SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 - --------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-2987. NIAGARA MOHAWK POWER CORPORATION - -------------------------------- (Exact name of registrant as specified in its charter) State of New York 15-0265555 - ------------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 Erie Boulevard West Syracuse, New York 13202 (Address of principal executive offices) (Zip Code) (315) 474-1511 Registrant's telephone number, including area code Indicate by check mark whether the 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $1 par value, outstanding at July 31, 1997 - 144,419,351 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES FORM 10-Q - For the Quarter Ended June 30, 1997 INDEX - ----- PART I. FINANCIAL INFORMATION Glossary of Terms Item 1. Financial Statements. a) Consolidated Statements of Income - Three Months and Six Months ended June 30, 1997 and 1996 b) Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 c) Consolidated Statements of Cash Flows - Six Months ended June 30, 1997 and 1996 d) Notes to Consolidated Financial Statements e) Review by Independent Accountants f) 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. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Events. Item 6. Exhibits and Reports on Form 8-K. Signature Exhibit Index NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- GLOSSARY OF TERMS - ----------------- TERM DEFINITION - ---- ---------- Dth Dekatherms FAC Fuel Adjustment Clause FERC Federal Energy Regulatory Commission GAAP Generally Accepted Accounting Principles GRT New York State Gross Receipts Tax GWh Gigawatt-hours IPP Independent Power Producer KWh Kilowatt-hours MWs Megawatts MRA Master Restructuring Agreement NRC Nuclear Regulatory Commission NYPA New York Power Authority PPA Power Purchase Agreement PRP Potentially Responsible Party PSC New York State Public Service Commission QF Qualifying Facility SFAS Statement of Financial Accounting Standards No. 71 No. 71 "Accounting for the Effects of Certain Types of Regulation" SFAS Statement of Financial Accounting Standards No. 101 No. 101 "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71" SFAS Statement of Financial Accounting Standards No. 121 No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" SFAS Statement of Financial Accounting Standards No. 128 No. 128 "Earnings per Share" Unit 1 Nine Mile Point Nuclear Station Unit No. 1 Unit 2 Nine Mile Point Nuclear Station Unit No. 2 PART 1. FINANCIAL INFORMATION - ----------------------------- ITEM 1. FINANCIAL STATEMENTS. - ----------------------------- NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED) - ----------------------------------------------- THREE MONTHS ENDED JUNE 30, --------------------------- 1997 1996 --------- ---------- (In thousands of dollars) OPERATING REVENUES: Electric $ 804,537 $ 804,457 Gas 141,161 156,314 ---------- ---------- 945,698 960,771 ---------- ---------- OPERATING EXPENSES: Fuel for electric generation 35,192 36,937 Electricity purchased 316,998 301,057 Gas purchased 62,924 80,557 Other operation and maintenance expense 199,792 200,343 Depreciation and amortization 84,799 82,142 Federal and foreign income taxes 28,032 29,392 Other taxes 115,289 116,980 ---------- ---------- 843,026 847,408 ---------- ---------- OPERATING INCOME 102,672 113,363 ---------- ---------- OTHER INCOME AND (DEDUCTIONS): Allowance for other funds used during construction 1,197 794 Federal and foreign income taxes 1,150 857 Other items (net) 5,072 6,731 ---------- ---------- 7,419 8,382 ---------- ---------- INCOME BEFORE INTEREST CHARGES 110,091 121,745 ---------- ---------- INTEREST CHARGES: Interest on long-term debt 68,929 68,597 Other interest 1,405 789 Allowance for borrowed funds used during construction (992) (633) ---------- ---------- 69,342 68,753 ---------- ---------- NET INCOME 40,749 52,992 Dividends on preferred stock 9,409 9,532 ---------- ---------- BALANCE AVAILABLE FOR COMMON STOCK $ 31,340 $ 43,460 ========== ========== Average number of shares of common stock outstanding (in thousands) 144,391 144,337 Balance available per average share of common stock $ .22 $ .30 SIX MONTHS ENDED JUNE 30, ------------------------- 1997 1996 --------- ---------- (In thousands of dollars) OPERATING REVENUES: Electric $1,681,906 $1,655,594 Gas 427,624 468,240 ---------- ---------- 2,109,530 2,123,834 ---------- ---------- OPERATING EXPENSES: Fuel for electric generation 72,657 86,501 Electricity purchased 645,801 588,365 Gas purchased 211,555 270,552 Other operation and maintenance expense 406,457 409,365 Depreciation and amortization 169,021 164,206 Federal and foreign income taxes 100,671 86,015 Other taxes 241,398 247,458 ---------- ---------- 1,847,560 1,852,462 ---------- ---------- OPERATING INCOME 261,970 271,372 ---------- ---------- OTHER INCOME AND (DEDUCTIONS): Allowance for other funds used during construction 2,636 1,202 Federal and foreign income taxes 5,312 4,661 Other items (net) 10,733 9,183 ---------- ---------- 18,681 15,046 ---------- ---------- INCOME BEFORE INTEREST CHARGES 280,651 286,418 ---------- ---------- INTEREST CHARGES: Interest on long-term debt 136,889 136,788 Other interest 2,173 2,171 Allowance for borrowed funds used during construction (2,182) (1,655) ---------- ---------- 136,880 137,304 ---------- ---------- NET INCOME 143,771 149,114 Dividends on preferred stock 18,808 19,151 ---------- ---------- BALANCE AVAILABLE FOR COMMON STOCK $ 124,963 $ 129,963 ========== ========== Average number of shares of common stock outstanding (in thousands) 144,390 144,335 Balance available per average share of common stock $ .87 $ .90 /TABLE NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------- ASSETS - ------ JUNE 30, 1997 (UNAUDITED) DECEMBER 31, 1996 ------------- ----------------- (In thousands of dollars) UTILITY PLANT: Electric plant $ 8,700,438 $ 8,611,419 Nuclear fuel 575,751 573,041 Gas plant 1,097,246 1,082,298 Common plant 312,558 292,591 Construction work in progress 259,280 279,992 ---------- ---------- Total utility plant 10,945,273 10,839,341 Less-Accumulated depreciation and amortization 4,056,261 3,881,726 ---------- ---------- Net utility plant 6,889,012 6,957,615 ---------- ---------- OTHER PROPERTY AND INVESTMENTS 238,837 257,145 ---------- ---------- CURRENT ASSETS: Cash, including temporary cash investments of $576,694 and $223,829, respectively 602,246 325,398 Accounts receivable (less allowance for doubtful accounts of $69,000 and $52,100, respectively) 311,961 373,305 Materials and supplies, at average cost: Coal and oil for production of electricity 18,919 20,788 Gas storage 23,687 43,431 Other 119,993 120,914 Prepaid taxes 57,428 11,976 Other 28,549 25,329 ---------- ---------- 1,162,783 921,141 ---------- ---------- REGULATORY ASSETS (NOTE 3): Regulatory tax asset 387,376 390,994 Deferred finance charges 239,880 239,880 Deferred environmental restoration costs (Note 2) 225,000 225,000 Unamortized debt expense 61,296 65,993 Postretirement benefits other than pensions 58,345 60,482 Other 189,188 206,352 ---------- ---------- 1,161,085 1,188,701 ---------- ---------- OTHER ASSETS 71,482 77,428 ---------- ---------- $ 9,523,199 $ 9,402,030 ========== ========== The accompanying notes are an integral part of these financial