ML20197C051

Safety Evaluation Rept Supporting Amend 1 to CPPR-112

ML20197C051
Person / Time
Site:	Nine Mile Point
Issue date:	10/27/1978
From:	Silver H, Varga S Office of Nuclear Reactor Regulation
To:
Shared Package
ML20197C043	List: ML20197C037 ML20197C051 ML20197C064 ML20197C070
References
NUDOCS 7811140261
Download: ML20197C051 (26)

Text

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SAFETY EVAi.UATION REPORT OCT 2 7197a SUPPORTING AMENDMENT NO. 1 TO CPPR-ll2 INTRODUCTION Construction permit CPPR-ll2 was issued on June 24, 1974 to the Niagara Mohawk Power Corporation (NMPC) as applicart and owner of the Nine Mile Point Nuclear Station, Unit 2 (NMP-2) generating facility. On September 22, 1975, NMPC entered into an agreement with Central Hudson Gas and Electric Corporation, Long Island Lighting Company, New York State Electric

& Gas Corporation and Rochester Gas & Electric Corporation to sell ownership ,

interests in the plant to the above-named companies. The New York Public Service Commission approved the transfer of ownership interests to the ,

above-noted companies on December 5, 1977. -

By letter dated February 6,1978, Niagara Mohawk Power Corporation filed a request for amendment to the construction permit to include the above noted companies as co-owners of NMP-2. By letter of August 16, 1978, -

the request for amendment was modified to conform to the Atomic Safety and Licensing Board's decision in ALAB-459 (Marble Hill) which required that co-owners of a facility also be co-applicants in any licensing action.

The August 16, 1978, modification to the amendment also stated that the Tri Counties Construction Trust (Construction Trust) would finance Long Island Lighting Company's (LILCO) ownership interest in the Nine Mile Point Unit 2 facility during the 1978-80 peri od. The Staff understands that approval of this financing arrangement has been obtained from the New York Public Service Commission. The Staff has also ascertained that the Construction Trust, while having legal ownership for security purposes during construction, will not have any involvement whatsoever in the design

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and construction of the Nine Mile Point licit 2 facility. Beneficial ownership of its interest in the facility will remain with LILC0 at all times. Accordingly, the Construction Trust has not been named as a co-applicant or co-owner.

The application states that NMPC has the responsibility for licensing, design, procurement, construction, operation, and all related functions, and that the owners have delegated to NMPC the authority to act on their behalf in f acility and materials license applications and amendments as may be required.

The application further states that none of the co-owners is owned, controlled, or dominated by an alien, a foreign corporation, or a foreign government.

ANALYSIS We have reviewed the application for Amendment No. I to CPPR-ll2 and conclude that since NMPC will retain responsibility for the design, construction, and operation of NMP-2, addition of co-owners would not involve a significant hazards consideration inasmuch as it does not involve an increase in the probability of an accident, an increase in the consequences of an accident, or a decrease in safety margins. We therefore conclude that the activities authorized by this amendment would not constitute an unreasonable risk to the health and safety of the public.

Since the application for amendment states that the co-owners are not owned, controlled, or dominated by an alien, a foreign corporation, or a foreign government, we conulude from our review that the activities

authorized by this amendment would not be inimical to the common defense and security.

We have evaluated the financial qualifications of the above-named companies to participate with NMPC as co-owners of NMP-2 as presented below.

Financial - General The NRC regulations relating to the determination of an applicant's financial qualifications appear in Section 50.33(f) and Appendix C to 10 CFR Part 50. These regulations state that there must be reasonable assurance that an applicant can obtain the necessary funds to cover the estimated construction cost of a proposed nuclear power plant and its related fuel cycle costs. This standard of reasonable assurance, however, must be viewed in light of the extended period of time from the start of construction to the date of commercial operation. The earliest date for commercial operation of the NMP-2 facility is estimated to be March 1983.

Consequently, we must make certain basic assumptions in our financial analysis about future conditions. Our analysis of the applicants' financial qualifications assumes that there will be rational regulatory policies with respect to the setting of rates and that viable capital markets will exist. The former assumption implies that rates will be set by the appropriate regulatory agencies to at least cover the cost of service, including the

cost of capital. The latter assumption implies that capital will be available at some price. Given these fundamental assumptions, our evaluation is then focused on the reasonableness of the applicants' financial planning.

The applicants have subrnitted financial information in support of their application. The following analysis summarizes our review of the information, and gives the qualifications of each applicant to finance its respective share of the costs of the design and construction of the facility.

