SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
| | | For the quarterly period ended September 30, 2001
|
OR
[ ] | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
For the transition period from __________ to ____________
|
Commission Registrant, State of Incorporation I.R.S. EmployerFile Number Address and Telephone Number Identification No.0-25595 Niagara Mohawk Holdings, Inc. 16-1549726 (a New York corporation) 300 Erie Boulevard West Syracuse, New York 13202 315.474.15111-2987 Niagara Mohawk Power Corporation 15-0265555 (a New York corporation) 300 Erie Boulevard West Syracuse, New York 13202 315.474.1511
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
The number of shares outstanding of each of the issuer’s classes of voting stock, as of October 31, 2001, were as follows:
Registrant Title Shares Outstanding
Niagara Mohawk Holdings, Inc. Common Stock, $0.01 par value 160,239,818
Niagara Mohawk Power Corporation Common Stock, $1.00 par value 187,364,863
(all held by Niagara Mohawk
Holdings, Inc.)
Filing FormatThis Quarterly Report on Form 10-Q is a combined quarterly report being filed separately by two registrants: Niagara Mohawk Holdings, Inc. (“Holdings”) and Niagara Mohawk Power Corporation (“Niagara Mohawk”). Holdings became the holding company for Niagara Mohawk on March 18, 1999. Except where the context clearly indicates otherwise, any references in this report to “Holdings” includes all subsidiaries of Holdings including Niagara Mohawk. Niagara Mohawk makes no representation as to the information contained in this report in relation to Holdings and its subsidiaries other than Niagara Mohawk.
NIAGARA MOHAWK HOLDINGS, INC.AND SUBSIDIARY COMPANIES
FORM 10-Q - For the Quarter Ended September 30, 2001
| PART I. | FINANCIAL INFORMATION |
| Item 1. | Financial Statements |
| | Consolidated Financial Statements: |
| | Niagara Mohawk Holdings, Inc. |
| | Consolidated Statements of Income |
| | Consolidated Balance Sheets |
| | Consolidated Statements of Cash Flows |
| | Niagara Mohawk Power Corporation |
| | Consolidated Statements of Income |
| | Consolidated Balance Sheets |
| | Consolidated Statements of Cash Flows |
| | Notes to Consolidated Financial Statements |
| | Review by Independent Accountants |
| | Independent Accountants’ Report on the Limited Review of the Interim Financial Information |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
| PART II. | OTHER INFORMATION |
| Item 6. | Exhibits and Reports on Form 8-K |
NIAGARA MOHAWK HOLDINGS, INC.AND SUBSIDIARY COMPANIES
GLOSSARY OF TERMS
| TERM | DEFINITION
|
| CTC | Competitive transition charges: a mechanism established in Niagara Mohawk’s Power Choice agreement to recover stranded costs from customers
|
| Dth | Dekatherm: one thousand cubic feet of gas with a heat content of 1,000 British Thermal Units per cubic foot
|
| EBITDA | A non–GAAP measure of cash flow which is calculated as: earnings before interest charges, interest income, income taxes, depreciation and amortization, and other non-cash items, including amortization of nuclear fuel, allowance for funds used during construction, amortization/accretion of MRA/IPP buyout costs, deferral of MRA interest rate savings, cumulative effect of a change in accounting principle and non–recurring and extraordinary items. EBITDA may not be comparable to similarly titled measures used by other companies.
|
| FERC | Federal Energy Regulatory Commission
|
| GAAP | Generally Accepted Accounting Principles
|
| GRT | Gross Receipts Tax
|
| Gwh | Gigawatt–hour: one gigawatt–hour equals one billion watt-hours
|
| IPP | Independent Power Producer: any person that owns or operates, in whole or in part, one or more Independent Power Facilities, including the purchasers of Niagara Mohawk’s generation assets
|
| IPP Party | Independent Power Producers that were a party to the MRA
|
| KWh | Kilowatt–hour: a unit of electrical energy equal to one kilowatt of power supplied or taken from an electric circuit steadily for one hour
|
| MRA | Master Restructuring Agreement: a Niagara Mohawk agreement, including amendments thereto, which terminated, restated or amended certain IPP Party power purchase agreements effective June 30, 1998
|
| MRA regulatory asset | Recoverable costs to terminate, restate or amend IPP Party contracts, which have been deferred and are being amortized and recovered under Niagara Mohawk’s Power Choice agreement
|
| MW | Megawatt: one million watts
|
| National Grid | National Grid Group plc is a holding company based in the United Kingdom. Unless the context clearly denotes otherwise, this definition also includes a holding company to be established over National Grid Group plc contemporaneously with the Holdings merger. Its principal subsidiary, the National Grid Company plc, owns and operates the high voltage transmission system in England and Wales.
|
| NYISO | New York Independent System Operator
|
| Power Choice | Niagara Mohawk's five-year electric rate agreement, which incorporates the MRA agreement, approved by the PSC in an Order dated March 20, 1998, and became effective September 1, 1998
|
| PPA | Power Purchase Agreement: long-term contracts under which a utility is obligated to purchase electricity from an IPP at specified times
|
| Provider of last resort | The entity that will provide electric or gas commodity to its customers who are unable or unwilling to obtain an alternative supplier
|
| PRP | Potentially Responsible Party (may include current site owner, site owner at the time of disposal, entity who arranged for disposal at the location, or transporters or disposal material)
|
| PSC | New York State Public Service Commission
|
| SFAS No. 71 | Statement of Financial Accounting Standards No. 71
“Accounting for the Effects of Certain Types of Regulation”
|
| SFAS No. 133 | Statement of Financial Accounting Standards No. 133
“Accounting for Derivative Instruments and Hedging Activities”
|
| Stranded Costs | Regulated utility costs that may become unrecoverable due to a change in the regulatory environment
|
| TCC | Transmission Congestion Contract: Transmission congestion is a component of the cost differential in the price of electricity between two geographic locations. A TCC confers on the holder the right to collect or obligation to pay congestion charges for a single megawatt of energy at the price of congestion between those locations.
|
| Unit 1 | Nine Mile Point Unit No. 1
|
| Unit 2 | Nine Mile Point Unit No. 2
|
PART I
ITEM 1. FINANCIAL STATEMENTSNIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
(in thousands of dollars)
Operating revenues:
Electric $1,056,476 $1,004,847 $2,937,947 $2,827,261
Gas 77,553 90,953 652,784 507,130
Other 406 3,804 718 5,292
----------- ----------- ----------- -----------
1,134,435 1,099,604 3,591,449 3,339,683
----------- ----------- ----------- -----------
Operating expenses:
Electricity purchased 501,049 482,441 1,352,964 1,265,078
Fuel for electric generation 9,286 19,103 30,985 48,077
Gas purchased 27,167 45,650 418,794 282,630
Other operation and maintenance expenses 225,388 189,229 741,926 636,598
Disallowed nuclear investment costs 123,000 - 123,000 -
Amortization/accretion of MRA/IPP buyout costs 90,743 93,903 272,888 281,539
Depreciation and amortization 79,399 77,492 236,503 233,804
Other taxes 65,475 70,672 181,283 209,446
----------- ----------- ----------- -----------
1,121,507 978,490 3,358,343 2,957,172
----------- ----------- ----------- -----------
Operating income 12,928 121,114 233,106 382,511
Impairment charge on investment - (44,000) -
Other deductions (9,479) (4,173) (9,947) (6,538)
----------- ----------- ----------- -----------
Income before interest charges 3,449 116,941 179,159 375,973
Interest charges 95,094 108,249 297,581 329,146
Preferred dividend requirement of subsidiary 7,724 7,871 23,239 23,679
----------- ----------- ----------- -----------
Income (loss) before income taxes (99,369) 821 (141,661) 23,148
Income tax expense (benefit) (103,555) (1,903) (93,936) 24,759
----------- ----------- ----------- -----------
Income (loss) before extraordinary item and 4,186 2,724 (47,725) (1,611)
cumulative effect of a change in accounting
principle
Extraordinary item - Loss from the
extinguishment of debt, net of income taxes - - - (909)
Cumulative effect of a change in accounting
principle, net of income taxes (Note 1) - - 12,790 -
----------- ----------- ----------- -----------
Net income (loss) (Note 1) $ 4,186 $ 2,724 $ (34,935) $ (2,520)
=========== =========== =========== ===========
Average number of shares of common stock
outstanding (in thousands) 160,240 161,001 160,240 169,782
Basic and diluted income (loss) per average
share of common stock before extraordinary
item and cumulative effect of a change in
accounting principle $ 0.03 $ 0.02 $ (0.30) $ (0.01)
Cumulative effect of a change in accounting
principle - - 0.08 -
----------- ----------- ----------- -----------
Basic and diluted income (loss) per average
share of common stock $ 0.03 $ 0.02 $ (0.22) $ (0.01)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
September 30,
2001 December 31,
(Unaudited) 2000
------------ ------------
(In thousands of dollars)
Utility plant:
Electric plant $ 6,175,430 $ 7,179,329
Nuclear fuel 674,729 672,259
Gas plant 1,336,269 1,310,649
Common plant 358,985 349,751
Construction work in progress 226,251 289,634
------------ ------------
Total utility plant 8,771,664 9,801,622
Less - Accumulated depreciation and amortization 4,184,350 4,019,282
------------ ------------
Net utility plant 4,587,314 5,782,340
------------ ------------
Other property and investments 584,219 596,036
------------ ------------
Current assets:
Cash, including temporary cash investments
of $412,759 and $66,796, respectively 470,737 108,343
Accounts receivable (less allowance for doubtful
accounts of $63,900 and $62,600, respectively) 323,269 470,820
Materials and supplies, at average cost:
Gas storage 70,137 53,863
Other 91,023 93,431
Assets from price risk management activities (Note 1) 15,958 67,603
Prepaid taxes 38,732 19,393
Other 21,497 37,745
------------ ------------
1,031,353 851,198
------------ ------------
Regulatory assets (Note 3):
MRA regulatory asset 3,062,480 3,328,720
Swap contracts regulatory asset 623,819 625,103
Regulatory tax asset 409,549 408,303
IPP restructuring costs 206,052 234,117
Deferred environmental restoration costs (Note 2) 305,000 285,000
Deferred loss on sale of assets 1,114,971 158,333
Postretirement benefits other than pensions 42,204 45,084
Unamortized debt expense 36,584 39,823
Other 197,542 191,524
------------ ------------
5,998,201 5,316,007
------------ ------------
Other assets 95,456 78,081
------------ ------------
$12,296,543 $12,623,662
============ ============
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK HOLDINGS, INC.AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
September 30,
2001 December 31,
(Unaudited) 2000
------------ ------------
(in thousands of dollars)
Capitalization (Note 1):
Common stockholders' equity:
Common stock - $0.01 par value; authorized 300,000,000 shares;
issued 187,364,863 shares; outstanding 160,239,818 shares $ 1,874 $ 1,874
Treasury stock, at cost - 27,125,045 shares (407,193) (407,193)
Capital stock premium and expense 2,548,995 2,547,885
Accumulated other comprehensive income (56,851) (31,861)
Retained earnings 529,474 564,409
----------- ------------
2,616,299 2,675,114
Preferred stock of subsidiary:
Not subject to mandatory redemption 440,000 440,000
Subject to mandatory redemption 50,700 53,750
Long-term debt 4,815,410 4,678,963
----------- ------------
Total capitalization 7,922,409 7,847,827
----------- ------------
Current liabilities:
Short-term debt 250,000 110,000
Long-term debt due within one year 340,907 628,325
Sinking fund requirements on redeemable preferred
stock of subsidiary 3,050 7,620
Accounts payable 320,211 482,965
Payable on outstanding bank checks 19,793 28,536
Customers' deposits 20,180 18,807
Accrued taxes 23,707 9,881
Accrued interest 114,194 98,408
Accrued vacation pay 35,623 34,607
Liabilities from price risk management activities (Note 1) 33,359 2,719
Deferred gain on hedging activity (Note 1) - 17,409
Other 159,345 137,953
------------ ------------
1,320,369 1,577,230
------------ ------------
Regulatory and other liabilities:
Accumulated deferred income taxes 1,373,016 1,472,818
Liability for swap contracts (Note 3) 765,376 778,229
Employee pension and other benefits 245,376 218,569
Deferred gain on swap hedges - 66,405
Other 364,997 377,584
------------ ------------
2,748,765 2,913,605
------------ ------------
Commitments and contingencies (Notes 2):
Liability for environmental restoration 305,000 285,000
------------ ------------
$12,296,543 $12,623,662
============ ============
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
(UNAUDITED)
Nine Months Ended September 30,
2001 2000
---------- -----------
(in thousands of dollars)
Cash flows from operating activities:
Net loss $ (34,935) $ (2,520)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary loss on extinguishment of debt, net of taxes - 887
Cumulative effect of a change in accounting principle, net of taxes (8,826) -
Depreciation and amortization 236,503 233,804
Impairment charge on investment 44,000 -
Disallowed nuclear investment costs 123,000 -
Amortization/accretion of MRA/IPP buyout costs 272,888 281,539
Amortization of nuclear fuel 19,984 21,619
Reversal of deferred nuclear investment tax credits (79,711) -
Provision for deferred income taxes (26,090) 14,605
Net accounts receivable (net of changes in accounts receivable sold) 134,851 (103,522)
Materials and supplies (18,129) (27,551)
Accounts payable and accrued expenses (135,286) 25,646
Accrued interest and taxes 29,612 84,506
Changes in MRA and IPP buyout costs regulatory assets 36,101 24,538
Deferral of MRA interest rate savings 11,733 16,240
Changes in other assets and liabilities (20,490) (5,921)
---------- ----------
Net cash provided by operating activities 585,205 563,870
---------- ----------
Cash flows from investing activities:
Construction additions (181,491) (142,197)
Nuclear fuel (2,470) (17,477)
---------- ----------
Acquisition of utility plant (183,961) (159,674)
Materials and supplies related to construction (520) (512)
Accounts payable and accrued expenses related to construction (33,822) 6,412
Proceeds from the sale of generation assets 83,838 47,500
Other investments (32,502) (91,923)
Other (1,460) 375
---------- ----------
Net cash used in investing activities (168,427) (197,822)
---------- ----------
Cash flows from financing activities:
Net change in short-term debt 140,000 -
Reduction in preferred stock of subsidiary (3,050) (7,620)
Reduction in long-term debt (712,742) (312,241)
Proceeds from long-term debt 530,000 200,000
Purchase of treasury stock - (250,026)
Other (8,592) 1,354
---------- ----------
Net cash used in financing activities (54,384) (368,533)
---------- ----------
Net increase (decrease) in cash 362,394 (2,485)
Cash at beginning of period 108,343 116,164
---------- ----------
Cash at end of period $ 470,737 $ 113,679
========== ==========
Supplemental disclosures of cash flow information:
Interest paid $ 254,103 $ 235,188
Income taxes paid $ 5,839 $ 10,669
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK POWER CORPORATIONAND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
----------- --------- ----------- -----------
(in thousands of dollars)
Operating revenues:
Electric $ 940,854 $829,785 $2,545,595 $2,428,057
Gas 69,092 79,752 590,208 462,577
----------- --------- ----------- -----------
1,009,946 909,537 3,135,803 2,890,634
----------- --------- ----------- -----------
Operating expenses:
Electricity purchased 381,619 303,786 956,167 869,868
Fuel for electric generation 9,286 19,103 30,985 48,077
