that sharpen our customer and community focus serve the mutual interests of all Electric Use Indicates New Economic Vitality our constituencies shareholders, customers and Over the past decade, our base of retail customers has employees alike because they help to ensure that we grown steadily at a rate of about 1 percent a year, will maintain leadership in our markets. representing an average annual increase of approxi-mately 12,000 new electric customers and 3,000 new gas customers.

Last year was no exception in terms of base growth, but retail electric sales volume registered the sharpest HSl'tOVll increase in more than a decade up 5.5 percent for the year, reflecting across the board gains of 7.5 per-cent in industrial, 4.3 percent in commercial and 4.6 8I'ur in residential kilowatt hours. 'ercent process for addressing this balance of interests Unusually hot summer weather was partially re-has thrust us into new territory in 1988 as we de- sponsible, but we believe increased economic vitality veloped programs to: in our service territory is the underlying cause of our o Train 5,500 employees to be more responsive in retail electric sales growth in 1988. Total electric sales their customer contacts. declined slightly reflecting the marked downturn in o Forge an innovative public-private partnership sales to other utilities.

aimed at encouraging business development in our service territory.

o Explore new ways to meet long-term energy needs through energy conservation, demand-side man-agement and competitive bids by third-party suppliers.

c Provide customers with a greater degree of control over energy use and price through programs that enable them to: 1989 REVENUE DOLLAR participate in real-time energy pricing and other forms of time-of-use rates; make more efficient use of energy through con- Residential customers servation and demand-side management customers 39'ommercial methodology; customers o Provide low-cost natural gas to a greater number of 34'ndustrial 17'll customers through aggressive marketing programs others 109 and by exploring new avenues of gas availability.

"NIAQRA MOIIAWKPOPOVER CORPORATION aii(l SUBSIDIARY COMPANIKS 4-5 Direct sale of gas, which has trended down sharply since deregulation, leveled off in 1988, led by growing Thinking Like A Customer demand in the residential sector of our business. The "If we make mistakes with our customers," says changes in federal regulation that reduced sales vol- John LaFalce, a Niagara Mohawk gas mechanic ume among our industrial customers have created a in Schenectady, "it's usually because we haven' new business for us in gas transportation. In 1988, we done enough. We haven't listened well enough; registered a 25% volume increase against 1987 in we haven't provided enough information or haven't tried to see things from the customer' transportation of customer-owned gas. point of view."

This is part of the message LaFalce is taking to New Data Brings Us Closer to Customers co-workers in training sessions this spring. He is Two separate but concurrent programs in 1989 are one of 55 Niagara Mohawk people chosen for aimed at developing more information about our special schooling as a facilitator, or trainer, in a customer base. companywide program to increase employee re-As part of our "Think Like a Customer" initiative, sponsiveness to customer needs. Approximately we willbe expanding customer surveys in 1989 to 5,500 employees will participate in this training derive a better measure of customer perceptions of in 1989.

"It's not enough to say, 'I'm here to hook up our service. We have also assembled teams of your gas,' LaFalce says. "You have to help the employees in each of our operating regions to analyze customer understand exactly what will take customer service procedures and make recommen- place, how much time is required and what we dations to improve service. intend to do to restore any property disruption."

The 19-year Niagara Mohawk veteran says the training, which includes advice on dealing with irate customers and difficult situations, has application away from the job as well.

R<<tel <<X 8lllt "I have more confidence," he says. "I under-stand how good communications can work in your favor to turn around a bad situation and make a good one that much better."D At the same time, our Research & Development De-partment willbe undertaking a two-year study to pro-file the kinds of businesses most likely to succeed in our service territory. This willbe the second phase of R&D's Industrial Technology Assessment Program which built a base of information on industry in our service territory through surveys or visits with hun-dreds of local businesses.O ELECTRICITYGENERATED AND WHERE IT WENT AND PURCHASED BY TYPE OF FUEL, 1988 Fuel for the production of electricity 25tf and electricity purchased Interestandothercosts-net 22tf Hydro 29'/o Various sources 23/o Income and other taxes 16<<f Coal 21%

Wages, salaries, employee benefits 14tf Oil 19/o Gas purchased Nuclear 5%

to stockholders 7tt 9'ividends Depreciation 7<<t Natural gas 3%

arly this year, Niagara Mohawk and New York technological advances and other cost-saving systems State formed an Economic Development and techniques.

Partnership to create jobs in our service terri- Since 1984, more than 146 businesses have availed tory. The alliance, which has its roots in our 1988 themselves of one or more of our economic develop-negotiated rate agreement, willearmark $ 4 million ment incentive rates contributing to the creation or over a two-year span for the attraction or expansion of retention of approximately 11,050 jobs.

very specific types of businesses.

It also underscores the emphasis we are placing on Managing Electric Demand Provides Benefits for All formal and informal partnerships as we explore the Customer electric use created new demand peaks on opportunities and responsibilities inherent in our three occasions during the year, setting a year-end relationships with the individuals, businesses and record peak on Dec. 12 of 6,220 megawatts-a level communities we serve. we did not expect until the early 1990's.

The strength of our core utilitybusiness depends on This growth, led by industrial demand which in-the vitality of our customer base. At every turn, we are creased 7.5 percent during the year, demonstrates the confirming that what works to our customers'est vitality of business in our service territory.

interests also works to ours. But it also presents a challenge. Ensuring the best The Niagara Mohawk-New York State Economic service at the lowest possible price means we must Development Partnership is one illustration of our maintain ample and efficient supplies of electricity, commitment to develop mutually beneficial solutions while skillfullykeeping expenses and the need to to the long- and short-term energy needs of our cus- acquire or build new capacity at a minimum.

tomers and our communities. Other examples of this During 1989, Niagara Mohawk willbe engaged in commitment include expansion of economic de- the development and implementation of a range of velopment rates; extension of real-time energy pric- energy pricing and conservation programs to make ing and conservation programs; introduction of a the customer and the company winners.

competitive bidding program to procure new electric For instance, technological advances and innova-resources and our efforts to obtain access to Canadian tive pricing are giving some of the company's largest gas. industrial customers a look at tomorrow's electricity prices today. These customers can reshuffle manufac-turing steps to realize substantial savings, because each day they are given prices based on the costs of production at the time.

'(lROHH(l%1118, 1l1I In 1989, we willbegin extending time-of-use pricing to our largest residential customers. Time-of-use rates willnot only give homeowners the ability to control NM Discount Rates Spur Economic Development their electric costs, it willalso help us shift electric Niagara Mohawk offers discounted energy prices to demand away from peak hours of the day.

attract new business to our service territory and to And, in the months ahead, Niagara Mohawk willbe help existing business renew or expand operations. considering a number of programs that use simple We also work with companies to implement energy conservation tactics to reduce peak load.

These demand-side efforts will tend to shift electric usage to off-peak hours and may reduce revenues over the short term. This is a factor under consideration in the regulatory process. Longer term, strategic load shifting can help defer the need for new generating capacity.

'NIAGARA i)IOIIAWKPOWER CORPORATIONl an(l SIIIISIIARYCOMPANIES 0 7 Competitive Bidding Promises Alternatives to Ifwe are successful in obtaining the necessary reg-Construction ulatory approvals and rights of way, we could have The substantial financial risk in building large elec- the new pipeline in service as early as November tric plants today makes few utilities eager to embark 1990.

on major new construction projects. Access to Canadian gas is important for several In the near term, additional electric capacity prob- reasons: 1) it strengthens our ability to supply our ably willcome from relatively small, widely scattered rapidly growing market; 2) its lower price reduces our independent power plants and from conservation and overall cost to customers; and 3) it provides a load-shifting programs. strategic link to additional suppliers.

In 1988, we added 7,500 new customers and 194 miles of new gas main. We also won the right to serve three new franchises last year and are pursuing the benefits of offering service to the many additional areas that have become attractive in recent years due to urban expansion.

Prospects continue strong for natural gas service, Niagara Mohawk's territory, rich in both natural which accounted for approximately 16 percent of our resources and industrial customers, has drawn a flood total corporate revenue in 1988. Deregulation and at-of proposals from independent developers. The chal- tractive prices are creating new avenues of supply and lenge now is adding that new capacity in a sensible demand.Q and cost-effective manner.

The most promising alternative is a public bidding program. Competitive bidding could allow Niagara Mohawk to add capacity as customer demand grows and to increase the number of productive Emphasis on Partnerships partnerships it enjoys with many independent power Energy-cost reduction wasn't just a goal, it was a producers. life-or-death proposition for Crucible Specialty Bids could include proposals for new generators, Metals four years ago. Francis Petro; who be-energy conservation or other steps that would post- came president of the Syracuse-based division pone the need for new plants. of Crucible Materials Corp., shortly after a 1985 The company submitted a bidding proposal to the management buyout, said the specialty steel New York State Public Service Commission in producer was literally smelting its profits away.

"To compete in the global marketplace for October. In 1989, we expect to conduct our first auc- steel, we need 100 percent electrical reliability at tion for 350 megawatts of capacity, which would be- the lowest possible cost," Petro recalls telling come available in 1994. Niagara Mohawk. "Is that unreasonable?"

Through a program that included industrial NM Plans Strategic Link to Canadian Gas gas conversion, time-of-use rates and economic Natural gas continues to be the heating fuel of pref- development incentive rates, Niagara Mohawk erence for new home builders in our service territory. helped Crucible slash its energy bill. Petro says It's also the number one choice of homeowners con- this was a major component in a larger program the 1,450-employee company undertook to make templating furnace replacements. its steel more price-competitive.

Co-generation is another market we are actively "The average price of all our products is more exploring. Gas transportation contracts with indus- competitive in the world market than it was in trial users offer opportunities for enhanced revenues 1979," Petro says. "And we'e selling in at least along with the potential for balancing the sharp 12 countries and growing, where we didn't have winter demand peaks typical of residential gas use a foothold two years ago."Cl patterns.

As we move to capitalize on this demand through an aggressive program of contacts with industrial customers and franchise expansion, we are also exploring avenues of new supply-especially Canadian natural gas.

We signed an agreement with TransCanada PipeLine Ltd. early this year to pursue plans to build a 25-mile line across the St. Lawrence River. The transaction, which also includes a contract for natu-ral gas supply, doesn't rule out several other options at our disposal including the proposed Iroquois pipeline through Central New York. But, at this juncture, it appears to be the most timely, cost-effective choice.

ommercial operation of Nine Mile Two in 1988 demonstrating the versatility and flexibilityof this was the final installment in a major building generating source.

program. During the past 25 years, Niagara We maximized the use of oil-burning units in Mohawk has added nearly 3,500 megawatts of electric Albany and Oswego as the price of fuel oil declined as power to the New York Power Pool and increased much as 25 percent below prior-year levels. This oil our system capacity almost 88 percent with the con- price decline, while partly due to market forces, was struction of Nine Mile Point Units One and Two; also a result of our success in renegotiating a long-Oswego Steam Units Five and Six; and the Granby term oil supply contract for our Oswego Station. The Hydroelectric Station. new contract terms resulted in a savings of approxi-The legacy of Niagara Mohawk's construction era is mately $ 15 million in fuel oil costs in 1988. Late in a low-cost mix of nuclear, hydroelectric, coal, oil and 1988, we successfully pursued yet another, though natural gas generating capacity. Combined with pur- much more modest, long-term oil contract chased power arrangements, we have confidence that improvement which willresult in some additional we can meet our customers'eeds into the next cen- savings in 1989.

tury, without embarking on another cycle of major With hydroelectric production down 6.8 percent plant construction. due to unusually dry weather and with Nine Mile One As we make the transition from a construction era off line, fossil generation was a low-cost alternative to to an operations era, our strategy is to: expensive purchased power.

o maintain the low-cost advantage of our existing Our strategy on fossil generation is to take full ad-plants through judicious refurbishment and high vantage of the economies of our existing facilities. En-operating standards; couraged by the continuing low price of oil and off-o balance growing demand, where possible, with system sales opportunities, we plan to add about 170 demand-side management and conservation megawatts of fossil generation capacity in 1989 by methodology; revitalizing an older oil-fired unit and two gas tur-o employ third-party producers, through competitive bines. Much of this additional power is targeted for bidding, when new capacity is required; sale to the wholesale market.

o increase customer access to natural gas, a plentiful, Moreover, our continuing life-extension studies in-economical energy source. dicate that our fossil units, built for 45 years of pro-ductive service, are capable of at least 60 years'pera-tion with modest repairs. While we plan to weigh the cost of refurbishment against demand-side manage-llEC M ment and non-utility production alternatives, we are encouraged by the integrity of our existing plants.

NM's People Accept Nuclear Challenge Our nuclear plants are a significant asset, represent-Fossil Plants Take Advantage Of 1988 Oil Price ing about 19 percent of our generating capability.

Decline Nine Mile One, a nuclear power industry pioneer, will Niagara Mohawk's fossil (coal, oil and natural gas- celebrate the 20th anniversary of its commercial op-fired) plants set new production records in 1988, eration in 1989. Nine Mile Two, a new and more com-plex facility, is just beginning what promises to be a long and productive life.

At year end, both units were listed on the Nuclear Regulatory Commission's roster of plants requiring closer monitoring. Nine Mile One, shut down since

'NIAIIARAMOlbOVK POWilR CORPORATION an(I SIIIISIIARYCOMPANILS 8-9 Dec. 19, 1987, was placed on the list last June. Nine for them to provide. Over time, we'e managed to Mile Two was added to the list in December, reflect- take advantage of low hydroelectric power costs ing the NRC's concern following the plant's uneven ductivityy through programs that extend the lives and pro-first year of operation. of our plants.

Nine Mile Two currently is under no restrictions for This process has become increasingly complex, operations but our ability to restart Nine Mile One is however, as we endeavor to work in good faith to subject to approval of NRC Region 1 stafE, based on satisfy a growing list of waterway interest groups, our successful completion oEa restart action plan. ranging from recreationalists, environmentalists, and The problems underscored by the NRC are more fishing enthusiasts to civic and industry groups, pri-managerial than technical and reveal the regulatory vate businesses and non-utility power producers.

body's concern for the preparedness of people en- Our strategy recently has been to redevelop plants trusted with day-to-day nuclear operations. Our chal- through joint ventures with independent power pro-lenge is to complete the work planned in the Unit One ducers, using designs that address the concerns of all restart program filed with the NRC this past De- interests. The Glen Park and Union Falls stations, cember, and achieve progress on our nuclear im- opened in 1987 and 1988, respectively, and the Middle provement program. This willrevitalize the morale Falls station, currently under construction, are good and spirit of our nuclear workers, who have been examples.

laboring long and hard to bring the sophisticated, Further plans for redevelopment are dependent on new Nine Mile Two to maximum efficiency and to our progress in retaining federal operating licenses. Iri prepare the older Nine Mile One for its remaining 1993, federal relicensing decisions are due on nearly 15-year sprint or longer ifits operating license is halE of our hydroelectric plants.%

extended.

lLIP WlI3 3 Building a Winning Team Larry Burkhardt, Niagara Mohawk's new execu-tive vice president of nuclear operationsbe-lieves he was recruited "to build a winning team" Our people have ensured that Nine Mile One's pro- and often reminds his colleagues that they are ductivity, during its two decades of service, has con- "running this race to win."

sistently ranked with the best reactors of its kind and "Second best just gets mud in your face," says has provided over $ 800 million in fuel savings- with Burkhardt, who uses sports analogies to remove approximately half that total accumulated between some of the abstraction from the term "excel-1983 and 1987. In 1987, Nine Mile One set the pro-lence" and to help drive home the importance of discipline and teamwork.

ductivity record for U.S. boiling water reactors. A 32-year Navy nuclear veteran who, on his We are keenly aware of the costs incurred each day 1986 retirement as a rear admiral, held adminis-this facility is out of service. We are committed to trative and policy responsibility for 900,000 mili-meeting our schedule on Nine Mile One and having tary and civilian personnel, Burkhardt is encour-both nuclear plants in productive operation in 1989. aged by the company's goal of becoming "the best" nuclear utility.

NM Pursues New Strategies To Extend Hydro Legacy "We have technical competence, loyalty and Our company not only derives its name from two riv- dedication," Burkhardt says of the nuclear work-ers but about one-third of its power comes from Up- force. "Now, we just have to improve our effec-tiveness and get into the habit of winning state New York's abundant waterways. We generate beginning with a few small successes and build-low-cost hydroelectric power at 77 sites in our system ing on them until we'e come to expect nothing and buy additional supplies under a long-term con- less."Q tract with the New York Power Authority. In 1988, we agreed in principle with NYPA to extend this contract until 2007.

While the average age of our hydro stations is ap-proximately 60 years, they remain capable of highly efficient operations. For example, in 1988 they pro-duced 94 percent of the energy theoretically possible

s energy demand climbs in our service territory gram, we identified 119,000 senior citizens, or and unemployment declines, it's tempting to approximately one-third of the estimated total in paint a picture of unremitting prosperity. But our territory by asking them to enroll in Club our people dealing day-to-day with customers tell a SENIORITY. The drive continues in 1989.

different story. Membership entitles customers to a special news-Meter readers, customer representatives, service letter and assures them of special attention from our personnel and other Niagara Mohawk people who consumer services personnel.

work closely with the public, present us with a por-trait of a growing number of customers who have dif- Energy Packaging Energy-related programs de-ficulty managing their daily affairs. vised for the low-income elderly are often undersub-As at other utilities, we have been actively develop- scribed because this interest group can least afford to ing programs to provide assistance. These include participate. In 1988, Niagara Mohawk provided energy conservation activities, health and safety pro- money that enables five New York county agencies grams and our efforts to improve the readability and involved with aging to hire individuals called content of our bills. But increasingly, we are focusing "Energy Packagers" who willhelp low-income elderly our efforts on those who require special care. households take advantage of a wide range of avail-able services, including home weatherization and repair, furnace-replacement and bill payment programs.

To date, special assistance is being provided to 180 RIIRSI $ 1I1jSR I10W homes or individuals through this program, which is conducted through the State Office for the Aging and extends through 1989.

Our interests are bottom-line oriented as well as humanitarian. We know there's help available for the Consumer Advocates In 1988, Niagara Mohawk elderly, the disabled, the poor and the otherwise dis- completed its first full year of operating a team of advantaged, who make up the largest proportion of specially trained employees, with backgrounds in so-our uncollectibles. But often, they need assistance in cial work or social services, to act as ombudsmen for getting the help they need. customers in five regions. Consumer advocates inter-Four programs, introduced in 1988, are especially vene in difficultand emergency situations, using noteworthy: company programs and help from human-service agencies to promptly solve customer problems.

Club SENIORITY Customers age 60 years and older frequently need special services. Through an aggressive advertising and customer outreach pro- Gatekeeper Jointly sponsored by Niagara Mohawk and the State Office for the Aging, this program trains those employees, who frequently come in contact with customers, to be sensitive to conditions that in-dicate economic, emotional or health problems in homes- particularly those of senior citizens. Through referrals provided by Niagara Mohawk people, human-service agencies receive the information they need to take appropriate action.