statements /TABLE NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------- CAPITALIZATION AND LIABILITIES - ------------------------------ JUNE 30, 1997 (UNAUDITED) DECEMBER 31, 1996 ------------- ----------------- (In thousands of dollars) CAPITALIZATION: COMMON STOCKHOLDERS' EQUITY: Common stock - $1 par value; authorized 185,000,000 shares; issued 144,390,619 and 144,365,214 shares, respectively $ 144,391 $ 144,365 Capital stock premium and expense 1,783,239 1,783,725 Retained earnings 782,445 657,482 ---------- ---------- 2,710,075 2,585,572 ---------- ---------- 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 222,000 and 240,000 shares, respectively 20,400 22,200 CUMULATIVE PREFERRED STOCK, AUTHORIZED 19,600,000 SHARES, $25 PAR VALUE: Non-redeemable (optionally redeemable), issued 9,200,000 shares 230,000 230,000 Redeemable (mandatorily redeemable), issued 2,764,005 and 2,864,005 shares, respectively 62,030 64,530 ---------- ---------- 522,430 526,730 ---------- ---------- Long-term debt 3,476,156 3,477,879 ---------- --------- TOTAL CAPITALIZATION 6,708,661 6,590,181 ---------- --------- CURRENT LIABILITIES: Long-term debt due within one year 48,054 48,084 Sinking fund requirements on redeemable preferred stock 8,870 8,870 Accounts payable 181,624 271,830 Payable on outstanding bank checks 20,913 32,008 Customers' deposits 16,415 15,505 Accrued taxes 91,496 4,216 Accrued interest 63,671 63,252 Accrued vacation pay 36,484 36,436 Other 53,874 52,455 ---------- ---------- 521,401 532,656 ---------- ---------- REGULATORY LIABILITIES (NOTE 3): Deferred finance charges 239,880 239,880 ---------- ---------- OTHER LIABILITIES: Accumulated deferred income taxes 1,359,476 1,331,913 Employee pension and other benefits 241,028 238,688 Deferred pension settlement gain 15,853 19,269 Unbilled revenues 19,981 49,881 Other 191,919 174,562 ---------- ---------- 1,828,257 1,814,313 ---------- ---------- COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 3): Liability for environmental restoration 225,000 225,000 ---------- ---------- $9,523,199 $9,402,030 ========== ========== The accompanying notes are an integral part of these financial statements /TABLE NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------- INCREASE (DECREASE) IN CASH (UNAUDITED) - --------------------------------------- SIX MONTHS ENDED JUNE 30, 1997 1996 ------------- ------------ (In thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 143,771 $ 149,114 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 169,021 164,206 Amortization of nuclear fuel 12,944 21,058 Provision for deferred income taxes 31,181 22,442 Decrease in net accounts receivable 31,444 38,490 Decrease in materials and supplies 22,166 13,067 Decrease in accounts payable and accrued expenses (80,179) (58,728) Increase in accrued interest and taxes 87,699 62,459 Changes in other assets and liabilities 12,558 11,206 ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 430,605 423,314 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction additions (115,825) (115,986) Nuclear fuel (2,710) (6,346) ---------- ---------- Acquisition of utility plant (118,535) (122,332) Decrease in materials and supplies related to construction 368 2,232 Decrease in accounts payable and accrued expenses related to construction (20,045) (14,682) Decrease in other investments 5,012 24,919 Other 5,538 (7,629) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (127,662) (117,492) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in long-term debt - 105,000 Net change in revolving credit agreements - (170,000) Reductions of preferred stock (4,300) (6,800) Reductions in long-term debt (3,300) (29,341) Dividends paid (18,808) (19,151) Other 313 (487) ---------- --------- NET CASH USED IN FINANCING ACTIVITIES (26,095) (120,779) ---------- --------- NET INCREASE IN CASH 276,848 185,043 Cash at beginning of period 325,398 153,475 ---------- ---------- CASH AT END OF PERIOD $ 602,246 $ 338,518 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $138,954 $141,743 Income taxes paid $47,116 $52,219 The accompanying notes are an integral part of these financial statements /TABLE NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Niagara Mohawk Power Corporation and subsidiary companies (the "Company"), in the opinion of management, has included adjustments (which include normal recurring adjustments) necessary for a fair statement of the results of operations for the interim periods presented. The consolidated financial statements for 1997 are subject to adjustment at the end of the year when they will be audited by independent accountants. The consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes for the years ended December 31, 1996, 1995 and 1994 included in the Company's 1996 Annual Report to Shareholders on Form 10-K. The Company'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, the Company's quarterly net income will generally fluctuate accordingly. Therefore, the earnings for the three-month and six-month periods ended June 30, 1997, should not be taken as an indication of earnings for all or any part of the balance of the year. At December 31, 1996, the Company discontinued application of regulatory accounting principles to the Company's fossil and hydro generation business. Accordingly, existing regulatory assets related to this business, amounting to approximately $103.6 million ($67.4 million after tax or 47 cents per share) were charged against 1996 income as an extraordinary non-cash charge. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128. SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and applies to companies with publicly held common stock. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statements for all entities with complex capital structures. In compliance with the requirements of this standard, the Company will adopt SFAS No. 128 in the fourth quarter of 1997. The Company does not expect that the adoption of SFAS No. 128 will have a significant impact on the reporting of EPS for the Company. However, the MRA entered into by the Company on July 9, 1997 to terminate, restate or amend IPP contracts is expected to result in the issuance of 46 million shares of common stock, representing approximately 25% of the anticipated fully-diluted outstanding common shares. These shares will be issued upon the closing of the MRA, which is contingent upon regulatory and other approvals. Certain amounts have been reclassified on the accompanying Consolidated Financial Statements to conform with the 1997 presentation. NOTE 2. CONTINGENCIES. ENVIRONMENTAL ISSUES: The public utility industry typically utilizes and/or generates in its operations a broad range of potentially hazardous wastes and by- products. The Company 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 assure compliance with such requirements. The Company is also currently conducting a program to investigate and restore, as necessary to meet current environmental standards, certain properties associated with its former gas manufacturing process and other properties which the Company has learned may be contaminated with industrial waste, as well as investigating identified industrial waste sites as to which it may be determined that the Company contributed. The Company 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. The Company is currently aware of 89 sites with which it has been or may be associated, including 45 which are Company-owned. With respect to non-owned sites, the Company may be required to contribute some proportionate share of remedial costs. Investigations at each of the Company-owned sites are designed to (1) determine if environmental contamination problems exist, (2) if necessary, determine the appropriate remedial actions required for site restoration 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. After site investigations are completed, the Company expects to determine site-specific remedial actions and to estimate the attendant costs for restoration. However, since technologies are still developing the ultimate cost of remedial actions may change substantially. 