Financial - Construction Cost Estimates The most recent cost estimates for NMP-2 are provided in the NMPC letter of May 26, 1978. The cost estimates are summarized as follows:

(millions of dollars)

Total nuclear production plant costs - - - - - - $1,018.3 Transmission, distribution, and general plants costs - - - - - - - - - - - - - - - - - 7.6 Nuclear fuel inventory cost for the first core - - - - - - - - - - - - - - - - - - - - -

71.5 TOTAL

$1,097.4 We have compared the cost of the nuclear production plant estimated by the applicants with the cost projected by the costing model (CONCEPT) developed by the Department of Energy. This analytical model projected the cost of NMP-2 to be $1,202.0 million, compared with the applicants' estimate of $1,097.4 million. Since the CONCEPT model is used primarily

as a rough check of the cost estimate made by the applicants and is not intended to be a substitute for detailed engineering cost estimates, we conclude that it is reasonable to use the applicants' estimate in our financial analysis.

Sources of Construction Funds The ownership, costs, and elactrical output of the proposed facility will be shared accordin( to the following percentages:

Niagara Mohawk Power Corporation 41%

Central Hudson Gas & Electric Corporation 9%

Long Island Lighting Company 18%

New York State Electric & Gas Corporation 18%

Rochester Gas and Electric Corporation 14%

The percent allocation is based on the agreement signed by the four parties on September 22, 1975. Each owner will pay its ownership percentage of the cost of constructing the project and bear its ownership percentage of all l

liabilities in connection with the project.

l The applicants will finance their respective ownership costs from internal funds, external sales of debt and equity, and short term borrowing. Avail able funds from these sources in 1977, after debt payments and retirements, totaled $32.2 million for Central Hudson Gas & Electric Corporation;

$333.8 million for Long Island Lighting Company; $152.6 million for New York State Electric & Gas Corporation; $99.6 million for Rochester Gas and Electric Corporation; and $255.8 million for Niagara Mohawk Power Corporation.

Financial Analysis The ability of an investor-owned utility to finance a construction program over a future period is a function of a number of variables, the most important of which is the level of profitability. Profitability can be assessed by referring to the return a utility earns on the capital it employs in its business and comparing it to the risk-adjusted returns earned elsewhere in the economy. The concept of the fair rate of return on investment is deeply ingrained in public utility reguation. The capability of an electric utility to finance a construction program requiring large amounts of external financing will depend, in part, on its ability to earn such a fair rate of return. Further, a fair rate of return on total capital will also result in the return on common equity being fair and reasonable, since common equity is a component of total capital. All other things being equal, the return on common equity is the best indication of a company's profitability and will have a substantial impact on other facets of a company's financial performance.

l Although a fair rate of return might be characterized as the most significant l

variable affecting an applicant's ability to finan:e its propsed construction l program, it must also be coupled with a properly balanced capital structure l

to provide reasonable assurance that adequate coverages on its senior securities will result, thereby maintaining their narketability. Historically, the average investor-owned electric utility has had a capital structure

comprised of around 50 to 55 percent long-term debt,10 to 15 percent preferred stock, and 30 to 40 percent common equity. Given a particular capital structure with its embedded costs of debt and preferred stock, the return on common equity will determine the level of interest coverage and preferred dividend coverage. These coverages, in turn, will significantly affect the ratings assigned to a company's senior securities by the principal rating agencies and, consequently, the interest rate demanded by investors to purchase these securities. The return on common equity will also affect the company's common stock. When large amounts of securities need to be sold to finance a construction program, the ability to sell common stock is the key to maintaining a reasonably balanced capital structure. In addition, the return on common equity affects the level of internally generated funds through its impact on retained earnings, although the primary source of internally generated funds is depreciation. l Since a lengthy and uncertain future period is involved in the analysis of an applicant's financial qualification, we do not look solely at historical data. For this reason, we have requested each applicant to submit a projected system-wide " sources and uses of funds" statement covering the period of construction, demonstra'.ing how anticipated construction expenditures i i

might be met by internal and external sources of funds. Our analysis of the submitted projections then focuses on the reasonableness of these projections and their underlaying assumptions.

The projected " sources and uses o' funds" statements submitted by the five applicants for the period frcm 1978 to 1983 together with the under-lying assumptions, are presented an the attached Tables 1 through 5.

The applicants project a rate of return on year-end common equity in the range of 10 - 13 percent, during the six-year construction period. Based on information submitted by the applicants, a rate of return on this order of magnitude has been determined to be just and reasonable by State Public Utilities Commissions in their respective service areas. Given prevailing and reasonably forseeable capital market conditions, we conclude that the applicants' assumptions with respect to rates of return on common equity are within a reasonable range.

The assumed capital structures for the applicants are 49 to 52 percent long-term debt; 10 to 14 percent preferred stock; and 36 to 40 percent common equity. As noted above, these assumed capital structures are historically typical of the electric utility industry and, in our judgment, are within the zone of reasonableness. Furthermore, the projected rates of return, when applied to these capital structures, will result in adequate coverages of fixed charges (i.e., total interest charges and amortization of debt discourt expense)for each applicant.