'IIIAGARAiMOIIAIVKPOPOVER CORPORATION aml SIJIISIDIARY COi)IPAWIilS 10-11 Subsidiary Growth Represents Commitment to Dividend Reinvestment Plan Diversification At year-end 1988, some 62,945 dividend-reinvestment Niagara Mohawk's subsidiaries, Opinac Energy Corp. plan participants held approximately 19.5 million and HYDRA-CO Enterprises, Inc., continued their shares of the company's stock, or 14.5 percent of the record of growth in 1988. company's outstanding common shares. This partici-pation resulted in the reinvestment of more than

$ 23.1 million in dividends in Niagara Mohawk stock during the year.

lIV8M MlS R A prospectus describing the plan and an authoriza-tion form to join may be obtained by writing Niagara Mohawk's Dividend Reinvestment Plan, P.O. Box 7058, Syracuse, New York 13261.9 At year end, the Canadian-based Opinac Explora-tion, Ltd. had estimated proven reserves of 173 billion cubic feet of natural gas and 1.8 million barrels of crude oil for a combined value of $ 82 million (U.S.).

This compares with 138 billion cubic feet of natural gas and 1.4 million barrels of crude-oil proven re- Delivering Extra Help serves in 1987 for a combined value of $ 65 million Leo Reiter says his job hasn't skipped a beat (U.S.). Opinac Energy also operates Canadian Niag- since he left the Erie County Department of So-cial Services to join Niagara Mohawk recently as ara Power Co., Ltd., which generates electricity at a consumer advocate. Leo's job is to make sure Niagara Falls, Ontario. that people entitled to special help in paying HYDRA-CO Enterprises Inc., Niagara Mohawk's their energy bills, get it.

presence in the field of co-generation and independent "I know all the social service aciencies. I know power production, brought an additional 36 the rules. We have good working relations,"

megawatts of power on line in 1988 with the comple- Reiter says. Further, he believes that agencies tion of a wind power and a hydroelectric project. such as the County Departments of Social Serv-By December, the small power producer had the ices, the Offices for the Aging, Red Cross and ability to generate 173 megawatts of electricity, with Catholic Charities, to name a few, appreciate 203 megawatts of generating capacity under con- having a local company contact who under-stands their workings.

struction and 113 megawatts in development. His clients are frequently elderly or disabled Niagara Mohawk also maintains an investment in people, or families with deep financial problems.

NITECH Inc., which was developed to produce and . They are either unaware of, or physically or men-market the Power-Donut (tm) Sensor Line Monitoring tally unable to secure, available energy related, System, originally a Niagara Mohawk research support.

project. Referrals typically come through Niagara Niagara Mohawk's diversification strategy is to Mohawk's Credit Department, but meter readers own and operate energy-related businesses. and service representatives also make a signifi-cant contribution. "No business enters people' homes with the regularity we do. We have a NM Maintains Active Investor Program unique opportunity to solve some of our own Our Investor Relations and Shareholder Services de- problems by helping others."U, partments conduct a program of regular communica-tions with shareholders, which includes annual and quarterly reports and a quarterly "In The Know" newsletter for shareholders who have requested addi-tional information.

Company representatives meet regularly with the security analysts and portfolio managers who advise a broad range of retail and institutional clients. On Dec. 31, institutions held about 26 percent of the company's common shares outstanding.

Management's Discussion and Analysis of Financial Condition and Results of Operations A number of significant events have oc- Stipulation Agreement) and gas rate and the implementation of an interim curred during the past several years moratoriums and the resolution of relief agreement with respect to re-which have had an impact on the Com- other outstanding issues (as defined placement power costs associated pany's financial condition and results of below) with the Public Service Com- with the Unit 1 outage, beginning with operations. Some of the more notable mission (PSC), discussed in more de- the fuel cost month of January 1989, events include: tail below, in connection with the proceeding es-o commercial operation of Nine Mile o continued emphasis on improving tablished by the PSC to investigate Point Nuclear Station Unit No. 2 (Unit customer service and identifying the Unit 1 outage (see Note 10 of 2), approval of the Unit 2 cost settle- market opportunities, enhancing sys- Notes to Consolidated Financial ment agreement and associated tem reliability and revitalizing the nu- Statements).

write-off of disallowed costs in 1987 clear program with a resultant in-(see Note 10 of Notes to Consolidated crease in the level of operating ex-Financial Statements), penditures, and The eftects of these and other events o a 42% reduction in the common stock othe continuing outage of Nine Mile will continue to influence the Com-dividend to the current level, Point Nuclear Station Unit No. 1 (Unit pany's financial results in 1989 and pos-o negotiated two-year electric (the 1) which began in December 1987, sibly beyond.

RESULTS OF OPERATIONS nancial Statements). This decrease is investigation (see Unit 1 outage discus-attributable to a number of significant sion below) as well as a continuation of For 1988, earnings per share decreased factors, including a full year's impact of or increase in the level of operating ex-31% to $ 1.21 per share compared to the reduction in the Company's earn- penses experienced by the Company.

1987's $ 1.76 per share earned prior to ings base resulting from the Unit 2 In May 1988, the Company, PSC Staff reflecting the loss of $ 833 million ($ 6.54 write-off as initially reflected in the and several intervening parties (includ-per share) relating to the write-oft of Company's March 1987 rate order, cer- ing the New York State Consumer Pro-disallowed Unit 2 costs in 1987 (see tain provisions of the electric and gas tection Board, the New York Depart-Note 10 of Notes to Consolidated Fi- stipulation agreements, which because ment of Law, the New York Department of changed conditions did not account of Economic Development and others) for the costs of programs that the Com- entered into a comprehensive Joint EARNED RATE OF RETURN pany is now incurring, the Unit 1 ex- Stipulation and Agreement (the Stipula-ON COMMON EQUITY tended outage (see Note 10 of Notes to tion Agreement) concerning the Com-Consolidated Financial Statements) and pany's then pending electric rate filing 15 D/o a further write-down of the Company's and several other pending matters. The 14 cP/,

investment in N M Uranium, Inc. (see Stipulation Agreement was approved by 13.6% Note 3 ot Notes to Consolidated Finan- the PSC in an order issued August 30, 12.7/o cial Statements) which were offset in 1988. The major provisions of the Stipu-part by an increase in electric sales to lation Agreement were as follows:

the public. Non-cash earnings, consist- o The Company agreed to no increase ing primarily of allowance for funds in base rates for electric service 87% used during construction and unbilled through June 30, 1990.

revenue, represented approximately o The Company agreed to refund to 10% of the balance of income available ratepayers $ 14 million over the twelve for common stockholders in 1988 and month period ending June 30, 1989.

are expected to increase to nearly 40% o The PSC proceeding ordered in 1987 in 1989. to inquire into the cost of past fuel As a reflection of these events, the procurement practices was dis-1984 1985 1986 1987 1988 Company achieved an 8.7% return on missed, based upon the provisions common equity in 1988 as compared of the Stipulation Agreement, in its with 12.7% (excluding the Unit 2 write- entirety.

off) in 1987 and 13.6% in 1986. Although o The PSC, in connection with its inves-no authorized return on equity was es- tigation into the fossil fuel procure-tablished in the Stipulation Agreement, ment practices of the Company, will the Company had anticipated a return continue its examination of the exist-on equity of approximately 10.0% in ing fuel adjustment clause (which was consideration of the provisions of the subsequently expanded into a state-Stipulation Agreement and an estimate wide generic proceeding). However, of the incremental costs of the Unit 1 modification to the existing fuel ad-outage. The authorized return on equity justment clause, if any, shall not be at December 31, 1987 and 1986 was made etfective for the Company prior 13.0% and 13.5%, respectively. The re- to July1,1990.

turn on equity for 1989, while based o The Company will be allowed to keep upon certain assumptions that cannot amounts earned up to 13.8% and be predicted with accuracy, is expected 14.0% return on equity for the twelve to be less than the actual earned return month periods ending June 30, 1989 on equity for 1988 as a consequence of, and June 30, 1990, respectively, sub-among other things, the continuing un- ject to certain assumptions and certainties surrounding the Unit 1 out- rate-making conventions used in the age and the associated PSC prudency Stipulation Agreement, with an equal

NIAGARA MOIIAiVKPOWER CORPORATION Nld SUBSIDIARY COMPANIES I2-13 sharing with consumers of any earn- vestigate the prudence of the Unit 1 million to $ 12.3 million per month re-ings in excess of those amounts; outage. Through the function of the fuel duction in cash flow) dependent upon however, the Company expects to adjustment clause sharing mechanism, the level of replacement power costs earn substantially less than the return the Company has absorbed through absorbed by the Company through the on equity caps established. December 31, 1988 approximately $ 17.2 normal operation of the fuel adjustment o The Company will be allowed to re- million of replacement power costs clause, the amount of incremental ex-flect in income approximately $ 50 mil- necessitated by the Unit 1 outage and penses necessitated by an extension of lion in unbilled electric revenues, rep- has collected from ratepayers approxi- the outage and the continued suspen-resenting non-cash earnings, to offset mately $ 75.9 million. The Company has sion of collection of replacement power otherwise required increases in costs also absorbed approximately $ 26.7 mil- costs billed to customers under the fuel over the two year period. lion of incremental Unit 1 operating and adjustment clause. These amounts o The Company was permitted to re- maintenance costs in excess of exclude expenditures to be incurred in cover approximately $ 41 million of its amounts provided for in the ratesetting 1989 relative to the long-term nuclear

$ 47 million investment in the Lake process. improvement program, which will exert Erie Generating Station Project. The The Company entered into an interim additional upward pressure on ex-remaining $ 6 million of the Com- relief agreement with the PSC Staff and penses.

pany's investment was charged other intervenors, which was approved The Company is unable to predict the against Other Income Deductions. by the PSC in January 1989, to suspend results of the PSC's prudence investiga-o For the Company's ratemaking pur- collection from ratepayers of $ 225,000 tion, what sanctions, if any, may ulti-poses, April 5, 1988 will be recognized per day through the fuel adjustment mately be imposed and the adverse im-as the commercial operation date for clause, commencing with the fuel cost pact on the Company's financial condi-Unit 2. The Company deferred all month of January 1989 until the earlier tion, results of operations or level of re-costs of operating Unit 2 from April 5, of restart of Unit1 or June30,1989. This tained earnings which might result if 1988 to June 30, 1988 including carry- will reduce the Company's cash flow any such sanctions are imposed.

ing charges. Such deferred costs through the agreement period by ap- The following discussion and analysis shall be amortized and recovered proximately $ 6.75 million per month. highlights items having a significant ef-over the life of Unit 2. The suspension of collection from fect on operations during the three-year o The Company will spend $ 4 million on ratepayers will also serve to reduce period ended December 31, 1988. It may economic development programs to earnings per share through the agree- not be indicative of future operations or be developed in conjunction with the ment period by approximately $ .03 per earnings. It should be read in conjunc-New York Department of Economic month. tion with the Notes to Consolidated Fi-Development. If Unit 1 is not returned to service by nancial Statements and other financial The effect of the recognition of the June 30, 1989, the parties to the interim and statistical information appearing

$ 14 million refund, the write-off of a por- agreement will be free to seek an exten- elsewhere in this report.

tion of the Lake Erie Generating Station sion of interim relief in whatever form Electric revenues increased $ 247.3 Project costs, the accrual of unbilled they think appropriate. The Company million or 11.8% over the three-year electric revenues and the accrual of cannot predict what form an extension period. This increase results primarily economic development program ex- of interim relief might take, if sought, or from increased sales to ultimate con-penditures on 1988 results of opera- the resultant impact on the Company's sumers reflecting a combination of tions was to reduce earnings per share financial condition, results of opera- weather-related sales and load growth by $ .15. tions or external financing require- in the Company's service territory, base As discussed further in Note 10 of ments. However, should the outage be rate increases and the recording of un-Notes to Consolidated Financial State- extended beyond June 30, 1989 and billed electric revenues in accordance ments, Unit 1 was taken out of service in interim relief is secured in essentially with the Stipulation Agreement, offset December 1987, and currently remains the same form, earnings would be ad- in part by decreased sales to other elec-out of service. On September 8, 1988, versely affected by approximately $ .07 tric systems, as indicated in the table the PSC instituted a proceeding to in- to $ .09 per month (approximately $ 9.5 below:

ELECTRIC SALES MlI sons of Kw.hrs. Increase (decrease) from prior year ln millions of dollars Electric revenues 1988 1987 1986 Total 37,086 6,964 35,684 Increase in base rates $ 12.9 $ 49.7 $ 52.3 $ 114.9 35,296 34,347 4,154 34,995 Fuel and purchased power cost revenues . 39.8 (53.8) 12.6 (1.4) 5,286 3,579 1,732 Sales to ultimate consumers............. 82.0 43.4 61.5 186.9 3,263 Sales to other electric systems........... (57.8) 22.2 (100.3) (135.9) 1,530 Unbilled electric revenues............... 62.5 62.5 Miscellaneous operating revenues .......

30,768 0,1 0,01 34.1 (23.1) 9.3 20.3 UJ

$ 173.5 $ 38.4 $ 35.4 $ 247.3 I

1984 1985 1986 1987 1988

On March 12, 1986, the PSC approved Rate action initiated in 1987 sought $ 119.5 million (5.8%) additional based upon forecast operations for the rate year ending June 30, 1989 blectiic'evenues a 2.1% electric rate increase to provide "'nd the Company additional annual rev- a 14.25% return on equity. The Company, as discussed above, reached a enues of $ 39,974,000, based on (i) fore- negotiated resolution of this request which resulted in, among other things, no cast sales for the twelve months ended increase in base electric rates through June 30, 1990. As a result of the continuing March 31, 1987, (ii) a 13.5% return on effects of the events discussed above and other factors, the Company will need to common equity and (iii) the inclusion of seek additional electric rate relief to become effective in July 1990. The form and

$ 680 million of Construction Work in extent of such rate relief is currently being considered.

Progress (CWIP) in electric rate base. Changes in fuel and purchase power cost revenues are generally margin-neutral The new rates were put into effect on while sales to other utilities, based upon regulatory sharing mechanisms, generally March 17, 1986. On August 23, 1986, in result in low margin contribution. Thus, fluctuations in these revenue components connection with a second-stage filing do not have a significant impact on net operating income. The Company was per-involving this rate decision, the PSC mitted to recognize in earnings unbilled electric revenues in an amount equal to approved additional annual electric the revenue required to amortize $ 39 million of the Company's investment in the revenues of $ 7,475,000 for items which discontinued Lake Erie Generation Station and to recoup other specified costs, were not considered in the March 1986 therefore the effect of accrual of unbilled electric revenues on net operating in-decision. come was minimal. Included in fuel and purchased power cost revenues is approx-On March 13, 1987, the PSC approved imately $ 75.9 million of replacement power costs associated with the Unit 1 outage.

a 4.0% electric rate increase to provide Electric kilowatt-hour sales were 35.0 billion in 1988, a decrease of 1.9% from the Company additional annual rev- 1987 and an increase of 1.9% from 1986. The 1988 decrease reflects increased enues of $ 74,898,000 based on (i) fore- sales in all customer classifications, offset by a substantial decline in sales to other cast sales for the twelve months ended electric systems caused by unfavorable price competition in the wholesale energy March 31, 1988, (ii) a 13.0% return on market. (See Electric and Gas Statistics-Electric Sales appearing on page 38).

equity, and (iii) the inclusion of $ 1.625 Details of the changes in electric revenues and kilowatt-hour sales by customer billion of CWIP in electric rate base group are highlighted in table below:

($ 1.5 billion relating to Unit 2). The new 1988 %Increase (decrease) from prior year rates, put into effect on March 16, 1987, %of reflect tax law changes of the Tax Re- Electric 1988 1987 . 1986 form Act of 1986 and a reduction to Class of service Revenues Revenues Sales Revenues Sales Revenues Sales 13.0% from the 14.0% return on equity requested by the Company. No adjust- Residential ........... 34.4% 9 0o/o 4.P/o 5.2/o 3.2/o 8.5% 4.3o/o ment to gas rates was requested by the Commercial .......... 35.3 5.7 4.3 2.1 3.3 8.2 4.7 Company in connection with either of Industrial ............. 19.5 5.2 7.5 (3.0) 1.1 2.6 (0.8) these rate decisions. Municipal service ..... 1.8 1.5 .8 (1.0), 0.4 4.6 (2.9)

Total to ultimate consumers ......... 91.0 6.7 5.5 2.0 2.5 6.9 2.5 TOTAL ELECTRIC AND GAS OPERATING REVENUES Miilionsofdollars Other electric systems . 2.6 (49.0) (58.3) 23.2 16.1 (51.1) (32.3)

Miscellaneous ........ 6.4 179.2 (30.0) 13.7 Total .. ...100.0o/o 8.P/o (1.9)% 1.8o/o 3.9o/o 1.7o/o (2.7)%

$ 2,786 $ 2,800

$ 2,695 $ 2,660 $ 2,343 Gas revenues decreased $ 141.7 million or 23.7% over the three-year period. As

$ 2,623

$ 2,135

$ 2,096 $ 2,13 shown by the table below, this decrease is attributable to lower costs for purchased

$ 2,170 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 increased residential sales. Rates for transported gas gener-ally yield margins similar to margins on gas sold directly by the Company. As a result, substantial decreases in gas revenues caused by the migration of customers to the transported gas classification have not had a significant impact on earnings

$ 651

$ 59 from gas operations. Also, changes in purchased gas adjustment clause revenues

$ 52

$ 57 are generally margin-neutral.