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; and the United States Environmental Protection Agency figure for average cost to remediate a site. Actual Company expenditures are dependent upon the total cost of investigation and remediation and the ultimate determination of the Company'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. The Company has denied any responsibility in certain of these PRP sites and is contesting liability accordingly. As a consequence of site characterizations and assessments completed to date and negotiations with PRP's, the Company has accrued a liability in the amount of $225 million, which is reflected in the Company's Consolidated Balance Sheets at June 30, 1997 and December 31, 1996. This liability represents the low end of the range of its share of the estimated cost for investigation and remediation. The potential high end of the range is presently estimated at approximately $850 million, including approximately $340 million in the unlikely event the Company is required to assume 100% responsibility at non-owned sites. In addition, the Company has recorded a regulatory asset representing the remediation obligations to be recovered from ratepayers. Where appropriate, the Company has provided notices of insurance claims to carriers with respect to the investigation and remediation costs for manufactured gas plant, industrial waste sites and sites for which the Company has been identified as a PRP. The Company has settled some of these claims and continues to pursue others, but is unable to predict what the final ratemaking disposition will be. TAX ASSESSMENTS: (See Form 10-Q for the quarter ended March 31, 1997, Part I, Item 1. Financial Statements - "Note 2. Contingencies - Tax assessments.") The Internal Revenue Service ("IRS") has conducted an examination of the Company's federal income tax returns for the years 1989 and 1990 and issued a Revenue Agents' Report. The IRS has raised an issue concerning the deductibility of payments made to IPPs in accordance with certain contracts that include a provision for a tracking account. A tracking account represents amounts that these mandated contracts required the Company to pay IPPs in excess of the Company's avoided costs, including a carrying charge. The IRS proposes to disallow a current deduction for amounts paid in excess of the avoided costs of the Company. Although the Company believes that any such disallowances for the years 1989 and 1990 will not have a material impact on its financial position or results of operations, it believes that a disallowance for these above-market payments for the years subsequent to 1990 could have a material adverse affect on its cash flows. To the extent that contracts involving tracking accounts are terminated or restated or amended under the MRA with IPPs as described in Note 3, then it is possible that the effects of any proposed disallowance would be mitigated. The Company is vigorously defending its position on this issue. The IRS has commenced its examination of the Company's federal income tax returns for the years 1991 through 1993. LITIGATION: In March 1993, Inter-Power of New York, Inc. ("Inter-Power"), filed a complaint against the Company and certain of its officers and employees in the Supreme Court of the State of New York, Albany County ("NYS Supreme Court"). Inter-Power alleged, among other matters, fraud, negligent misrepresentation and breach of contract in connection with the Company's alleged termination of a PPA in January 1993. The plaintiff sought enforcement of the original contract or compensatory and punitive damages in an aggregate amount that would not exceed $1 billion, excluding pre-judgment interest. In early 1994, the NYS Supreme Court dismissed two of the plaintiff's claims; this dismissal was upheld by the Appellate Division, Third Department of the NYS Supreme Court. Subsequently, the NYS Supreme Court granted the Company's motion for summary judgment on the remaining causes of action in Inter-Power's complaint. In August 1994, Inter-Power appealed this decision and on July 27, 1995, the Appellate Division, Third Department affirmed the granting of summary judgment as to all counts, except for one dealing with an alleged breach of the PPA relating to the Company's having declared the agreement null and void on the grounds that Inter-Power had failed to provide it with information regarding its fuel supply in a timely fashion. This one breach of contract claim was remanded to the NYS Supreme Court for further consideration. Discovery on this one breach of contract claim is currently in progress. The Company is unable to predict the ultimate disposition of this lawsuit. However, the Company believes it has meritorious defenses and intends to defend this lawsuit vigorously, but can neither provide any judgment regarding the likely outcome nor provide any estimate or range of possible loss. Accordingly, no provision for liability, if any, that may result from this lawsuit has been made in the Company's financial statements. NOTE 3. RATE AND REGULATORY ISSUES AND CONTINGENCIES. The Company's financial statements conform to GAAP, as applied to regulated public utilities and reflect the application of SFAS No. 71. As discussed in Note 1, the Company discontinued application of regulatory accounting principles to the Company's fossil and hydro generation business. Substantively, SFAS No. 71 permits a public utility regulated on a cost-of-service basis to defer certain costs when authorized to do so by the regulator which would otherwise be charged to expense. These deferred costs are known as regulatory assets, which in the case of the Company are approximately $921 million, net of approximately $240 million of regulatory liabilities at June 30, 1997. These regulatory assets are probable of recovery. The portion of the $921 million which has been allocated to the nuclear generation and electric transmission and distribution business is approximately $775 million, which is net of approximately $240 million of regulatory liabilities. Regulatory assets allocated to the rate-regulated gas distribution business are $146 million. Generally, regulatory assets and liabilities were allocated to the portion of the business that incurred the underlying transaction that resulted in the recognition of the regulatory asset or liability. The allocation methods used between electric and gas are consistent with those used in prior regulatory proceedings. The Company has concluded that