Gas purchased 20,657 34,009 362,143 237,974
Other operation and maintenance expenses 221,256 182,071 723,427 619,583
Disallowed nuclear investment costs 123,000 - 123,000 -
Amortization/accretion of MRA/IPP buyout costs 90,743 93,903 272,888 281,539
Depreciation and amortization 79,287 77,360 236,148 233,404
Other taxes (Note 1) 65,319 70,533 180,763 208,785
----------- --------- ----------- -----------
991,167 780,765 2,885,521 2,499,230
----------- --------- ----------- -----------
Operating Income 18,779 128,772 250,282 391,404
Other deductions (12,299) (7,170) (14,996) (14,562)
----------- --------- ----------- -----------
Income before interest charges 6,480 121,602 235,286 376,842
Interest charges 95,094 108,249 297,581 329,146
----------- --------- ----------- -----------
Income (loss) before income taxes (88,614) 13,353 (62,295) 47,696
Income tax expense (benefit) (102,965) 106 (89,653) 25,393
----------- --------- ----------- -----------
Income before extraordinary item 14,351 13,247 27,358 22,303
Extraordinary item - Loss from the
extinguishment of debt, net of income taxes - - - (909)
----------- --------- ----------- -----------
Net income (Note 1) 14,351 13,247 27,358 21,394
Dividends on preferred stock 7,724 7,871 23,239 23,679
----------- --------- ----------- -----------
Balance available for common stock $ 6,627 $ 5,376 $ 4,119 $ (2,285)
=========== ========= =========== ===========
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK POWER CORPORATIONAND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
September 30,
2001 December 31,
(Unaudited) 2000
------------ ------------
(In thousands of dollars)
Utility plant:
Electric plant $ 6,175,430 $ 7,179,329
Nuclear fuel 674,729 672,259
Gas plant 1,336,269 1,310,649
Common plant 358,985 349,751
Construction work in progress 226,251 289,634
------------ ------------
Total utility plant 8,771,664 9,801,622
Less - Accumulated depreciation and amortization 4,184,350 4,019,282
------------ ------------
Net utility plant 4,587,314 5,782,340
------------ ------------
Other property and investments 452,311 420,391
------------ ------------
Current assets:
Cash, including temporary cash investments
of $399,768 and $48,123, respectively 436,878 75,025
Accounts receivable (less allowance for doubtful
accounts of $57,300 and $59,100, respectively) 272,412 390,452
Materials and supplies, at average cost:
Gas storage 64,627 50,947
Other 91,023 93,431
Assets from price risk management activities (Note 1) - 65,052
Prepaid taxes 28,888 7,882
Other 18,779 31,195
------------ ------------
912,607 713,984
------------ ------------
Regulatory assets (Note 3):
MRA regulatory asset 3,062,480 3,328,720
Swap contracts regulatory asset 623,819 625,103
Regulatory tax asset 409,549 408,303
IPP restructuring costs 206,052 234,117
Deferred environmental restoration costs (Note 2) 305,000 285,000
Deferred loss on sale of assets 1,114,971 158,333
Postretirement benefits other than pensions 42,204 45,084
Unamortized debt expense 36,584 39,823
Other 197,542 191,524
------------ ------------
5,998,201 5,316,007
------------ ------------
Other assets 94,763 77,235
------------ ------------
$12,045,196 $12,309,957
============ ============
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK POWER CORPORATIONAND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
September 30,
2001 December 31,
(Unaudited) 2000
------------ -------------
(In thousands of dollars)
Capitalization:
Common stockholders' equity:
Common stock - $1 par value; authorized 250,000,000 shares;
issued and outstanding 187,364,863 shares $ 187,365 $ 187,365
Repurchase of Holdings' common stock, at cost (407,193) (407,193)
Capital stock premium and expense 2,363,513 2,362,404
Accumulated other comprehensive income (27,636) (7,459)
Retained earnings 266,065 299,106
------------ ------------
2,382,114 2,434,223
------------ ------------
Cumulative preferred stock, authorized 3,400,000 shares, $100 par value:
Non-redeemable (optionally redeemable), issued 2,100,000 shares 210,000 210,000
Redeemable (mandatorily redeemable), issued 150,000 and
168,000 shares, respectively 13,200 15,000
Cumulative preferred stock, authorized 19,600,000 shares, $25 par value:
Non-redeemable (optionally redeemable), issued 6,200,000 shares 230,000 230,000
Redeemable (mandatorily redeemable), issued 1,600,000 and
1,782,801 shares, respectively 37,500 38,750
------------ ------------
490,700 493,750
------------ ------------
Long-term debt 4,815,410 4,678,963
------------ ------------
Total capitalization 7,688,224 7,606,936
------------ ------------
Current liabilities:
Short-term debt 250,000 110,000
Long-term debt due within one year 340,907 628,325
Sinking fund requirements on redeemable preferred stock 3,050 7,620
Accounts payable 275,750 404,115
Payable on outstanding bank checks 19,793 28,536
Customers' deposits 20,180 18,807
Accrued taxes 22,689 10,867
Accrued interest 114,194 98,408
Accrued vacation pay 35,623 34,607
Liabilities from price risk management activities (Note 1) 33,359 2,719
Deferred gain on futures contracts (Note 1) - 17,409
Other 185,497 136,789
------------ ------------
1,301,042 1,498,202
------------ ------------
Regulatory and other liabilities:
Accumulated deferred income taxes 1,375,181 1,479,032
Liability for swap contracts (Note 3) 765,376 778,229
Employee pension and other benefits 245,376 218,569
Deferred gain on swap hedges - 66,405
Other 364,997 377,584
------------ ------------
2,750,930 2,919,819
------------ ------------
Commitments and contingencies (Note 2):
Liability for environmental restoration 305,000 285,000
------------ ------------
$12,045,196 $12,309,957
============ ============
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK POWER CORPORATIONAND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
(UNAUDITED)
Nine Months Ended September 30,
2001 2000
---------- ----------
(In thousands of dollars)
Cash flows from operating activities:
Net income $ 27,358 $ 21,394
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 236,148 233,404
Amortization/accretion of MRA/IPP buyout costs 272,888 281,539
Amortization of nuclear fuel 19,984 21,619
Disallowed nuclear investment costs 123,000 -
Extraordinary loss on the extinguishment of debt, net of taxes - 887
Reversal of deferred nuclear investment costs (79,711) -
Provision for deferred income taxes (25,386) 14,600
Net accounts receivable (net of changes in accounts receivable sold) 105,340 (66,023)
Materials and supplies (15,535) (25,185)
Accounts payable and accrued expenses (134,935) 14,420
Accrued interest and taxes 27,608 81,815
Changes in MRA and IPP buyout costs regulatory assets 36,101 24,538
Deferral of MRA interest rate savings 11,733 16,240
Changes in other assets and liabilities 1,000 6,723
---------- ----------
Net cash provided by operating activities 605,593 625,971
---------- ----------
Cash flows from investing activities:
Construction additions (181,491) (142,197)
Nuclear fuel (2,470) (17,477)
---------- -----------
Acquisition of utility plant (183,961) (159,674)
Materials and supplies related to construction (520) (512)
Accounts payable and accrued expenses related to construction (26,944) 3,605
Other investments (32,239) (54,974)
Proceeds from the sale of generation assets 83,838 47,500
Other (1,104) 4,390
---------- ----------
Net cash used in investing activities (160,930) (159,665)
---------- ----------
Cash flows from financing activities:
Common stock dividend paid to Holdings (10,000) (46,132)
Repurchase of Holdings' common stock - (250,026)
Preferred dividends paid (23,239) (23,679)
Reduction in long-term debt (712,742) (312,241)
Proceeds from long-term debt 530,000 200,000
Reduction in preferred stock (3,050) (7,620)
Net change in short-term debt 140,000 -
Other (3,779) 1,354
---------- ----------
Net cash used in financing activities (82,810) (438,344)
---------- ----------
Net increase in cash 361,853 27,962
Cash at beginning of period 75,025 72,479
---------- ----------
Cash at end of period $ 436,878 $ 100,441
========== ==========
Supplemental disclosures of cash flow information:
Interest paid $ 254,103 $ 235,188
Income taxes paid $ 3,317 $ 9,347
Supplemental schedule of noncash financing activities:
In 2001, the Board of Directors declared a dividend of $37.2 million
payable by Niagara Mohawk to Holdings, of which $10 million was paid in May 2001.
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK HOLDINGS, INC.AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: This Quarterly Report on Form 10-Q is a combined report of Holdings and Niagara Mohawk, a regulated electric and gas utility subsidiary. The Notes to the Consolidated Financial Statements apply to both Holdings and Niagara Mohawk. Holdings’ consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries, including Niagara Mohawk. Niagara Mohawk’s consolidated financial statements include its accounts as well as those of its wholly owned subsidiaries.
Holdings and Niagara Mohawk, in the opinion of management, have included all adjustments (which include normal recurring adjustments) necessary for a fair statement of the results of operations for the interim periods presented. These financial statements for 2001 are subject to adjustment at the end of the year when they will be audited by independent accountants. These financial statements and notes thereto should be read in conjunction with the audited financial statements included in Holdings and Niagara Mohawk’s combined 2000 Annual Report on Form 10-K.
Niagara Mohawk’s electric sales tend to be substantially higher in summer and winter months as related to weather patterns in its service territory; gas sales tend to peak in the winter. Notwithstanding other factors, Niagara Mohawk’s quarterly net income will generally fluctuate accordingly. Therefore, the earnings for the three-month and nine-month periods ended September 30, 2001 should not be taken as an indication of earnings for all or any part of the balance of the year.
The closing of the MRA, which occurred on June 30, 1998, and the implementation of Power Choice on September 1, 1998 have depressed and will continue to substantially depress earnings during the five-year term of Power Choice. The ability of Niagara Mohawk to improve earnings in the future will depend on the outcome of the regulatory process, including the effect on rates, proposed in connection with the pending merger with National Grid. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Pending Merger Agreement with National Grid,” for a discussion of the pending merger, and see Holdings and Niagara Mohawk’s combined Form 10-K for the fiscal year ended December 31, 2000, Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Pending Merger Rate Plan,” for a discussion of the rate plan filed in connection with the merger. The closing of the sale of the generation assets at various times during 2000 and 2001 has also affected the comparability of the financial statements. See Holdings and Niagara Mohawk’s combined Form 10-K for the fiscal year ended December 31, 2000, Part II, Item 8. Financial Statements and Supplementary Data - Note 2, for a further discussion of the MRA and the generation asset sales.
The consolidated cash flow statements for Holdings and Niagara Mohawk have been presented to reflect the closings of the sales of the fossil generation assets, such that certain individual line items are net of the effects of the sales.
Comprehensive Income:Comprehensive income is the change in the equity of a company, not including those changes that result from shareholder transactions. While the primary component of comprehensive income is reported net income or loss, the other components of comprehensive income relate to foreign currency translation adjustments, additional minimum pension liability recognition, deferred gains and losses associated with hedging activity and unrealized gains and losses associated with certain investments held as available for sale. The primary difference in comprehensive income between Holdings and Niagara Mohawk is the treatment of Niagara Mohawk’s preferred dividends and reported net income or loss. Total comprehensive income (loss) for the three months and nine months ended September 30, 2001 and 2000 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
Company: 2001 2000 2001 2000
- -------------- ------ ------ ------- ------
(in millions of dollars)
Holdings $(6.9) $ 1.6 $(59.9) $(5.7)
Niagara Mohawk 7.1 13.5 7.2 21.8
New Accounting Standards: SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended became effective for fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No.138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133” which, among other changes, modified the type and number of transactions to which the new standard would need to be applied. Holdings and Niagara Mohawk adopted this standard beginning January 1, 2001. See Holdings and Niagara Mohawk’s combined Form 10-Q for the period ended March 31, 2001, Part I, Item 1. Notes to Consolidated Financial Statements - Note 1, Summary of Significant Accounting Policies - Derivatives and Hedging Activities, for more discussion of the implementation of SFAS No. 133. See Holdings and Niagara Mohawk’s combined Form 10-Q for the period ended June 30, 2001, Part I, Item 1. Notes to Consolidated Financial Statements - Note 1, Summary of Significant Accounting Policies - New Accounting Standards - Other, for a discussion of the impacts of the new accounting standards - SFAS No. 141, “Business Combinations,” SFAS No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 143, “Accounting for Asset Retirement Obligations.”
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” related to the disposal of a segment of a business. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves significant implementation issues related to SFAS No. 121. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Holdings and Niagara Mohawk are currently evaluating the impact of SFAS No. 144 on its financial position and results of operations.
NOTE 2. CONTINGENCIES
Environmental issues: The public utility industry typically utilizes and/or generates in its operations a broad range of hazardous and potentially hazardous wastes and by-products. Niagara Mohawk believes it is handling identified wastes and by-products in a manner consistent with federal, state, and local requirements and has implemented an environmental audit program to identify any potential areas of concern and aid in compliance with such requirements. Niagara Mohawk is also currently conducting a program to investigate and remediate, as necessary, to meet current environmental standards certain properties associated with former gas manufacturing and other properties which Niagara Mohawk has learned may be contaminated with industrial waste, as well as investigating identified industrial waste sites as to which it may be determined that Niagara Mohawk has contributed. Niagara Mohawk has also been advised that various federal, state, or local agencies believe certain properties require investigation and has prioritized the sites based on available information in order to enhance the management of investigation and remediation, if necessary.
Niagara Mohawk is currently aware of 121 sites that comprise the current liability estimates, including 65 which are Niagara Mohawk-owned. With respect to non-owned sites, Niagara Mohawk may be required to contribute some proportionate share of remedial costs. Although one party can, as a matter of law, be held liable for all of the remedial costs at a site, regardless of fault, in practice, costs are usually allocated among PRPs. Niagara Mohawk has denied any responsibility at certain of these PRP sites and is contesting liability accordingly.