Increase (decrease) from prior year 1984 1985 1986 1987 1988 ln millions of dollars Gas revenues 1988 1987 1986 Total Increase in base rates............. $ 3.0 $ 3.0 GAS SALES Millions of dekatherrns Purchased gas adjustment clause revenues (6.2) (12.0) (20.0) (38.2)

Increase (decrease) in 115.0 108.7 residential sales ................ 18.9 (8.8) 13.2 23.3 108.4 Increase (decrease) in commercial 100.8 I 4:9 I 27.3 and industrial sales ............. (15.1) (61.9) '68.6) (145.6)

9. Transportation of customer-owned gas 2.3 9.3 2.2 13.8 Miscellaneous operating revenues . 3.6 (1.8) 0.2 2.0 s s.s $ (75.2) s (70.0) $ (141.7)

Gas sales, excluding transportation of customer-owned gas, were 81.4 million dekatherms in 1988, a slight increase from 1987 (see Electric and Gas Statistics-Gas Sales appearing on page 38). The increase for 1988 reflects a 6.3% increase in sales in the residential class reflecting a combination of weather-related sales and 1984 1985 1986 1987 1988 load growth offset by a 41% decrease in sales in the industrial class because of

NIA(jARAi>IOIIAWKPOWER CORPORATION alIII SUBSIDIARY COMPANIES I4-I5 competition from oil and the ability of customers to purchase gas directly from slightly in 1987 and increasing 7.6% in producers. The Company transported 27.2 million dekatherms for customers pur- 1986. This substantial increase results chasing gas directly from producers and expects a continued increase in such primarily from Unit 2 becoming com-transportation activities. To the extent the increase is due to existing customers mercial in 1988 and increased costs re-electing to purchase gas directly from suppliers, there will be a corresponding suiting from the continuing outage at reduction in gas revenues. Changes in gas revenues and dekatherm sales by cus- Unit 1 and the mid-cycle outage at Unit tomer group are detailed in the table below: 2. Further, the Company embarked on a number of customer service, generating 1988  % Increase (decrease) from prior year station life-extension and nuclear im-

%of provement programs in 1988 which in-Gas 1988 1987 1986 creased the level of expenses as com-Class of service Revenues Revenues Sales Revenues Sales Revenues Sales pared to 1987. Increases in 1986 were Residential .. 63.3o/o 3.F/o 6.3o/o (5.6)% (2.8)% 6.0o/o 4.4% primarily the result of increases in Commercial .. 26.2 (1.0) 1.8 (15.2) (13.6) (3.3) 0.8 maintenance costs associated with the Industrial .... 4.2 (36.1) (41.0) (56.6) (53.5) (48.7) (46.7) Company's electric distribution system and scheduled costs coincident with Total to ultimate the refueling of Unit 1.

consumers......... 93.7 (0.7) .6 (15.2) (14.5) (11.8) (10.9) Depreciation and amortization ex-Other gas systems .... 2.1 6.4 (13.8) (38.4) (32.8) (23.5) (23.6) pense for 1988 increased 15.6% over Transportation of 1987 and 17.3% over 1986, principally customer-owned from Unit 2 becoming commercial.

gas................ 3.0 19.8 24.6 414.8 349.1 Net Federal and foreign income taxes Miscellaneous ....... 1.2 189.9 (49.7) 68.6 for 1988 decreased as a result of a re-Total .. 100.F/o 0.8o/o 5.3o/o (14.2)% 2.3/o (11.7)% (11.5)% duction in taxable income and the statutory tax rate. The increase in taxes other than income taxes in the three In January 1988, the PSC approved a and 17.8% in 1986. The decrease for year period is due principally to higher gas rate settlement proposed by the 1988 is the result of a 1.2% increase in property taxes resulting from property Company and interested parties, which dekatherms purchased to meet cus- additions and the reflection of Unit 2 will maintain current gas base rates tomer demand, offset by lower rates taxes that are now being charged to through June 1990 while refunding ap- charged by the Company's principal operations.

proximately $ 5.7 million to gas custom- supplier and favorable spot market pur- Other income and deductions, ers to reflect changes resulting princi- chases and a decrease in purchased excluding Federal income taxes, in-pally from the Tax Reform Act of 1986. gas costs recognized and recovered creased $ 166 million from 1987. This in-In accordance with this agreement, the through the purchased gas adjustment crease is primarily the result of the rec-Company will be allowed to retain all clause. In 1988, the Company pur- ognition in 1987 of $ 218 million of disal-gas segment earnings up to a 13.0% re- chased 37% of its gas supply require- lowed plant costs (net of tax) offset by a turn on equity and 30% of any earnings ments on the spot market, the maximum $ 15 million decrease in AFC and a de-in excess of 13.0%. The Company ex- allowable under its contract with its crease of other items of $ 37 million. The pects to seek additional gas rate relief principal supplier. The Company's net decrease in AFC is attributable to lower to become effective in July 1990, and is cost per dekatherm purchased de- AFC rates, lower interest bearing plant currently considering the form and ex- creased to $ 3.19 in 1988 from $ 3.27 in balances as a result of the write-off of tent of such rate relief. 1987 and $ 3.52 in 1986. disallowed plant costs and increased In 1988, electric fuel and purchased Through the energy and purchased CWIP in rate base through March 1988.

power, costs increased to $ 704 million gas adjustment clauses, costs of fuel, The decrease in other items (net) is from $ 666 million in 1987 and $ 672 mill- purchased power and gas purchased, primarily the result of the recording of ion in 1986. The increase in 1988 is the above or below the levels allowed in ap- the $ 14 million refund to customers in result of a $ 58.5 million increase in fuel proved rate schedules, are billed or accordance with the Stipulation and purchased power costs incurred credited to customers. The Company's Agreement, coupled with a $ 11.1 million offset by a $ 20.0 million net decrease in electric fuel adjustment clause provides decline in earnings during 1988 by costs deferred and recovered through for partial pass-through of fuel and pur- Opinac Energy Corporation primarily the operation of the fuel adjustment chased power cost fluctuations from because of nonrecurring gains recog-clause. Included in electric'fuel and those forecast in rate proceedings, with nized in 1987 from the sale of the St.

purchased power costs for 1988 is $ 93.1 the Company absorbing a specific por- Lawrence Power Company and certain million of replacement power costs as- tion of increases or retaining a portion other investments.

sociated with the Unit 1 outage, of of decreases to a maximum of $ 15 mil- Net interest charges increased $ 7.6 which $ 75.9 million was recovered from lion per rate year. In December 1987,'he million in 1988, primarily the result of a ratepayers through the fuel adjustment PSC established a proceeding to $ 4.4 million decrease in the credit for clause. Although generation and examine the operation of the existing the borrowed funds component of AFC.

kilowatt hour purchases decreased fuel adjustment clause. Also, as dis- Dividends on Preferred Stock de-3.2%, fuel and purchased power costs cussed above, the Company will, for a creased $ 2.9 million in 1988 as a result incurred increased because of the use portion of 1989, suspend collection of of net reductions in amounts outstand-of higher cost fossil-fired generation to $ 225,000 per day in accordance with an ing. The weighted average long-term replace nuclear generation due to the interim relief agreement relating to re- debt interest rate and preferred divi-outage at Unit 1 during 1988. (see Elec- placement power costs occasioned by dend rate paid, reflecting the actual tric and Gas Statistics Electricity Gen- the Unit 1 outage. (See Note 10 of Notes cost of variable rate issues, decreased erated and Purchased appearing on to Consolidated Financial Statements.) to 8.92% and 7.90%, respectively, in Page 38). Other operation and maintenance ex- 1988, from 8.99/o and 7.93%, respec-The total cost of gas purchased de- penses increased $ 120.2 million or tively, in 1987, as a result of the Com-creased 1.1% in 1988, 20.8% in 1987, 22.1% in 1988, after having decreased pany's refinancing efforts.

MAINTENANCEAND OTHER TOTALTAXESINCLUDING Millions Of dollars quirements consist of amounts for the '

INCOMETAXES OPERATION EXPENSE Milliona Of dollars Company's construction program, working capital needs, maturing debt 663.0 issues and sinking fund'provisions on 482 outstanding debt and preferred stock 462,0 546.8 and have been affected by the Com-542.8 508.3 pany's efforts in recent years to lower 494.6 397.7 383.9 437 364.0 capital costs through refinancing. Using

'424 353.6 the maximum rates payable on variable 410 rate securities, the year-end average cost of long-term and preferred divi-dend rates including sinking fund re-quirements and current maturities were 9.87% and 9.15%, respectively, repre-149.1 158,9 201.0 I senting the lowest such average capital 141.0 144.3 costs since 1985. Total capital needs have been decreasing since 1987 as 1984 1985 1986 1987 1988 1984 1985 1986 1987 1988 Unit 2 approached completion and as budgeted construction expenditures Effects of Changing Prices. The rate of inflation continued to be moderate in 1988. were curtailed. Annual expenditures for The Company is especially sensitive to inflation because o'f the amount of capital it the years 1986-1988 for construction must raise to finance its construction program and because its prices are regulated and nuclear fuel, including related AFC using a rate base that reflects the historical cost of utility plant. and overheads capitalized, were $ 774.1 The Company's consolidated financial statements are based on historical events million, $ 447.2 million and $ 353.9 mil-and transactions when the purchasing power of the dollar was substantially differ- lion, respectively.

ent from the present. The effects of inflation on most utilities, including the Com- The 1989 estimate for construction pany, are most significant in the areas of depreciation and utility plant. The Com- additions, overheads capitalized and pany could not replace its utility plant and equipment for the historical cost value at nuclear fuel, and excluding AFC, is ap-which they are recorded on the books. In addition, the Company would probably proximately $ 429 million, of which 54%

not replace these assets with identical ones due to technological advances and is expected to be funded by internal regulatory changes which have occurred. In light of these considerations, the de- sources. Mandatory and optional debt preciation charges in operating expenses do not reflect the current cost of provid- and preferred stock retirements and ing service. The Company, however, will seek additional revenue to cover the costs other requirements are expected to add of maintaining service as assets are replaced. approximately another $ 117 million to During a period of inflation, holders of monetary assets suffer a loss of general the Company's capital requirements, for purchasing power while holders of monetary liabilities experience a gain. The gain a total of $ 546 million. Current esti-from the decline in purchasing power of net amounts owed is primarily attributable mates of total capital requirements for to the substantial amount of debt which has been used to finance utility plant. the years 1990-1993 are $ 570 million, Since the depreciation on utility plant is limited to the recovery of historical costs, $ 521 million, $ 633 million, and $ 529 mil-the Company does not have the opportunity to realize a holding gain on debt and is lion, respectively. Such estimates take limited to recovery only of the embedded cost of debt capital. The following table into consideration, among other things, presents selected financial data restated for the effects of changing prices in aver- the 1988 Stipulation Agreement and the age 1988 dollars. effects of the outage at Unit 1 through 1988 1987 1986 June 30, 1989. Future capital require-ments rely on life-extension of the Operating Revenues ($ 000's) ... $ 2r 800,453 $ 2,723,620 $ 2,862,840 Company's existing facilities and the Gain from decline in proposed competitive bidding proce-purchasing power on net dures in New York State for indepen-amountsowed($ 000's) ...... $ 145,124 $ 153,056 $ 39,191 dent power production to satisfy future capacity requirements. Therefore, they Per Common Share: do not include any current plans by the Cash dividends declared ..... 1.20 $ 1.70 $ 2.24 Company to construct new base load Market price at year end...... $ 13.00 12.46 $ 18.02 generating facilities.

Average Consumer Price Index . 353.4 340.4 328.4 Also, in connection with the Com-pany's Restart Action Plan for Unit 1 its overall nuclear improvement FINANCIALPOSITION, LIQUIDITYAND CAPITAL RESOURCES and program, operating expenditures are Financial Position. The Company's The ratio of earnings to fixed charges expected to increase over presently capital structure and earnings base has for 1988 was 2.10. This is an im- forecasted levels.

been weakened by the 1987 write-off of provement from the 1987 ratio of 1.65 The Nuclear Regulatory Commission Unit 2's disallowed costs. The capital (excluding the cumulative effect of (NRC) has issued regulations which structure at December 31, 1988 was adoption of SFAS No. 90) which was could require the Company to acceler-55.1% long-term debt, 10.7% preferred negatively impacted by the Unit 2 ate funding requirements for decom-stock and 34.2% common equity as write-off. The ratio in 1986 was 2.98. The missioning of its nuclear units by compared to 47.0%, 10.5% and 42.5%, Unit 2 write-off and its resultant impact amounts which cannot currently be de-respectively, at December 31, 1986 on the Company's earnings capability termined'. The Company currently uses

-prior to such write-off, and 54.9%, necessitated a reduction in the common the internal reserve method of ac-12.0% and 33.1%, respectively, at stock dividend rate in 1987 to a current cumulating decommissioning costs, December 31, 1987. Book value of the annual level of $ 1.20 per share (See which does not require internal segre-common stock was $ 13.87 per share at also: Market Price of Common Stock gation of funds collected. The NRC reg-December 31, 1988 as compared to and Related Stockholder Matters). ulations require the establishment of an

$ 20.23 per share at December 31, 1986 external trust to accumulate decommis-and $ 13.82 per share at December 31, Construction and Other Capital Re- sioning costs, which will decrease the 1987. quirements. The Company's overall re- Company's sources of cash in the fu-

~ NIAGARA MOHAWK POWER CORPORATION aiIII SIIBSIDIARYCOMPANIES 10-17 ANNUALEXTERNAL ings per share of the issuance of new The Company's ratings at December FINANCING BY TYPE Millions of dollars common stock, the Company intends to 31, 1988 on its secured and unsecured 780.5 temporarily suspend sales of new com- debt respectively, were:

7. mon stock under the Dividend Rein- Secured Unsecured Preferred vestment and Employee Stock Plans ef-700.9 Standard &

614.3 fective during the first quarter of 1989 50.0 584.1 but expects to purchase its require- Poors

.0 Corporation BBB+ BBB BBB 189.6 ments on the open market. The antici- Moody's 185.3 ED pated amount of external financing in 407.2 Investors 90.7 ID 1989 reflects this decision. Although ex- Service Baa1 Baa2 baa2 346.5 ca 374.7 ternal financing plans for 1990 to 1993 Duff & Phelps 8 9 9 323,8 316.5 have not been finalized, the aggregate Fitch 297.0 level of financing during this four year Investors period is expected to be substantially Services BBB BBB- BBB-I cn greater than previous estimates reflect- On February 7, 1989, Moody's Inves-CI ing, among other things, the substantial tors Service downgraded the Com-concerns relating to the Company's pany's secured and unsecured debt rat-1984 1985 1986 1987 1988 nuclear operations, the potential addi- ings to Baa2 and Baa3, respectively and tional requirements to meet the NRC's its preferred stock rating to baa3. On new decommissioning regulations, the February 8, 1989, Duff 8 Phelps lowered effects of rate regulation and the need its ratings on the Company's secured ture. The impact on capital require- to improve the Company's financial debt and unsecured debt to 9 and 10, ments resulting from the NRC regula- position. The nature, timing and amount respectively. Further, Duff & Phelps tions could be substantial considering of such future financings will also de- lowered its rating on the Company's the Company's current forecast of de- pend, in part, on construction expendi- preferred stock from 9 to 12, or below commissioning costs and the re- ture levels, duration of and costs as- investment grade. Reductions of the coveries of such costs currently allowed sociated with the Unit 1 outage, retire- Company's credit ratings, and the at-by the PSC (see Note 10 of Notes to ments of securities, timeliness and ade- tendant adverse effect on the interest or Consolidated Financial Statements). quacy of rate relief, the level of inter- dividend rates that may be required in nally generated funds and dividend future issues of its securities, especially payments, the availability and cost of if ratings were to fall or remain below capital and the ability of the Company to investment grade, may reduce the Liquidity and Capital Resources. Cash meet its interest and preferred stock div- Company's financing flexibility and ad-flows to meet the Company's require- idend coverage requirements, to satisfy versely affect its capital structure and ments for operating, investing and legal requirements and restrictions in financial positiori.

financing activities during the past governing instruments and to maintain Ordinarily, construction related three years are reported in the Consoli- an adequate credit rating. short-term borrowings are refunded dated Statement of Cash Flows on page The Company believes that tradition- with long-term securities on a continu-

21. ally available sources of financing ing basis. Bank credit arrangements During 1988, the Company raised ap- should be sufficient to satisfy the Com- which, at December 31, 1988, totaled proximately $ 407.2 million through ex- pany's external financing needs during $ 335 million, (including $ 150 million of ternal sources, consisting of $ 269.8 mil- this period. As of December 31, 1988, revolving credit and term loan lion of debt, $ 90.7 million of common under the applicable earnings test set agreements, $ 85 million in lines of stock from the issuance of 6,679,672 forth in the indenture, the Company credit and a $ 100 million Bankers Ac-new shares through the Dividend Rein- would be permitted to issue up to $ 1.35 ceptance Facility Agreement) are used vestment and Employee Stock Plans billion of First Mortgage Bonds assum- by the Company to enhance flexiblility and a net increase of $ 46.7 million of ing a 10.75% interest rate and the exis- as to the type and timing of its long-term short-term debt and intermediate term tence of sufficient Additional Property, security sales. Such credit arrange-bank revolving credit obligations. The as defined in the Company's indenture, ments were reduced in 1988 from $ 555 Company also completed $ 12.6 million to secure that level of indebtedness. million at December 31, 1987, to enable of capital lease financing and raised However, based on the amount of Addi- the Company to better control its bor-

$ 100 million internally through the sale tional Property currently certified and rowing costs with less stringent terms of a portion of its accounts receivable. available, the Company could only issue than were contained in previous bank The Company expects external approximately $ 468 million of First credit agreements. In January 1989, the financing of approximately $ 297 million Mortgage Bonds. In addition, the Com- Company arranged a short-term $ 50 in 1989, which reflects the cash flow pany may issue approximately $ 972 mil- million line of credit which is secured by impact of the Interim Relief Agreement lion of First Mortgage Bonds at De- equipment.

relative to the Unit 1 outage. The level of cember 31, 1988 on the basis of retired The unsecured debt limitation im-external financing could be substan- bonds without regard to the earnings posed by the Company's charter is 10%

tially increased should the company be test. $ 100 million of Preference Stock is of consolidated capitalization plus $ 50 required to fund its guarantee of $ 150 currently authorized for sale if needed. million, which, as of January 1, 1989, million of tax-exempt obligations of The Company does not expect to be equates to approximately $ 565 million Long Island Lighting Company (see able to issue additional Preferred Stock and against which the Company has Note 11 of Notes to Consolidated Fi- until 1991, except for refunding issues, outstanding unsecured debt of $ 456 nancial Statements) or should the Unit 1 as a result of a restrictive provision in million. The Company intends to outage extend beyond June 30, 1989. the Company's charter. The Company negotiate additional credit facilities that With respect to the guarantee obliga- will also continue to explore and utilize, would enable it to borrow unsecured tion, the Company has credit facilities in as appropriate, other methods of raising debt up'to the permissible limit and to place to fund its obligation if necessary. funds including the sale of additional add other borrowing capability on a se-To minimize the dilutive effect on earn- accounts receivable. cured basis as required.