the termination or restructuring of IPP contracts and implementation of PowerChoice, or a similar proposal, is the probable outcome of negotiations that have taken place since the PowerChoice announcement. Under PowerChoice, the separated non-nuclear generation business would no longer be rate-regulated on a cost-of-service basis and, accordingly, regulatory assets related to the non-nuclear power generation business, amounting to approximately $103.6 million ($67.4 million after tax or 47 cents per share) at December 31, 1996, were charged against income as an extraordinary non-cash charge. Of the remaining electric business, under PowerChoice, the Company expects that its nuclear generation and electric transmission and distribution business would continue to be rate-regulated on a cost-of-service basis and, accordingly, the Company would continue to apply SFAS No. 71 to these businesses. PowerChoice and the termination or restructuring costs of IPP contracts would result in rates that reflect reduced or stable costs that the Company believes would meet the Governor's stated economic objectives as to energy prices in New York State as well as the PSC's objectives (see Form 10-K for fiscal year ended December 31, 1996, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "PSC Competitive Opportunities Proceeding - Electric"). Therefore, the Company expects the PSC would continue to apply the concept of cost-of-service based rates to the nuclear generation and transmission and distribution business. The Company expects that these cost-of-service based rates could be charged to and collected from customers without causing unanticipated reduction in demand. The Company proposes, and believes it is probable that the PSC would approve, deferral and recovery of the termination or restructuring costs of IPP contracts over a period not to exceed ten years. To the extent that deferral of the termination or restructuring cost would not be approved by the PSC and the Company determines, nonetheless, to effectuate the termination or restructuring, that amount would be charged to expense, which could have a material adverse effect on the financial condition, and in the year of the write-off, the results of operations of the Company. Furthermore, the Company does not expect the PSC to provide a specific return on the regulatory asset associated with IPP termination or restructuring costs. SFAS No. 71 does not require the Company to earn a return on regulatory assets in assessing its applicability. The Company believes that the prices it would charge for electric service, assuming no reduction in demand, including a non-bypassable transition charge, over the ten-year period would be sufficient to recover the regulatory asset for the termination or restructuring costs of IPP contracts and provide recovery of and a return on the remainder of its regulated assets, as appropriate. The Company expects that the reported amounts of future net income would be adversely affected by a lack of a return on the regulatory asset associated with the IPP termination or restructuring and the expected lower returns of the unregulated non- nuclear generating business. In the year of implementation of PowerChoice, it is likely that the Company will have a nominal amount of either net income or a loss. The Company has been made aware of a request by the SEC Chief Accountant to the Public Utilities Committee of the American Institute of Certified Public Accountants to develop guidance on applying SFAS No. 101. The Emerging Issues Task Force ("EITF") 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" in July 1997. The Task Force reached the following conclusions: (1) the future recognition of regulatory assets for the portion of the business that no longer qualifies for application of SFAS No. 71 depends on the regulators' treatment of the recovery of those costs and other stranded assets from cash flows of other aspects of the business still considered to be regulated and (2) a utility should discontinue the application of SFAS No. 71 when the legislative and regulatory plan has been enacted, including transition plans to a competitive environment and the handling of stranded costs subject to future rate recovery. The Company does not believe that the conclusions reached in this EITF will have a significant impact on its current accounting and disclosure of SFAS No. 71 for the Company. With the probable implementation of PowerChoice, specifically the separation of non-nuclear generation as an entity that would no longer be cost-of-service regulated, the Company is required to assess the carrying amounts of its long-lived assets in accordance with SFAS No. 121. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company is required to estimate future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The Company has determined that there is no impairment of its non-nuclear generating assets. In certain instances, the Company has considered opportunities to invest in changes in fuel sources that are technologically available to improve cash flow. In one instance, the Company has considered the value of relocating a unit to a region where demand is greater. To the extent an impairment loss could not be otherwise avoided, the Company believes it would be able to recover the loss through the non-bypassable transition fee proposed in PowerChoice. In reaching conclusions as to impairment of non-nuclear generating assets, the Company must make significant estimates and judgments as to the future price of electricity, capacity factors and cost of operation of each of its generating units and, where necessary, the fair market value of each unit. As PowerChoice is implemented and generation markets become open to competition, these estimates and judgments may change. An update of the SFAS No. 121 assessment must be prepared when conditions occur which in the opinion of management may have impaired the value of these assets. As described in Form 10-K for fiscal year ended December 31, 1996, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Announced Agreement-in-Principle to Terminate or Restructure 44 IPP Contracts" and Form 8-K dated July 9, 1997, Item 5. Other Events, the conclusion of the termination or restatement or amendment of IPP contracts, and closing of the financing necessary to implement such termination or restatement or amendment, as well as implementation of PowerChoice, is subject to a number of contingencies. In the event the Company is unable to successfully bring these events to conclusion, it would pursue a traditional rate request. However, notwithstanding such a rate request, it is likely that application of SFAS No. 71 would be discontinued. The resulting after-tax charges against income, based on regulatory assets and liabilities associated with the nuclear generation and transmission and distribution businesses as of June 30, 1997, would be approximately $504 million or $3.49 per share. Various requirements under applicable law and regulations and under corporate instruments, including those with respect to issuance of debt and equity securities, payment of common and preferred dividends, the continued availability of the Company's senior debt facility and certain types of transfers of assets could be adversely impacted by any such