Investigations at each of the Niagara Mohawk-owned sites are designed to (1) determine if environmental contamination problems exist, (2) if necessary, determine the appropriate remedial actions, and (3) where appropriate, identify other parties who should bear some or all of the cost of remediation. Legal action against such other parties will be initiated where appropriate. As site investigations are completed, Niagara Mohawk expects to determine site-specific remedial actions and to estimate the attendant costs for restoration. However, since investigations and regulatory reviews are ongoing for most sites, the estimated cost of remedial action is subject to change.
Estimates of the cost of remediation and post-remedial monitoring are based upon a variety of factors, including identified or potential contaminants; location, size and use of the site; proximity to sensitive resources; status of regulatory investigation and knowledge of activities at similarly situated sites. Additionally, Niagara Mohawk’s estimating process includes an initiative where these factors are developed and reviewed using direct input and support obtained from the New York State Department of Environmental Conservation (“DEC”). Actual Niagara Mohawk expenditures are dependent upon the total cost of investigation and remediation and the ultimate determination of Niagara Mohawk’s share of responsibility for such costs, as well as the financial viability of other identified responsible parties since clean-up obligations are joint and several. Niagara Mohawk has denied any responsibility at certain of these PRP sites and is contesting liability accordingly.
As a consequence of site characterizations and assessments completed to date and negotiations with other PRPs or with the appropriate environmental regulatory agency, Niagara Mohawk has accrued a liability in the amount of $305 million and $285 million, which is reflected in both Holdings and Niagara Mohawk’s Consolidated Balance Sheets at September 30, 2001 and December 31, 2000, respectively. The potential high end of the range is presently estimated at approximately $530 million. Niagara Mohawk increased its environmental liability $20 million in 2001 as compared to 2000 primarily as a result of the availability of information on certain sites resulting from progress made on the remediation of one site and the issuance of a feasibility study on another site in October 2001. Such information revealed that the soil contamination on the site being remediated was greater than originally anticipated. The probabilistic method was used to determine the amount to be accrued for 21 of Niagara Mohawk’s largest sites. The amount accrued for Niagara Mohawk’s remaining sites is determined through feasibility studies or engineering estimates, Niagara Mohawk’s estimated share of a PRP allocation or where no better estimate is available, the low end of a range of possible outcomes is used. In response to an October 1999 request for information, Niagara Mohawk informed the DEC of 24 additional former manufactured gas plant sites that it may be associated with, including two sites that are currently owned by Niagara Mohawk. Niagara Mohawk has executed a voluntary clean-up order with the DEC for the investigation and, as required, the remediation of these additional sites. The order is awaiting execution by the DEC. Niagara Mohawk has included amounts for only the investigation of these sites in the estimated liability. Niagara Mohawk is currently unable to estimate the costs to remediate these additional sites, since they primarily relate to non-owned sites that have been owned and operated by other parties, as well as by some former manufactured gas plant-related predecessor companies of Niagara Mohawk, and because they have not been subjected to site investigations.
Niagara Mohawk has recorded a regulatory asset representing the investigation, remediation and monitoring obligations to be recovered from ratepayers. Power Choice and the gas rate settlements provide for the continued application of deferral accounting for variations in spending from amounts provided in rates. As a result, Niagara Mohawk does not believe that site investigation and remediation costs will have a material adverse effect on its results of operations or financial condition.
Based on previously submitted feasibility studies and the DEC’s ongoing regulatory review process for Niagara Mohawk’s Harbor Point site, the estimated total cost range for this site consists of a high end of $86.2 million, with an expected value calculation of $62.3 million, which is included in the amounts accrued at September 30, 2001 and December 31, 2000. The DEC has categorized this site into three operating units. With respect to one operating unit, the DEC issued a record of decision (“ROD”) in March 2001. Based on this ROD and legal settlement efforts with respect to another responsible party, the estimated range for this operating unit consists of a high end of $15.6 million and an expected value calculation of $13.6 million. With respect to another operating unit, the DEC is expected to issue a proposed remedial action plan (“PRAP”) within the next six months. Currently, the high end of this unit is estimated to be $63.5 million, with an expected value calculation of $43.2 million. With respect to the last operating unit, the DEC is requiring additional investigations and a feasibility study. Currently, the high end of this unit is estimated to be $7.1 million, with an expected value calculation of $5.5 million. The estimated costs for the latter two operating units do not consider contributions from other PRPs, the amount of which Niagara Mohawk is unable to estimate.
NOTE 3. RATE AND REGULATORY ISSUES AND CONTINGENCIES
Holdings and Niagara Mohawk’s financial statements conform to GAAP, including the accounting principles for rate-regulated entities with respect to its regulated operations. Substantively, SFAS No. 71 permits a public utility, regulated on a cost-of-service basis, to defer certain costs, which would otherwise be charged to expense, when authorized to do so by the regulator. These deferred costs are known as regulatory assets, which in the case of Niagara Mohawk are approximately $6.0 billion at September 30, 2001. These regulatory assets are probable of recovery.
MRA regulatory asset: Under Power Choice, a regulatory asset was established for the costs of the MRA and represents the cost to terminate, restate, or amend IPP Party contracts. This regulatory asset is being amortized generally over ten years, beginning September 1, 1998. Niagara Mohawk’s rates under Power Choice have been designed to permit recovery of the MRA regulatory asset.
Swap contract regulatory asset: The swap contracts regulatory asset represents the expected future recovery of the swap contract liabilities. The swap contract liability is the present value of the forecasted difference between estimated future market prices and the contract prices for the notional quantities of power in the restated PPA contracts with the IPPs and in the financial swaps associated with the PPAs from the sale of the Huntley and Dunkirk coal-fired and the Albany oil and gas-fired generation plants. In the balance sheet presentation, a portion of the Swap Contracts Regulatory Asset is recorded within the MRA Regulatory Asset. The portion of this regulatory asset associated with the restated IPP contracts will be amortized over ten years ending in June 2008, in accordance with the MRA and Power Choice, as notional quantities are settled. The portion of this regulatory asset associated with the Huntley and Dunkirk PPAs will be amortized over the remaining terms of these contracts ending in June 2003. The Albany contract expires on September 30, 2003. See Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, Item 8. Financial Statements and Supplementary Data - Note 8 and Note 9, for a further discussion of the several PPAs and other financial agreements that Niagara Mohawk has entered into as part of the MRA and the sale of its generation assets. The amount of this regulatory asset will fluctuate as estimates of future market and contract prices change over the terms of the contracts and will decline as the remaining contract periods shorten.
IPP Restructuring Costs: Niagara Mohawk is also permitted to defer and amortize the cost of any additional IPP contract restructurings. Through September 30, 2001, there have been 13 IPP contracts for approximately 161 MWs terminated for a total consideration (cash and/or notes) of $242.1 million. Deferred costs associated with IPP restructurings will generally be amortized over five years in accordance with Power Choice, unless PSC approval is obtained for a different amortization period. Niagara Mohawk retains the annual net savings of the restructurings during the remaining term of Power Choice to offset the amortization expense. Niagara Mohawk continues to evaluate opportunities related to restructurings and amendments of other IPP contracts.
Deferred loss on sale of assets: See Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, Item 8. Financial Statements and Supplementary Data - Note 2, for a detailed discussion of the non-nuclear generation asset sales. Power Choice required Niagara Mohawk to divest its portfolio of fossil and hydro generation assets and provided for deferral and future recovery of net losses resulting from the sale of the fossil and hydro generation asset portfolio. Niagara Mohawk has completed the sales of these assets and has recorded a regulatory asset of $122.7 million as of September 30, 2001, for the net loss on the sale of its coal-fired generation plants, its hydro generation assets, and its oil and gas fired plants. The net loss is included in Niagara Mohawk’s balance sheet as “Deferred Loss on Sale of Assets.” In accordance with Power Choice, Niagara Mohawk will not earn a return on the deferred loss during the Power Choice period and would have to request a return to be applicable after the expiration of Power Choice (August 31, 2003), subject to the approval of the PSC. The net loss or stranded cost balance of $122.7 million at September 30, 2001 reflects the results of the PSC Staff’s recommended adjustments based on their review of the generation asset sales through year end 2000, as well as the results of the Roseton sale. Niagara Mohawk will begin recovery of the loss in 2003, over a period not to exceed the average remaining life of the assets sold, estimated at 20 years. Niagara Mohawk has recorded a non-cash incentive as provided for in Power Choice of $18.6 million based on the asset sales, of which $6.8 million is reflected in income in 2001 in the “Other Deductions” line item of the Consolidated Income Statements and $11.8 million was reflected in income in 1999 and 2000. The incentive earned reflects PSC Staff recommended adjustments based on their review to date and is included in the other regulatory assets on the Consolidated Balance Sheets. The merger rate plan proposal would modify the recovery period of stranded costs and incentives.
See Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, Item 8. Financial Statements and Supplementary Data - Note 3, for a complete discussion regarding the announced sale of Niagara Mohawk’s interests in Unit 1 and Unit 2 to Constellation Nuclear, LLC (“Constellation”) and Holdings and Niagara Mohawk’s combined Form 8-K filed November 9, 2001 for the unaudited pro forma financial information related to the sale of the nuclear assets. Earlier in 2001, the Nuclear Regulatory Commission and the FERC approved the sale of the nuclear assets to Constellation. On October 24, 2001, the PSC approved the sale and the associated rate treatment and the sale transaction to Constellation was closed on November 7, 2001. The rate treatment approved is consistent with the settlement reached by Niagara Mohawk with Multiple Intervenors (an association of large customers on behalf of its members in Niagara Mohawk’s service territory) and the staff of the PSC. The key provisions of the rate treatment include:
| • | Full recovery of all stranded costs (other than $123 million), including a return, over a period projected not to exceed ten years. |
| • | Approval of 2 PPAs, 1 for 41 percent (Niagara Mohawk’s ownership share) of 90 percent of the output of Unit 2 for a term of 10 years, and another for 90 percent of the output of Unit 1 until the end of its current license life (2009). |
| • | Return on the nuclear regulatory asset as applies to Niagara Mohawk's transmission and distribution assets. |
| • | Niagara Mohawk retains any interest payments that Constellation makes. |
SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” requires that all long-lived assets for which management has committed to a plan of disposal be reported at the lower of carrying amount or fair value less costs to sell. Since the PSC approved the sale and the transaction with Constellation closed on November 7, 2001, Niagara Mohawk’s best estimate of future cash flows is from the sale of the power plants and, taking into consideration the expected cash proceeds from the sale of the assets, Niagara Mohawk determined the assets’ book value to be impaired as of September 30, 2001. Accordingly, as of September 30, 2001, Niagara Mohawk recorded the write-off of $123 million before tax with a corresponding reduction in Electric plant and based upon the adjusted purchase price of $521 million and assuming an allocation of proceeds first to materials and supplies, nuclear fuel (net of amortization) and construction work in progress and direct selling expenses, Niagara Mohawk further reduced its nuclear plant by $965.4 million to its sale value and recorded a regulatory asset for the same amount. In addition, Niagara Mohawk recorded $26.9 million estimated pension and postretirement benefits other than pensions curtailment and settlement losses as a result of the employees transferring to the buyer. This loss is included in the Deferred Loss on Sale of Assets line item of the balance sheet and is subject to change based on final numbers to be received from the actuary. Now that the sale of the nuclear assets has occurred, Niagara Mohawk will complete the accounting for the sale including the reclassification of all the other nuclear regulatory assets and liabilities to the Deferred Loss on the Sale of Assets. (See Holdings and Niagara Mohawk’s combined Form 8-K filed November 9, 2001 for the unaudited pro forma financial information related to the sale of the nuclear assets).
In addition, Niagara Mohawk recorded in third quarter earnings the previously deferred nuclear investment tax credits of approximately $79.7 million. (See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Pending Merger Agreement with National Grid,” for a discussion how the nuclear regulatory asset established by the sale of the nuclear assets would be impacted by the merger).
SFAS No. 71 and other accounting matters: The Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on Issue No. 97-4, “Deregulation of the Pricing of Electricity - Issues Related to the Application of SFAS No. 71” and SFAS No. 101, “Regulated Enterprises - Accounting for the Discontinuance of Application of FASB Statement No. 71” in July 1997. EITF 97-4 does not require a company to earn a return on regulatory assets that arise from a deregulating transition plan in assessing the applicability of SFAS No. 71. Niagara Mohawk believes that the regulated cash flows to be derived from prices it will charge for electric service in the future, including the CTC and assuming no unforeseen reduction in demand or bypass of the CTC or exit fees, will be sufficient to recover the MRA regulatory asset over its planned amortization period and to provide recovery of and a return on the remainder of its assets, as appropriate. In the event Niagara Mohawk determines, as a result of lower than expected revenues and/or higher than expected costs, that its net regulatory assets are not probable of recovery, it can no longer apply the principles of SFAS No. 71 and would be required to record an after-tax, non-cash charge against income for any remaining unamortized regulatory assets and liabilities. If Niagara Mohawk could no longer apply SFAS No. 71, the resulting charge would be material to Holdings and Niagara Mohawk’s reported financial condition and results of operations and adversely affect Niagara Mohawk’s, and therefore, Holdings’ ability to pay dividends.
Under Power Choice, Niagara Mohawk’s remaining electric business (electric transmission, distribution and nuclear business) continues to be rate-regulated on a cost-of-service basis and, accordingly, Niagara Mohawk continues to apply SFAS No. 71 to these businesses. Also, Niagara Mohawk’s IPP contracts, including those restructured under the MRA, as well as the PPAs entered into in connection with the generation divestiture, continue to be the obligations of the regulated business.
NOTE 4. SEGMENT INFORMATION
Holdings is organized between regulated and unregulated activities. Within the regulated business, Niagara Mohawk, which has 98 percent of total assets and 87 percent of total revenues, there are two principal business units: Energy Delivery and Nuclear. As discussed in Note 3 above, Niagara Mohawk has sold the nuclear generation assets. Although there are two identified business units, financial performance and resource allocation are measured and managed at the regulated business level. On October 2, 2001, Holdings’ management announced an agreement to sell Niagara Mohawk Energy, Inc.’s (“Niagara Mohawk Energy”) energy marketing business, Niagara Mohawk Energy Marketing, Inc. (“NMEM”) to Select Energy, Inc., the energy marketing and services subsidiary of Northeast Utilities. The sale of NMEM is subject to approval by the FERC and is expected to close in late November 2001.
Holdings and Niagara Mohawk use a shareholder value based management system. The measure of shareholder value creation is Economic Value Added (“EVA®”). EVA® is the financial measure used to evaluate projects, allocate resources and report and provide performance incentives.