Consolidated Balance Sheets In thousands of dollars At December 31, 1988 1987 ASSETS Utilityplant, at original cost (Note 1):

Electric plant $ 6,497,398 ~

$ 4,777,519 Nuclear fuel (Note 3) . 404,686 408,427 Gas plant . 611,671 577,201 Common plant . 138,226 138,360 Construction work in progress (Note 10) 315,644 1,789,562 Total utility plant 7,967,625 7,691,069 Less accumulated depreciation and amortization 2,090,170 1,913,687 Net utilityplant . 5,877,455 5,777,382 Other property and investments 155,257 115,076 Current assets:

Cash, including time deposits of $ 11,335 and $ 9,017, respectively . 19,027 29,791 Accounts receivable (less allowance for doubtful accounts of $ 3,600)(Note 11) . 228,914 305,028 Unbilled electric revenues(Note 1) 126,000 Materials and supplies, at average cost:

Coal and oil for production of electricity. 47,382 47,863 Other 76,950 71,336 Prepayments:

Taxes 39,914 30,971 Other 26,642 21,624 564,829 506,613 Deferred debits:

Unamortized debt expense 128,520 125,108 Deferred recoverable energy costs. 32)239 8,436 Deferred finance charges (Note 1) 239,880 202,044 Other 77,861 59,439 478,500 395,027

$ 7,076,041 $ 6,794,098

"'IAQRAMOIMVKPOPOVER CORPORATION mid SUBSIDIARY COMPANIES IS-19 In thousands of dollars At December 31, 1988 1987 CAPITALIZATIONAND LIABILITIES Capitalization (Note 7):

Common stockholders'quity:

Common stock, issued 135,633,096 and 128,953,424 shares, respectively 135,633 $ 128,953 Capital stock premium and expense . 1)640,593 1,548,826 Retained earnings. 105,168 103,739 1)8811394 1,781,518 Non-redeemable preferred stock . 290,000 290,000 Redeemable preferred stock ..... 295,510 355,490 Long-term debt . 2,995,748 2,903,921 Total capitalization 5,462,652 5,330,929 Current liabilities:

Short-term debt (Note 4) 108,000 50,005 Long-term debt due within one year 110,571 77,508 Sinking fund requirements on redeemable preferred stock (Note 7) 17,980 14,980 Accounts payable . 219,798 164,350 Payable on outstanding bank checks 82,279 48,253 Customers'eposits 9,985 9,680 Accrued taxes 16,132 19,761 Accrued interest . 71,842 70,411 Accrued vacation pay 29,904 29,862 Due to cotenants under Cotenant Agreement (Note 10) .. 171,100 Other .. 39,640 44,418 706,131 700,328 Deferred credits:

Mandated refunds to customers . 51613 36,167 Accumulated deferred Federal income taxes 562,811 476,768 Deferred finance charges (Note 1) 239,880 202,044 Unbilled electric revenues(Note 1) 63i534 Other...... 35,420 47,862 907,258 762,841 Commitments and contingencies (Notes 3, 10 and 11)

$ 7,076,041 $ 6,794,098

~ y r Consolidated Statements of Income and Retained Earnings ln thousands of dollars For the year ended December 31 ~

1988 1987 1986 Operating revenues:

Electric . $ 2,343,732 $ 2,170,191 $ 2,131,833 Gas . 456,721 453,239 528,486 2>800,453 2,623,430 2,660,319 Operating expenses:

Operation:

Fuel for electric generation 360,373 339,382 319,834 Electricity purchased 343,511 326,152 352,126 Gas purchased . 265,033 268,099 338,634 Other operation expenses . 462,060 383,874 397,714 Maintenance 200,969 158,939 149,124 Depreciation and amortization 182,209 157,631 155,311 Federal and foreign income taxes . 134,451 195,472 211,237 Othertaxes 329,869 308,483 295,165 Amortization of investment in generating station project (Note 2) 39,813 2,318,288 2,138,032 2,219,145 Operating income 482,165 485,398 441,174 Other income and deductions:

Allowance for other funds used during construction ..... 5,149 20,563 121,932 Federal income taxes . 13,587 17,622 32,293 Current year effect of adoption of SFAS No. 90(Note 10):

Disallowed plant costs . (268,400)

Related income taxes 50,400 Other items (net) (25,758) 10,947 37,539 (7,022) (168,868) 191,764 Income before interest charges . 475,143 316,530 632,938 Interest charges:

Interest on long-term debt. 264,866 264,472 264,054 Other interest . 7,336 4,587 14,880 Allowance for borrowed funds used during construction (5,873) (10,315) (43,861) 266,329 258,744 235,073 Income before cumulative effect of accounting change 208>814 57,786 397,865 Cumulative effect on prior years of adoption of SFAS No.90(Note10) . (615,000)

Net income (loss) . 208,814 (557,214) 397,865 Dividends on preferred stock 49,157 52,017 53,817 Balance available for common stock 159,657 (609,231) 344,048 Dividends on common stock 158,228 208,881 264,312 1,429 (818,112) 79,736 Retained earnings at beginning of year .. 103,739 921,851 842,115 Retained earnings at end of year 105,168 $ 103,739 $ 921,851 Average number of shares of common stock outstanding (in thousands) . 131,853 127,435 127,076 Per average share of common stock:

Balance available for common stock before cumulative effect of accounting change ...... $ 1.21 0.5 $ 2.71 Cumulative effect on prior years of adoption of SFAS No. 90 (Note 10) (4.83)

Balance available for common stock $ 1.21 $ (4.78) 2.71 Dividends paid . 1.20 $ 1.64 $ 2.08 Proforma amounts assuming effects of adoption of SFAS No. 90 applied retroactively:

Balance available for common stock .............. $ $ 5,769 16,048 Balance available per share of common stock...... $ $ .05 $ .13

() Denotes deduction

.-NIAGARA MOIIAEVKPOWER CORPORATION alIII SUBSIDIARY COMPANIES 20-2I Consolidated Statements of Cash Flows Increase (Decrease) in Cash In thousands of dollars For the year ended December 31, 1988 1987 1986 Cash flows from operating activities:

Net income (loss) . $ 208,814 $ (557,214) 397,865 Adjustments to reconcile net income to net cash provided by operating activities:

Cumulative effect on prior years of adoption of SFAS No. 90..... 615,000 Disallowed plant costs . 268,400 Depreciation and amortization. 222,022 157,631 155,311 Amortization of nuclear fuel 16,362 28,748 18,257 Provision for deferred Federal income taxes 82,477 97,934 133,743 Allowance for other funds used during construction............ (5,149) (20,563) (121,932)

Deferred recoverable energy costs (23,803) 1,499 22,585 Gain on sale of investments (13,000)

Unbilled electric revenues . (62,466)

Decrease in mandated refunds to customers.................. (30,554) (27,062) (16,771)

(Increase) decrease in net accounts receivable 76,114 (15,678) (5,388)

(Increase) decrease in materials and supplies (3>000) (3,452) 17,848 Increase (decrease) in accounts payable and accrued expenses . 46,727 38,667 (29,270)

Increase (decrease) in accrued interest and taxes .............. (2,198) 11,181 (4,726)

Changes in other assets and liabilities . (26,925) (21,526) (10,204)

Net cash provided by operating activities 498,421 560,565 557,318 Cash flows from investing activities:

Construction additions ................................ (349>823) (409,068) (736,242)

Nuclear fuel (3,759) (28,765) (23,536)

Less: Allowance for other funds used during construction . ',149 20,563 121,932 Acquisition of utility plant . (348,433) (417,270) (637,846)

(Increase) decrease in materials and supplies .................. (2,133) 772 (4,463)

Increase (decrease) in accounts payable and accrued expenses . 12,877 (6,334) (11,864)

Sale of utility plant 128,000 Repayment of construction advances . 92,847 Payments under Cotenant Agreement . (171,100)

Sale of LILCO General & Refunding Bonds........ 140,000 (Increase) decrease in other investments (41,200) (22,823) 72,596 Cotenant prepayments to Nine Mile Point Nuclear..............

Unit No. 2 project fund (331) (83,808)

Other 9,197 12,664 (10,675)

Net cash used In Investing activities (540,792) (433,322) (315,213)

Cash flows from financing activities:

Proceeds from sale of common stock . 90,683 24,459 4,603 Proceeds from sale of preferred stock . 25,000 75,000 Sale of first mortgage bonds. 200>000 100,000 500,000 Issuance of other long-term debt. 69,800 270,060 98,900 Redemption of preferred stock (56>980) (62,380) (60,050)

Reductions of long-term debt (137,193) (273,005) (439,315)

Net change in short-term debt and revolving credit agreement 46,736 (72,987) 101,976 Dividends paid . (177,168) (268,591) (320,255)

Other (4,271) (15,987) (71,918)

Net cash provided by (used In) financing activities 31,607 (273,431) (111,059)

Net increase (decrease) in cash (10,764) (146,188) 131,046 Cash at beginning of year 29,791 175,979 44,933 Cash at end of year $ 19,027 $ 29,791 $ 175,979 Supplemental disclosures of cash flow Information:

Cash paid during the year for:

Interest $ 299,351 $ 284,348 $ 301,224 Income taxes. 42,348 44,479 47,770 Supplemental schedule of noncash investing and financing activities:

Net increase in capital lease obligations . $ 227 $ 9,397 14,284

Notes to Consolidated Financial Statements NOTE 1. Summary of Significant Accounting Policies is computed on the straight-line basis using the average or-The Company is subject to regulation by the New York State remaining service lives by classes of depreciable property. In Public Service Commission (PSC) and the Federal Energy addition, certain costs associated with the discontinued Lake Erie Generating Station Project (see Note 2) were amortized Regulatory Commission (FERC) with respect to its rates for service and the maintenance of its accounting records. The over shorter periods as approved by the PSC. For Federal in-Company's accounting policies conform to generally accepted come tax purposes, the Company computes depreciation accounting principles, as applied to regulated public utilities, using accelerated methods and shorter allowable depreciable and are in accordance with the accounting requirements and lives. Estimated decommissioning costs (costs to remove the ratemaking practices of the regulatory authorities. plant from service in the future) for the Company's Nine Mile Point Nuclear Station Unit No. 1 and its share of decommis-Statement of Cash Flows: In November 1987, Statement of Fi- sioning costs of Unit 2 are being recovered in rates through an nancial Accounting Standards No. 95, (SFAS No. 95), "State- annual allowance and charged to operations through depre-ment of Cash Flows" was issued by the Financial Accounting ciation charges (see Note 10).

Standards Board (FASB). The Company adopted SFAS No. 95 for the year ended December 31, 1988 and has restated the Amortization of Nuclear Fuel: Amortization of the cost of nu-consolidated statements of changes in financial position for clear fuel is determined on the basis of the quantity of heat 1987 and 1986 to conform with the 1988 presentation of cash produced for the generation of electric energy. The cost of flows. The Company considers all highly liquid investments, disposal of nuclear fuel, which presently is $ .001 per kilowatt-purchased with a remaining maturity of three months or less, hour of net generation, is based upon a contract with the U.S.

to be cash equivalents. Department of Energy. These costs are charged to operating expense and recovered from customers through base rates or Principles of Consolidation: The consolidated financial state- through the fuel adjustment clause.

ments include the Company and its wholly-owned subsidiaries.

All significant intercompany balances and transactions have Revenues: Revenues are based on cycle billings rendered to been eliminated. Assets and liabilities of foreign subsidiaries certain customers monthly and others bi-monthly. Although are translated into U.S. dollars at the exchange rate in effect at the Company commenced the accrual in 1988 of electric rev-the balance sheet date. Revenue and expense accounts are enues for energy consumed and not billed at the end of the translated at the average exchange rate in effect during the fiscal year, the impact of such accruals have not yet been fully year. Currency translation adjustments are recorded as a com- recognized in the Company's results of operations in accor-ponent of equity and do not have a significant impact on finan- dance with the Stipulation Agreement. Approximately $ 62.5 cial condition. million of such accrued electric revenues is included in the results of operations for the year ended December 31, 1988, Utility Plant: The cost of additions to utility plant and of re- and the remainder is included in Deferred Credits. The placements of retirement units of property is capitalized. Cost amounts included in the Deferred Credit may be used to re-includes direct material, labor, overhead and an allowance for duce future revenue requirements.

funds used during construction (AFC). The cost of current re- The Company's tariffs include electric and gas adjustment pairs and maintenance is charged to expense. Whenever utility clauses under which energy and purchased gas costs, respec-plant is retired, its original cost, together with the cost of re- tively, above or below the levels allowed in approved rate moval, less salvage, is charged to accumulated depreciation. 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 Allowance for Funds Used During Construction: The Company PSC has periodically authorized the Company to make capitalizes AFC in amounts equivalent to the cost of funds changes in the level of allowed energy and purchased gas devoted to plant under construction. AFC rates are determined costs included in approved rate schedules. As a result of such in accordance with FERC and PSC regulations.,The AFC rate in periodic changes, a portion of energy costs deferred at the effect December 31, 1988 was 10.40k. AFC is segregated into time of change would not be recovered or may be overrecov-its two components, borrowed funds and other funds, and is ered under the normal operation of the electric and gas ad-reflected in th'e Interest Charges section and the Other Income justment clauses. However, the Company has been permitted and Deductions section, respectively, of the Consolidated to amortize and bill or credit such portions to customers, Statement of Income. through the electric and'gas adjustment clauses, over a Effective April 1985, pursuant to a PSC authorization, the specified period of time from the effective date of each change.

Company discontinued accruing AFC on $ 320 million of con- The Company's electric fuel adjustment clause provides for struction work in progress (CWIP) for which a cash return was partial pass-through of fuel cost fluctuations from amounts being allowed through inclusion in rate base of that portion of forecast with the Company absorbing a specific portion of in-the investment in the Nine Mile Point Nuclear Station Unit No. 2 creases or retaining a portion of decreases up to a maximum of (Unit 2). This amount was increased to $ 680 million in April $ 15 million per rate year (However, see Note 10 "Interim 1986 and $ 1,625 million (including $ 125 million of other CWIP) Agreement on Unit 1 Outage Replacement Power Costs" ).

in April 1987. Amounts equal to the Unit 2's AFC which was no longer accrued on the CWIP included in rate base have been accumulated in deferred debit and credit accounts up to the Federal income Taxes: In accordance with PSC requirements, commercial operation date of Unit 2. The balance in the de- the tax effect of book and tax timing differences is flowed ferred accounts, amounting to $ 239.9 million at December 31, through unless authorized by the PSC to be deferred. The 1988, await future ratemaking disposition by the PSC. A por- Company provides deferred taxes on certain benefits realized tion of the deferred credit could be utilized to reduce future from depreciation, on deferred energy and purchased gas revenue requirements over a period shorter than the life of Unit costs, on nuclear fuel disposal costs accrued prior to April 2 with a like amount of deferred debit amortized and recovered 1983, on nuclear generating plant decommissioning costs, on in rates over the remaining life of Unit 2, as has been the ex- certain construction overheads and on certain other items (see perience of other New York State utilities. Note 9). As directed by the PSC, the Company defers any amounts payable pursuant to the alternative minimum tax Depreciation, Amortization and Nuclear Generating Plant De- rules. In conformity with ratemaking practices of the PSC, the commissioning Costs: For accounting purposes, depreciation Company has not provided deferred taxes on the cumulative

'-'NIAGARA MOIIAWKPOWR COIIPORATIOlt aml SIIIISIDIARYCOMPANIES 22-23 amount of approximateiy $ 1.6 billion of other tax deductions investment in the subsidiary, which includes costs incurred which include certain depreciation differences and various since acquisition and AFC accrued through March 31, 1981, construction overheads deductible currently for tax purposes has been reduced by the proceeds from the sale of uranium, and capitalized for accounting and ratemaking purposes. The net of tax, transfers of uranium to the Company and write-offs Company has claimed investment tax credits and deferred the of portions of the Company's investment, and is included in the benefits of such credits as realized in accordance with PSC consolidated financial statements as part of the nuclear fuel directives. Deferred investment credit is amortized to Other component of utility plant. Such investment, net of valuation Income and Deductions over the useful life of the underlying reserves of $ 20.5 million and $ 13.0 million at December 31, property. For purposes of computing capital cost recovery de- 1988 and 1987, respectively, totaled $ 44.9 million at December ductions and normalization, the asset basis has been reduced 31, 1988 and $ 52.5 million at December 31, 1987.

by all or a portion of the credit claimed consistent with then In connection with the Company's rate decisions in March current tax laws. The imputed tax benefit of the borrowed 1984, and March 1986 and the Stipulation Agreement, the PSC funds component of AFC on transitional property is recorded has allowed, as the cost of approximately 1,313,000 lbs. of in Other Income and Deductions. NMU uranium utilized in the 1984, 1986 and current reloads of The FASB has issued Statements of Financial Accounting the Company's Nine Mile Point Nuclear Unit No. 1 and approx-Standards No. 96 and No. 100 (SFAS No. 96 and No. 100) "Ac- imately 107,000 lbs. utilized for a portion of the initial core at counting for Income Taxes" which require the adoption of Nine Mile Point Nuclear Unit No. 2, a price which represents SFAS 96 for fiscai years beginning after 1989. The pronounce- the average United States delivery price for the year of transfer, ment continues the present comprehensive inter-period tax al- as reported by the U.S. Department of Energy (DOE). The total location rules, but shifts to the use of the liability method for allowed value of these transfers using DOE prices is approxi-accounting for deferred taxes rather than the deferred method mately $ 45.0 million while the Company's cost is approximately required under APB Opinion No. 11. Regulated utilities are not $ 63.0 million. The differential between the Company's cost of exempt from the provisions of SFAS No. 96, which specifically this NMU uranium and that amount allowed to be recovered in prohibits net-of-tax accounting and reporting and requires (i) rates charged to customers has been deferred subject to the recognition of a deferred tax liability for tax benefits that are PSC approval of the comparison of cost to market on an flowed through to customers when temporary differences aggregate basis over the life of the project and is reflected in originate and (ii) adjustment of a deferred tax liabilityor asset the Company's investment in NMU.

for an enacted change in tax laws or rates. However, any im- In October 1988, NMU transferred approximately 186,000 lbs.

pact of the pronouncement should be considered within the of uranium to the Company (with a cost of approximately $ 8.6 ratesetting environment. The adoption of the requirements of million) to be used in the 1990 refueling of Nine Mile Point SFAS No. 96 is not expected to significantly impact the Com- Nuclear Unit No. 2. Although the allowable value for this mate-pany's financial condition or results of operations. rial is expected to be the appropriate DOE price, such costs must still be reviewed in the Company's next rate proceeding.

Amortization of Debt issue Costs: The premium or discount Approximately 955,000 pounds of uranium remain to be trans-and debt expenses on long-term debt issues and on certain ferred, with the final transfer currently scheduled for 1991.

debt retirements prior to maturity, are amortized ratably over Based upon DOE's recently issued forecast which reflects a the lives of the related issues and included in interest on long- continued decline in average delivery prices from previous term debt (see Note 7). forecasts and the anticipated further decline in average de-livery prices, the Company expects that based upon costs al-NOTE 2. Depreciation and Amortization lowed in rates to date and the estimated value of remaining transfers, a minimum of $ 20.5 million of its investment in NMU The total provision for depreciation and amortization, includ- may not be recoverable in rates. Accordingly, the Company has ing amounts charged to clearing accounts, was $ 183,385,000 reduced the carrying value of such investment by $ 13 million in for 1988, $ 158,761,000 for 1987 and $ 156,494,000 for 1986. The 1987 and $ 7.5 million in 1988. The Company can provide no 1988 provision excludes approximately $ 39,800,000 resulting assurance that all of its remaining investment in NMU will ulti-from the amortization of costs associated with the discon- mately be recovered.

tinued Lake Erie Generating Station Project (LEGS) in accor-dance with the Stipulation Agreement (see discussion of the NOTE 4. Bank Credit Arrangements Stipulation Agreement in Management's Discussion and Analysis of Financial Condition and Results of Operations). At December 31, 1988, the Company had $ 335 million of The remaining unrecovered cost of LEGS of approximately bank credit arrangements with 30 banks. These credit ar-

$ 6,200,000, representing a portion of carrying charges accrued rangements consisted of $ 150 million in commitments under a on LEGS, was charged primarily against Other Income and Revolving Credit Agreement, $ 72 million in short-term com-Deductions for the year ended December 31, 1988. The percen- mitments under Credit Agreements, $ 13 million in lines of tage relationship between the total provision for depreciation credit and $ 100 million under a Bankers Acceptance Facility and average depreciable property was 2.7% in 1988 and Agreement. The Revolving Credit Agreement extends into 1991 3.0% in 1987 and 1986. The Company performs depreciation and the interest rate applicable to borrowing is based on cer-studies on a continuing basis and, upon approval by the PSC, tain rate options available under the Agreement. All of the periodically adjusts the rates of its various classes of depreci- other bank credit arrangements are subject to review on an abie property. 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 NOTE 3. N M Uranium, Inc. commercial paper outstanding, including amounts currently During 1976, through a wholly-owned subsidiary, N M issued in connection with Interest Rate Exchange Agreements Uranium, Inc. (NMU), the Company purchased a 50 percent (see Note 7). The Revolving Credit Agreement contains rep-undivided interest in uranium deposits and associated mining resentations which, if not met or re-negotiated, would prevent equipment to be held by a jointly-owned mining venture. Ac- the Company from making new borrowings under such quisition of this interest was made primarily to provide a more agreements. The Company is presently in compliance with assured future supply of nuclear fuel. Mining operations are these convenants and restrictions.

now complete and site restoration activities are underway. The The Company pays fees for substantially all of its bank credit

arrangements. The Bankers Acceptance Facility Agreement, NOTE 6. Information Regarding the Electric which is used to finance the fuel inventory for the Company's and Gas Businesses generating stations, provides for the payment of fees only at the time of issuance of each acceptance. Additional bank The Company is engaged in the electric and natural gas util-:

credit arrangements in connection with the Company's ity businesses. Certain information regarding these segments guarantee of certain obligations of LILCO are discussed in is set forth in the following table. General corporate expenses, Note 11. property common to both segments and depreciation or such In January 1989, the Company arranged a short-term $ 50 common property have been allocated to the segments in ac-million line of credit which is secured by equipment. cordance with practice established for regulatory purposes.