write-downs. NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES REVIEW BY INDEPENDENT ACCOUNTANTS The Company's independent accountants, Price Waterhouse LLP, have made limited reviews (based on procedures adopted by the American Institute of Certified Public Accountants) of the unaudited Consolidated Balance Sheet of Niagara Mohawk Power Corporation and Subsidiary Companies as of June 30, 1997 and the unaudited Consolidated Statements of Income for the three-month and six- month periods ended June 30, 1997 and 1996 and the unaudited Consolidated Statements of Cash Flows for the six-months ended June 30, 1997 and 1996. The accountants' report regarding their limited reviews of the Form 10-Q of Niagara Mohawk Power Corporation and its subsidiaries appears on the next page. That report does not express an opinion on the interim unaudited consolidated financial information. Price Waterhouse 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, 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 and the liability provisions of Section 11 of such Act do not apply. PRICE WATERHOUSE LLP ONE MONY PLAZA SYRACUSE NY 13202 TELEPHONE 315-474-6571 REPORT OF INDEPENDENT ACCOUNTANTS August 7, 1997 To the Stockholders and Board of Directors of Niagara Mohawk Power Corporation 300 Erie Boulevard West Syracuse, NY 13202 We have reviewed the condensed consolidated balance sheet of Niagara Mohawk Power Corporation and its subsidiaries as of June 30, 1997, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 1997 and 1996 and of cash flows for the six months ended June 30, 1997 and 1996. These financial statements are the responsibility of the Company's management. 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 condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1996, and the related consolidated statements of income, of retained earnings and of cash flows for the year then ended (not presented herein), and in our report dated March 13, 1997, we expressed an unqualified opinion (containing explanatory paragraphs with respect to the Company's application of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" [SFAS No. 71] for its nuclear generation, electric transmission and distribution and gas businesses and discontinuation of SFAS No. 71 for its non- nuclear generation business in 1996). In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet To the Stockholders and Board of Directors August 7, 1997 Page 2 from which it has been derived. As discussed in Note 3, the Company believes that it continues to meet the requirements for application of SFAS No. 71 for its nuclear generation, electric transmission and distribution and gas businesses. In the event that the Company is unable to complete the termination or restructuring of independent power producer contracts and implement PowerChoice, this conclusion could change in 1997 and beyond, resulting in material adverse effects on the Company's financial condition and results of operations. /s/ Price Waterhouse LLP - ------------------------ PRICE WATERHOUSE LLP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL CHALLENGES The Company faces significant challenges in its efforts to maintain its financial condition in the face of expanding competition. While utilities across the nation must address these concerns to varying degrees, the Company believes that it is more financially vulnerable because of its large industrial customer base, an oversupply of high-cost mandated power purchases from IPPs, an excess supply of wholesale power at relatively low prices, a high tax burden, a stagnant economy in the Company's service territory and significant investments in nuclear plants. Moreover, solving the problems the Company faces, including the implementation of PowerChoice, requires the cooperation and agreement of third parties outside the Company's control and, thus, limits the options available to solve those problems and keep the Company financially viable. MASTER RESTRUCTURING AGREEMENT WITH 16 IPPS TO TERMINATE, RESTATE OR AMEND 29 CONTRACTS AND REVISED POWERCHOICE PROPOSAL On July 9, 1997, the Company entered into the MRA with 16 IPPs who have 29 power purchase agreements with the Company. Pursuant to the MRA, such power purchase agreements will be terminated, restated or amended, in exchange for an aggregate of $3,555,000,000 in cash, $50,000,000 in short term notes or cash (at the Company's option), 46 million shares of the Company's common stock and certain fixed price swap contracts. (See Exhibit 99.3 of Form 8-K, filed July 10, 1997 for a schedule setting forth the quantities and prices for the restated or amended contracts.) The closing of the MRA is conditioned upon, among other things, the Company and the IPPs negotiating their individual restated and amended contracts, the receipt of all regulatory approvals, the receipt of all consents by third parties necessary for the transactions contemplated by the MRA (including the termination of the existing power purchase contracts and the termination or amendment of all related third party agreements), the IPPs entering into new third party arrangements which will enable each IPP to restructure its projects on a reasonably satisfactory economic basis, the Company having completed all necessary financing arrangements and the Company and the IPPs having received all necessary approvals from their respective boards of directors, shareholders and partners. While one or more IPPs may under certain circumstances terminate the MRA with respect to itself, the Company's obligation to close the MRA is subject to its determination that as a result of any such terminations the benefits anticipated to be received by the Company pursuant to the MRA have not been materially and adversely affected. The foregoing is qualified in its entirety by the text of the MRA, a copy of which was filed as Exhibit 10.28 in the Company's Form 8-K, on July 10, 1997. The MRA formalizes an agreement in principle announced March 10 between the Company and 19 developers representing 44 contracts. Since then, the Company withdrew its offer with respect to a subgroup of three developers representing 15 hydro contracts. Because the agreement in principle called for the subgroup to be compensated solely through restructured contracts, their departure will not change the amount of cash and stock in the overall agreement, nor will it materially impact the cost reductions associated with the agreement. The Company hopes to achieve settlements with the subgroup separately. On July 23, 1997, the Company filed with the PSC an updated offer of settlement to its PowerChoice proposal which incorporates the terms of the MRA. The Company is unable to predict the outcome of this matter. PSC COMPETITIVE OPPORTUNITIES PROCEEDING - ELECTRIC (See Form 10-K for fiscal year ended December 31, 1996, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "PSC Competitive Opportunities Proceeding - Electric" and Form 10-Q for the quarter ended March 31, 1997, Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - "PSC Competitive Opportunities Proceeding - Electric.") On May 19, 1997, the PSC issued an Order establishing regulatory policies for the provision of retail energy services. The Order establishes eligibility requirements for Energy Service Companies; provides for certain consumer