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
------------------- -----------------------
Total Economic Total Economic
(In thousands of dollars) Revenues Value Added Revenues Value Added
- ------------------------- ----------------------- -----------------------
2001
Regulated $1,009,946 $(105,369) $3,135,803 $(354,872)
Unregulated 124,489 (12,397) 455,646 (69,256)
----------------------- -----------------------
Total Consolidated $1,134,435 $(117,766) $3,591,449 $(424,128)
========================= ======================= =======================
2000
Regulated $ 909,537 $(146,931) $2,890,634 $(430,398)
Unregulated 190,067 (11,129) 449,069 (24,905)
Eliminations - - (20) -
----------------------- -----------------------
Total Consolidated $1,099,604 $(158,060) $3,339,683 $(455,303)
========================= ======================= =======================
EVA® is calculated as Net Operating Profit after Taxes less a charge for the use of capital employed. The capital charge is determined by applying a rate representing an estimate of investors’ expected return given the risk of the business and a targeted capital structure. The rate is not the same as the embedded cost of capital, and in particular does not reflect the return on equity that may be established in a rate proceeding. Certain adjustments to accounting data are made to more closely reflect operating or economic results. For the three months and nine months ending September 30, 2001 and 2000, an adjustment is made to include the recognition of the estimated net present value of remaining future above-market contract payments to IPPs, which is calculated annually, and the corresponding recognition of imputed interest as shown in the table below.
Three months ended September 30, Nine months ended September 30,
(in thousands of dollars) 2001 2000 2001 2000
- ------------------------------ -------------------------------- -------------------------------
Estimated net present value of
the remaining future above
market contracts with the IPPs $1,314,600 $1,383,600 $1,314,600 $1,383,600
Corresponding recognition of
imputed interest $9,678 $10,188 $29,034 $30,564
EVA® is further segmented between EVA® from Operations and EVA® related to the IPPs. This distinction is used to allow management to focus on operating performance separate from the consequences of the IPP contracts, the MRA regulatory asset and finance decisions related to managing the capitalization of Holdings.
A reconciliation of total segment EVA® to total consolidated net income for the three months and nine months ended September 30, 2001 and 2000 is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands of dollars) 2001 2000 2001 2000
- ----------------------------------- -------------------------------- -------------------------------
Economic Value Added:
Operations $ 28,494 $ (62,084) $ (127,228) $ (162,079)
Stranded Costs (156,966) (95,976) (307,606) (293,224)
-------------------------------- -------------------------------
Total Economic Value Added (128,472) (158,060) (434,834) (455,303)
Charge for Use of Investor's Capital 212,358 230,615 647,018 704,095
Interest Components of IPP Payments
(net of taxes) (9,678) (10,188) (29,034) (30,564)
1998 Ice Storm Recovery Costs - 19,443 - 19,443
Interest Charges (net of taxes) (62,297) (71,215) (194,846) (215,603)
Extraordinary Item (net of taxes) - - - (909)
Niagara Mohawk Preferred Dividends (7,725) (7,871) (23,239) (23,679)
-------------------------------- -------------------------------
Consolidated Net Income (Loss) $ 4,186 $ 2,724 $ (34,935) $ (2,520)
================================ ===============================
EVA® is a registered trademark of Stern Stewart & Co.
NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES
Niagara Mohawk has six types of derivative instruments: (1) financial swap agreements based on notional quantities of electric power (IPP swaps, Huntley, Dunkirk, and Albany swaps), (2) NYMEX gas futures, gas basis swaps, and an oil swap acquired to offset price escalation in the aforementioned swaps, (3) NYMEX gas futures hedging a power purchase agreement indexed to gas prices, (4) fixed for floating electricity swaps designated as cash flow hedges of anticipated purchases of electricity, (5) NYMEX gas futures, and (6) Combination Call and Put Options designated as cash flow hedges of anticipated purchases of natural gas.
The derivative financial instruments held by Niagara Mohawk are used for hedging or cost control and not for trading. Niagara Mohawk has an Exposure Management Committee (“EMC”) to monitor and control efforts to manage risks. The EMC oversees the Financial Risk Management Policy (the “Policy”) applicable to the regulated company that outlines the parameters within which corporate managers are to engage in, manage, and report on various areas of risk exposure. At the core of the Policy is a condition that Niagara Mohawk will engage in activities at risk only to the extent that those activities fall within commodities and financial markets to which it has a physical market exposure in terms and in volumes consistent with its core business.
The IPP indexed swaps, Huntley, Dunkirk, and Albany swap contracts were entered into in connection with the MRA and the sale of the generation assets and serve to limit Niagara Mohawk’s exposure to electricity prices. These swaps are an exchange of a contract price for the floating market price based on a notional amount of power and offer some degree of hedge protection against volatile market prices. However, with the IPP indexed swaps and the Albany swap, the contract payments are indexed, primarily to fuel prices (natural gas and oil), and therefore, the payments Niagara Mohawk must make fluctuate with the prices for these commodities. To mitigate exposure, Niagara Mohawk acquired NYMEX gas futures, gas basis swaps, and the Albany Oil swap. The gas basis swaps and Albany Oil swap expired at the end of August 2001. The NYMEX gas futures are currently extended through March 2002.
Niagara Mohawk has also been making payments to a non-MRA IPP under a contract to buy power where the price for this power is indexed to natural gas. Volatility in the price of gas impacts the cost of this contract. Niagara Mohawk purchases NYMEX gas futures contracts to mitigate the impact the price of gas has on this contract.
Purchases of electricity and natural gas for distribution to its customers can expose Niagara Mohawk to price risk for those commodities. Niagara Mohawk attempts to mitigate these risks using fixed for floating electric swaps and through the purchase of NYMEX gas futures.
During several months of 2001, ending in July, Niagara Mohawk was in a short position for electricity needed to supply customers. Electricity was purchased through the NYISO at market prices. Niagara Mohawk locked in the price for a portion of this shortage through fixed for floating swaps on electricity. At September 30, 2001 there were no open electric swap contracts. Through September 30, 2001, Niagara Mohawk has recorded a decrease of $5.9 million to “Electricity purchased” from the settlement of these cash flow hedges.
For purchases of natural gas used to supply customers, Niagara Mohawk’s exposure to gas commodity price fluctuations is limited by a regulatory ruling that transfers the commodity price risk to the customer for prudently incurred commodity costs. A related regulatory ruling requires that gas utilities in New York state include volatility of customers bills as one of the criteria to be used in developing their gas supply purchasing strategies. Niagara Mohawk is using NYMEX gas futures, and, beginning in April 2001, combinations of NYMEX call options and put options as hedges to effectively and prudently manage the volatility of those costs. The combination options are financial instruments called collars. Like the futures contracts, the collars are designated and documented as cash flow hedges of the anticipated purchases of natural gas. The use of collars, along with the purchase of gas futures contracts, is consistent with Niagara Mohawk’s overall strategy of mitigating the volatility in gas prices. For the first nine months of 2001, Niagara Mohawk has recorded a decrease of $2.6 million to “Gas purchased” from the settlement of these cash flow hedges.
The EMC has approved the use of gas basis swaps as an additional tool in hedging the cost of natural gas. Niagara Mohawk anticipates entering this market sometime during the fourth quarter.
The transactions that result in the reclassification to earnings of the gains or losses from the cash flow hedges are the purchases of natural gas in each of the months hedged. Net deferred losses at September 30, 2001 for gas cash flow hedges is $ 19.9 million based on September market prices. The deferral is recorded in “Accumulated other comprehensive income.” Since none of Niagara Mohawk’s cash flow hedges extend beyond one year, the net settlement gains or losses resulting from these hedges will be reclassified to earnings within the next 12 months. There were no gains or losses reclassified into earnings resulting from the discontinuance of cash flow hedges.
The application of SFAS No. 133 in the accounting for transmission congestion contracts (TCCs) was discussed in Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, Item 8 Financial Statements and Supplementary Data - Note 1, Summary of Significant Accounting Policies - Derivatives. It has been determined that TCCs, as used by Niagara Mohawk, are excluded from the application of SFAS No. 133.
Niagara Mohawk Energy, through its subsidiary Niagara Mohawk Energy Marketing, Inc. (“NMEM”) also holds financial instruments and is engaged in trading activities. Niagara Mohawk Energy maintains a separate Risk Management and Trading Policy Manual that allows for transactions such as marketing and trading in retail and wholesale, physically and financially settled, energy based instruments. Like Niagara Mohawk’s Policy, the energy trading policy seeks to assure that risks are identified, evaluated, and actively managed. The NMEM portfolio of contracts will be sold along with NMEM in the deal announced on October 2, 2001 (See Note 4. Segment Information.) Normal trading activities within this portfolio will continue until the closing of the sale.
For a more detailed discussion of the various derivative instruments used, see Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, Item 8. Financial Statements and Supplementary Data - Note 9, Fair Value of Financial and Derivative Financial Instruments. See also Holdings and Niagara Mohawk’s combined Form 10-K for fiscal period ended December 31, 2000, Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, for a detailed discussion about how these items factor into Holdings and Niagara Mohawk’s risk management strategy.
REVIEW BY INDEPENDENT ACCOUNTANTS
Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation’s independent accountants, PricewaterhouseCoopers LLP, have applied limited procedures in accordance with professional standards for a review of the unaudited Consolidated Balance Sheets of Niagara Mohawk Holdings, Inc. and its subsidiary companies, as of September 30, 2001 and 2000, and the related unaudited consolidated statements of income and of cash flows for the three-month and nine-month periods ended September 30, 2001 and 2000, and the unaudited Consolidated Balance Sheets of Niagara Mohawk Power Corporation and its subsidiary companies as of September 30, 2001 and 2000, and the related unaudited Consolidated Statements of Income and of cash flows for the three-month and nine-month periods ended September 30, 2001 and 2000. The report of PricewaterhouseCoopers LLP dated November 14, 2001, regarding their limited reviews of the financial statements of Niagara Mohawk Holdings and its subsidiaries and Niagara Mohawk Power Corporation and its subsidiaries appears on the next page.
PricewaterhouseCoopers LLP’s report does not express an opinion on and PricewaterhouseCoopers LLP did not audit the interim unaudited consolidated financial information. Accordingly, the degree of reliance on the report of PricewaterhouseCoopers LLP on such financial information should be restricted in the light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP has not carried out any significant or additional audit tests beyond those which would have been necessary if their report had not been included. Accordingly, PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because such report is not a “report” or “part of the Registration Statement” within the meaning of Sections 7 and 11 of the Securities Act of 1933.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Niagara Mohawk Holdings, Inc. and
Niagara Mohawk Power Corporation
300 Erie Boulevard West
Syracuse, NY 13202
We have reviewed the accompanying condensed consolidated balance sheets of Niagara Mohawk Holdings, Inc. and its subsidiaries as of September 30, 2001, and the related condensed consolidated statements of income for each of the three-month and nine-month periods ended September 30, 2001 and 2000, and of cash flows for the nine-month periods ended September 30, 2001 and 2000 and the condensed consolidated balance sheets of Niagara Mohawk Power Corporation and its subsidiaries as of September 30, 2001, and the related condensed consolidated statements of income for each of the three-month and nine-month periods ended September 30, 2001 and 2000 and of cash flows for the nine-month periods ended September 30, 2001 and 2000. These financial statements are the responsibility of the management of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheets of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation as of December 31, 2000, and the related consolidated statements of income, and retained earnings, of cash flows and of comprehensive income for the year then ended (not presented herein), and in our report dated January 23, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheets as of December 31, 2000 is fairly stated, in all material respects, in relation to the consolidated balance sheets from which it has been derived.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Syracuse, New York
November 14, 2001
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 that involve risk and uncertainty, including Holdings and Niagara Mohawk’s cash flow, the receipt of shareholder approval at National Grid to establish a new holding company to facilitate the merger and the timing and nature of federal and state regulatory actions on the pending merger with National Grid or the imposition of unacceptable conditions to approval by one or more regulatory agencies, the planned repayment of debt, the outcome of rate and reconciliation issues with the NYISO, volatile energy prices and the potential effect it could have on the collection of accounts receivable and the corresponding bad debt expense. These forward-looking statements are based upon a number of assumptions, including assumptions regarding the Power Choice agreement and regulatory actions to continue to support such an agreement. Actual future results and developments may differ materially depending on a number of factors, including regulatory changes either by the federal government or the PSC, including municipalization and exit fees, the timing and nature of federal and state regulatory actions on the pending merger with National Grid, uncertainties regarding the ultimate impact on Holdings and Niagara Mohawk as the regulated electric and gas industries are further deregulated and electricity and gas suppliers gain open access to Niagara Mohawk’s retail customers, the supply and demand of both gas and electricity, operations at the NYISO including implementation of FERC Order 2000, challenges to the Power Choice agreement under New York laws, the timing and extent of changes in commodity prices and interest rates, the effects of weather, efforts made by Niagara Mohawk to collect from customers, particularly in an environment of rising commodity costs, estimates future environmental expenditures and the economic conditions of Niagara Mohawk’s service territory.
Pending Merger Agreement with National Grid
In September 2000, Holdings entered into a merger agreement with National Grid, under which National Grid will acquire Holdings, with Holdings’ shares being exchanged for a combination of cash and American Depository Shares in a new National Grid holding company.
The pending merger was approved by Holdings’ shareholders on January 19, 2001 and by National Grid’s shareholders on January 29, 2001. However, the merger is contingent on National Grid shareholders further approving the new holding company structure at a second meeting. On February 26, 2001, the merger received clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. On June 13, 2001, FERC approved the merger. The pending merger is subject to a number of regulatory and other approvals and consents, including approvals by the SEC under the Public Utility Holding Company Act of 1935 and the PSC. Although Holdings is targeting the pending merger to be completed in early 2002, Holdings cannot predict the timing or the outcome of the negotiations or timetable under which the PSC will consider the petition for the merger and the merger rate plan.
Holdings’ shareholders will receive $19 per share, subject to the dollar value of 5 National Grid ordinary shares being between $32.50 and $51.00 in a specified period shortly before the closing of the pending merger. In the event that the dollar value of 5 National Grid ordinary shares is greater than $51.00 during such period, the per share consideration received by Holdings’ shareholders will increase by two-thirds of the percentage of the increase in value over $51.00. In the event that the dollar value of 5 National Grid ordinary shares is less than $32.50 during such period, the per share consideration received by Holdings’ shareholders will decrease by two-thirds of the percentage of the decrease in value below $32.50. Shareholders can elect to receive their consideration either in cash or ADS’s, or a combination of both, subject to the aggregate cash consideration offered being at least $1.015 billion. If cash elections received from Holdings’ shareholders exceed $1.015 billion, National Grid has the option to increase the cash element of the consideration.