Conclusions on Financi61 Qualifications Based on our analysis, we conclude that Niagara Mohawk Power Corporation, Central Hudson Gas & Electric Corporation, Long Island Lighting Company,

New York State Electric & Gas Corporation, and Rochester Gas and Electric Corporation have reasonable assurance of obtaining the necessary funds to cover the estimated construction cost of the NMP-2 facility and its related fuel cycle costs. Our conclusion is based upon an assessment that the financial projections submitted by the applicants constitute reasonable financing plans. We do not consider these financial projections to be a forecast of the financing which will actually occur. We require only that the applicants demonstrate one possible method by which their planned con:truction program, including the subject facility, might be reasonably financed, Since we are dealing with future events, we naturally expect that financing plans will change from time to time to accommodate changing conditions. Nevertheless, the financing projections submitted by the applicants are in accordance with general industry practice and the underlying assumptions, although not susceptible to precise measurement against absolute criteria, are consistent with the postulated conditions.

Consequently, since we find that the applicants' financial projections are reasonable, we conclude that the standard of reasonable assurance has been satisfied. Accordingly, we find the applicants financially qualified to design and construct the proposed NMP-2 facility.

In accordance with the provisions of Section 50.71(b) of 10 CFR Part 50, the applicants will be filing annual certified financial statements with the Director of Nuclear Reactor Regulation. Information in these statements will be used by the staff in its monitoring of the applicants' construction program, including the NMP-2 facility.

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SAFETY CONCLUSIONS For reasons stated in the above analysis, we conclude that activities authorized by this amendment (1) do not involve a significant hazards consideration; (2) would not constitute an unreasonable risk to the health and safety of public; and (3) are not inimical to the common defense and security.

Based on our evaluation of financial information provided in the application for the amendment as summarized in the above analysis, we conclude that there is reasonable assurance the the above-named co-owners are financially qualified to participate in the ownership of NMP ,2.

l 24 Harl ilver, Project Manager Lig t ater Reactors Branch No. 4 Divi on of Project Management

) f A / $Nw. ' k StevenA.karga,bt.Q.7(

, Ch ef Light Water Reactors ranch No. 4 Division of Project Management OCT 2 71978 .

TABLE 1 Applicant: CENTRAL lluDSON GAS & ELECTRIC CORPORATION Nuclear Plant: Nine Mile Point Unit 2 l

PRO FORMA SOURCES OF FUNDS FOR SYSTEM-WIDE CONSTRUCTION EXPENDITURES AND CAPITAL STRUCTURE DURING PERIOD OF CONSTRUCTION OF SUBJECT NUCLEX'R POWEk PLANT (Millions of Dollars)

Construction Years of Subject Nuclear Power Plant l 1978 1979 1980 1981 1982 1983 EXTERNAL FINANCING Common stock $10.3 $12.9 512.9 $ $17.6 $

Preferred stock 18.0

, Long-term debt: 30.0 25.0 25.0 25.0 35.0 15.0 l Notes payable l Contributions from parent-net Other funds-Short-term debt 14.7 (18.9) ( 9.9) ( 3.0) 18.4 23.0 Totel External Funds $55.0 $19.0 $28.0 $40.0 $71.0 S38.0 INTERilALLY GENERATED CASil Net income Less:

preferred dividends conc.on dividends Retained earnings 4.7 6.3 7.1 7.7 8.4 10.0 Deferred taxes 3.2 4.4 4.1 2.8 5.4 5.4 Ineest. tax cred.-deferred Depreciation and amort. 13.6 15.6 16.1 16.5 17.0 19.0 Change in working capital less: AFDC (5.0) (6.0) (6.8) (7.4)_ (8.0)_ (9.5)

Total Internal Funds $16.5 $20.3 320.5 $19.6 $22.8 $24.9 TOTAL FUNDS 371.5 $39.3 $48.5 $59.6 $93.8 $62.9 CONSTRUCTION EXPENDITURES

• Nuclear power plants $19.0 $22.6 $17.8 $28.7 $51.9 $39.5 Other 42.9 15.0 16.3 21.0 33.9 21.8 Total const. exp's $61.9 $37.6 33I4 Elf $49.7 $85.8 $61.3 Subject nuclear plant 116.8 $17.3 T12.9 $10./ $ 7.1 S 2.9 CExclusive of AFDC

TABLE 1 (continued)

Construction Years of Subject Nuclear Power Plant 1978 1979 1980 1981 1982 1983 OTHER CAPITAL REQUIREMENTS Redemption of Maturing Bonds

& Other Long-Term Debt $ 8.0 $12.0 $ 8.0 Acquisition of Bonds for

$ $ 6.0 $

Sinking Funds Miscellaneous Requirements-Working Capital, etc. 1.6 1.7 2.4 1.9 2.0 1.6 TOTAL CAPITAL REQUIREMENTS $71.5 $39.1 $48.5 $59.6 $93.8 $62.9 CAPITAL STRUCTURE ($ & %)

Long-tenn debt $197.6 49.5% $222.4 50.2% $235.2 49.4%

Preferred stock $252.1 48.6% $280.9 48.9% $295.7 49.4%

61.0 15.3 61.0 13.8 61.0 12.8 79.0 15.2 79.0 13.8 79.0 13.2 Common equity 140.4 35.2 159.7 36.0 188.0 36.2 TOTAL 180.3 37.8 214.0 37.3 224.0 37.4