Amounts outstanding under Interest Rate Exchange Agree- Identifiable assets include net utility plant, unbilled electric ments and Revolving Credit Agreements totaled $ 75 million at revenues, materials and supplies, deferred finance charges, December 31, 1988 and are recorded as long-term debt. deferred recoverable energy costs and other deferred debits.

The following table summarizes additional information Corporate assets consist of other property and investments, applicable to'short-term debt: cash, accounts receivable, prepayments, unamortized debt expense and other deferred debits.

fn thousands of dollars At December 31: 1988 1987 Short-term debt:

Commercial paper.... $ 811000 $ 27,000 Notes payable ........ 5 Bankers acceptances . 27,000 23,000 fn thousands of dollars

$ 1081000 $ 50,005 1988 1987 1986 Weighted average interest rate(a) .. 9.28% 7.46%

Operating revenues:

Electric ........... $ 2,343,732 $ 2,170,191 $ 2,131,833 For ear ended December 31: Gas . 456,721 453,239 528,486 Daily average outstanding ......

Total $ 2,800,453 $ 2,623,430 $ 2,660,319

$ 46,254 $ 51,256 Daily weighted average interest rate(a) 7.58% 6.63%

Maximum amount outstandin $ 173,100 $ 154,000 (a) Excluding fees. Operating Income before taxes:

Electric ................... $ 570,088 $ 637,120 $ 596,864 Gas 46,528 43,750 55,547 NOTE 5. Jointly-Owned Generating Facilities Total $ 616,616 $ 680,870 $ 652,411 The following table reflects the Company's share of jointly-owned generating facilities at December 31, 1988. The Com-pany is required to provide its respective share of financing for Pretax operating Income, Including AFC:

any additions to the facilities. The Company's share of ex- Electric ................... $ 580,239 $ 667,610 $ 762,362 penses associated with the facilities is included in the appro- Gas . 47,399 44,138 55,842 priate operating expenses in the Consolidated Statement of Total ................... 627,638 711,748 818,204 Income. Income taxes ................ 134,451 195,472 211,237 Other income and deductions (12,171) (189,431) 69,832 fn thousands of dollars Interest charges ............. 272,202 269,059 278,934 Percentage Construction Cumulative effect of owner- Utility Accumulated work in accountin change ........ 615,000 ship plant depreciation progress Net income(/oss) $ 208,814 $ (557,214 $ 397,865 Roseton Steam Station Units No. 1 and 2(a) 25 $ 83,823 $ 31,427 $ 92 Oswego Steam Station Unit No.6(b) ....... 76 $ 262,108 $ 60,638 $ 1,742 Depreciation and amortization:

Nine Mile Point Nuclear Station Unit No. 2(c) 41 $ 1,468,075 $ 25,544 $ 530 Gas.....

Electric Total

................... $ 167,566 $ 143,508 $ 141,663 14,643

$ 182,209 $ 157,631 14,123 13,648

$ 155,311 (a) The remaining ownership interests are Central Hudson Gas and Electric Corporation, the operator of the plant (35%)

and Consolidated Edison Company of New York, Inc.

(40%). Construction expenditures (including nuclear fuel):

(b) The Company is the operator. The remaining ownership Electric .................. $ 304,515 $ 408,008 $ 734,348 interest is Rochester Gas and Electric Corporation (24%). Gas . 49,344 39,222 39,714 Output of Oswego Unit No. 6, which has a capability of Total $ 353,859 $ 447,230 $ 774,062 850,000 kw., is shared in the same proportions as the co-tenants'espective ownership interests.

(c) The Company is the operator. The remaining ownership interests are Long Island Lighting Company (18%), New Identifiable assets:

York State Electric and Gas Corporation (18%), Rochester Electric ........... $ 5,9101897 $ 5,626,117 $ 6,424,656 Gas and Electric Corporation (14%), and Central Hudson Gas . 539,309 491,315 468,299 Gas and Electric Corporation (9%). Output of Unit 2, which Total .......... 6,450,206 6,117,432 6,892,955 has a capability of 1,084,000 kw., is shared in the same Corporate assets . 625,835 676,666 718,248 proportions as the cotenants'espective ownership Total assets interests. $7,076,041 $ 6,794,098 $ 7,611,203

Nli'AGARA MOIIAWKPO)VER CORPORATION aml SUBSIDIARY COMPANIES 24-25 NOTE 7. Capitalization CAPITAL STOCK The following table summarizes the shares of capital stock authorized, issued and outstanding:

At December 31, 1988 1987 1986 Common stock, $ 1 par value:

Authorized 150,000,000 150,000,000 150,000,000 Issued & outstandin 135,633,096 128,953,424 127,140,994 Preferred stock, $ 100 par value:

Authorized 3,400,000 3,400,000 3,400,000 Issued & outstandin 2,644,000 2,927,000 3,260,000 Preferred stock, $ 25 par value:

Authorized 19,600>000 19,600,000 19,600,000 Issued & outstandin 13,563,602 14,710,801 14,874,000 Preference stock, $ 25 par value:

Authorized 4,000,000 4,000,000 4,000,000 Issued & outstandin 0 0 0 The table below summarizes changes in capital accounts for 1986, 1987 and 1988:

Preferred Stock

$ 100 par vafue par value Capital Stock Non- Non- Premium and Common Stock

$ 1 par value Shares able'ble'25 Redeem- Redeem-Shares Redeem-able'ble Redeem- Expense (Net)'alance January 1, 1986 126,928,340 $ 126,928 3,318,000 $ 210,000 $ 121,800)a) 14,044,000 $ 80,000 $ 271,100(a) $ 1,519,577 Salesln1986 ............ 60,354 61 3,000,000 75,000 (939)

Issued to stock purchase plans in 1986 ........... 152,300 152 2,821 Redemptions ............ (58,000) (5,800) (2,170,000) (54,250) 437 Foreign currency translation ad'ustment .. 603 Balance December31,1986 127,140,994 127,141 3,260,000 210,000 116,00Q'a) 14,874,000 80,000 291,850(a) 1,522,499 Salesin1987 ............. 1,000,000 25,000 (423)

Issued to stock purchase plans in 1987 ............ 1,812,430 1,812 22,442 Redemptions ............. (333,000) (33,300) (1,163,199) (29.080) 577 Foreign currency translation adjustment ... 3,731 Balance December 31,1987 128,953,424 128,953 2,927,000 210,000 82,700]a) 14,710,801 80,000 287,770(e) 1,548,826 Sales in 1988 .............

Issued to stock purchase plans in 1988 ............ 6,679,672 6,680 83,937 Redemptions ............. (283,000) (28,300) (1,147,199) (28,680) 672 Foreign currency translation ad ustment.... 7,158 Balance December31,1988 135,633,096 $ 135,633 2,644,000 $ 210,000 $ 54,40Q'a) 13.563.602 $ 80,000 $ 259.09Q'a) $ 1,640,593

• In thousands ol dollars (a) Includes sinking fund requirements due within one year

NON-REDEEMABLE PREFERRED STOCK (Optionally Redeemable)

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

Redemption price per share (Belore adding accumulated dividends)

In thousands ol dollars Eventual At December 31, 1988 1987 1986 December 31, 1988 minimum Preferred $ 100 par value:

3.40% Series; 200,000 shares......... $ 20>000 $ 20,000 $ 20,000 $ 103.50 $ 103.50 3.60% Series; 350,000 shares......... 35,000 35,000 35,000 104.85 104.85 3.90% Series; 240,000 shares......, .. 24,000 24,000 24,000 106.00 106.00 4.10% Series; 210,000 shares......... 21,000 21,000 21,000 102.00 102.00 4.85% Series; 250,000 shares......... 25,000 25,000 25,000 102.00 102.00 5.25% Series; 200,000 shares......... 20,000 20,000 20,000 102.00 102.00 6.10% Series; 250,000 shares......... 25>000 25,000 25,000 101.00 101.00 7.72% Series; 400,000 shares......... 40,000 40,000 40,000 103.51 102.36 Preferred $ 25 par value:

Adjustable Rate SeriesA; 1,200,000 shares .........-......... 30,000 30,000 30,000 25.75 25.00 Adjustable Rate Series C; 2,000,000 shares .................. 50,000 50.000 50,000 (a) 25.00

$ 290,000 $ 290,000 $ 290,000 (a) Not redeemable until 1990.

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

Redemption price per share (Belore adding accumulated dividends)

In thousands ol dollars Eventual At December 31, 1988 1987 1986 December 31, 1988 minimum Preferred $ 100 par value:

7.45% Series; 384,000, 402,000, and 420,000 shares .. $ 38,400 $ 40,200 $ 42,000 $ 103.85 $ 100.00 10.13% Series; none, 225,000 and 250,000 shares ..... 22,500 25,000 10.60% Series; 160,000, 200,000 and 240,000shares . 16,000 20,000 24,000 107.95 102.65 12.75% Series; none and 250,000 shares ............. 25,000 Preferred $ 25 par value:

8.375% Series; 1,000,000, 1,100,000 and 1,200,000 shares 25,000 27,500 30,000 25.99 25.00 8.70% Series; 1,000,000 shares . 25,000 25,000 (a) 25.00 8.75% Series; 3,000,000 shares . 75>000 75,000 75,000 (a) 25.00 9.75%Series;606,000,672,000,and738,000shares .... 15>150 16,800 18,450 25.9075 25.00 9.75% Series (second); none and 816,000 shares 20,400 10.13% Series; none, 900,000 and 1,000,000 shares ... 22,500 25,000 10.75% Series; 1,600,000 shares . 40,000 40,000 40,000 26.19 25.00 12.25% Series; 613,880, 656,940 and 700,000 shares... 15,347 16,423 17,500 (b) 25.00 12.50% Series; 543,722, 581,861 and 620,000shares... 13,593 14,547 15,500 (b) 25.00 Ad'ustable Rate Series B; 2,000,000 shares............ 50,000 50,000 50,000 (c) 25.00 313>490 370,470 407,850 Less sinkin fund and redemption re uirements 17,980 14,980 60,380

$ 295,510 $ 355,490 $ 347,470 (a) Not redeemable until 1992.

(b) Not redeemable until 1S91.

(c) Not redeemable until 1S89.

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.

t ~

19AGARA MOIIAWKPOWER CORPORATION ail(l SIIIISIDIARYCOMPANIKS 20-27 The Company's five-year mandatory sinking fund redemption requirements for preferred stock are as follows:

In thousands of dollars No. of shares Commencing 1989 1990 1991 1992 1993 Preferred $ 100 par value:

7.45% Series .......... 18,000 6/30/77 $ 1,800 $ 1,800 $ 1,800 $ 1,800 $ 1,800 10.6(P/o Series . ~... ~.... 20,000 3/31/80 2,000 2,000 2,000 2,000 2,000 Preferred $ 25 par value:

8.375% Series .... ~ ~ ~ ~ ~ ~ 100,000 4/1/83 2,500 2,500 2,500 2,500 2,500 8.70/o Series ........... 200,000 6/30/93 5,000 8.75%Series ........ ~ ~ ~ 600,000 12/31/92 15,000 15,000 9.75%Series ........ ~ ~ ~ 66,000 10/1/80 1,650 1,650 1,650 1,650 1,650 10.75% Series ........... 320,000 6/30/89 8,000 8,000 8,000 8,000 8,000 12.25% Series ........... 43,060 3/31/87 1,077 1,077 1,077 "1,077 1,077 12.5(y/>> Series ........... 38,139 3/31/87 953 953 953 953 953 Ad'ustabie Rate Series B . 50,000 9/30/93 1,250

$ 17,980 $ 17,980 $ 17,980 $ 32.980 $ 39,230 LONG-TERM DEBT Long-term debt and long-term debt due within one year consisted of the following:

In thousands of dollars In thousands oI dollars At December 31 ~ 1988 1987 At December 31, 1988 1987 First mortgage bonds:

3r/s% Series due June1, 1988 ......... $ $ 50,000 *11s/s% Series due October 1 ~ 2014 ... 40,015 40,015 12%Seriesdue March1,1989.......... 20,000 20,000 10'/oSeriesdue June1,2016 ........ 150,000 150,000

'Vs%SeriesdueOctober1 ~ 1989 ...... 13,000 13,000 10/o Series due November 1, 2016 ... 100,000 100,000 4V4%SeriesdueApril 1,1990 ......... 50,000 50,000 8Vs%Series due November1,2025 . 75,000 75,000 4Vs%SeriesdueNovember1,1991 .... 40,000 40,000 Total First Mortgage Bonds ......... 2,135,943 2,073,136 12.73% Series due February 1 1992.....~ 20>000 20,000 13.06% Series due February 1, 1992..... 50,000 50,000 Promissory notes:

12.73% Series due February 20, 1992.... 10,000 10,000 8% Series A due June 1 ~ 2004....... 46,600 46,600 12.68% Series due February 28, 1992.... 20,000 20,000 11% Series due May 1, 1993 ............ 50>000 50,000 Adjustable Rate Series due 8%%Series due August 1, 1994 ....... 150,000 150,000 July 1, 2015 100>000 100,000 4%% Series due December 1, 1994 .... 40,000 40,000 December 1, 2023 . 69>800 9>/s% Series due October 1 1996 ...... 100,000 100,000 December 1, 2025 . 75,000 75 000

~

Sr/s% Series due November 1, 1996 .... 45,000 45,000 December 1 2026 .

~ 50,000 50,000 9Vs%Seriesdue July1,1997 .......... 100,000 100,000 March 1, 2027 25,760 25,760 6>/4% Series due August 1, 1997 ....... 40>000 40,000 July 1, 2027 93>200 93,200 9Vs%Series due May1,1998 .......... 200,000 Unsecurednotes payable:

6>/s%SeriesdueAugust1,1998 ....... 60,000 60,000 Medium Term Notes, Various rates, 9Vs% Series due December 1, 1999 .... 75,000 75,000 due 1989-1994 200>000 200,000 12.95% Series due October 1,2000 ..... 48,002 58,668 Swiss Franc Bonds due December 15, 1995 .. 50,000 50,000 7s/s% Series due February 1, 2001 ...... 65,000 65,000 15.02/o Unsecured Notes due 1990 ......... 50,000 50,000 7%% Series due February 1, 2002...... 80,000 80,000 Notes, Interest Rate Exchange Agreement... 75>000 50,000 7s/4%SeriesdueAugust1,2002 ....... 80,000 80,000 Revolving credit agreement, 8>/4%Seriesdue December1,2003 .... 80,000 80,000 Oswego Facilities Trust ................. 36,259 9Vs% Series due December 1, 2003 .... 44,118 47,059 Other . .................................. 135>909 131 180

~

9.95% Series due September 1, 2004... 80,000 85,000 Unamortized premIum discount 294 (893 10.20% Series due March 1, 2005 ....... 30,478 31,578 8.35% Series due August 1, 2007 ...... 66,640 66,640 TOTAL LONG-TERM DEBT ............. 3,106,319 2,981,429 Less long-term debt due within one year . 110,571 77,508 8Vs%Seriesdue December1,2007 .... 38,000 40,000 12r/s% Series due March 1, 2013 ........ 65,486 $ 2,995,748 $ 2,903,921

'11>/4%Series due July 1 2014 ..........

~ 75,690 75,690 'axwxempt pollution control related issues Several series of First Mortgage Bonds and Notes were is- Pursuant to agreements between NYSERDA and the Company, sued to secure a like amount of tax-exempt revenue bonds and proceeds from such issues were used for the purpose of notes issued by the New York State Energy Research financing the construction of certain pollution control facilities and Development Authority (NYSERDA). Approximately at the Company's generating facilities.

$ 414,000,000 of such securities bear interest at a daily adjusta- Notes Payable include a ten-year Swiss franc bond issue ble interest rate (with a Company option to convert to a fixed equivalent to $ 50,000,000 in U.S. funds. Simultaneously with interest rate which would require the Company to issue First the sale of these bonds, the Company entered into a currency Mortgage Bonds to secure the debt) which averaged 4.60% for exchange agreement to fully hedge against currency exchange 1988 and are supported by bank direct pay letters of credit. rate fluctuations.

The Company has Interest Rate Exchange Agreements ex- by the Oswego Facilities Trust (Trust). The Trust te"npotarify tending into 1991 for $ 75,000,000. The'agreements require the discontinued issuing commercial paper in July 1988 and thi Company to make fixed rate payments which, calculated on a interest rate exchange agreement was transferred to the Com-semi-annual bond basis, are equivalent to 7.53% and, in ex- pany.

change, receive a LIBOR based floating rate payment from a Other long-term debt in 1988 consists of obligations under bank. The Company generally uses its own commercial paper capital leases of $ 65,854,000 (see Note 11) and a liability to the notes as the source of funding. The related interest expense is U.S. Department of Energy for nuclear fuel disposal of recorded on a net basis. Such Interest Rate Exchange $ 70,055,000.

Agreements include a $ 25,000,000 agreement previously held 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 In thousands of dollars Amount Commencing 1989 1990 1991 1992 1993 First Mortgage Bonds:

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

~ $ 1,500 3/1/76 $ 1,478(a) $ 1,500 $ 1,500 $ 1,500 $ 1,500 8.35% Series due August 1, 2007 ..... 750 8/1/62 (a) (a) (a) (a) 64qa) 6%% Series due December 1, 2007 ... 2,000 12/1/83 2,000 2,000 2,000 2,000 2,000 9.95% Series due September 1, 2004 . 5,000 9/1/85 5,000 5,000 5,000 5,000 5,000 12.95% Series due October 1, 2000 .... 5,333 10/1/66 5,333 5,333 5,333 5,333 5,333 9~h% Series due De'cember 1 2003 ...

~ 2,941 12/1/67 2,941 2,941 2,941 2,941 2,941 PromIssory Notes:

8% Series A due June 1 2004 ........