Regulatory Agreements and the Restructuring of the Regulated Electric Utility Business
Pending Merger Rate Plan:On October 11, 2001, Niagara Mohawk, the PSC staff and other parties submitted a plan to the PSC for its consideration. Key terms of the plan are as follows:
| • | Net customer savings of about $1 billion over the next 10 years, compared with rates projected without the merger. This includes a $152 million reduction in delivery charges compared to rates approved in Niagara Mohawk’s current rate agreement, followed by stabilized delivery charges for 10 years, subject to limited adjustments. This equals an expected reduction in Niagara Mohawk electricity delivery rates of more than eight percent, which results in a projected five percent decrease in overall electricity bills, including a projected commodity cost. |
| • | Price-stabilized commodity service for residential and commercial customers for several years, giving those customers significant protection from severe fluctuations in the generation marketplace. |
| • | Agreement to forgo the collection of approximately $850 million in nuclear-related costs that otherwise would have been collected in rates. |
| • | Ability to recover a return on the remaining MRA regulatory asset. |
| • | Also, as part of the agreement, the companies would expand Niagara Mohawk’s annual upstate New York economic development efforts by $12.5 million. |
| • | The extension by 16 months of the existing multi-year gas rate settlement agreement, resulting in a freeze in natural gas delivery rates through December 2004. |
| • | Extension of the Low Income Customer Assistance Program and introduction of a special low-income rate. |
| • | Establishment of a Service Quality Assurance Program that calls for up to $24 million in annual penalties or more under certain conditions, if defined customer service goals are not achieved. |
The parties have requested that the proposed merger and rate plan settlement agreement be considered at the November 28, 2001 PSC meeting. However, Niagara Mohawk cannot predict the timing or the outcome under which the PSC will consider the proposed merger and rate plan settlement agreement.
Power Choice: The PSC approved Niagara Mohawk’s Power Choice agreement on March 20, 1998 and the rate plan was implemented beginning September 1, 1998. The Power Choice agreement outlined Niagara Mohawk’s future structure in the regulated electric business.
The Power Choice agreement established a five-year electric rate plan that reduced class average residential and commercial prices by an aggregate of 3.2 percent over the first three years, beginning September 1, 1998. On September 1, 1999, Niagara Mohawk implemented its second phase of rate reductions and implemented its third phase of rate reductions on September 1, 2000. The reduction in prices includes certain savings that result from approved reductions of the GRT. New York State tax law changes that further reduce the GRT rate for some customers and eliminate the GRT for others, are not reflected in the price reductions. The tax law changes are discussed in Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, Item 8. Financial Statements and Supplementary Data, - Note 1. Summary of Significant Accounting Policies, “Basis of Presentation.”
On August 29, 2001, the PSC approved rate plan changes to cover the final two years of the Power Choice agreement. This filing was necessary because the proposed merger rate filing was not approved in time for September implementation. The merger rate filing described above would supersede this filing if approved. The rate plan changes allows for implementation of the Power Choice agreement to pass through certain commodity-related costs to customers beginning September 1, 2001. Electric commodity costs, which fluctuate with market conditions, are projected to be higher as a result of recent trends in commodity markets, increases in charges from the NYISO and the expiration of some Niagara Mohawk supply contracts. Partially offsetting the projected increase in commodity costs is a reduction in overall, system-wide rates for electric delivery service of 5.4 percent associated with a lowering of the competitive transition charge with respect to existing supply contracts. The overall average price increase will be 4.9 percent, with the average residential bill increasing 7.9 percent. Such increases are dependent upon actual commodity market conditions. However, residential and commercial customers will be provided with a partial price protection from severe fluctuations in the commodity prices through a delivery charge adjustment mechanism.
The rate plan changes include the introduction of a transmission revenue adjustment mechanism, which will compare actual transmission revenues with the $87.4 million forecast base transmission revenue used to develop Power Choice electric delivery prices, with differences collected from or returned to customers. This mechanism is expected to provide credits to customers of approximately $33 million in the two-year period, which are included in the average price adjustments mentioned above.
Energy Supply Agreement with Tractebel: On July 18, 2001, Niagara Mohawk entered into an energy-supply agreement with Tractebel. The agreeement was terminated as of November 11, 2001, since certain approvals were not obtained from the PSC. Under the termination provisions of the agreement with Tractebel, Niagara Mohawk would have been required to take assignment of hedges entered into by Tractebel on Niagara Mohawk’s behalf, but Tractebel has informed Niagara Mohawk that no hedges exist that need to be assigned.
Generation Asset Sales: See Item 1. Notes to the Consolidated Financial Statements - Note 3. Rate and Regulatory Issues and Contingencies, “Deferred loss on sale of assets” and Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Regulatory Agreements and the Restructuring of the Regulated Electric Utility Business - Generation Asset Sales.”
Stranded Cost Recovery: In approving Power Choice, the PSC authorized changes to Niagara Mohawk’s Retail Tariff providing for the recovery of stranded costs in the case of municipalization regardless of whether the new municipal utility requires transmission service from Niagara Mohawk. The calculation of stranded costs for customers leaving Niagara Mohawk’s system to be supplied by a municipal or other utility or IPP is governed by Rule 52 of Niagara Mohawk’s Retail Tariff, which became effective on April 6, 1998. A number of communities served by Niagara Mohawk are considering municipalization and have requested an estimate of their stranded cost obligation.
Alliance for Municipal Power
The Alliance for Municipal Power (“AMP”) is a group of approximately 20 towns and villages in St. Lawrence and Franklin counties pursuing municipalization. AMP appealed the Commission’s orders approving Power Choice and Rule 52, which appeal was dismissed by the Supreme Court of Albany County. AMP filed an appeal of this decision, but failed to perfect its appeal within the time limit specified in New York’s Civil Practice Laws and Rules.
At the PSC’s request, Niagara Mohawk provided AMP with stranded cost calculations under Rule 52 and Order No. 888. Niagara Mohawk estimated AMP’s total stranded cost estimate at $150 million under Rule 52 and $272 million under Order No. 888. On June 23, 1999, a representative of the AMP communities submitted a letter to the PSC disputing Niagara Mohawk’s exit fee calculations and requesting that the alternative dispute resolution procedures of Niagara Mohawk’s Power Choice Settlement be invoked to resolve that dispute. By letter dated August 10, 1999, the PSC directed Niagara Mohawk to meet with representatives of the AMP communities and an administrative law judge employed by the PSC. Thereafter, representatives of Niagara Mohawk and the AMP communities met on several occasions to exchange information and views on this subject, but no agreement has been reached.
On September 29, 2000, AMP filed a Petition for an Expedited Declaratory Order with the FERC. In that petition, AMP urged the FERC to nullify the exit fee provisions of Niagara Mohawk’s Retail Tariff on a variety of grounds. In an order dated January 25, 2001, the FERC dismissed AMP’s petition without prejudice to AMP’s right to raise any of the issues raised therein in a proceeding before the PSC. On February 23, 2001, AMP requested rehearing of this determination. Niagara Mohawk and the PSC both opposed this request, which was denied by the FERC in an order dated March 26, 2001. AMP did not appeal this order within the period provided by law, and the FERC’s order in this case is now final.
On August 24, 2001, AMP filed a petition with the PSC seeking a declaratory order directing a hearing to determine the stranded cost obligations owed Niagara Mohawk. The Hearing Officer is in the process of scheduling a conference to discuss AMP’s petition.
If the AMP communities withdrew from Niagara Mohawk’s system, Niagara Mohawk would experience a potential revenue loss of approximately two percent per year. The impact on Niagara Mohawk’s electric margin is considered to be immaterial. Suspension or renegotiation of the exit fee provisions of Power Choice could have a material adverse effect on Holdings and Niagara Mohawk’s results of operations, financial condition, and future cash flows.
FERC Order 2000. In December 1999, the FERC issued Order 2000, which requires all public utilities that own, operate or control interstate electric transmission to file a proposal for a Regional Transmission Organization (“RTO”). Utilities not currently part of a FERC approved transmission entity had to file their plans to form an RTO by October 15, 2000. Utilities, including Niagara Mohawk, who are part of a FERC approved transmission entity (Niagara Mohawk is a member of the NYISO), had to file with the FERC demonstrating the transmission entity conforms to the minimum characteristics and functions of an RTO, and if required, identify specific plans to make it conform, including any obstacles to achieve full compliance with Order 2000. On January 16, 2001, following a collaborative process with the other New York transmission owning utilities, with the staff of the NYISO, and other New York wholesale market participants, Niagara Mohawk and the other New York transmission owning utilities made a joint filing with the NYISO at the FERC describing how the NYISO is generally compliant with many of the Order 2000 requirements, and steps that will be taken to achieve full compliance with the remaining requirements. A number of generators, marketers and industrial customers subsequently intervened in this proceeding requesting various forms of relief ranging from a FERC order requiring the NYISO to merge with the New England independent system operator and Pennsylvania Jersey Maryland independent system operator (“PJM”) to modification or abolition of various provisions of the NYISO’s Open Access Transmission Tariff.
On July 12, 2001, FERC ruled that the three Northeast ISOs (ISO New England, NYISO and PJM) did not meet all the criteria in Order 2000, and that discussions must begin immediately to begin the process of developing a single RTO spanning the Northeast region served by the three ISOs. The FERC ordered the commencement of a mediation process to develop a plan that would achieve a single RTO for the Northeast region of the country utilizing the best practices from each of the existing Northeast ISOs.
On July 24, 2001, the PSC announced their support of FERC’s process to establish a single RTO to run the daily power markets and oversee the flow of electricity in the Northeastern United States, citing both economic and system reliability benefits. In addition, the PSC noted their belief that the RTO approach will strengthen the reliability of the system, promote better transmission planning and result in efficient wholesale prices for electricity.
The mediation process mentioned above commenced in August 2001 and involved all entities involved in the three Northeast regions, as well as Canadian entities. The mediation process focused on developing a “best practices” approach and associated business plan to migrate the three ISOs into one Northeast RTO. The resulting business plan was submitted by the FERC ALJ to the Commission on September 17, 2001. A Commission Order on the business plan is expected before the end of the year. Niagara Mohawk cannot predict the financial impacts, if any, that may result from the ultimate compliance with the FERC Order 2000 or any subsequent findings in that regard.
FERC Order on Niagara Mohawk’s Transmission Rates with Sithe. Sithe/Independence Power Partners, LP (“Sithe”) had filed two complaints against Niagara Mohawk challenging the transmission rates charged by Niagara Mohawk. In its most recent complaint, Sithe challenged Niagara Mohawk’s revenue requirements and loss methodology, and also sought a refund of approximately $65 million which they paid for certain interconnection facilities.
On June 29, 2001, Niagara Mohawk and Sithe negotiated and filed a settlement resolving all of the issues in this proceeding with the FERC for an amount that will not have a material adverse effect on Niagara Mohawk’s results of operations or financial condition. On October 11, 2001, FERC issued an order accepting this settlement on the condition that Niagara Mohawk modify a provision of that settlement prohibiting the FERC from subsequently amending that agreement on behalf of Sithe, Niagara Mohawk or any third party unless the FERC found that change to be required by a compelling public interest. The FERC held that the parties to the settlement could bind themselves and the FERC to this high “public interest” standard with respect to disputes among themselves, but could not bind third parties to this standard. The Commission gave Niagara Mohawk 30 days to accept or reject this change to the settlement.
Niagara Mohawk and Sithe submitted a revised settlement agreeement in compliance with the requirements of FERC's October 11, 2001 Order on November 9, 2001. It is expected that FERC will accept the revised settlement agreement.
Financial Position
Holdings and Niagara Mohawk’s capital structure at September 30, 2001 and December 31, 2000, was as follows:
September 30, December 31,
% 2001 2000
- -------------------------------------------------------
Holdings:
Long-term debt 62.4 62.6
Preferred stock of subsidiary 5.9 5.8
Common equity 31.7 31.6
Niagara Mohawk:
Long-term debt 64.2 64.4
Preferred stock 5.9 6.0
Common equity 28.8 29.6
The financing of the MRA significantly increased the leverage of Niagara Mohawk and Holdings. However, the increased operating cash flow resulting from the MRA and Power Choice, including the proceeds from the sale of the generation assets, have and will continue to allow both entities to reduce the leverage in the capital structure. Book value of Holdings’ common stock was $16.33 per share at September 30, 2001, as compared to $16.69 at December 31, 2000.
EBITDA for the 12 months ended September 30, 2001 was $1,096.1 million for Holdings. EBITDA has declined approximately $84.7 million as compared to the same period in 2000, primarily as a result of lower operating income. EBITDA represents earnings before interest charges, interest income, income taxes, depreciation and amortization, and other non-cash items, including amortization of nuclear fuel, allowance for funds used during construction, amortization/accretion of MRA/IPP buyout costs, deferral of MRA interest rate savings, cumulative change in accounting principle and non-recurring and extraordinary items. EBITDA is a non-GAAP measure of cash flows and is presented to provide additional information about Holdings and Niagara Mohawk’s ability to meet its future requirements for debt service. EBITDA should not be considered an alternative to net income as an indicator of operating performance or as an alternative to cash flows, as presented on the Consolidated Statement of Cash Flows, as a measure of liquidity. EBITDA may not be comparable to similarly titled measures used by other companies. Following is a reconciliation of EBITDA to Holdings’ net income:
Twelve Months Ended
(in thousands of dollars) September 30,
2001 2000
----------- -----------
EBITDA $1,096,108 $1,180,787
Interest income 13,612 21,411
Extraordinary item - (909)
Cumulative effect of a change in
accounting principle 12,790 -
Income taxes 125,464 (21,173)
Preferred dividend requirement
of subsidiary (30,997) (33,448)
Interest charges (405,709) (436,490)
Depreciation and amortization (315,036) (310,600)
Impairment charge on Telergy investment (44,000) -
Disallowed nuclear regulatory asset cost (123,000) -
Nuclear fuel amortization (27,744) (28,882)
Amortization/accretion of
MRA/IPP buyout costs (366,836) (373,099)
Allowance for funds used during
construction 2,352 3,022
Deferral of MRA interest rate
savings (15,962) (21,305)
----------- -----------
Net income $ (78,958) $ (20,686)
=========== ===========
Liquidity and Capital Resources
(See Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Financial Position, Liquidity and Capital Resources”).
Short Term. At September 30, 2001, Holdings and Niagara Mohawk’s principal sources of liquidity included cash and cash equivalents of $470.7 million and $436.9 million, respectively, and accounts receivable of $323.3 million and $272.4 million, respectively. Accounts receivable are net of amounts sold, as discussed below. Holdings and Niagara Mohawk have a negative working capital balance of $289.0 million and $388.4 million, respectively, primarily due to long-term debt due within one year of $340.9 million at Niagara Mohawk and short-term debt of $250 million. Ordinarily, construction related short-term borrowings are refunded with long-term securities on a periodic basis. This approach generally results in a working capital deficit. Working capital deficits may also be a result of the seasonal nature of Niagara Mohawk’s operations as well as the timing of differences between the collection of customer receivables and the payments of fuel and purchased power costs. As discussed below, Niagara Mohawk believes it has sufficient cash flow and borrowing capacity to fund such deficits as necessary in the near term.