$399.0 100.0% 5443.1 100.0% $476.5 100.0% $319.1 100.0% $573.9 100.0% $598.7 100.0%

' Assumptions upon which " Sources of Funds" statement is based a) Return on common equity: 12% in 1979-1982; 13% in 1983 l Based on relationship between rates allowed by PSC and those actually realized

, b) Preferred Stock dividend rate: 9%

l c) long-term debt interst rate: 9%

• i Short-term debt interest rate: 8%

d) Market to Book Ratio for

! Common Stock Of ferings: 90% 1979; 100% 1980-1983 l e) Common Stock dividend payout ratio: 65%

' f) Structure per above schedule g) Coverages: Mortgage Indenture - range from 2.71 to 2.99 Pre-Tax Interest - range from 2.74 to 2.88

, h) Ho assumptions were required with respect to growth in kWh. sales and kWh. unit prices since the projection for retained earnings is a function of return on equity and payout ratio.

HOTE: With respect to above items, it has been assumed that AFDC would be limited to 33-1/3%

of income available to common.

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TABLE 2 Applicant: Long Island Lighting Company Nuclear Plant: Nine Mile Point Unit 2 PRO FORMA SOURCES OF FUNDS FOR SYSTEM-WIDE CONSTRUCTION EXPENDITURES AND CAPITAL STRUCTURE DURING PERIOD OF CONSTRUCTION OF SUBJECT NUCLEAR POWER PLANT (Millions of Dollars)

Construction Years of Subject Nuclear Power Plant 1978 1979 1980 1981 1982 1983 EXTERNAL FINANCIf.G Connon stock $ 96.4 $ 96.3 $ 13.4 $ 13.4 $ 13.4 $ 13.4 Preferred stock Long-term debt 75.0 100.0 205.0 65.0 60.0 Notes payable Contributions from parent-net Other funds (Trust-Nuclear Fuel) 59.9 35.7 34.1 33.5 43.0 45.5 (Trust-Nine Mile Point) 101.7 19.3 44.7 (165.7)

Total External Funds 333.0 251.3 92.2 86.2 121.4 118.9 INTERNALLY GENERATED CASH Net Income 142.3 167.7 195.2 201.8 211.4 221.3 Less: preferred dividends 30.7 30.7 30.5 29.8 29.2 28.5 coninon dividends 78.0 93.6 103.2 116.1 123.0 130.1 Retained earnings 33.6 43.4 61.5 55.9 59.2 62.7 l Deferred taxes (0.8) 1.4 2.6 26.3 26.7 27.9 Invest tax credit deferred 11.4 23.5 23.6 - - -

l Other 19.4 11.0 35.0 11.3 13.4 12.8 Depreciation and amort. 51.9 55.9 69.0 105.1 107.7 113.0 Chan9e in working capital Less: AFDC (59.1) (58.4) (41.7) (24.6) (43.3) (45.6)

Total Internal Funds 56.4 76.8 150.0 174.0 163.7 170.8 TOTAL FUNDS $389.4 $328.1 $242.2 $260.2 $285.1 $289.7

~CONSTRUCTI0tt EXPENDITURES

• Nuclear power plants $237.9 $171.9 $ 79.9 $ 53.5 $ 75.0 $112.7 Other 116.3 141.6 115.8 122.3 119.7 128.6 Total const. exp. 's 354.2 313.5 195.7 175.8 194.7 241.3 Subject nuclear plant $ 31.9 $ 34.3 $ 25.7 $ 17.8 3 11.9 $ 3.0 OExclusive of AFDC

TABf.E 2 (continued)

Construction Years of Subject Nuclear Power Plant 1978 1979 1980 1981 1902 1983 OTHER CAPITAL REQUIREMENTS Redemption of Maturing Bonds 30.0 -

20.0 60.0 70.0 25.0 Acquisition of Preferred Stock for Sinking Fcnds -

1.1 7.9 7.9 7.9 7.9 Miscellaneous Requirements (Trust interest) 5.2 13.5 18.6 16.5 12.5 15.5 TOTAL CAPITAL REQUIREMENTS $389.4 $328.1 $242.2 $260.2 $285.1 $289.7 CAPITAL STRUCTURE (WITH TRUSTS INCL. IN L0ilG-lERM DEBT) ($ & %)

Long-term debt 1,338.6 1,493.6 1,552.4 1,565.2 1,603.2 1,683.7 Preferred stock 393.4 392.3 385.4 377.4 369.6 361.7 Conmn equity 953.6 1,093.3 1,168.2 1,237.5 1,310.1 1,386.2 TOTAL 2,685.6 2,979.2 3,106.0 3,180.2 3,282.9 3,431.6 Long-tenn debt 49.8% 50.1% 50.0% 49.2% 48.8% 49.1%

Preferred stock 14.7 13.2 12.4 11.9 11.3 10.5 Cor.n.on equi ty 35.5 36.7 37.6 38.9 39.9 40.4 TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

The assumptions upon which the " Source of Funds" statement were based are:

(a) The rate of return on average coarnon stock equity was assumed to be 12.5% in 1978 and 14.3% for the years 1979 through 1983. The 1979-83 return was that requested by the Company in its recent rate case filing.