~ 500 6/1/90 500 500 600 600

"$ 16,752 $ 17,274 $ 17,274 $ 17,374 $ 18.014 (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 1988 requirements for these series were satisfied by the certification of additional property. The Com-pany anticipates that the 1989 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, 1988, are $ 6,550,000.

NOTE 8. Pension and Other Retirement Plans The following table sets forth the plan's funded status and amounts recognized in the Company's Consolidated Balance The Company and its subsidiaries have non-contributory, Sheets:

defined-benefit pension plans covering substantially all their In thousands of dollars employees. Benefits are based on years of service and the At December 31 ~ 1988 1987 employee's compensation level. The pension cost was Actuarial present value of accumulated

$ 26,000,000 for 1988, $ 30,200,000 for 1987, $ 41,400,000 for benefit obligations:

1986 (of which $ 7,800,000 for 1988, $ 11,400,000 for 1987 and Vested benefits . $ 516,014 $ 493,625

$ 15,600,000 for 1986 was related to construction labor and, Non-vested benefits 34,401 37,362 accordingly, was charged to construction projects). The Com- Accumulated benefit obligations .. 550,415 530,987 pany's general policy is to fund the pension costs accrued with Additional amounts related to consideration given to the maximum amount that can be de- pro'ected pa increases ........ 194,405 201,415 ducted for Federal income tax purposes. Contributions are in-tended to provide not only for benefits attributed to service to Projected benefits obligation for date but also for those expected to be earned in the future. service rendered to date ......... 744,620 732,402 Net pension cost for 1988 and 1987 included the following Plan assets at fair value, consisting components: primarily of listed stocks, bonds, other fixed income obligations and In thousands of dollars insurance contracts 811,094 739,219 At December 31, 1988 1987 Plan assets in excess of projected benefit obligations 66,274 6,817 Service cost-benefits earned during

$ 22,900 $ 26,900 Unrecognized net obligation at the period interest cost on projected benefit obligation... 56,300 53,900 January 1, 1987 being recognized over Return on Plan assets. (56,000) (53,400) approximately 19 years.................. 46,354 49,146

................ 2,600 2,800 Unrecognized net gain from past Amortization of net obli ation experience different from that assumed Net ension cost. $ 26,000 $ 30,200 and effects of changes in assumptions... 119,040 49,565 Prior service cost not yet recognized in net periodic pension cost ............... 210 Prepaid (accrued) pension costs included In addition to providing pension benefits, the Company and .......

in Other current assets and liabilities $ 6,202) $ 6,398 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 In 1988 and 1987, the discount rate and rate of increase in they reach retirement age while working for the Company. future compensation levels used in determining the actuarial These benefits are provided through an insurance company present value of the projected benefit obligations were 8.25%

whose premiums are based on the claims paid during the year. and 4.5% (plus merit increases) and 8.0% and 5.0% (plus merit The cost of providing these benefits to retired employees increases), respectively. The expected long-term rate of return amounted to approximately $ 12,600,000 for 1988, $ 8,800,000 on plan assets was 8.75% in 1988 and 8.0% in 1987.

for 1987 and $ 7,900,000 for 1986.

WIACiARA MOIIAIVKPOWER CORPORATION ml(l SIIIISIDIARYCOi>IPAi)ITS 28-29 NOTE 9. Federal and Foreign Income Taxes Components of United States and foreign income beforein-come taxes:

Income Tax Reform: In October 1986, the Tax Reform Act of In thousands ol dollars 1986 (Act) was signed into law. One of the provisions of the Act 1988 1987 1986 lowered the statutory corporate Federal income tax rate from United States .............. $ 322,814 $ 180,213 $ 570,113 46% to 34% effective July 1, 1987. The deferred Federal income Foreign 16,485 28,594 14,311 taxes below relating to book/tax timing differences have been Consolidatin eliminations . (9,621) 23,571 7,61 provided at 34% in 1988, the blended statutory rate of approx-imately 40% for 1987 and at 46% in 1986. Income before income taxes and the cumulative effect of the accounting change in 1987 $ 329,678 $ 185,236 $ 576,809 Following is a summary of the components of Federal and foreign income tax and a reconcilation between the amount of Federal income tax expense reported in the Consolidated Statement of Income and the computed amount at the statutory tax rate:

Summary Analysis: In thousands of dollars 1988 1987 1986 Components of Federal and foreign Income taxes:

Current tax expense: Federal. S 60,173 $ 39,574 S 24,959 Forei n . 7,282 9,012 6,767 67,455 48,586 31,726 Deferred Federal income tax ex ense . 66,996 146,886 179,511 Income taxes included in Operating Expenses 134,451 195,472 211,237 Current Federal income tax expense included in Other Income and Deductions . 13,475 Current Federal tax credits associated with disallowed plant depreciation....... (29,068) (19,070)

Deferred Federal income tax expense (credits) included in Other Income and Deductions . 15,481 48,952 45,768 Total . $ 120,864 $ 127,450 $ 178,944 Components of deferred Federal Income taxes(Note 1)t Depreciation. $ 109,920 $ 96,812 $ 50,399 Investment tax credit (392) 49,303 48,252 Alternative minimum tax (33,?86)

Benefit associated with disallowed plant costs (50,400)

Construction overheads (2,826) 14,492 26,111 Recoverable energy and purchased gas costs ......... 8,664 (3,858) (9,309)

Unbilled electric revenues 4,912 (15,181)

Gain on disposition of property (15,374)

Reacquisition of bonds (2,463) 3,299 15,700 Other 1,552) 3,467 17,964 Deferred Federal income taxes net $ 82,477 $ 97,934 $ 133.743 Reconciliation between Federal and foreign Income taxes and the tax computed at prevailing U.S. statutory rate on Income before Income taxes:

Computed tax . $ 112,091 S 74,002 $ 265,332 Reduction attributable to flow-through of certain tax adjustments:

Depreciation. (18,959) (24,160) (18,235)

Allowance for funds used during construction 3,747 12,336 76,266 Taxes, pensions and employee benefits capitalized for accounting purposes .. 3>929 (798) 1,645 Real estate taxes on an assessment date basis 2>537 859 4,074 Deferred taxes provided at other than the statutory rate. 7,929 10,439 7,210 Tax adjustments associated with disallowed plant costs (56,826)

Other 7,95 4,702 15,428 8,773 53,448 86,388 Federal and torei n income taxes $ 120,864 $ 127,450 $ 178,944

NOTE 10. Nuclear Operations the refund of any imprudently incurred costs, to investighte <<he Unit 1 outage. The further relief sought by the Attorney General The Company is the owner and operator of Nine Mile Point was denied subject to the possibility of being reconsidered at a Nuclear Station Unit No. 1 (Unit 1) and the operator and a 41/o later date.

co-owner of Nine Mile Point Nuclear Station Unit No. 2 (Unit 2) The Company, the PSC Staff, the Attorney General, the Con-(See Note 5). Contingencies involving the Company's owner- sumer Protection Board and Multiple Intervenors reached an ship of these facilities are discussed below. interim relief agreement (the "Interim Relief Agreement" ),

which was approved by the PSC in an order issued January 26, 1989. The Interim Relief Agreement provides that the Com-pany, commencing with the fuel cost month of January 1989 Unit 1 Outage and Restart Action Plan: Unit 1 was taken out of until the earlier of restart of Unit 1 or June 30, 1989, will tem-service in December 1987 for repairs to its feedwater system. poraiily suspend collection from ratepayers of $ 225 thousand During these repairs, the Company decided to proceed from per day through the fuel adjustment clause mechanism, which this outage into refueling of Unit 1, an activity that was previ- approximates the incremental replacement power costs relat-ously scheduled to begin in March 1988. The Unit 1 outage was ing to the outage which would otherwise be funded by further extended to complete the in-service inspection re- ratepayers. This will reduce the Company's cash flow during quired by the Nuclear Regulatory Commission (NRC) regula- the period by approximately $ 6.75 million per month.

tions. Such inspections are continuing. During March 1988, the The Company will defer such amounts for regulatory pur-NRC imposed a $ 100,000 civil penalty against the Company for poses, with appropriate carrying charges, for future recovery failure to take corrective action and to comply with these NRC pending the results of the PSC's prudence investigation. How-regulations relating to performing and evaluating the in- ever, the degree of uncertainty associated with the ultimate service inspections at Unit 1. outcome of the PSC's prudence investigation will preclude the In April 1988, the Staff of the NRC (NRC Staff) completed a accrual of these revenues for financial reporting purposes, Systematic Appraisal of Licensee Performance (SALP) at Unit 1 which will have the result of reducing earnings per share dur-covering the twenty-four month period ended February 1988. ing the period by approximately $ .03 per month. The Company In this assessment, the NRC Staff identified certain areas in will also continue to absorb its share of the replacement power addition to the in-service inspection program which required costs as provided for in the fuel adjustment clause mechanism increased management and NRC attention and expressed and the incremental operating expenses incurred during the concern that these certain identified areas, if unattended, outage not provided for in rates. The replacement power cost could give rise to significant performance problems. associated with the Unit 1 outage is approximately $ 250 to During July 1988, the Company received a letter from the $ 300 thousand per day, the precise amount of which is depen-NRC Staff stating the Unit 1 was identified as having dent upon seasonal factors and relative demand.

weaknesses that warrant increased NRC attention and require These amounts do not include additional expenses as-close monitoring. The NRC Staff contrasted certain weakness- sociated with preparing for the restart of Unit 1 and complying es at Unit 1 with the satisfactory performance at Unit 2 (How- with NRC requirements relating to the Company's manage-ever, see "NRC Assessment of Nine Mile Point Station Per- ment of operations at its nuclear facilities. (see "Results of formance" below). Citing the civil penalty relating to in-service Operations" in Management's Discussion and Analysis) inspections discussed above, the April 1988 SALP review and The Interim Relief Agreement obviated the need for the operator training and attitude concerns, the NRC Staff iden- Company to litigate at this time the question of the appropri-tified a trend that, in their view, is "of significant concern." ateness of interim rate relief and thus permits continued con-The NRC held a public meeting July 13, 1988 and, among centration of the Company's resources on the effort to restart other things, reviewed the performance of operating nuclear Unit 1. The Interim Relief Agreement does not resolve any is-power plants licensed by the NRC. At this meeting, the NRC sues of responsibility which may arise during the conduct of Staff indicated that Unit 1 would not be allowed to restart until the prudence investigation and is not an admission of impru-such time as a comprehensive plan addressing and rectifying dence by the Company. If Unit 1 is not returned to service by the NRC Staff's concerns is developed and approval for restart June 30, 1989, the parties to the Interim Relief Agreement will is received from the NRC Staff. be free to seek an extension of interim relief in whatever form The Company developed a comprehensive plan to correct they think appropriate. The Company cannot predict what form the. root causes of the concerns raised by the NRC Staff and an extension of interim relief might take, if sought, or the submitted this Restart Action Plan to the NRC Region I Admin- resultant impact on the Company's financial condition or re-istrator in December 1988. Restart of Unit 1 is conditioned sults of operations. (see"Results of Operations" in Manage-upon the NRC Region I Administrator's concurrence that Unit 1 ment's Discussion and Analysis) and management are ready to restart. Based upon a present Through December 31, 1988, the Company has collected assessment by the Company of the tasks to be completed prior from ratepayers approximately $ 75.9 million of increased fuel to notification to the NRC of its readiness to restart, the Com- adjustment clause revenues occasioned by the Unit 1 outage.

pany anticipates that Unit 1 will not return to service prior to These revenues are subject to full or partial refund if the Com-mid-1989. However, the Company can provide no assurance pany is found to have acted imprudently in a way which caused that the current scope of effort to be completed prior to notifi- or extended the outage. The Company is unable to predict the cation of readiness to restart will not be expanded by future results of the PSC's prudence investigation, what sanctions events of which the Company is not currently aware. may ultimately be imposed and the impact on the Company's financial condition, results of operations or level of retained earnings which might result if any such sanctions are imposed.

Interim Agreement on Unit 1 Outage Replacement Power Costs: On May 23, 1988, the Attorney General of the State of New York filed a petition with the PSC requesting that the PSC, Unit 2 Mid-cycle Outage: On October 1, 1988, Unit 2 began a

1) cease recovery of replacement power costs incurred by the scheduled maintenance and inspection mid-cycle outage Company as a result of the Unit 1 outage discussed above, 2) which was expected to be completed by the end of December institute a proceeding to determine whether the Company 1988. The outage has been extended to March 1989 to effect should refund replacement power costs already collected and repair and retest of a main steam isolation valve, repair of

3) remove Unit 1 from the Company's rate base until Unit 1 generator retaining rings, replacement of a generator cou-returns to service. In an order issued September 8, 1988, the pling, repair and retest of six valves in the residual heat re-PSC instituted a proceeding, based upon its authority to order moval system and conduct required surveillance tests.

'ÃI GARA MOHAEVK I'OWER CORI'ORATIOIY all(l SUBSIDIARY COMPAi]lllS 30-31 NRC Assessment of Nine Mile Point Station Performance: In Based upon the Settlement as implemented by the PSC, the December 1988, NRC senior managers conducted their bian- commercial operation date of April 5, 1988 as provided for in nual review of the performance of nuclear power plants the Stipulation Agreement (see discussion in Management's licensed by the NRC. As a result of this review, the Company Discussion and Analysis of Financial Condition and Results of was advised on December 20, 1988, that the Nine Mile Point Operations), the $ 171 million payment to the cotenants and the Station (Units 1 and 2) was being categorized as requiring disallowance of certain plant related costs, approximately close monitoring by the NRC. The conclusion was based on $ 1,147 million of the Company's share of project costs will not current NRC assessment of Unit 2's overall performance in be recoverable in rates. See "Unit 2.Financial Accounting Rec-certain areas during the first year of its operation and a June ognition" below.

1988 assessment of the overall performance of Unit 1 (See Unit 1 Outage and Restart Action Plan above). Further, the NRC Staff observed that increased licensee and NRC management attention is needed to ensure that performance improvement Unit 2 Financial Accounting Recognition: In December 1986, at the Nine Mile Point Station is achieved. A public meeting of the FASB issued Statement of Financial Accounting Standards the NRC was held on December 21, 1988, wherein the need for No. 90, "Regulated Enterprises-Accounting for Abandon-increased licensee and NRC management attention was con- ments and Disallowances of Plant Costs," an amendment of firmed. 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 purposes and a reasonable estimate of the amount Unit 2 Ratemaking and Cost Settlement: In September 1986, of the disallowance can be made, the estimated amount of the the PSC approved an agreement entitled "Specifications of probable disallowance shall be deducted from the reported Terms and Conditions of Offer of Settlement" (the Settlement) cost of the plant and recognized as a loss.

that constitutes a complete disposition of a July 1985 PSC pro- The Company adopted SFAS No. 90 in 1987 and recognized ceeding established to investigate the prudence of costs in- as a loss for financial accounting purposes the disallowance of curred for the construction of Unit 2. The Settlement contains, Unit 2 costs, including the cost of disallowed plant related among other stipulations, key terms and conditions which pro- facilities, of approximately $ 1,147 million, reduced to $ 833 mil-vide that the maximum amount of Unit 2's construction expen- lion ($ 6.54 per share) net of Federal income taxes. The ultimate ditures to be included in the cotenants'ate bases would be amount of the disallowance is dependent upon a final determi-

$ 4.16 billion and that each cotenant would waive any and all nation of the cost of Unit 2 and subsequent approval by the claims it may have against any other cotenant concerning the PSC.

design, engineering or construction of Unit 2. Pursuant to the Stipulation Agreement entered into by the In order to induce concurrence among the cotenants while Company and other parties and approved by the PSC, a sepa-the Settlement was being negotiated, the Company entered rate, non-rate case proceeding was established to litigate re-into an agreement with the other cotenant companies (Coten- maining Unit 2 settlement cap issues. The proceeding is to ant Agreement) whereby it reimbursed the cotenant com- begin following the conclusion of the current mid-cycle out-panies, upon commercial operation of Unit 2 as ultimately rec- age. The Company is unable to predict the outcome of the ognized by the PSC, for $ 171 million representing the coten- proceeding or the resultant impact on its financial condition or ants'hare of the $ 290 million difference between the Settle- results of operation.

ment's originally proposed allowed cost of $ 4.450 billion and the approved settlement value of $ 4.160 billion. Payment to the cotenants did not cause a reallocation of ownership interests in Unit 2.

In connection with the Company's rate case decided in Unit 2 Contractor Litigation: In connection with problems en-March 1987, the PSC adopted their Staff's position on Settle- countered with Unit 2's original Main Steam Isolation Valves ment implementation issues, which included, for ratesetting (MSIV's), which caused a major delay in the completion of Unit purposes, the recognition of tax benefits at primarily a 34% 2, the Company and the cotenant companies have initiated a rate rather than preservation at a 46% rate, the recording of lawsuit in New York State Supreme Court in Syracuse, New deferred Federal income tax benefits in present value dollars, York, seeking damages of approximately $ 500 million against exclusion from rate base of unrealized tax benefits, the disal- Gulf + Western, Inc., Crosby Valve and Gage Company and lowance of certain plant-related costs, such as common Wickes Manufacturing Company, the companies having con-facilities, and a write-off of disallowed costs, net of Federal tractual responsibility for the design and fabrication of Unit 2's income taxes, entirely against common equity. These require- original MSIV's. The defendants have filed their answer which ments have had a detrimental impact on the financial condition disagrees with the Company's claim. The Company is unable to and results of operations of the Company. The Company be- predict the ultimate outcome of the lawsuit.

lieves that the implementation requirements ordered by the On August 1, 1988, the Company and the cotenant com-PSC are contrary to the terms and intent of the Settlement and, panies initiated a lawsuit in federal court in Syracuse, New in July 1987, the Company and Cotenant companies appealed York, against three corporations involved in the construction the PSC's decision to the State of New York Supreme Court- of Unit 2, Stone & Webster Engineering Corp. (the architect-Albany County. The Company is unable to predict the results of engineer and construction manager for Unit 2), ITT Fluid Prod-such action. ucts Corp. and ITT Fluid Technology Corp. (successor com-Several intervening parties petitioned the PSC for rehearing panies to ITT Grinnell, a major piping contractor of Unit 2). The of its decision in connection with the Settlement and such lawsuit seeks damages for, among other things, breach of con-petitions were denied. In April 1987, the Consumer Protection tractual and professional obligations in their performance Board and the Attorney General of the State of New York filed a under their contracts which resulted in delays and cost over-lawsuit asking that the PSC decision be annulled and that the runs. Stone 8 Webster Engineering Corporation has filed its PSC be directed to conduct a full prudence investigation with answer which disagrees with the Company's claim. Filing of respect to Unit 2. The Company is unable to predict the ulti- answers by the other two defendants has been delayed pend-mate outcome of this proceeding. ing resolution of their motion to dismiss portions of the com-

plaint. The Company is unable to predict the ultimate outcome Nuclear LiabilityInsurance: In August 1988, amendn.enS were of the lawsuit. enacted to the Price-Anderson Act (the Act) which significantfy In connection with the Unit 2 contractor litigation discussed. increase liability limits under the Act and extend its effective-above, the Company must submit its proposed accounting for ness to the year 2002. The public liability limit with respect to a-any settlement proceeds received to the PSC for approval. nuclear accident at a licensed reactor increased from $ 710 The Company and cotenant companies have entered into an million to approximately $ 7.1 billion, with the excess over agreement with General Electric Company (GE) relating to cer- commercially available insurance to be funded by assessments tain disputes which arose in connection with the Nuclear of up to $ 63 million per licensed facility for each nuclear inci-Steam Supply System (NSSS) portion of the construction of dent, payable at a rate not to exceed $ 10 million per year. Such Unit 2, providing for settlement, mutual releases, and confiden- assessments are subject to periodic inflation-indexing and to a tiality of the specific elements of the agreement. The agree- 5'/o surcharge if funds prove insufficient to pay claims. The ment provides that GE will supply certain goods and services Company's interest in Units 1 and 2 could expose it to a poten-to the Company and cotenant companies over a period of years tial loss, for each accident, of $ 88.8 million through as-without cost or at a reduced cost. Among other things, GE will sessments of $ 14.1 million per year in the event of a sufficiently supply engineering services which will improve Unit 2's tech- serious nuclear accident at its own or another U.S. commercial nical specifications and which may ultimately result in the in- nuclear reactor. The amendments also provide, among other creased capacity of Unit 2; software designed to help avoid things, that insurance and indemnity will cover precautionary unplanned outages; other goods and services in support of evacuations whether or not a nuclear incident actually occurs.