Net cash from operating activities was $585.2 million for Holdings and $605.6 million for Niagara Mohawk in the nine months ended September 30, 2001 which funded its acquisition of utility plant and the retirement of certain debt obligations. Niagara Mohawk has a senior bank facility agreement that provides Niagara Mohawk with $846.9 million of credit consisting of a $322.9 million 364 day revolving credit facility (expires May 31, 2002, with the option to convert up to $280.0 million loans outstanding at the termination date to a one-year term loan), a 5-year $100 million revolving credit facility (expires May 31, 2005), and $424 million for letters of credit with a 3-year term (expires June 2, 2003). The letter of credit facility provides credit support for Niagara Mohawk’s adjustable rate pollution control revenue bonds issued through the New York State Energy Research and Development Authority. As of September 30, 2001, Niagara Mohawk borrowed $290 million from the revolving credit facility, consisting of $190 million from the 364 day revolving credit facility and $100 million from the 5-year revolving credit facility, leaving Niagara Mohawk with $132.9 million of borrowing capability under the bank facility agreement. The interest rate applicable to the facility is variable based on certain rate options available under the agreement and approximated 4.0 percent at October 31, 2001. Niagara Mohawk also has the ability to issue first mortgage bonds to the extent that there have been maturities since June 30, 1998. Through October 31, 2001, Niagara Mohawk had $520 million in such first mortgage bond maturities.
Niagara Mohawk Energy has a $75 million bank facility secured by certain assets of Opinac and a $25 million guarantee from Holdings. The facility provides for letters of credit and a $10 million line of credit. The bank facility expires on September 30, 2002. As of September 30, 2001, approximately $51 million in letters of credit were outstanding and there were no borrowings against the line of credit. In addition, Holdings has issued guarantees of $8 million as of September 30, 2001 to trade counter-parties of Niagara Mohawk Energy.
Niagara Mohawk has established a single-purpose, financing subsidiary, NM Receivables LLC (“NMR”), whose business consists of the purchase and resale of an undivided interest in a designated pool of Niagara Mohawk customer receivables, including accrued unbilled revenues. During February 2001, NMR was not in compliance with the statistical ratios relating to the pool of receivables sold. The purchaser has granted a waiver for this period. NMR returned to compliance with this ratio in March 2001 and remained in compliance through May 2001. The amount of receivables sold at June 30, 2001 was $290 million, which exceeded the amount that could be supported by the then outstanding accounts receivable. Subsequently, the amount of receivables sold has been reduced to bring Niagara Mohawk back into compliance. The amount of the receivables sold at September 30, 2001 was $279 million. See Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Liquidity and Capital Resources,” for a discussion of NMR’s compliance with statistical ratios in 2000. See Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, Item 8. Financial Statements and Supplementary Data - Note 8. Commitments and Contingencies, for a further discussion of this customer receivables program.
Niagara Mohawk issued $300 million in unsecured debt in September 2001 to provide it with financial flexibility, particularly in light of the uncertainty in the timing of the sale of the nuclear assets at that time. The financing was principally driven by the need to fund debt maturities of $302 million in July 2001 and $100 million in October 2001.
On July 1, 2001, Niagara Mohawk had $302 million in senior notes maturities. In order to meet that obligation and other internal cash requirements, Niagara Mohawk borrowed $315 million on its existing senior bank facility and entered into a term loan with certain banks to obtain an additional $60 million in short term debt. The term loan was intended to be a bridge loan pending the nuclear sale and was repaid in late October 2001.
Niagara Mohawk is obligated to use 85 percent of the net cash proceeds of the sale of the nuclear assets to reduce its senior debt outstanding within 180 days after the receipt of such proceeds and plans to pay down the senior bank borrowing.
Holdingsnet cash used in investing activitiesdecreased $29.4 million in 2001 as compared to the same period in 2000. This decrease was primarily due to higher proceeds from the sales of generation assets in the first nine months of 2001 as compared to the first nine months of 2000 of approximately $36.3 million and a decrease in other investments of $59.4 million, partially offset by an increase in accounts payable and supplies related to construction of approximately $40.2 million and an increase in the acquisition of utility plant of approximately $24.3 million. Other investments were lower in the first nine months of 2001 as compared to the first nine months of 2000, since Opinac North America, Inc. (“ONA”), a subsidiary of Holdings, invested $42.8 million in eVionyx, Inc. (formerly EVonyx, Inc.), a research and development company, in 2000. ONA did not make any similar type of investments in 2001. In addition, other investments were lower in the first nine months of 2001 as compared to the first nine months of 2000, since the contributions to the supplemental executive retirement plan decreased by $22.4 million.
Niagara Mohawk’snet cash used in investing activitiesincreased $1.3 million in 2001 as compared to the same period in 2000. The increase was primarily due to an increase in accounts payable and supplies related to construction of approximately $30.5 million and an increase in the acquisition of utility plant of approximately $24.3 million, partially offset by a decrease of other investments of $22.7 million and higher proceeds from the sales of generation assets in the first nine months of 2001 as compared to the first nine months of 2000 of approximately $36.3 million.
Niagara Mohawk’snet cash used in financing activities decreased $355.5 million as compared to the same period in 2000, primarily due to the discontinuance of the stock repurchase program as a result of the pending merger. In the first nine months of 2000, Niagara Mohawk repurchased Holdings’ common stock for $250.0 million. Niagara Mohawk did not repurchase any common stock in 2001. In addition, Niagara Mohawk paid less dividends to Holdings in 2001 as compared to 2000. In the first nine months of 2001, Niagara Mohawk paid a dividend of $10.0 million to Holdings. A total dividend of $37.2 million has been declared, leaving $27.2 million in dividends payable by Niagara Mohawk to Holdings, which will be paid in the fourth quarter of 2001. In the first nine months of 2000, Niagara Mohawk paid a dividend of $46.1 million to Holdings. There was also a decrease because Niagara Mohawk retired less debt in the first nine months of 2001 (net debt reductions were $42.7 million) as compared to 2000 (net debt reductions were $112.2 million).
Results of Operations
The following discussion presents the material changes in results of operations for the three months and nine months ended September 30, 2001 in comparison to the same period in 2000. The results of operations section includes the results of both Holdings and Niagara Mohawk. The results of operations reflect the seasonal nature of the business, with peak electric loads in summer and winter periods. Gas sales peak principally in the winter. The earnings for the three-month and nine month period should not be taken as an indication of earnings for all or any part of the balance of the year. As a result of the closing of the MRA and the implementation of Power Choice effective September 1, 1998, reported earnings for the five years under Power Choice have been and will continue to be substantially depressed as a result of the regulatory treatment of the MRA regulatory asset. The anticipated effect of the seasonality factor, when coupled with the impact of the MRA and Power Choice, would be to record income in the first quarter, which is reduced by losses in the subsequent quarters. The ability of Niagara Mohawk to improve earnings in the future periods will depend on the outcome of the regulatory process, including the outcome of the merger rate filing, and may otherwise be affected by the pending merger with National Grid. See “Pending Merger Agreement with National Grid” for a discussion of the pending merger. This discussion should also be read in conjunction with other financial and statistical information appearing elsewhere in this report. See Holdings and Niagara Mohawk’s combined Form 10-K for the fiscal year ended December 31, 2000, Part II, Item 8. Financial Statements and Supplementary Data - Note 1. “Summary of Significant Accounting Policies,” for a further discussion of the formation of the holding company structure during 1999.
Three Months Ended September 30, 2001 versus Three Months Ended September 30, 2000
Holdings:
Holdings reported earnings for the third quarter of 2001 of $4.2 million or 3 cents per share, as compared with earnings of $2.7 million or 2 cents per share for the third quarter of 2000. The third quarter results for 2001, as compared with the third quarter of 2000, were positively impacted by the following items:
| • | Niagara Mohawk recorded previously deferred investment tax credits related to the sale of the nuclear assets of $79.7 million or 50 cents per share in income. |
| • | Lower interest expense of approximately $13.2 million or 5 cents per share due to the repayment of debt during 2000 and 2001. |
| • | Impact of lower natural gas prices on indexed IPP contracts, which lowered costs by $10.7 million or 4 cents per share, compared to 2000. Fuel and purchased power costs were also lower because of an indexed contract with an IPP not part of the MRA. |
| • | Higher deliveries of electricity to residential customers of $4.9 million or 2 cents per share. |
Third quarter 2001 results have been negatively impacted in comparison to 2000 results by the following items:
| • | Niagara Mohawk recorded a non-cash write-off of $123 million or 50 cents per share to reflect the disallowed nuclear investment costs as part of a regulatory settlement agreement related to the sale of the nuclear assets. |
| • | Niagara Mohawk received approximately $29.9 million, or 12 cents per share, of insurance proceeds and disaster relief associated with the 1998 ice storm restoration effort in the third quarter 2000. No similar insurance proceeds were received in the same period in 2001. |
Niagara Mohawk:
Niagara Mohawk had earnings of $14.4 million for the third quarter of 2001. The preferred dividend requirement reduced the balance available for common stock to earnings of $6.6 million. These earnings as compared to the same period in 2000 are explained above in the discussion of Holdings’ earnings for the same period, except for the subsidiary results.
Revenues and Sales/Deliveries
Electric:
Of the $51.6 million increase in Holdings electric revenues, $111.1 million relates to Niagara Mohawk’s revenues, partially offset by a decrease of $59.5 million related to Opinac’s unregulated revenues.
Regulated electric revenues increased $111.1 million or 13.4 percent from the third quarter of 2000. The increase in regulated electric revenues is primarily due to an increase in sales for resale of $80.4 million as a result of higher sales to the NYISO, an increase in revenues to ultimate customers of $37.6 million due to higher pass-through of commodity costs due to implementing the commodity adjustments clause mechanism in September 2001 in accordance with Power Choice and increased sales. In addition, the increase in regulated electric revenues is due to an increase in miscellaneous revenues of $38.2 million. The September 2001 Power Choice rates were higher since the commodity forecast reflected in base rates was higher, partially offset by lower delivery rates. Miscellaneous revenues increased primarily as a result of an increase in unbilled revenues of $12.5 million and the recording of $12.0 million of revenues to be received under the NYPA residential hydropower benefit mechanism as a result of an under collection from the prior year. In addition, miscellaneous revenues were lower in the nine months ended September 30, 2000 as compared to the nine months ended September 30, 2001, as a result of the May 2000 New York State tax law changes, whereby the gross receipts tax was replaced by a state income tax retroactive to January 1, 2000. Accordingly, Niagara Mohawk reduced miscellaneous electric revenues by $15.4 million for the 9 months ended September 30, 2000 and recorded a corresponding liability to customers to reflect an over collection of GRT. The increased revenues from the sales for resale to the NYISO is offset in electricity purchased costs.
These increases were partially offset by a decrease in distribution revenues of $9.7 million and a decrease in transmission revenues of $35.4 million primarily as a result of the reclassification of certain revenues and expenses between purchase power and transmission revenues so that amounts recorded in transmission revenues and purchase power will better reflect the definitions of those accounts as outlined in the Power Choice filing that became effective in September 1, 2001. In addition, the introduction of the transmission revenue adjustment mechanism (“TRAM”) on September 1, 2001 reduced transmission revenues by $5.3 million. The TRAM will compare actual transmission revenues with the $87.4 million annual forecast base transmission revenue used to develop Power Choice electric delivery prices, with differences collected from or returned to customers.
Regulated electric salesto ultimate consumers were approximately 7.8 billion KWh in the third quarter of 2001 as compared to 7.7 billion KWh in the third quarter in 2000.
Unregulated electric revenues decreased $59.5 million or 34.0 percent from the third quarter of 2000 primarily as a result of Niagara Mohawk Energy having decreased wholesale revenues of $27.2 million due to lower market prices for the third quarter 2001 as compared to the same period in 2000 and lower retail revenues of $23.5 million primarily due to the loss of a large customer. In addition, unregulated electric revenues were reduced by approximately $10 million in mark-to-market revenues as a result of lower prices.
Unregulated electric sales were 2.1 billion KWh or a 13.7 percent decrease from the third quarter of 2000 primarily due to lower retail sales, partially offset by an increase in wholesale sales.
Gas:
Of the $13.5 million decrease in Holdings gas revenues, $10.6 million relates to Niagara Mohawk regulated revenues and $2.9 million relates to Opinac unregulated revenues.
Regulated gas revenues decreased $10.6 million or 13.4 percent in the third quarter of 2001 from the comparable period in 2000, primarily as a result of decreased sales to residential and industrial customers and lower gas prices being passed through to customers.
Regulated gas salesto ultimate consumers were 3.7 million Dth or a 7.9 percent decrease from the third quarter of 2000.
Unregulated gas sales decreased 1.0 million Dth or 8.9 percent in the third quarter of 2001 from the comparable period in 2000. Wholesale sales decreased 1.2 million Dth as a result of lower trading activity due to increased market volatility. This was partially offset by an increase in retail sales of 0.2 million Dth due to increased sales activity.Unregulated gas revenues decreased $2.9 million or 25.7 percent in the third quarter of 2001 from the comparable period in 2000 due to lower wholesale revenues of $5.9 million . This decrease was partially offset by increased mark-to-market revenues of $2.7 million.
Operating Expenses
Holdings’ fuel for electric generationandelectricity purchased increased $8.8 million. It is explained by Niagara Mohawk’s activity and is partially offset by a decrease in unregulated electric supply costs of $59.2 million or 33.2 percent in the third quarter of 2001. Such decrease in the unregulated electric supply costs was primarily due to decreased sales requirements.
Niagara Mohawk’selectricity purchased increased $77.8 million or 25.6 percent in the third quarter of 2001, due to higher quantities of electricity purchased from the NYISO, which are offset by higher sales to the NYISO as noted above. This was partially offset by lower IPP purchases due to a decrease in hydro IPP purchases as a result of a reduction in water flow. The third quarter 2001 was a drier season as compared to the same period in 2000.
Niagara Mohawk’sfuel for electric generation decreased $9.8 million or 51.4 percent as compared to the third quarter in 2000, primarily as a result of the sale of Niagara Mohawk’s interest in the Roseton Steam Station in the first quarter 2001.
Holdings’ gas purchasedexpense reflects the decrease in Niagara Mohawk’s gas purchased expense of $13.4 million discussed below, as well as a decrease of $5.1 million in unregulated gas purchased costs in the third quarter of 2001.