(b) An assumption that the issue of new preferred stock was not required throughout the period 1978-1983 was made and, therefore, a preferred stock dividend rate projection for new issues was not necessary.

(c) The icng-term debt rate was assumed to be 9.5% for new issues and the short-term debt rate was 8.0%.

(d) Dollars of new coninon stock issues were derived by the annual requirement of conmon equity to meet the target capital structure reduced by the estimated annual amount of retained earnings. Projections of the amounts of conenon stock financing to be realized by the Automatic Dividend reinvestment Plan and the Employee Stock Purchase Plan were made based on current participation.

TABLE 2 (continued) .

(e) Payout ratios assumed for common stock dividends were 70% in 1978, 68% in 1979, 63% in 1980 and 67.5% in 1981-83. The common stock dividend was increased at an annual rate of 74 per share in March 1978. This modest increase was extended through the year 1980 and the payout ratio was increased to 67.5% objective in the years 1981-83. l (f) The target capital structure used was Long-terin Debt 50% and Preferred and Conmon Equity 50%. Nuclear fuel capital expenditures were financed through a resources trust throughout the period 1978-83. The LILCO portion of Nine Mile Point #2 Nuclear Plant Construction was financed through a construction trust in the years 1978-80 and within the Company capital structure in the years 1981-83.

(g) The resultant SEC and Indenture interest coverages over the ceriod of Construction were:

SEC Coverage Indenture Coverage 1978 2.77 2.48 1979 2.88 2.94 1980 3.03 3.56 1981 3.34 3.78 1982 3.40 3.92 1983 3.42 3.89 (h) Growth rate 1977-1983 1977-1983 Base Year Year Growth Rate i Dol 1ars - Millions 1977 1983 Amount  %

1. Capitalization $2,350.0 $3,431.6 $1,081.6 46

2. Operating Income 135.6 289.1 153.5 113

3. Income Before Interest Expense 217.9 339.1 121.2 56

4. Interest 85.5 117.8 32.3 38

5. Net Income 132.4 221.3 88.9 67

6. Preferred Dividends 30.7 23.5 (2.2) (7)

7. Balance for Common 101.7 192.8 91.1 90 s ~.

TABLE 3 Applicant: NEW YORK STATE ELECTRIC & GTc LUHf' ORATION Nuclear Plant: Nine Mile Point Unit 2 PRO FORMA SOURCES OF FUNDS FOR SYSTEM-WIDE CONSTRUCTION EXPFNDITURES AND CAPITAL STRUCTURE DURING PERIOD OF CONSTRUCTION OF SUBJECT NUCLEAR POWER PLANT (Millions of Dollars)

Construction Years of Subject Nuclear Power Plant 1978 1979 1980 1981 1982 1983 EXTERNAL FINANCING Common stock $ 74.0 $ 37.0 $ 80.0 $ 80.0 $100.0 $ 80.0 Preferred stock -

30.0 30.0 50.0 50.0 50.0 Long-term debt 100.0 50.0 150.0 275.0 175.0 200.0 Notes payable 48.0 69.0 41.0 15.0 43.0 37.0 Cnntributions from parent-net - - - - - -

l Other funds (describe) - - - - - -

Total External Funds 222.0 186.0 301.0 420.0 368.0 367.0 INTERNALLY GEllERATED CASH Net Income 72.0 72.0 90.0 106.0 125.0 146.0 Less:

preferred dividends 13.0 14.0 17.0 20.0 24.0 29.0 conmon dividends 39.0 43.0 49.0 57.0 66.0 75.0 Retained earnings 20.0 15.0 24.0 29.0 35.0 42.0 Deferred taxes 2.0 1.0 10.0 9.0 7.0 6.0 Invest. tax cred-deferred 3.0 2.0 6.0 4.0 2.0 --

Depreciation & amortization 44.0 46.0 49.0 52.0 55.0 59.0 Change in working capital (3.0) (1.0) (5.0) (3.0) (1.0) -

Less: AFDC 17.0 22.0 32.0 50.0 72.0 87.0 Total Internal Funds 49.0 41.0 52.0 41.0 26.0 20.0 i TOTAL FUNDS 5271.0_ $227.0 5353.0 $461.0 5394.0 5387.0 l

CONSTRUCTION EXPENDITURES

• Nuclear power plants (1) $ 61.0 (1) $ 33.0 $ 58.0 $ 65.0 $ 93.0 $133.0 Other 123.0 136.0 208.0 240.0 272.0 206.0 Total const. exp's. $184.0 $169.0 5266.0 $305.0 $365.0 $339.0 l Subject nuclear plant y $ 3 . 4 $ 25.7 $ 17.2 $ 11.1 $ 5.8 Exclusive of AFDC 1

l (i) Net - on a monthly basis from October 1978 through September 1979, Long Island Lighting Company to reimburse for j h expenses incurred through September 1978 on NYSE&G #1 and #2 Nuclear Project.