protections; requires certain provisions to be reflected in the utilities retail access tariffs; and establishes, for now, the responsibility of the utility to be the provider of last resort. On June 10, 1997, the PSC ordered a multi-utility, retail access pilot program that will allow qualified farmers and food processors to shop for electricity and other energy services. The PSC required utilities to adjust the current delivery rates for farmers and food processors, which should result in a rate reduction of about 10 percent for farmers and 3 percent to 8 percent for food processors. The PSC is requiring the Company to initiate delivery under this program by no later than November 1, 1997. The Company estimates that it could lose $4 million revenues a year from these rate discounts. The Company will have an opportunity to try to recover the money from ratepayers when it negotiates its PowerChoice restructuring agreement with state regulators. (See Form 10-K for fiscal year ended December 31, 1996, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "PowerChoice Proposal.") On August 1, 1997, the Company filed its revised proposal with the PSC for its compliance with the farm and food processor retail pilot program. The revised proposal is designed to meet the November 1, 1997 deadline and includes the discounts required by the order. PSC PROPOSAL OF NEW IPP OPERATING AND PPA MANAGEMENT PROCEDURES (See Form 10-K for fiscal year ended December 31, 1996, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "PSC Proposal of New IPP Operating and PPA Management Procedures.") CURTAILMENT: On May 20, 1997, the PSC addressed the procedures under which a utility, including the Company, may legally curtail purchases from IPPs that are QFs, unless curtailment is specifically prohibited by contract. Curtailment is allowed by a FERC rule, under certain operational circumstances when purchases from the QFs will exceed the costs the utility would incur if it generated the power itself. Advance notice must be provided to the QF along with the reasons for such curtailment, which are subject to verification by the PSC either before or after curtailment. The PSC stated that the Public Utilities Regulatory Policies Act which encouraged generation by IPPs was supposed to be revenue- neutral. However, they noted that this hasn't been the situation in New York State and ratepayers have been unduly burdened because of their lack of specific curtailment procedures. Based on the Company's review of the PSC's statements, a decision to permit curtailment could affect most of the 155 contracts (except those in the MRA) that the Company has with IPPs. The Company is unable to determine the affect of these statements until such a time as there is a final order. However, it is not likely to affect the Company's MRA to terminate, restate or amend 29 contracts with 16 IPPs, which represent more than 80% of the Company's over-market purchased power obligations, as described previously. REDUCTION OF GRT On August 4, 1997, the State Legislature passed a state budget, which includes a reduction of the GRT over three years. The reduction of the GRT for the New York State energy and telecommunications utilities is as follows: the first reduction of $28 million is scheduled to take effect during the 1998-1999 budget; $109 million in 1999-2000; $473.5 million in 2000-2001; and $440 million in 2001-2002. For gas and electric utilities, the tax imposed on gross income will be reduced from 3.5% to 3.25% on October 1, 1998, and from 3.25% to 2.5% on January 1, 2000. The state tax imposed on gross earnings will remain unchanged at .75%, bringing the total GRT to 3.25% -- a full percentage point lower than today's level of 4.25%. The savings from the reduction of the GRT will be passed on to the Company's customers. The Company believes that further tax relief is needed to relieve the Company's customers of high energy costs and to improve New York State's competitive position as the industry moves toward a competitive marketplace. POWER FOR JOBS PROGRAM (See Form 10-K for fiscal year ended December 31, 1996, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Governor Pataki's Proposed Legislation.") On July 15, 1997, the "Power for Jobs Program" was passed by the state legislature, which will allocate 400 MWs of low-cost power to eligible businesses for job retention and development purposes. Half of the 400 MWs will be obtained from NYPA and the other half through a competitive bid process, which is open not only to investor-owned utilities but also to any supplier. The program will be paid for through a credit against the GRT and a contribution from NYPA. This will be a three year program (with contracts up to three years in length) that will result in as much as 50 percent electric rate reductions for eligible businesses. FINANCING PLANS AND FINANCIAL POSITION (See Form 10-K for the fiscal year ended December 31, 1996, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Financial Position, Liquidity and Capital Resources.") On July 14, 1997, Standard & Poor's (S&P) raised its ratings on the Company's corporate credit and its senior secured debt to BB from BB-; senior unsecured debt to B+ from B; and its preferred stock to B from B-. S&P stated that these ratings remain on CreditWatch with positive implications. The upgrade followed the Company's July 9, 1997, announcement that it had entered into the MRA. S&P stated that the execution of the MRA represents a critical step in the process of returning the Company to financial stability. In addition, S&P stated that these ratings remain on CreditWatch in anticipation of the PSC's review later this year of the Company's revised PowerChoice restructuring proposal, which was filed on July 23, 1997. S&P also stated that it will conclude its review of the Company once regulatory approval is obtained. Subject to the conditions of the approval, if any, S&P will determine whether the corporate credit rating should be raised one-notch to BB+. On July 16, 1997, Moody's Investors Service (Moody's) stated that the rating outlook for the Company could turn positive if the PSC approves the MRA mentioned above. In addition, Moody's stated that it expects the PSC, which was instrumental in promoting IPP power in New York State, to favorably review the Company's restructuring proposal. UNIT 1 REFUELING AND MAINTENANCE OUTAGE (See Form 10-Q for the quarter ended March 31, 1997, Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Unit 1 Refueling and Maintenance Outage.") RESULTS OF OPERATIONS The following discussion presents the material changes in results of operations for the three months and six months ended June 30, 1997 in comparison to the same periods in 1996. The Company's results of operations reflect the seasonal nature of its business, with peak electric loads in summer and winter periods. Gas sales peak principally in the winter. The earnings for the three months and six months periods should not be taken as an indication of earnings for all or any part of the balance of the year. THREE MONTHS ENDED JUNE 30, 1997 VERSUS THREE MONTHS ENDED JUNE 30, 1996 Earnings for the second quarter 1997 were $31.3 million or 22 cents per share, as compared with $43.5 million or 30 cents per share in the second quarter of 1996. Earnings