Unit 2; and other goods and services relating to turbine up-grading and maintenance at the Company's and cotentant companies'enerating facilities.

GE will receive indemnification, including limited reim-bursement of legal expenses, from the Company and cotenant NOTE 11. Commitments and Contingencies companies against any future judgments against GE brought by other Unit 2 contractors related to the NSSS portion of the Construction Program: The Company is committed to an ongo-construction of Unit 2, to the extent such judgments result ing construction program to assure reliable delivery of its elec-from successful Company and cotenant company claims tric and gas services. The Company presently estimates that against the contractors. the construction program for the years 1989 through 1993 will While the Company does not believe that current treatment require approximately $ 1.5 billion, excluding AFC, nuclear fuel of the agreement is material to its financial position, the Com- and certain overheads capitalized. For the years 1989 through pany regards this as a favorable settlement. No part of the 1993, the estimates are $ 307 million, $ 298 million, $ 283 million, Agreement has been included in income pending determina- $ 317 million and $ 294 million, respectively.

tion by the PSC of the allocation of the benefits thereof be-tween the Company's shareholders and its ratepayers.

Long-term Contracts for the Purchase of Electric Power: At January 1, 1989, the Company had long-term contracts to Nuclear Plant Decommissioning: Based on a study completed purchase electric power from the following generating in 1986, the cost of decommissioning Unit 1, which is expected facilities owned by the New York Power Authority (NYPA):

to begin in the year 2005, is estimated by the Company to be approximately $ 442,000,000 at that time ($ 229,000,000 in 1988 Estimated Expiration Purchased dollars). The Company's 41'k share of costs to decommission date of capacity annual Unit 2, which is expected to begin in the year 2027, is estimated Facility contract in kw. capacity cost by the Company to be approximately $ 565,000,000

($ 116,900,000 in 1988 dollars). The current annual allowances Niagara-for recovery are based on total estimated decommissioning hydroelectric project .. 1990 1,077,000 $ 14,515,000 costs over the life of these units as previously authorized in Blenheim-Gilboa-rates, which amount to $ 195,300,000 and $ 256,400,000 (in fu- pumped storage generating station..... 2002 295,000 6,346,000 ture dollars), respectively, to be available in the year of de- FitzPatrick-commissioning. Through December 31, 1988, the Company nuclear plant ......... year-to- 53,000 (a) 5,735,000 has recovered $ 31,200,000 of decommissioning costs in rates year basis for both units. The Company continues to review the estimated 1.425,000 $ 26,596,000 requirements for decommissioning and plans to seek rate ad-justments when appropriate. There is no assurance that the (a) 21,000 kw for summer ol 1989; 45,000 kw, for winter ol 1989-90.

decommissioning allowance recovered in rates will ultimately aggregate a sufficient amount to decommission the units. The Company believes that decommissioning costs, if higher than The purchase capacities shown above are based on the con-currently estimated, will ultimately be recovered in the rate tracts currently in effect. The estimated annual capacity costs process, although no such assurance can be given. are subject to price escalation and are exclusive of applicable The NRC has recently issued regulations requiring owners of energy charges. Total cost of purchases under these contracts nuclear power plants to place costs associated with specific amounted to $ 46.3 million, $ 57.2 million and $ 68.5 million for decommissioning activities into an external trust at a substan- the years 1988, 1987 and 1986, respectively. The Company and tially accelerated rate from what has heretofore been required. NYPA have reached an agreement in principle to extend the Further, the NRC established guidelines for determining Niagara project contract into 2007. This extension is currently minimum amounts that must be available in the trust for these in the approval process.

specified decommissioning activities at the time of decommis- Under the requirements of the Federal Public Utility Reg-sioning. The Company anticipates that the NRC minimum will ulatory Policy Act, the Company is required to purchase power exceed the basis of current cost recovery for total decommis- generated by Qualifying Facilities as defined therein. Approxi-sioning costs associated with the Units. As a result, the NRC mately $ 95 million was paid to Qualifying Facilities in 1988 for regulations, which have not been considered in the rate setting 1,497,000,000 kwh of energy and associated capacity. Through environment, could require the Company to increase its capital December 31, 1988, the Company has entered into agreements requirements by an amount which cannot currently be deter- with numerous current and prospective independent pro-mined. The Company has until July 1990 to file a decommis- ducers, including Qualifying Facilities, which may substantially sioning plan for each unit with the NRC. increase its future purchase power commitments.

, AQRA MOIIAWKPOWER CORPORATION II(1 SIJIISIDIARY COMPANIES 32-33 Lease Commitments: The Company leases certain property The amount of damage claimed is not specified. The defen-and equipment which meet the accounting criteria for capitali- dants intend to contest this suit vigorously.

zation. Such leases, having a net book value of $ 65.9 million As permitted by law and by its by-laws, the Company has and $ 65.6 million at December 31, 1988 and 1987, respectively, indemnified its officers and directors for loss and expense, are included in the accompanying Consolidated Balance including judgments or settlements, incurred in connection Sheets. Since current rate-making practice treats all leases as with the defense of such actions, and has directors and officers operating leases, the capitalization of these leases has no im- liability insurance to cover all or part of its indemnification pact on the Company's Consolidated Statements of Income. obligation.

The Company recognizes as a charge against income an The Company is unable to predict the ultimate outcome of amount equal to the rental expense allowed for rate purposes. the action.

The Company's future minimum rental commitments under these capital leases and non-cancellable operating leases aggregate approximately $ 650 million, a substantial portion of which relates to a 41-year lease of a transmission line facility.

Annual future minimum rental commitments for the period Guarantee of Nine Mile Point Nuclear Unit No. 2 Cotenant's 1989-1 993 range between $ 24 million and $ 33 million. Debt: Under the terms of an agreement (Capital Funds Agree-ment) with Long Island Lighting Company (LILCO), the Com-pany provided its guarantee in December 1985 for a period of approximately three years through March 16, 1989 of up to

$ 165 million of LILCO's reimbursement obligations in connec-Sale of Customer Receivables: During 1988, the Company en- tion with $ 150 million principal 'amount of tax-exempt pollution tered into an agreement whereby it can sell an undivided inter- control bonds issued on behalf of LILCO on December 31, est in'a designated pool of customer receivables up to a 1985. On February 3, 1989 the Company consented to an ex-maximum of $ 100,000,000. At December 31, 1988, $ 100,000,000 tension of the tax-exempt arrangement for approximately two of receivables were sold under this agreement. The undivided years through March 1991. LILCO is required to pay certain interest in the designated pool of receivables was sold with fees to the Company in connection with the guarantee. If and limited recourse. For receivables sold, the Company has re- to the extent LILCO does not honor its obligations to the tained collection and administrative responsibilities as agent banks, the Company would be required to do so and has ar-for the purchaser. ranged for three-year term loans to fund its guarantee obliga-tions. Upon payment of the LILCO obligation, the Company would become the holder of LILCO's debt, which would bear interest at 16%. The Company has an interest of $ 85 million in LILCO's third mortgage, which serves as partial security in the Litigation: The Board of Trustees of the Town of Brookhaven event its guarantee is required to be honored. However, in the (Long Island) instituted a lawsuit on March 3, 1987 against the event of a LILCO bankruptcy, the Company can provide no Company, the General Electric Company and Monsanto Com- assurance as to its ability to realize the full value of its third pany in the United States District Court for the Eastern District mortgage interest. If the Company's First Mortgage Bond of New York alleging damages in the amount of $ 300,000,000 credit rating is below investment grade and the Company owes as a result of the disposal of polychlorinated biphenyls (PCB's) amounts to the banks under its three-year term loan, the banks in the Hudson River which is alleged to have impacted the have the right to require the Company to issue First Mortgage striped bass and other commercial fisheries off of eastern Bonds as security.

Long Island. A further allegation in the complaint against the Securities and Exchange Commission filings of LILCO in-Company is that the removal of its Fort Edward Dam, located in dicate that LILCO continues to face severe financial and legal the Hudson River, in the Village of Fort Edward, Washington difficulties and may be forced to seek 'relief in bankruptcy.

County, New York, caused PCB's which had previously been LILCO's auditors qualified their opinion on the 1987 financial impounded thereby to be transported downstream to the det- statements, questioning LILCO's ability to remain financially riment of such fisheries. Since fishing restrictions off of east- viable.

ern Long Island have been relaxed, the plaintiffs have discon- During December 1988, the proposed Settlement involving tinued the lawsuit with prejudice. LILCO's Shoreham Plant failed to gain ratification by the New In May 1988, a stockholders'erivative suit was commenced York legislature. Although efforts to revive the Settlement in in the United States District Court, Northern District of New some form continue, the form any ultimate Settlement may York, against certain members of the Board of Directors and take, if achieved, cannot currently be determined. In addition, several officers of the Company. The complaint purported to Suffolk County obtained a jury verdict against LILCO in De-state claims on behalf of the Company for alleged violations of cember 1988 for $ 23 million in connection with claimed perjury the federal securities laws and state law in connection with the by LILCO which allegedly resulted in certain rate increases Nine Mile Point Unit No. 2 project. The defendants filed a mo- being awarded to LILCO by the New York Public Service Com-tion to dismiss the action. The plaintiffs opposed the motion mission. Motions in Federal Court to certify the action as a but also filed an amended complaint adding new counts and a class action, to overturn the verdict and on other related mat-new party plaintiff. In October, the Court granted the defen- ters were heard on February 2, 1989, with no action taken. The dents'otion to dismiss the original complaint. At the same judge in the case has stated that LILCO's potential liability in time, the Court permitted plaintiffs the opportunity to file a connection with a class action on the issue could exceed $ 4 second amended complaint, with certain restrictions concern- billion, which is substantially in excess of LILCO's stockhold-ing the scope of their federal securities law claim. ers'quity. The above factors could adversely impact the con-On January 17, 1989, the plaintiffs filed a second amended tractual obligations of the Company with respect to LILCO and complaint. As in the first amended complaint, the new com- LILCO to the Company and have substantially reduced or plaint purports to state a claim on behalf of the Company for eliminated the possibility of a substitute guarantor being ob-alleged violations of the federal securities laws and for alleged tained by LILCO under the current arrangement. The Company negligence, mismanagement, waste and breaches of fiduciary will continue to monitor the LILCO situation with a view to best duty, all in connection with the Nine Mile Point Unit 2 project. protecting the Company's financial interest.

NOTE 12. Quarterly Financial Data (Unaudited)

Operating revenues, operating income, net income and earnings per common share by quarters for 1988, 1987 and 1986 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 utility business, the annual amounts are not generated 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 application for SFAS No. 90 for comparative purposes.

ln thousands of dollars F'roforma Amounts Net Earnings Net Earnings Quarter Operating Operating income per common income per common ended revenues income (loss) share (loss) share Dec. 31, 1988 $ 678,858 $ 68,245 $ (3,808) $ (.12) $ S 1987 653,906 114,509 (32,649)* (.36) (32,649) (.36) 1986 637,896 104,633 84,698 .57 4,302 .13)

Sept. 30, 1988 $ 608,393 $ 115,691 $ 52,297 $ .31 $ $

'1987 556,845 . 98,958 44,829 .25 44,829 .25 1986 554,546 92,640 74,909 .49 33,909 .17 June 30, 1988 $ 702)678 $ 128,008 $ 46,823 S .27 S S 1987 624,628 102,810 48,711 .29 48,711 .29 1986 636,859 97,585 85,535 .56 100,465) (.90)

March 31, 1988 $ 810,524 $ 170,221 $ 113>502 S .77 $ $

1987 788,051 169,121 (618,105)'4.96)* (3,105) (.13) 1986 831,018 146,316 152,723 1.08 140,723 .99

• See Note 10 regarding first and fourth quarter 1987 adjustments relating to the adoption of SFAS No. 90.

Year end adjustments to annual estimates of taxes and expense accruals made in the fourth quarter of 1988 had the effect of decreasing net income for the quarter by approximately $ 14 million or $ .11 per common share. In addition, in the fourth quarter of 1988 and 1987 the Company accrued $ 7.5 million ($ .04 per common share) and $ 13.0 million ($ .08 per common share),

respectively, relating to its investment in NM Uranium, Inc. resulting in a decrease in net income for each quarter (see Note 3).

~

I'iN IIA iWIIAWKPONtjlR CORPORATION an(l SIlIISII)IARYCOMPAi)IIlS 34-35 Report of Management Report of Independent Accountants The consolidated financial statements of Niagara Mohawk Power Corporation and its subsidiaries were prepared by I+ice Haterhouse and are the responsibility of management. Financial infor-mation contained elsewhere in this Annual Report is consis- To the Stockholders and tent with that in the financial statements. Board of Directors of To meet its responsibilities with respect to financial in- Niagara Mohawk Power Corporation 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 In our opinion, the accompanying consolidated balance integrity, objectivity and reliability of the financial records sheets and the related consolidated statements of income and protection of assets. This system includes communica- and retained earnings and of cash flows present fairly, in all tion through written policies and procedures, an organiza- material respects, the financial position of Niagara Mohawk tional structure that provides for appropriate division of re- Power Corporation and its subsidiaries at December 31, 1988 and 1987, and the results of their operations and their sponsibility and the training of personnel. This system is also tested by a comprehensive internal audit program. In cash flows for each of the three years in the period ended addition, the Company has a Code of Conduct which re- December 31, 1988, in conformity with generally accepted quires all employees to maintain the highest level of ethical accounting principles. These financial statements are the standards and requires key management employees to for- responsibility of the Company's management; our respon-mally affirm their compliance with the Code. sibility is to express an opinion on these financial state-The financial statements have been examined by Price ments based on our audits. We conducted our audits of Waterhouse, the Company's independent accountants, in these statements in accordance with generally accepted accordance with generally accepted auditing standards. As auditing standards which require that we plan and perform part of their examination, they made a study and evaluation the audit to obtain reasonable assurance about whether the of the Company's system of internal accounting control. financial statements are free of material misstatement. An The purpose of such study was to establish a basis for re- audit includes examining, on a test basis, evidence support-liance thereon in determining the nature, timing and extent ing the amounts and disclosures in the financial statements, of other auditing procedures that were necessary for ex- assessing the accounting principles used and significant pressing an opinion as to whether the financial statements estimates made by management, and evaluating the overall are presented fairly in all material respects. Their examina- financial statement presentation. We believe that our audits tion resulted in the expression of their opinion which fol- provide a reasonable basis for the opinion expressed above.

lows this report. The independent accountants'xamination As described in Note 10, the Company adopted in 1987 does not limit in any way management's responsibility for Statement of Financial Accounting Standards No. 90, "Reg-the fair presentation of the financial statements and all other ulated Enterprises Accounting for Abandonments and information, whether audited or unaudited, in this Annual Disallowances of Plant Costs." The adoption of this State-Report. ment resulted in the disallowed portion of the Company's The Audit Committee of the Board of Directors, consisting investment in the Nine Mile Point Nuclear Station No. 2 of four directors who are not employees, meets regularly (Unit 2) being recognized as a loss in the 1987 financial with management, internal auditors and Price Waterhouse statements.

to review and discuss internal accounting controls, audit As a result of continuing uncertainties with respect to Unit examinations and financial reporting matters. Price Wa- 2 discussed in Note 10, management is unable to predict terhouse and the Company's internal auditors have free ac- whether further regulatory actions by the New York State cess to meet individually with the Audit Committee at any Public Service Commission (PSC) with respect to its in-time, without management present. vestment in the Unit will have, in the aggregate, a material effect on its financial position or results of operations. Ac-cordingly, no provision for any additional loss that may re-sult upon resolution of these uncertainties has been made in the accompanying financial statements.

As discussed in Note 10, in 1988 the PSC instituted a pro-ceeding, based upon its authority to order the refund of any imprudently incurred costs, to investigate the Nine Mile Point Nuclear Station Unit No. 1 (Unit 1) outage. Manage-ment is unable to predict whether further regulatory actions by the PSC related to the Unit 1 outage will have a material effect on its financial position or results of operations. Ac-cordingly, no provision for loss that may result upon resolu-tion of this uncertainty has been made in the accompanying 1988 financial statements.

Syracuse, New York January 26, 1989

) ~ ~

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 tollowing selected financial data may not be indicative ot the Company's future financial condition or results of operations. Certain of 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-off of disallowed Unit 2 costs and resulted in a net loss for the year.