TABLE 3 (continued) -

Applicant: NEW YORK STATE ELECTRIC & GAS CORPORATION Nuclear Plant: Nine Mile Point Unit 2 Construction Years of Subject Nuclear Power Plant 1978 1979 1980 1981 1982 1983 OTHER CAPITAL REQUIREMENTS Redemption of Maturing Bonds 6.0 10.0 13.0 Acquisition of Bonds for 110.0 - -

Sinking Funds -

Miscellaneoy,s Requirements 3.0 3.0 l (detail)l2) 81.0 48.0 74.0 46.0 26.0 45.0 TOTAL CAPITAL REQUIREMENTS 271.0 227.0 353.0 461.0 394.0 387.0 CAPITAL STRUCTURE ($ & %)

long-term debt (includes notes) $818.0 $879.0 $988.0 $1,127.0 $1,327.0 $1,519.0 Preferred stock 176.0 206.0 231.0 277.0 Common equity 316.0 364.0 537.0 590_.0 694.0 804.0 938.0 1,060.0 TOTAL $1,531.0 $1,675.0 $1,913.0 $2,208.0 $2,581.0 $2,943.0 Long-term c'ebt (includes notes) 53% 53% 52% 51% 52% 52%

Preferred stock 12% 12% 12% 13% 12%

Common equity 12%

35% 35% 36% 36% 36% 36%

TOTAL 100% 100% 100% 100% 100% 100%

(2) Notes - prior year-end and Preferred Stock Sinking Funds.

TABLE 3 (continued)

Assumptions upon which " Sources of Funds" statement is based (a) Rate of return on Common Stock equity - 121 3% - See note.

(b) Preferred Stock dividend rate - 9%.

(c) Long term interest rate - 9%.  ;

Short term interest rate 8'3%. '

(d) Market / book ratio with respect to projected Common Stock offerings - 90%.

(e) Common Stock dividend payout ratio - approximately 65%.

(f) Target and year by year capital structure - See attached.

(g) Resultant SEC and indenture coverages over the period of construction -

Type Coverage 1977 1978 1979 1980-1983 Mortgage Indenture 2.05 2.38 2.24 N/A No detailed l SEC - Fixed Charges Actual 2.18 2.26 2.10 income forecast

- Fixed Charges Annualized 1.90 2.12 2.06 l

l l Note: The Company does not have a detailed income forecast beyond 1979.

Therefore, 1980-1983 is estimated based upon a rate of return on common equi ty of 12's%.

TABLE 4 Applicant: NIAGARA MOHAWK POWER CORPORAJION Nuclear Plant: Nine Mile Point Unit 2 -

PRO FORMA SOURCES OF FUNDS FOR SYSTEM-WIDE CONSTRUCTION EXPENDITURES AND CAPITAL STRUCTURE DURING PERIOD OF CONSTRUCTION OF SUBJECT NUCLEAR POWER PLANT (Millions of Dollars)

Construction Years of Subject Nuclear Power Plant 1978 1979 1980 1981 1982 1983 EXTERNAL FINANCING--

Common stock $ 76.1 $ 59.0 $ 19.4 $ 31.6 $ 42.3 $ 56.2 Preferred stock 74.0 30.0 36.9 43.0 49.2 59.0 l Lon9-term debt 140.0 179.4 260.7 141.5 234.0 Notes payable 37.8 (34.0)

Contributions from parent-net Other funds (describe)

Total External Funds 5 187.9 5 195.0 $ 235.7 $ 335.3 $ 233.0 3 349.2 Internally Generated Cash .

Het Income 130.5 139.5 187.9 201.9 218.4 238.0 Less:

preferred dividends 28.6 30.9 32.1 35.1 38.7 43.0 co!rmon dividends 79.7 88.3 101.2 108.4 116.8 126.7 Retained earnin9s 22.2 20.3 54.6 58.4 62.9 68.3 Deferred taxes 9.4 (7.4) 14.5 14.9 14.8 18.0 Invest. tax credi t - deferred 7.2 7.4 9.2 (1.9) (1.9) (1.9)

Depreciation and amort. 105.4 101.7 113.0 121.3 122.3 134.0 Change in workin9 capital (26.9) 33.2 (13.8) (14.1) (30.7) (15.9)

Less: AFDC 47.4 58.7 55.5 73.1 88.1 94.2 Total Internal Funds 5 69.9 $ 96TS $ 122.0 $ 105.5 $ 79.3 $ 108.3 TOTAL FUNDS S 257.8 $ 291.5 $ 357.7 $ 440.8 $ 312.3 $ 457.5 i