for the second quarter were lower due to several factors, including lower sales of electricity and natural gas, higher IPP capacity costs, higher electric customer discounts, and higher electric fuel costs that will be recovered next quarter through the fuel adjustment clause. ELECTRIC REVENUES Electric revenues were $804.5 million in the second quarter of both 1997 and 1996. FAC revenues increased $12.6 million, primarily as a result of the Company's increased payments to the IPPs recovered through the FAC, offset by a decrease in sales to other electric utilities of $9.9 million and a decrease in volume and mix of sales to ultimate customers of $2.7 million. ELECTRIC SALES Electric sales to ultimate consumers were approximately 8.0 billion KWh in the second quarter of 1997, a 0.7% decrease from 1996. After adjusting for the effects of weather, sales to ultimate consumers decreased 0.2%. Sales for resale decreased 597 million KWh (38.6%) resulting in a net decrease in total electric sales of 724 million KWh (7.5%). Electric fuel and purchased power costs increased $14.2 million or 4.2%. This increase is the result of a $12.7 million increase in actual purchased power costs (including a $10.6 million or 3.9% increase in payments to IPPs), a $4.1 million increase in costs deferred and recovered through the operation of the FAC, partially offset by a $2.6 million decrease in actual fuel costs. The decrease in fuel costs reflects a 16.3% decrease in Company generation, which includes the outage at Unit 1. GAS REVENUES Gas revenues decreased $15.2 million or 9.7% in the second quarter of 1997 from the comparable period in 1996 as set forth in the table below: Sales to ultimate consumers $ (9.2) million Purchased gas adjustment clause revenues (2.5) Spot market sales (2.1) Change in base rates (1.4) ------- $(15.2) million ======= GAS SALES Gas sales to ultimate consumers decreased 0.3 million Dth or 1.7% from the second quarter of 1996. After adjusting for the effects of weather, sales to ultimate consumers increased 1.3%. Spot market sales (sales for resale) which are generally from the higher priced gas available to the Company and therefore yield margins that are substantially lower than traditional sales to ultimate consumers increased. In addition, changes in purchased gas adjustment clause revenues are generally margin-neutral. The total cost of gas included in expense decreased $17.6 million or 21.9%. This was the result of a $1.9 million decrease in purchases for spot market sales, a $5.8 million decrease in purchased gas costs and certain other items recognized and recovered through the purchased gas adjustment clause, and a 30.8% decrease in the average cost per Dth purchased ($21.9 million), partially offset by a 3.0 million increase in Dth purchased and withdrawn from storage for ultimate consumer sales ($12.0 million). The Company's net cost per Dth sold, as charged to expense and excluding spot market purchases, decreased to an average of $3.46 in the second quarter of 1997 from $5.24 in 1996, the comparable period. SIX MONTHS ENDED JUNE 30, 1997 VERSUS SIX MONTHS ENDED JUNE 30, 1996 Earnings for the first six months of 1997 were $125.0 million or 87 cents per share, as compared with $130.0 million or 90 cents per share in 1996. Earnings for the first six months of 1997 were lower primarily as a result of lower electric and natural gas sales that occurred as a result of the warmer weather. In addition, earnings were negatively impacted by higher electric customer discounts, absorption of fuel costs in accordance with FAC partial pass-through mechanism, and an increase in bad debt expense which collectively reduced earnings by 8 cents per share. This was partially offset by the restructuring of gas rates and the timing of the recognition of interstate gas pipeline transportation cost under the new multi-year gas rate settlement agreement, which added 7 cents per share. ELECTRIC REVENUES Electric revenues for the first six months of 1997 increased $26.3 million or 1.6% from the comparable period in 1996. FAC revenues increased $47.7 million, primarily as a result of the Company's increased payments to the IPPs recovered through the FAC, offset by a decrease in revenues from sales to other electric utilities of $14.1 million and a decrease in volume and mix of sales to ultimate customers of $7.3 million. ELECTRIC SALES Electric sales to ultimate consumers were approximately 16.8 billion KWh in the first six months of 1997, a 1.2% decrease from the same period in 1996 primarily as a result of warmer weather. After adjusting for the effects of weather, sales to ultimate consumers would have increased 0.4%. Sales for resale decreased 606 million KWh (22.1%), resulting in a net decrease in total electric sales of 1,016 million KWh (5.1%). SIX MONTHS ENDED JUNE 30, ELECTRIC REVENUES (Thousands) SALES (GWh) ---------------------------------- -------------------------- % % 1997 1996 Change 1997 1996 Change Residential $ 648,347 $ 657,485 (1.4) 5,226 5,402 (3.3) Commercial 616,722 610,595 1.0 5,738 5,789 (0.9) Industrial 263,818 256,409 2.9 3,513 3,553 (1.1) Industrial - Special 30,747 29,083 5.7 2,206 2,150 2.6 Other 26,981 25,770 4.7 114 113 0.9 --------- ---------- ------ ------ ------ ----- Total to Ultimate Consumers 1,586,615 1,579,342 0.5 16,797 17,007 (1.2) Other Electric Systems 43,495 57,641 (24.5) 2,134 2,740 (22.1) Miscellaneous/Subsidiary 51,796 18,611 178.3 - 200 (100.0) ---------- --------- ------ ----- ------ ----- TOTAL $1,681,906 $1,655,594 1.6 18,931 19,947 (5.1) ========== ========= ====== ====== ====== ===== /TABLE As indicated in the table below, internal generation decreased in 1997, principally due to the outage at Unit 1. The Company's management of its IPP power supply generally divides the projects into three groups: hydroelectric, "must run" cogeneration and schedulable cogeneration projects. Due to high precipitation and spring run-off levels so far this year, hydroelectric IPP projects produced and delivered an increase of 17 GWh or 1.7% under PPAs resulting in increased payments to those IPPs of $5.6 million. A substantial portion of the Company's portfolio of IPP projects operate on a "must run" basis. This means that they tend to run at maximum production levels regardless of the need or economic value of the electricity produced. Must run IPPs produced and delivered an increase of 182 GWh or 4.3% under PPAs resulting in increased payments to those IPPs of $17.2 million, in part due to escalating contract rates. Quantities from schedulable cogeneration IPPs increased 186 GWh or 13.7%. Payments to schedulable IPPs increased $11.2 million, in part due to escalating contract rates. The terms of these PPAs allow the Company to schedule, given specified constraints, energy deliveries from the facilities and then pay for the energy delivered. The Company is also required to make fixed payments, so long as the IPP plants are available for service. (See Form 10-K for the fiscal year ended December 31, 1996, Part II, Item 8. Notes to Consolidated Financial Statements - "Note 9. Commitments and Contingencies - Long-term Contracts for the Purchase of Electric Power.") SIX MONTHS ENDED JUNE 30, GWh Cost Cents/KWh -------------------------- ------------------------- ---------- (Millions) FUEL FOR ELECTRIC