Niagara Mohawk’sgas purchased expense decreased $13.4 million in the third quarter of 2001 primarily due to a 56.2 percent decrease in volumes purchased ($25.3 million), partially offset by a 52.2 percent increase in the unit cost of gas ($10.3 million).
Other operation and maintenance expenses for both Holdings and Niagara Mohawk have increased in the third quarter of 2001 as compared to the same period in 2000, as a result of a higher system benefits charge of $7.6 million. The systems benefits charge is offset in electric revenues. The incremental merger related costs for the third quarter of 2001 were approximately $0.9 million. In addition, Niagara Mohawk received insurance proceeds and disaster relief associated with the 1998 ice storm restoration effort of $29.9 million in the third quarter 2000. No such proceeds were received in 2001.
The following table outlines the components of the line item “Amortization/Accretion of MRA/IPP Buyout Costs:”
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- --------- ---------
(in thousands)
Amortization of MRA regulatory asset $96,624 $96,624 $289,873 $289,873
Accretion to MRA regulatory asset
(Senior Discount Note) (8,098) (7,452) (23,634) (21,748)
Other MRA related accretion (7,007) (4,478) (21,023) (13,435)
Amortization of other IPP buyout costs 9,224 9,209 27,672 26,849
-------- -------- --------- ---------
$90,743 $93,903 $272,888 $281,539
======== ======== ========= =========
The decrease inother taxes for both Holdings and Niagara Mohawk is due to an increase in GRT credits of $5.2 million received due to an increase in the customers in Niagara Mohawk’s service territory that participate in New York State’s Power for Jobs program.
In the third quarter 2001, Niagara Mohawk recorded a non-cash write-off of $123 million before tax which is reflected on thedisallowed nuclear investment costsline item on the consolidated statements of income in accordance with the PSC Order approving the sale of the nuclear assets. (See Item 1. Financial Statements Note 3. Rate and Regulatory Issues and Contingencies - “Deferred loss on sale of assets,” for a further discussion of the accounting and ratemaking treatment related to the sale of the nuclear assets).
Holdings and Niagara Mohawk’sother deductions were higher in the third quarter 2001 as compared to the same period in 2000 primarily due to service reliability incentive penalties of $4.6 million for the rate year ended August 31, 2001.
Holdings and Niagara Mohawk’s interest charges decreased by $13.2 million in the third quarter of 2001 mainly due to the repayment of debt during 2000 and 2001.
The decrease in Holdings and Niagara Mohawk’sincome taxes of approximately $101.7 million and $103.1 million, respectively, in the third quarter of 2001 is due primarily to the recording of $79.7 million previously deferred investment tax credits related to the sale of the nuclear assets and the recording of the tax benefit of $43.1 million related to the non-cash write-off of $123 million of disallowed nuclear investment costs. This was partially offset by an increase of income tax expense due to changes in the estimate of the percentage allocation of income taxes to the third quarter 2001 as compared to the same period in 2000. As pre-tax income changes, the percentage relationship of the flow-through items to pre-tax income will also change.
Nine Months Ended September 30, 2001 versus Nine Months Ended September 30, 2000
Holdings:
The loss for the first nine months of 2001 was $34.9 million or a negative 30 cents per share, as compared with a loss of $2.5 million or a negative 1 cent per share for the same period in 2000. The loss for the first 9 months of 2001 includes a non-cash charge of $44.0 million or 27 cents per share due to the recognition of an impairment charge of its entire investment in Telergy, Inc., a development stage telecommunications company, as a result of Holdings’ assessment of its investment. The loss for 2001 was partially offset by the cumulative effect of an accounting change related to the adoption by Niagara Mohawk Energy of SFAS No. 133 of $12.8 million or 8 cents per share. The loss for the first 9 months of 2000 includes extraordinary charges related to the early repayment of debt of $0.9 million or 1 cent per share. Earnings for the first nine months of 2001, as compared with the first nine months of 2000, have also been negatively impacted by the following items:
| • | The impact of higher natural gas prices on indexed IPP contracts, which increased costs by $26.1 million or 11 cents per share. Fuel and purchased power costs were also higher because of an indexed contract with an IPP not part of the MRA. |
| • | Niagara Mohawk recorded a non-cash write-off of $123 million or 50 cents per share to reflect the disallowed nuclear investment costs as part of a regulatory settlement agreement related to the sale of the nuclear assets. |
| • | An increase in bad debt expense of $6.3 million or 3 cents per share which reflects the impact of the higher natural gas prices on customers. |
| • | Niagara Mohawk received approximately $29.9 million, or 12 cents per share, of insurance proceeds and disaster relief associated with the 1998 ice storm restoration effort in the third quarter 2000. No similar insurance proceeds were received in the same period in 2001. |
| • | A reduction in regulated electric revenues by $7.7 million or 3 cents per share as a result of the implementation of Niagara Mohawk’s third phase of rate reductions in September 2000 under Power Choice. |
Earnings for the first nine months were positively impacted by the following items:
| • | Niagara Mohawk recorded previously deferred investment tax credits related to the sale of the nuclear assets of $79.7 million or 50 cents per share. |
| • | The increase in GRT credits recorded by Niagara Mohawk of $27.3 million or 11 cents per share due to an increase in the customers in Niagara Mohawk’s service territory that participate in New York State’s Power for Jobs program. |
| • | Lower interest expense of approximately $31.6 million or 13 cents per share due to the repayment of debt during 2000 and 2001. |
Niagara Mohawk:
Niagara Mohawk had earnings of $27.4 million for the first 9 months of 2001. The preferred dividend requirement reduced the balance available for common stock to earnings of $4.1 million. These earnings as compared to the same period in 2000 are explained above in the discussion of Holdings’ earnings for the same period, except for the subsidiary results.
Revenues and Sales/Deliveries
Electric:
Of the $110.7 million increase in Holdings electric revenues, $117.5 million relates to Niagara Mohawk’s revenues, partially offset by a decrease in Opinac’s unregulated revenues of $6.8 million.
Regulated electric revenues increased $117.5 million or 4.8 percent from the first 9 months of 2000. The increase in regulated electric revenues is primarily due to an increase in sales for resale of $97.1 million as a result of higher sales to the NYISO, an increase in revenues from commercial customers of $21.4 million and an increase in miscellaneous revenues of $22.4 million. Miscellaneous revenues increased due to the recording of $12.0 million of revenues to be received under the NYPA residential hydropower benefit mechanism as a result of an under collection from the prior year and an increase in unbilled revenues of $16.5 million. In accordance with Power Choice, Niagara Mohawk recognizes changes in accrued unbilled revenue in its results of operations. The increased revenues from the sales for resale to the NYISO is offset in electricity purchased costs.
These increases were partially offset by a decrease in distribution revenues of $11.6 million and a decrease in transmission revenues of $14.7 million primarily as a result of the reclassification of certain revenues and expenses between purchase power and transmission revenues so that amounts recorded in transmission revenues and purchase power will better reflect the definitions of those accounts as outlined in the Power Choice filing that became effective in September 1, 2001. In addition, the introduction of the TRAM on September 1, 2001 reduced transmission revenues by $5.3 million. The TRAM will compare actual transmission revenues with the $87.4 million forecast base transmission revenue used to develop Power Choice electric delivery prices, with differences collected from or returned to customers.
Nine Months Ended September 30,
Electric Revenue (Thousands) Sales (GWh)
% %
2001 2000 Change 2001 2000 Change
----------- ----------- ------ ------- ------ -------
Regulated:
Residential $ 906,276 $ 902,620 0.4 7,555 7,473 1.1
Commercial 795,989 774,620 2.8 7,560 7,569 (0.1)
Industrial 345,127 340,261 1.4 4,138 4,524 (8.5)
Industrial - Special 49,203 46,822 5.1 3,526 3,201 10.2
Other 21,958 29,812 (26.3) 112 121 (7.4)
----------- ----------- ------ ------- ------- ------
Regulated Total to
Ultimate Consumers 2,118,553 2,094,135 1.2 22,891 22,888 0.0
Other Electric Systems 167,923 70,820 137.1 4,163 1,349 208.6
Distribution of Energy 124,571 136,192 (8.5) 3,043 2,949 3.2
Transmission of Energy 99,885 114,605 (12.8) - - -
Miscellaneous 34,663 12,305 181.7 - - -
----------- ----------- ------ ------- ------- ------
Total Regulated 2,545,595 2,428,057 4.8 30,097 27,186 10.7
Unregulated:
Wholesale & Retail 392,352 399,204 (1.7) 7,987 8,010 (0.3)
----------- ----------- ------ ------- ------- ------
Total $2,937,947 $2,827,261 3.9 38,084 35,196 8.2
=========== =========== ====== ======= ======= ======
Regulated electric salesto ultimate consumers were approximately 22.9 billion KWh for the first nine months of 2001 and 2000.
Unregulated electric revenues decreased $6.8 million or 1.7 percent from the first nine months of 2000 primarily as a result of Niagara Mohawk Energy having lower retail revenues of $49.0 million primarily due to the loss of a large customer. In addition, unregulated electric revenues were reduced by $18 million to reflect a decrease in mark-to-market revenues as a result of lower prices. These decreases were partially offset by increased wholesale revenues of $63.0 due to increased partner and trading volumes and higher prices.
Unregulated electric sales were 8.0 billion KWh in the first nine months of 2001 and 2000. Increased wholesale sales of 1.5 billion KWh were offset by lower retail sales of the same amount.
Gas:
Of the $145.7 million increase in Holdings gas revenues, $127.6 million relates to Niagara Mohawk regulated revenues and $18.1 million relates to Opinac unregulated revenues.
Regulated gas revenues increased $127.6 million or 27.6 percent in the first nine months of 2001 from the comparable period in 2000, primarily as a result of higher gas prices being passed through to customers.
Regulated gas salesto ultimate consumers were 52.1 million Dth or a 2.7 percent decrease from the first nine months of 2000.
Nine Months Ended September 30,
Gas Revenue (Thousands) Sales (Thousands of Dth)
% %
2001 2000 Change 2001 2000 Change
--------- --------- ------ ------- ------- ------
Regulated:
Residential $407,122 $320,462 27.0 39,758 41,104 (3.3)
Commercial 120,228 87,024 38.2 12,040 12,167 (1.0)
Industrial 2,728 1,831 49.0 325 321 1.2
--------- --------- ------ ------- ------- -----
Regulated Total to
Ultimate Consumers 530,078 409,317 29.5 52,123 53,592 (2.7)
Transportation of
Customer-Owned Gas 41,427 46,460 (10.8) 93,861 104,690 (10.3)
Miscellaneous 18,703 6,800 175.0 8 599 (98.7)
--------- --------- ------ -------- -------- ------
Total Regulated 590,208 462,577 27.6 145,992 158,881 (8.1)
Unregulated:
Wholesale & Retail 62,576 44,553 40.5 10,123 12,484 (18.9)
--------- --------- ------ -------- -------- ------
Total $652,784 $507,130 28.7 156,115 171,365 (8.9)
========= ========= ====== ======== ======== ======
Unregulated gas salesdecreased 2.4 million Dth or 18.9 percent in the first nine months of 2001 from the comparable period in 2000. Wholesale sales decreased 3.0 million Dth as a result of lower trading activity due to increased market volatility. This was partially offset by an increase in retail sales of 0.6 million Dth due to increased sales activity. Despite the decrease in sales,unregulated gas revenues increased $18.0 million or 40.5 percent in the first nine months of 2001 from the comparable period in 2000 due to higher gas commodity prices during the period.
Operating Expenses
Holdings’fuel for electric generation and electricity purchased, which increased $70.8 million, is explained by Niagara Mohawk's activity, as well as an increase in unregulated electric supply costs of $1.6 million or 0.4 percent in the first nine months of 2001, primarily due to increased sales requirements.
Nine Months Ended September 30,
(Niagara Mohawk only)
GWh Cost (millions) Cents/Kwh
------------------------ ----------------------- ------------
2001 2000 % Chg 2001 2000 % Chg 2001 2000
---- ---- ----- ---- ---- ----- ---- ----
Regulated Fuel for Electric Generation:
Oil and Natural Gas 115 461 (75.1) $ 5.2 $ 21.1 (75.4) 4.5 4.6
Nuclear 5,753 5,838 (1.5) 25.8 27.0 (4.4) 0.4 0.5
------- ------- ------ ------- ------- ------ ----- -----
Total electric generation 5,868 6,299 (6.8) 31.0 48.1 (35.6) 0.5 0.8
------- ------- ------ ------- ------- ------ ----- -----
Regulated Electricity Purchased:
IPPs:
Capacity - - - 9.7 9.8 (1.0) - -
Energy and taxes 2,801 3,833 (26.9) 154.1 228.0 (32.4) 5.5 5.9
------- ------- ------ ------- ------- ------ ----- -----
Total IPP purchases 2,801 3,833 (26.9) 163.8 237.8 (31.1) 5.8 6.2
------- ------- ------ ------- ------- ------ ----- -----
Fossil/Hydro PPAs:
Capacity - - - 19.6 33.2 (41.0) - -
Energy and taxes 1,973 2,662 (25.9) 64.4 74.6 (13.7) 3.3 2.8
------- ------- ------ ------- ------- ------ ----- -----
Total Fossil/Hydro purchases 1,973 2,662 (25.9) 84.0 107.8 (22.1) 4.3 4.0
------- ------- ------ ------- ------- ------ ----- -----
NYISO - energy purchases 11,071 7,021 57.7 535.8 339.6 57.8 4.8 4.8
NYISO - ancillary charges - - - 32.7 47.5 (31.2) - -
Other purchases 5,939 6,547 (9.3) 100.3 106.2 (5.6) 1.7 1.6
Swap payments - - - 51.1 53.7 (4.8) - -
------- ------- ------ ------- ------- ------ ----- -----
Sub-total regulated purchases 21,784 20,063 8.6 967.7 892.6 8.4 4.4 4.4
------- ------- ------ ------- ------- ------ ----- -----
Deferral - - - (11.5) (22.7) (49.3) - -
------- ------- ------ ------- ------- ------ ----- -----
Total regulated purchases 21,784 20,063 8.6 956.2 869.9 9.9 4.4 4.3
------- ------- ------ ------- ------- ------ ----- -----
Total generated and purchased 27,652 26,362 4.9 987.2 918.0 7.5 3.6 3.5
Losses/Niagara Mohawk use 598 2,125 (71.9) - - - - -
------- ------- ------ ------- ------- ------ ----- -----
27,054 24,237 11.6 $987.2 $918.0 7.5 3.6 3.8
======= ======= ====== ======= ======= ====== ===== =====
Niagara Mohawk’selectricity purchased increased $86.3 million or 9.9 percent in the first 9 months of 2001. The NYISO purchases were higher due to an increase in the quantity purchased. IPP purchases were lower due to a decrease in hydro IPP purchases as a result of a reduction in water flow. The first nine months of 2001 was a drier season as compared to the same period in 2000. These IPP hydro purchases have a higher cost per Kwh than market prices. Niagara Mohawk is required to purchase 100 percent of the output of these plants, in accordance with the hydro IPP contracts. The change in the deferral for electricity purchased is due to the regulatory treatment of the hydro PPA as discussed in Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, Item 8. Financial Statements and Supplementary Data - - Note 2. Rate and Regulatory Issues and Contingencies, “Deferred Loss on the Sale of Assets.”