Construction Expenditures

• Nuclear power plants $ 75.0 $ 82.8 $ 72.0 $ 77.8 $ 61.5 $ 61.7 Other 139.2 159.3 157.8 167.1 185.8 247.4 Total const. exp's. S 214.2 $ 242.1 $ 229T8 5 244.9 $ 247.3 $ 309.1 Subject nuclear plant $ 71.8 $ 76.0 $ 54.8 $ 33.9 $ 18.9 $ 6.5 o Exclusive of AFDC

TABLE 4 (continued)

Construction Years of Subject Nuclear Power Plant 1976 1979 1980 1981 1982 1983 Other Capital Requirements Redemption of Maturing Bonds $ $ $ 80.0 $ 140.0 $ $ 65.0 Acquisition of Bonds and Preferred Stock for Sinking Funds 34.8 3.8 10.5 10.5 11.7 16.2 Miscellaneous Requirements (detail)(7) 8.8 45.6 37.4 45.4 53.3 67.2 Total Capital Requirements 5 257.8 $ 291.5 $ 3577 3 440.8 $ 312.3 5 457.5 Capital Structure ($ & %)

Long-term debt $1,401.5 $1,539.7 $1,637.6 $1,756.8 $1,896.0 $2,060.7 Preferred stock 410.5 438.6 466.5 500.6 540.4 587.4 Common equity 1,066.5 1,145.8 1,219.8 1,309.8 1,415.0 1,539.5 TOTAL $2,878.5 T3,124.1 $3,323.9 $3,567.2 $3,851.4 $4,187.6 l

Long-term debt 48.7% 49.3% 49.3% 49.3% 49.2% 49.2%

Preferred stock 14.3 14.0 14.0 14.0 14.0 14.0 Common equity 37.0 36.7 36.7 36.7 36.8 36.8 TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

(1) Item Comprising Miscellaneous Requirements on Pro Forma Sources of Funds (Millions of Dollars)

Proceeds From Nuclear Fuel Other Overheads Sales of Generating Purchases Capitalir.ed Unit Total 1978 $19.9 $18.9 $(30.0) $8.8 s 1979 23.6 22.0 45.6 1980 17.5 20.0 37.5 1981 22.8 22.6 45.4 1982 41.3 25.4 (13.4) 53.3 1983 41.2 26.0 67.2 TABLE 4 (continued)

Assumptions upon which " Sources of Funds" statement is based.

1. Return on Average Common Equity:

1978 10.0%

1979 9.8%

1980 13.3!

1981 13.^,

1982 13.3%

1983 13.3%

2. Assumed Cost of New Securities:

a. Long-Term Debt- 9.0%

b. Short-Term Debt 7.5%

c. Preferred Stock

• 9.5%

• Except for the following 1978 Issues:

$40,000,000 of 8.375% Preferred Stock Issued in January,1978.

l $34,000,000 of 7.75% Preference Stock Contemplated for-June,1978.

l

3. Market / Book Ratio with Respect to Projected Common Stock Offerings:

Market Price Book Value* Ratio 1978 $15.00 $17.14 .875 1979 $16.50 $17.42 .947 1980 $18.42 $18.25 1.009 1981 $20.25 $19.15 1.057 1982 $21.31 $20.11 1.060 1983 $22.35 $21.12 1.058

• At Year End

TABLE 4 (continued)

4. For 1978 and 1979, Common dividends were calculated on the basis of estimated shares outstanding for each quarter and the anticipated dividend rate for each quarter. For 1980 through 1983, a 65% j payout ratio was assumed.

l 1

5. Target Capital Structure:

Long-Term Debt 49%

Preferred Stock

• 14%

Common Equity 37%

• Includes Preference Stock

6. SEC and Indenture Interest Coverages:

SEC Indenture 1978 2.42 2.52 1979 2.25 2.12 1980 2.86 2.89 1981 2.67 2.74 1982 2.71 2.56 1983 2.67 2.48 l

7. Annual Growth Rate in KWH Sales:

l 1978 (3.3%), 1979 (2.4%), 1980 (2.5%), 1981, (2.9%), 1982 (2.8%), 1983 (2.9%)

Price Per KWH (Average):

1978 ($.031),1979 ($.031),1980 ($.037),1981 ($.038),1982 ($.040),1983 ($.041)

Expenses were projected manually based on historical data and anticipated future developments.

Interest, preferred dividends and balance for common equity requirements were based on the rates assumed above and projected financin9 through 1983. Federal Income Taxes were computed utilizing current Company practices.

o 2 - - e 9

'; 7 s .