1987 I 986 1984 Operations: (000's)

Operating revenues. $ 2,800,453 $ 2,623,430 $ 2,660,319 $ 2,694,940 $ 2,785,546 Income before cumulative eftect of accounting change 208,814 57,786 397,865 411,430 359,734 Cumulative effect on prior years of adoption of SFAS No. 90 (615,000)

Net income (loss) . 208,814 (557,214) 397,865 411,430 359,734 Proforma balance available for common stock giving effect to the retroactive application of SFAS No. 90 5,769 16,048 64,871 359,734 Common stock data:

Book value per share at year end S 13.87 $ 13.82 $ 20.23 $ 19.61 $ 18.89 Market price at year end. 13 12 1674 20'/2 173)f)

Ratio of market price to book value at year end .. 93.7o/o 86.8o/o 82.P/o 104.5o/o 92.IP/o Dividend yield at year end 9.2'lo 10.IP/o 12.4% 10.1% 11.5o/o Earnings per average common share before '

cumulative effect of accounting change ...... S 1.21 $ .05 S 2.71 $ 2.88 2.84 Cumulative effect on prior years of adoption of SFAS No. 90 per average common share...... (4.83)

Earnings per average common share........... 1.21 (4.78) 2.71 2.88 2.84 Proforma earnings per average common share giving effect to the retroactive application of SFAS No. 90 .05 .13 .53 2.84 Rate of return on common equity .............. 8.7o/o 1 2.7o/o'3.6o/o 1 5.IP/o 1 4.PYo Dividends paid per common share ............. $ 1.20 $ 1.64 $ 2.08 S 2.06 S 1.98 Dividend payout ratio 99.2% 76.8% 71.5o/o 69.7Yo Capitalization: (000's)

Common equity . $ 1,881)394 $ 1,781,518 $ 2,571,491 $ 2,488,620 $ 2,207,117 Non-redeemable preterred stock 2901000 290,000 290,000 290,000 240,000 Redeemable preferred stock . 295,510 355,490 347,470 379,850 367,900 Long-term debt . 2,995,748 2,903,921 2,799,605 2,643,094 2,395,471 Total 5,462)652 5,330,929 6,008,566 5,801,564 5,210,488 First mortgage bonds maturing within one year 33,000 50,000 50,000 30,000 47,450 Total $ 5,495,652 $ 5,380,929 $ 6,058,566 $ 5,831,564 $ 5,257,938 Capitalization ratios:(incfuding firstmortgage bonds maturing within one year):

Common stock equity. 34.FYo 33.1% 42.5o/o 42.7o/o 42.IP/o Preferred stock. 10.7 12.0 10.5 11.5 11.5 Long-term debt 55.1 54.9 47.0 45.8 46.5 Financial ratios:

Ratio ot earnings to fixed charges................... 2.10 1.65" 2.98 3.07 3.11 Ratio of earnings to tixed charges without AFC....... 2.06 1.54" 2.42 2.37 2.43 Ratio of AFC to balance available for common stock .. 6.9% 48.2% 53.2/o 52.4%

Ratio of earnings to fixed charges and preferred stock dividends 1.67 1.04" 2.35 2.36 2.39 Proforma Ratios-giving ettect to the retroactive application of SFAS No. 90:

Earnings to fixed charges 1.65 1.28 1.40 3.11 Earnings to fixed charges and preferred stock dividends 1.04 1.05 1.17 2.39 Other ratios-% of operating revenues:

Fuel, purchased power and purchased gas ........ 34.6o/o 35.6o/o 38.(P/o 43 4% 46.9/o Maintenance, depreciation and amortization....... 15.1 12.1 11.4 10.9 10.1 Total taxes . 16.1 16.7 18.1 15.7 14.7 Operating income . 17.2 18.5 16.6 15.3 14.1 Balance available for common stock .............. 5.7 12.9 13.1 11.1 Miscellaneous: (000's)

Gross additions to utility plant S 353,859 $ 447,230 $ 774,062 $ 771,120 S 769,846 Total utility plant 7,967)625 7,691,069 8,445,993',640,905 6,903,184 Accumulated depreciation and amortization .. 2,090,170 1,913,687 1,763,443 1,629,437 1,501,282 Total assets . 7,076,041 6,794,098 7,611,203 7,013,837 6,233,401

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

'*Excudes the cumulative effect of the adoption of SFAS No. 90 amounting to $ 61 5 million.

Al'AG RA MOIIAWKPOWER CORPORATION ail(l SIJIISIDIARY COMPANIES 30-37 Market Price of Common Stock and Related Stockholder Matters The Company's common stock and cer- The common dividend rate was re- an amount equivalent to six full quar-tain of its preferred series are listed on the duced effective the third quarter of terly dividends and thereafter until all New York Stock Exchange. The common 1987. The Company is currently paying dividends thereon are paid or declared stock is also traded on the Boston, Cin- cash dividends quarterly. Declaration of and set apart for payment, the holders cinnati, Midwest, Pacific and Philadelphia future dividends and levels of payments of such stock can elect two members to stock exchanges. Common stock options are necessarily dependent on future the Board of Directors. No dividends on are traded on the American Stock Ex- earnings, cash flow, financial require- Preferred Stock are now in arrears and change. The ticker symbol is "NMK". ments, the duration of, and costs as- no Preference Stock is now outstand-Preferred and common stock dividends sociated with, the outage at Nine Mile ing.

were paid on March 31, June 30, Sep- Point Nuclear Station Unit No. 1 (Unit 1), Upon any dissolution, liquidation or tember 30 and December 31. The Com- the adequacy and timeliness of rate re- winding up of the Company's business, pany presently estimates that none of the lief, the level of retained earnings out of the holders of Common Stock are enti-1988 common or preferred stock div- which dividends can be declared and tled to receive a pro rata share of all of idends will constitute a return of capital other uncertainties facing the Company the Company's assets remaining and and therefore all of such dividends are (see Management's Discussion and available for distribution after the full subject to Federal income tax as ordinary Analysis of Financial Condition and Re- amounts to which holders of Preferred income. sults of Operations and Notes 10 and 11 and Preference Stock are entitled have The table below shows dividends per of Notes to Consolidated Financial been satisfied.

share for the Company's common stock Statements). Also, restrictions in gov- The indenture securing the Com-and quoted market prices: erning instruments and provisions of pany's mortgage debt provides that state law and the Federal Power Act surplus shall be reserved and held un-may affect the declaration and payment available for the payment of dividends of dividends. While the Company ex- on Common Stock to the extent that Dividend paid Price range pects to continue the payment of div- expenditures for maintenance and re-1988 per share High Low idends, management and the Board of pairs plus provisions for depreciation Directors must take into account, in re- do not exceed 2.25% of depreciable 1st Quarter $ 30 $ 14 $ 12 spect of future quarterly dividend decla- property as defined therein. Such pro-2nd Quarter .30 15'/2 122/e rations and the level of such dividends, visions have never restricted the Com-3rd Quarter .30 152/e 127/e the facts and elements referred to above 'pany's surplus.

4th Quarter .30 14'/4 12'/2 in evaluating the decision to declare a At year end, about 162,000 stockhold-dividend. ers owned common shares of Niagara

$ 1.20 The holders of Common Stock are en- Mohawk and about 7,000 held Preferred titled to one vote per share but may not Stock. The chart below summarizes cumulate their votes for the election of common stockholder ownership by size Directors. Whenever dividends on Pre- of holding:

1987 ferred Stock are in default in an amount Size of holding Total Total shares 1st Quarter equivalent to four full quarterly divi- (Shares) stockholders held

$ .52 $ 19'/e $ 157/e dends and thereafter until all dividends 2nd Quarter .52 17'/4 147/e thereon are paid or declared and set 1 to 99 51,662 1,530,043 3rd Quarter .30 17 14 aside for payment, the holders of such 100 to 999 99,227 25,298,708 4th Quarter .30 14e/e 111/e stock can elect a majority of the Board 1,000 or more 10,661 108,804,345 of Directors. Whenever dividends on any Preference Stock are in default in 161,550 135,633,096 EARNINGS AND DIVIDENDS PAID PER COMMON SHARE COMMON STOCK PRICES CAPITALIZATIONRATIOS

$ 25.50 46 5% 45 8% 47.0o/o 55.1%

$ 2.84 $ 2.88 cc

$ 2.71 co cur Co $ 21.88 R rxr DLu

~O

$ 2.08

$ 1.98 Eo $ 20.50 $ 19.13 fsh76> x $ 17.75 1,6

$ 1.21 17.39 11 5% 11.5% 10.5%

O $ 16.38 16.75 U $ 15.50 42 oo/o 42 7o/o 42.5% 12.0o/o 10.7%

C/>

rh 33,1o/o 34.2o/o

$ 12.00 5 0 $ 11.13 Dg CI Qcf 1984 1985 1986 1987 1988 1984 1985 1986 1987 1988 1984 1985 1986 1987 1988 o excluding the ef feel of the write off of disallowed Nine Mile Unit No. 2 costs ($ e.54 per share).

ELECTRIC STATISTICS Electric and Gas Statistics 1988 .1987 198Ci ELECTRIC CAPABILITY Electric sales(Millions of kw-hrs)

Thousands of kilowatts Residential ................ 10,099 9,655 9,359 At January 1, 1989  % 1988 1987 Commercial ............... 11,182 10,718 10,374 Thermal: Industrial .................. 11,745 10,922 10,801 Coal fuel Municipal service .......... 237 235 234 Huntley, Niagara River .. 715 10 715 715 Other electric systems ...... 1,732 4,154 3,579 Dunkirk, Lake Erie ..... 560 7 560 555 34,995 35,684 34,347 Total coal fuel .. 1,275 17 1,275 1,270 Residual oil fuel Electric revenues (Thousands of dollars)

Albany, Hudson River" ... 400 6 400 400 Residential ................ $ 805,523 739,034 $ 702,309 Oswego, Lake Ontario"'. 1,571 21 1,572 1,563 Commercial ............... 827,918 783,103 766,815 Roseton, Hudson River ... 300 4 300 299 Industrial .................. 458,332 435,518 448,855 Middle distillate oil fuel Municipal service .......... 41,231 40,603 41,031 19 Combustion turbine Other electrical systems .... 60,214 118,021 95,809 and diesel units .......... 237 3 237 237 Miscellaneous ............. 150,514 53,912 77,014 Total oil luel 2,508 34 2,509 2,499

$ 2,343,732 $ 2,170,191 $ 2,131,833 Nuclear fuel Nine Mile Point, Lake Ontario . 1,054 14 610 610 Electric customers(Average)

Purchased-firm contract Residential ................ 1,324,367 1,307,946 1,291,111 Power Authority- Commercial ............... 140,237 138,193 136,304 FitzPatrick, Lake Ontario ... 53 1 59 153 Industrial.................. 2,322 2,374 2,481 Total nuclear fuel 1,107 15 669 763 Other ..................... 3,182 3,400 3,282 Total thermal sources .. 4,890 66 4,453 4,532 1,470,108 1,451,913 1,433,178 Hydro:

Owned and leased hydro stations (78) . '95 9 695 684 Residential(Average)

Purchased-firm contracts Annual kw-hr. use Power Authority-Niagara River.... 1,077- 15 1,076 1 ~ 111 per customer ............ 7,626 7,382 7,249 Power Authority- Cost to customer per kw-hr.. 7.98tt 7.65/ 7.50tf Blenheim-Gilboa Annual revenue Pumped Storage Plant........... 295 4 270 270 per customer ............ $ 608.23 $ 565.03 $ 543.96 Other 294 4 285 262 Total h dro sources .. 32 2,326 2,327 Total capability',361 Other urchases..... 121 7,372 100 2 97 6,876 6,939 80 GAS STATISTICS 1988 1987 1986 Gas Sales(Thousands of dekatherms) 1988 1987 1986 Residential ................ 51,065 48,054 49,430 Etectric peak load during ear .. 6,220 5,780 5,724 Commercial ............... 23,951 23,520 27,218

'Available capability can be increased during heavy load periods by Industrial.................. 4,274 7,242 15,575 purchases from neighboring interconnected systems. Hydro station Other gas systems.......... 2,158 2,504 3,724 capability is based on average December stream-flow conditions. Total sales......... 81,448 81,320 95,947 "Has capability to burn natural gas'(as well as oil) as a fuel. Transportation of

"'Oswego Unit 3 burns natural gas only. customer-owned gas . 27,244 21,862 4,868 The Nine Mile Point Unit No. 2, increased capability by 444,000 KW representing the Company's share of the output.

Total gas delivered ..... 108,692 103,182 100,815 Gas revenues(Thousands of dollars)

ELECTRICITY GENERATED Residential ................ $ 289,026 $ 280,092 $ 296,853 AND PURCHASED Commercial ............... 119,929 121 145

~ 142,807 Millions of kw-hrs.

Industrial .................. 19,008 29,733 68,476 Other gas systems.......... 9,363 8,802 14,300 1988  % 1987  % 1986 Transportation of

,Thermal: customer-owned gas ..... 13,841 11,551 2,244 Generated Miscellaneous ............. 5,554 1,916 3,806 Coal ........... 7,894 21 7,185 18 6,140 16 $ 456,721 $ 453,239 $ 528,486 Oil ............. 7,444 19 4,256 11 5,811 16 Nuclear ........ 1,460 4 4,753 12 3,147 8 Gas customers(Average)

Natural gas ..... 1,070 3 1,785 4 177 1 Residential ............... 4171360 411,566 407,546 Purchased- Commercial .............. 35,017 33,974 33,248 Nuclear from Industrial ................. 323 395 465 Power Authorit . 306 1 700 2 1,284 3 Other 2 2 2 Total thermal 18,174 48 18,679 47 16,559 44 Transportation...........'. 403 184 40 Hydro: 453,105 446,121 441,301 Generated .......... 3,171 8 3,396 8 4,140 11 Purchased from ResIdential (Average):

Power Authority... 7,014 18 7,378 19 7,683 20 Annual dekathermuse-Other ............ 978 3 1,017 3 565 2 per customer ......... 122.4 116.8 121.3 Totalh dro 11,163 29 11,791 30 12,388 33 Cost to customer per dekatherm ........ $ 5.66 $ 5.83 $ 6.01 Other purchased power- Annual revenue varlous sources ...... 8,804 23 8,942 23 8,692 23 per customer ......... $ 692.51 $ 680.55 $ 728.39 Total generated Maximum day gas and purchased 38,141 100 39,412 100 37,639 100 send out (dekatherms) . 818,128 758,914 786,165

I)IitG~RA iMOIIAWKPOWll3 COIIPORATION an(l SUIISII)IAIIYCOiMPANIKS 38-39 Directors Officers William F. Allyn (E,F) William J. Donlon Samuel F. Manno President & Chief Executive Officer Welch Allyn, Inc., Chairman of the Board Vice President, Purchasing &

Skaneateles Falls and Chief Executive Officer Materials Management (Elected Jane 1, 1988)

James Bartlett (Retired May 2, 1988) Thomas J. Perkins Former Executive Vice President, Syracuse John M. Endries Vice President, Nuclear President (Died November 24, 1988)

(Elected Jane 1, 1988)

Lawrence Burkhardt, III (F) (Elected October 24, 1988) James A. Perry Executive Vice President, Nuclear Operations Lawrence Burkhardt, III Vice President, Quality Assurance Executive Vice President, Edmund M. Davis(A,B,E) Nuclear Operations Nicholas L. Prioletti, Jr.

Partner, Hiscock & Barclay, at torncys-at-law, Syracuse Controller Anthony J. Baratta, Jr.

Senior Vice Prcsidcnt Richard H. Ryczek William J. Donlon (A) Vice President, Gas Chairman of thc Board and Chief Executive Officer John P. Hennessey Senior Vice President Jack R. Swartz Edward W. Duffy (A, B, C, F) Vice President, Regional Former Chairman of the Board and Chief Executive Officer, Charles V. Mangan Operations Marine Midland Banks, Inc. a bank holding company, Buffalo Senior Vice President Carl D. Terry John W. Powers Vice President, Nuclear John M. Endries Senior Vice President and Engineering and Licensing President Trcasurcr Perry B. Woods, Jr.

John G. Haehl, Jr. Michael P. Ranalli Vice Prcsidcnt, Human Former Chairman of the Board and Chief Executive OAicer Senior Vice President Resources Joseph T. Ash Harold J. Bogan Lauman Martin (Retired May 2,1988; Died Jtate 2,1988) Vice President, Consumer Services Assistant Secretary Consultant (formerly Senior Vice President and General Counsel), Syracuse Thomas H. Baron Joseph F. Cleary Vice President, Fossil Generation Assistant Sccrctary Baldwin Maull (A, B) Michael J. Cahill John J. Hennigan Corporate Director, New York Vice President, Regional Assistant Sccrctary Martha Hancock Northrup Operations (C, D) John W. Keib Homemaker, former President, Crousc-Irving Memorial Robert M. Cleary, Jr. Assistant General Counsel Hospital Board, Syracuse Vice President, Regional Operations Frederick C. McCal1, Jr.

Henry A. Panasci, Jr. (B, E) Assistant Sccrctary Chairman of thc Board and Chief Executive Officer, Fay's Drug Richard E.A. Duffy Company, Inc., Liverpool Vice President, Public Alfairs & Arthur W. Roos Corporate Communications Assistant Treasurer Patti McGill Peterson (C, D) Gerald D. Garcy Robert A. Sanguine President, St. Lawrence University, Canton Vice President, Power Contracts Assistant Controller Frank P. Piskor(A,C,F) James P. Gorman Steven W. Tasker President Emeritus, St. Lawrence University, Canton Vice Prcsidcnt, Corporate Audits Assistant Controller Edward F. Hoffman Ronald A. Ungerer Donald B. Riefler (E, F) Vice President, Engineering Assistant Controller Chairman, Market Risk Committee, Morgan Guaranty Trust (Non-Nuclear)

Company of New York, Ncw York Richard N. Wescott Darlene D. Kerr Assistant Treasurer Steven Browning Sample (D, F) Vice President, System Electric Prcsidcnt, State University of New York at Buffalo, Bulfalo Operations Henry B. Wightman, Jr.

Assistant Controller, Nuclear Gary J. Lavine Lewis A. Swyer (Died December 25, 1988) Vice President, General Counsel Chairman, L,A. Swycr Co., Inc., builders and construction and Secretary managers, Albany John G. Wick (D, E)

Partner, Falk & Sicmcr, attorneys-at-law, Buffalo A. Memberof the Executive Committee B. Membcrof thc Compensation Committee C. Member of the Audit Committee D. Member of the Committee on Corporate Public Policy E. Mcmbcr of the Finance Committee F. Member of the Nuclear Oversight Committee

NIAGARA MOIIAWKPOWHR COIIPORATION aft(l SUBSIDIARY COMPANIHS 4',

Corporate Information Annual Meeting The annual meeting of shareholders willbc held in thc auditorium of the Everson Museum of Art, 401 Harrison Street, Syracuse, N.Y. 13202 at 10:30 a.m. Tuesday, May 2, 1989. A notice of the meeting, proxy statement and form of proxy will be sent to holders of common 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 York State) 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 Reinvestmcnt Plan Shareholders and customers interested in purchasing common stock through the Dividend Reinvestment and Common Stock Purchase Plan should call or write our Shareholder Services Department at P.O. Box 7058, Syracuse, N.Y. 13261.

SEC Form 10-K Report A copy of the Company's Form 10-K Report filed annually with thc Securities and Exchange Commission is available without charge after March 31, 1989, by writing the Investor Relations Department at 300 Erie Boulevard West, Syracuse, N.Y. 13202.

Disbursing Agent Preferred and Coniinon Stocks:

Niagara Mohawk Power Corporation 300 Erie Boulevard West, Syracuse, N.Y. 13202 Bonds:

Marine Midland Bank, N.A.

140 Broadway, New York, N.Y. 10015 Transfer Agents and Registrars Preferred and Cornnron Stocks:

Morgan Shareholder Services Trust Company of New York 30 West Broadway, New York, N.Y. 10015 Bonds:

Marine Midland Bank, NA,.

140 Broadway, New York, N.Y. 10015 Stock Exchanges Cornrnon Stock and Certain Preferred Series:

Listed and traded on the New York Stock Exhange.

Connnon Stock: Also traded on the Boston, Cincinnati, Midwest, Pacific and Philadelphia stock exchanges.

Bonds: Traded on the New York Stock Exchange.

Ticker Symbol: NMK Corporate Headquarters 300 Erie Boulevard West Syracuse, New York 13202 (315) 474-1511 The Information in this report is not given in connection with the sale of, or offer to buy, any security.

Printed in U.S.A.