Niagara Mohawk has entered into financial agreements with IPP Parties in connection with the MRA and with buyers of its previously owned coal and oil/gas fired facilities. The swap payments included in the Regulated Electric Fuel and Purchased Power Costs table are measured as the difference between the specified contract price and the market price of electricity, relative to respective notional quantities of electricity. In addition, the swap payments reflect the NYMEX gas futures contracts and fixed for floating basis swaps that Niagara Mohawk entered into to hedge the escalation in the natural gas price component of six IPP indexed swap contracts. Under Power Choice, Niagara Mohawk bears the risk of increases in the indexed contract prices until August 31, 2001. However, Niagara Mohawk believes that the Power Choice prices for the payments under the IPP, Huntley, Dunkirk and Albany swaps are, in aggregate, sufficient to recover the expenditures through August 31, 2001. Thereafter, changes in prices will be borne by customers. See Holdings and Niagara Mohawk’s combined Form 10-K for fiscal year ended December 31, 2000, Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk - “Commodity Price Risk” and Item 8. Financial Statements and Supplementary Data - Note 9. Fair Value of Financial and Derivative Financial Instruments, “Swap Contracts Regulatory Asset” and “Derivative Hedging Instruments.”
Niagara Mohawk’sfuel for electric generation decreased $17.1 million as compared to the first 9 months in 2000 primarily as a result of the sale of the Roseton Steam Station in the first quarter 2001.
Holdings’ gas purchasedexpensereflects the increase in Niagara Mohawk’s gas purchased expense of $124.2 million discussed below, as well as an increase of $12.0 million in unregulated gas purchased costs in the first 9 months of 2001 primarily as a result of higher natural gas prices.
Despite a decrease in regulated gas sales, Niagara Mohawk’sgas purchased expense increased $124.2 million in the first 9 months of 2001 as a result of higher natural gas prices.
Other operation and maintenance expenses for both Holdings and Niagara Mohawk have increased in the first 9 months of 2001 as compared to the same period in 2000, primarily as a result of an increase in transmission expense of $37.0 million in part due to TCCs purchased through the auction process conducted by the NYISO, an increase in bad debt expense of $6.3 million which reflects the impact of the higher natural gas prices being passed on to customers, a higher systems benefit charge of $15.3 million, and a higher management incentive accrual of $7.5 million. The systems benefits charge and the TCC expense are both offset in electric revenues. The incremental merger related costs for the first 9 months of 2001 were approximately $2.8 million. In addition, Niagara Mohawk received insurance proceeds and disaster relief associated with the 1998 ice storm restoration effort of $29.9 million in the third quarter 2000.
The decrease inother taxes for both Holdings and Niagara Mohawk is due to an increase in GRT credits ($27.3 million) received due to an increase in the customers in Niagara Mohawk’s service territory that participate in New York State’s Power for Jobs program.
In the first 9 months of 2001, Niagara Mohawk recorded a non-cash write-off of $123 million before tax which is reflected on thedisallowed nuclear investment costsline item on the consolidated statements of income in accordance with the PSC Order approving the sale of the nuclear assets. (See Item 1. Financial Statements Note 3. Rate and Regulatory Issues and Contingencies - “Deferred loss on the sale of assets,” for a further discussion of the accounting and ratemaking treatment related to the sale of the nuclear assets).
Holdings and Niagara Mohawk’s other deductionswere higher in the first 9 months of 2001 as compared to the same period in 2000 primarily due to service reliability incentive penalties of $4.6 million for the rate year ended August 31, 2001, partially offset by the receipt of multi-tax refunds from a previously owned subsidiary of $3.9 million for tax periods prior to 1995.
Theimpairment charge on investment of $44.0 million was the result of Holdings’ assessment of its investment in Telergy, Inc., a development stage telecommunications company.
Holdings and Niagara Mohawk’s interest charges decreased by $31.6 million mainly due to the repayment of debt during 2000 and 2001.
The decrease in Holdings and Niagara Mohawk’sincome taxes of approximately $118.7 million and $115.0 million, respectively, is due primarily to the recording of previously deferred investment tax credits related to the sale of the nuclear assets of $79.7 million and the recording of the tax benefit of $43.1 million related to the non-cash write-off of $123 million of disallowed nuclear investment costs. This was partially offset by an increase of income tax expense due to changes in the estimate of the percentage allocation of income taxes to the third quarter 2001 as compared to the same period in 2000. As pre-tax income changes, the percentage relationship of the flow-through items to pre-tax income will also change.
Holdings recorded acumulative effect for a change in accounting principleof $19.7 million, net of income taxes of $6.9 million related to the adoption by Niagara Mohawk Energy of SFAS No. 133. (See Item 1. Financial Statements - Note.1. Summary of Significant Accounting Policies - “Derivatives and Hedging Activities”).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no material changes in Holdings market risk or market risk strategies during the nine months ended September 30, 2001. For a detail discussion of market risk, see Holdings and Niagara Mohawk’s combined Form 10-K for fiscal period ended December 31, 2000, Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk. See Item 1. Financial Statements - Note 4. Segment Information, for a discussion of the potential sale of Niagara Mohawk Energy’s energy marketing business. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Results of Operations,” for discussion of the recognition of an impairment charge of Holdings’ entire investment in Telergy, Inc.
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
PART II
ITEM 1. LEGAL PROCEEDINGS
DEC Air Pollution Notice of Violation
On May 25, 2000, the DEC issued an air pollution notice of violation to Niagara Mohawk regarding the operation of its two formerly owned coal-fired generation plants (Huntley and Dunkirk). The notice of violation was also issued to NRG Energy, Inc. (“NRG”), the current owner and operator of both plants. The notice alleges violations of the federal Clean Air Act and the New York State Environmental Conservation Law resulting from the alleged failure of the companies to obtain permits for plant modifications and the alleged failure to install air pollution control equipment. While no specific relief was sought in the notice of violation, the DEC and the New York State Attorney General have indicated in meetings with Niagara Mohawk and NRG that they will be seeking substantial fines against Niagara Mohawk and NRG as well as the imposition of pollution controls. The New York State Attorney General has also indicated that they will be pursuing mitigation of alleged environmental harm. It is Niagara Mohawk’s position that the cost of pollution controls should be borne by NRG.
In May 2001, the New York State Attorney General advised Niagara Mohawk and NRG of its intent to file suit, alleging that the plants are in violation of the federal Clean Air Act. However, there has been no action from the Attorney General to date.
On July 13, 2001, Niagara Mohawk filed a declaratory judgment action against NRG in New York State Supreme Court. Niagara Mohawk is seeking a declaratory judgment that NRG is responsible for any control upgrades and mitigation resulting from the above-referenced enforcement action. The litigation is presently proceeding to discovery.
Niagara Mohawk is unable to predict whether or not the results of this enforcement action will have an adverse material effect on its financial position and results of operation or whether Niagara Mohawk’s action against NRG will be successful.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10-1 - Amendment 2 to the Deferred Compensation Plan dated August 17, 2001
Exhibit 10-2 - Amendment 2 to the Long Term Incentive Plan dated August 17, 2001
Exhibit 10-3 - Amendment 2 to the Deferred Stock Unit Plan for Outside Directors dated August 17, 2001
Exhibit 10-4 - CEO Special Award Plan
Exhibit 10-5 - Amendment 2 to CEO Special Award Program dated August 17, 2001
Exhibit 10-6 - Amendment 1 to 1995 Stock Incentive Plan dated August 17, 2001
Exhibit 10-7 - Amendment 2 to 1995 Stock Incentive Plan dated August 17, 2001
Exhibit 10-8 - Amendment to the Supplemental Executive Retirement Plan dated August 17, 2001
Exhibit 10-9 - PSC Opinion and Order regarding approval of the sale of Nine Mile Point Nuclear Station Units No. 1 and No. 2
Exhibit 10-10 - Merger Rate Agreement reached among Niagara Mohawk, the PSC staff and other parties, filed with the PSC on October 11, 2001
Exhibit 11 - Computation of the Average Number of Shares of Common Stock Outstanding for the Three Months Ended September 30, 2001 and 2000
Exhibit 15 - Accountants’ Acknowledgement Letter
In accordance with Paragraph 4(iii) of Item 601(b) of Regulation S-K, the Company agrees to furnish to the Securities and Exchange Commission, upon request, a copy of the agreements comprising the $804 million senior debt facility that the Company completed with a bank group on June 1, 2000. The total amount of long-term debt authorized under such agreement does not exceed ten percent of the total consolidated assets of the Company and its subsidiaries.
Exhibit 99 - Press release of Holdings issued on November 13, 2001 related to its third quarter earnings.
(b) Reports on Form 8-K:
Niagara Mohawk Holdings, Inc.
| | Form 8-K Reporting Date - November 7, 2001
Items reported: |
| (1) | Item 2. Disposition of Nuclear Assets.
Registrant disposed of its nuclear assets. |
| (2) | Item 5. Other Events.
Registrant filed a press release relating to the sale of its nuclear generation assets. |
| (3) | Item 7. Financial Statements and Exhibits.
Registrant provided unaudited pro forma financial information on the sale of its nuclear assets. |
Niagara Mohawk Power Corporation
| | Form 8-K Reporting Date - September 25, 2001
Items reported: |
| (1) | Item 5. Other Events.
Registrant entered into an underwriting agreement. |
| (2) | Item 7. Financial Statements and Exhibits.
Exhibit 1.1 - Underwriting Agreement dated September 25, 2001 by and between Niagara Mohawk and Salomon Smith Barney, Inc.
Exhibit 1.2 - Form of Second Supplemental Indenture between Niagara Mohawk and The Bank of New York as Trustee. |
| | Form 8-K Reporting Date - November 7, 2001
Items reported: |
| (1) | Item 2. Disposition of Nuclear Assets.
Registrant disposed of its nuclear assets. |
| (2) | Item 5. Other Events.
Registrant filed a press release relating to the sale of its nuclear generation assets. |
| (3) | Item 7. Financial Statements and Exhibits.
Registrant provided unaudited pro forma financial information on the sale of its nuclear assets. |
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
NIAGARA MOHAWK HOLDINGS, INC.
(Registrant)
Date: November 14, 2001 By: /s/ Steven W. Tasker
Steve W. Tasker
Vice President–Controller and
Principal Accounting Officer
NIAGARA MOHAWK POWER CORPORATION
(Registrant)
Date: November 14, 2001 By: /s/ Steven W. Tasker
Steve W. Tasker
Vice President–Controller and
Principal Accounting Officer
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
EXHIBIT INDEX
| | 10-1 | Amendment 2 to the Deferred Compensation Plan
August 17, 2001 |
| | 10-2 | Amendment 2 to the Long Term Investment Plan
August 17, 2001 |
| | 10-3 | Amendment 2 to the Outside Directors Deferred Stock Unit Plan
August 17, 2001 |
| | 10-4 | CEO Special Award Program |
| | 10-5 | Amendment 2 to CEO Special Award Program
August 17, 2001 |
| | 10-6 | Amendment 1 to the 1995 Stock Incentive Plan
August 17, 2001 |
| | 10-7 | Amendment 2 to the 1995 Stock Incentive Plan
August 17, 2001 |
| | 10-8 | Amendment to the Supplemental Executive Retirement Plan
August 17, 2001 |
| | 10-9 | PSC Opinion and Order regarding approval of the sale of Nine Mile Point
Nuclear Station Units No. 1 and No. 2 |
| | 10-10 | Merger Rate Agreement reached among Niagara Mohawk, the PSC Staff
and other parties, filed with the PSC on October 11, 2001 |
| | 11 | Niagara Mohawk Holdings, Inc.
Computation of the Average Number of Shares
of Common Stock Outstanding for the Three
Months and Nine Months Ended September 30, 2001 and 2000 |
| | 15 | Accountants’ Acknowledgement Letter |
| | 99 | Press release of Holdings issued on November 13, 2001
relating to its third quarter earnings |
Exhibit 11
NIAGARA MOHAWK HOLDINGS, INC.AND SUBSIDIARY COMPANIES
Computation of the Average Number of Shares of Common Stock Outstanding
For the Three Months and Nine Months Ended September 30, 2001 and 2000
(4)
Average Number of
Shares Outstanding
As Shown on the
Consolidated
(1) (2) (3) Statement of
Shares of Number of Share Income
Common Days Days (3 divided by number
Stock Outstanding (2 x 1) of Days in Period)
- --------------------------------------------------------------------------------------------------------
For the Three Months Ended September 30:
----------------------------------------
July 1 - September 30, 2001 160,239,818 92 14,742,063,256 160,239,818
============ ============== ===========
July 1 - September 30, 2000 164,399,547 92 15,124,758,324
Shares repurchased by 4,159,729 (a) 312,644,108
Niagara Mohawk ------------ --------------
160,239,818 14,812,114,216 161,001,241
============ ============== ===========
For the Nine Months Ended September 30:
---------------------------------------
January 1 - September 30, 2001 160,239,818 273 43,745,470,314 160,239,818
============ ============== ===========
January 1 - September 30, 2000 177,364,863 274 48,597,972,462
Shares repurchased by 17,125,045 (a) 2,077,788,412
Niagara Mohawk ------------ --------------
160,239,818 46,520,184,050 169,781,694
============ ============== ===========
| | (a) | Number of days outstanding not shown as shares represent an accumulation of purchases of Holdings’ common stock by Niagara Mohawk during 2000. Share days for the shares repurchased are based on the total nuber of days each share was repurchased during 2000. |
| | Note: | Earnings per share calculated on both a primary and fully diluted basis are the same due to the effects of rounding. |
Exhibit 15
November 14, 2001
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that our report dated November 14, 2001 on our review of interim financial information of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation as of and for the period ended September 30, 2001 and included in Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power Corporation combined quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in Niagara Mohawk Holdings, Inc. Registration Statement on Form S-8 (No. 333-13781) and in the Registration Statement on Form S-3 (No. 333-55923); and incorporated by reference in Niagara Mohawk Power Corporation Registration Statements on Form S-8 (Nos. 33-36189 and 33-42771) and in the Registration Statements on Form S-3 (Nos. 33-50703, 33-54827 and 33-55546) and in the Registration Statement on Form S-4 (No.333-49769).
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