TABLE 5 -

Applicant: ROCHESTER GAS AND ELECTRIC CORPORATION Nuclear Plant: Nine MJ1e Point Unit 2 PRO FORMA SOURCES OF FUNDS FOR SYSTEM-WIDE CONSTRUCTION EXPENDITURES AND CAPITAL STRUCTURE DURING PERIOD OF CONSTRUCTION OF SUBJECT NUCLEAR POWER PLANT (Millions of Dollars)

Construction Years of Subject Nuclear Power Plant 1978 1979 1980 1981 1982 1983 EXTERNAL FINANCING Conmon stock $ 23.6 $ 24.2 $ 4.8 $ 25.5 $ 25.9 $ 26.4 Preferred stock 0 20.0 20.0 20.0 0 20.0 Lon9 term debt 52.0 30.0 45.0 50.0 70.0 95.0 Notes payable 4.7 28.7 14.6 (10.5) 19.9 16.5 Contributions from parent-net 0 0 0 0 0 0 Other funds (describe)

TOTAL EXTERNAL FUNDS 80.3 102.9 84.4 85.0 115.8 157.9 INTERNALLY GENERATED CASH Net Income 36.2 45.6 56.2 63.3 71.4 79.8 Less:

preferred dividends 5.7 6.6 8.5 10.4 11.4 12.3 connon dividends 18.9 21.3 23.4 25.3 29.3 33.5 Retained earnings 0 0 0 0 0 0 Deferred taxes ( 0.7) (0.6) (0.1) 0 0.1 1.3 Invest. tax cred. - deferred 1.0 0.5 2.8 7.8 6.1 1.6 l Depreciation and amort. 38.3 40.5 45.9 48.7 50.4 53.9 l Chan9e in working capital ( 0.8) (2.7) (1.1) 1.4 (1.5) (0.8)

Less: AFDC 14.1 19.0 19.1 25.4 34.9 42.2 TOTAL INTERNAL FUNDS 35.3 36.4 52.7 60.1 50.9 47.8 TOTAL FUNDS $115.6 $139.3 $137.1 $145.1_ $166.7 $205.7

TABLE 5 (continued) -

Construction Years of Subject Nuclear Power Plant 1978 1979 1980 1981 1982 1983 1

CONSTRUCTION EXPENDITURES

• Nuclear power plants $ 28.3 $ 35.7 $ 42.4 $ 78.1 $ 71.6 $ 87.3 l Other 87.3 86.9 82.7 67.0 89.1 88.7 Total const. exp's $115.6 $122.6 $125.1 $145.1 $160.7 $176.0 Subject nuclear plant $ 24.1 $ 26.9 $ 20._4_ $ 19.5 $ 9.1 $ 4.3 OTHER CAPITAL REQUIREMENTS Redemption of Maturing Bonds 0 16.7 12.0 0 6.0 29.7 Acquistion of Bonds for Sinking Funds 0 0 0 0 0 0 Misc. Requirements (detail)

TOTAL CAPITAL REQUIREMENTS $115.6_ $139.3 $137.1 $145.1 $166.7 $205.7 C/1PITAL STRUCTURE ($ & %)

tong-term debt $412.3 $425.6 $458.7 $508.7 $572.7 $638.0 Pieferred stock 95.0 115.0 135.0 155.0 155.0 175.0 Conhwo equi ty 317.9 359.2 387.7 440.1 496.2 555.9 TOTAL $825.2 $899.8 $981.4 $1,108,8 $1,223.9 $1,368.9 Long-term debt 50.0% 47.3% 46.7% 46.1% 46.8% 46.6%

Preferred stock 11.5 12.8 13.8 14.0 12.7 12.8 Conrnon equity 38.5 39.9 39.5 _

39.9 40.5 40.6 TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

l 0 Exclusive of AFDC

. l

TABLE 5 (continued)

Assumptions upon which " Sources of Funds" Statement is based.

1. Rate of Return on Average Conrnon Equity - Maintained between 11.4 and 11.6% (1979) and 12.7 and 12.9% (1980-1983)

2. Preferred Stock Dividend Rate - 9.5%

Short Term Interest Rate - 8%

Bond Interest Rate - 8.54% (1978) and 9-1/4% (1979-1983)

Market Price of Common Stock - $19.00 (1978) increasing $1.00 per year to

$22.00 (1981) remaining constaat through 1983 Conrnon Stock Dividend Payout Ratio - 50%

3. Growth Rates:

Retaii Sales (KWH) - 1979 (4.5%), 1980 (4.0%), 1981 (4.3%), 1982 (4.2%), 1983 (4.0%)

Revenues - Sufficient to maintain approximately 12.8% return on average equity

4. Target Capital Structure:

Bonds 44-47%

Preferred Stock 12-14%

Short Term Debt 0-3 %

Common Equity 38-41%

5. Operation and maintenance expenses were projected either manually or by the best fit of historical data to a least squares curve. Interest charges were actually calculated based on known and assumed financings and assumed interest rates. Net income was a result of all the above assumptions and projections.

6. Interest Coverages 1978 1979 1980 1981 1982 1983 SEC 2.32 2.42 2.70 2.87 2.76 2.53 Indenture 2.69 2.74 3.20 3.27 2.92 2.63 I