GENERATION: % % 1997 1996 Change 1997 1996 Change 1997 1996 Coal 3,401 3,507 (3.0) $48.0 $49.6 (3.2) 1.4 1.4 Oil 106 269 (60.6) 6.3 11.4 (44.7) 5.9 4.2 Natural Gas 176 50 252.0 3.2 2.2 45.5 1.8 4.4 Nuclear 3,251 4,506 (27.9) 15.8 25.3 (37.6) 0.5 0.6 Hydro 1,889 2,156 (12.4) - - - - - ----- ------ ---- ---- ---- ---- --- --- 8,823 10,488 (15.9) 73.3 88.5 (17.2) 0.8 0.8 ----- ------ ---- ---- ---- ---- --- --- ELECTRICITY PURCHASED: IPPs: Capacity - - - 112.9 106.5 6.0 - - Energy and taxes 7,053 6,668 5.8 465.5 437.9 6.3 6.6 6.6 ------ ------ ---- ----- ----- ---- --- --- Total IPP purchases 7,053 6,668 5.8 578.4 544.4 6.3 8.2 8.2 Other 4,632 4,551 1.8 62.4 61.4 1.6 1.4 1.4 ------ ------ ---- ----- ----- ---- --- --- 11,685 11,219 4.2 640.8 605.8 5.8 5.5 5.4 ------ ------ ---- ----- ----- ---- --- --- TOTAL SUPPLY 20,508 21,707 (5.5) 714.1 694.3 2.9 3.5 3.2 ------ ------ ---- ----- ----- ---- --- --- Fuel adjustment clause - - - 4.4 (19.4) 122.7 - - Losses/Company use 1,577 1,760 (10.4) - - - - - ------ ------ ---- ----- ----- ----- ---- ---- Sales 18,931 19,947 (5.1) $718.5 $674.9 6.5 3.8 3.4 ====== ====== ==== ===== ===== ===== ==== ==== /TABLE GAS REVENUES Gas revenues decreased $40.6 million or 8.7% in the first six months of 1997 from the comparable period in 1996 as set forth in the table below: Sales to ultimate consumers $(41.5) million Spot market sales (22.9) Change in base rates (4.1) Purchased gas adjustment clause revenues 27.9 ------- $(40.6) million ======= GAS SALES Gas sales to ultimate consumers for the first six months of 1997 decreased 6.1 million Dth or 9.9% from 1996. After adjusting for the effects of weather, sales to ultimate consumers decreased 1.3%. Spot market sales (sales for resale), which are generally from the higher priced gas available to the Company and therefore yield margins that are substantially lower than traditional sales to ultimate consumers, also decreased. In addition, changes in purchased gas adjustment clause revenues are generally margin- neutral. SIX MONTHS ENDED JUNE 30, GAS REVENUES (Thousands) SALES (Thousands of Dth) ------------------------------- ----------------------------- % % 1997 1996 Change 1997 1996 Change Residential $285,246 $291,938 (2.3) 39,165 41,593 (5.8) Commercial 102,342 116,252 (12.0) 15,518 18,261 (15.0) Industrial 4,819 9,680 (50.2) 1,047 1,975 (47.0) -------- -------- --------- ------- ------- ------- Total to Ultimate Consumers 392,407 417,870 (6.1) 55,730 61,829 (9.9) Transportation of Customer-Owned Gas 28,037 25,448 10.2 77,287 63,255 22.2 Spot Market Sales 5,482 28,369 (80.7) 2,737 7,023 (61.0) Miscellaneous 1,698 (3,447) (149.3) 13 17 (23.5) ---------- ------- --------- ------- ------- ------- Total to System Core Customers $427,624 $468,240 (8.7) 135,767 132,124 2.8 ========= ======== ========= ======= ======= ======= /TABLE The total cost of gas included in expense decreased $59.0 million or 21.8%. This was the result of a 3.5 million decrease in Dth purchased and withdrawn from storage for ultimate consumer sales ($11.5 million), a $17.1 million decrease in Dth purchased for spot market sales, and a $31.0 million decrease in purchased gas costs and certain other items recognized and recovered through the purchased gas adjustment clause, partially offset by a $0.6 million increase in the average cost per Dth purchased. The Company's net cost per Dth sold, as charged to expense and excluding spot market purchases, decreased to an average of $3.71 in the first six months of 1997 from $4.19 in 1996, the comparable period. BAD DEBT EXPENSE for the first six months of 1997 was $32.5 million as compared with $27.3 million in 1996. The increase in bad debt expense reflects the implementation of the risk assessment methodology in the third quarter of 1996, which puts more emphasis on past-due balances. Previously, the Company followed regulatory practice and consequently focused on final billed accounts only (typically accounts that are no longer active). As a result, bad debt expense will vary more directly with revenues, which are seasonal. The increase in federal and foreign income taxes (net) of approximately $14.0 million was primarily due to the timing of the recognition of tax expense. Other taxes decreased by $6.1 million primarily as a result of lower real estate taxes. PART II. OTHER INFORMATION NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES ITEM 1. LEGAL PROCEEDINGS. (See Form 10-K for fiscal year ended December 31, 1996, Part I, Item 3. Legal Proceedings and Form 10-Q for the quarter ended March 31, 1997, Part II, Item 1. Legal Proceedings - "Norcon Litigation.") ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Company's annual meeting of shareholders on May 6, 1997, (1) the election of Directors was as follows: WITHHELD FOR AUTHORITY Lawrence Burkhardt, III 114,771,529 7,584,160 Douglas M. Costle 115,100,707 7,254,982 Donald B. Riefler 115,147,017 7,208,672 Stephen B. Schwartz 115,043,524 7,312,165 (2) A shareholder proposal relating to the Company's endorsement of the Coalition for Environmentally Responsible Economies Principles as part of its commitment to be publicly accountable for its environmental impact was rejected by a vote of 17,577,749 for, 74,153,746 against, 8,791,238 abstentions, and 21,832,956 broker non-votes. (3) A shareholder proposal relating to the recommendation, with respect to future contract obligations, that when a dividend is cut, no salaries will be increased or any stock options allowed to executives or directors until the dividend is restored to its original amount before the cut, was rejected by a vote of 21,002,320 for, 74,565,793 against, 4,954,620 abstentions, and 21,832,956 broker non-votes. ITEM 5. OTHER EVENTS. (See Form 10-K for fiscal year ended December 31, 1996, Part I, Item 1. Business - "New York Power Authority.") On May 23, 1997, the Company signed an agreement with NYPA and the PSC that allows NYPA's current industrial customers to continue to receive their power allocations from the James A. FitzPatrick plant. The agreement also protects the Company's remaining customers by generally requiring the reimbursement of stranded costs on any NYPA sales above current levels. In addition, the Company's termination of its purchases of FitzPatrick power for its system use took effect May 24, 1997. The settlement enables the State of New York to continue to use NYPA's electricity to keep and create jobs and investment in New York State while protecting the financial interests of the Company. This agreement will also terminate litigation pending on the dispute before the PSC and the FERC. Approval of this settlement agreement is currently pending before the FERC. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: Exhibit 10-1 - NMPC Officers' Long Term Incentive Compensation Plan - Plan Document. Exhibit 10-2 - CEO Award Plan. Exhibit 10-3 - Amendment to Employment Agreement between NMPC and David J. Arrington, Albert J. Budney, Jr., William E. Davis, Darlene D. Kerr, Gary J. Lavine, John W. Powers and B. Ralph Sylvia, dated June 9, 1997. Exhibit 11 - Computation of the Average Number of Shares of Common Stock Outstanding for the Three Months and Six Months Ended June 30, 1997 and 1996. Exhibit 12 - Statement Showing Computations of Ratio of Earnings to Fixed Charges, Ratio of Earnings to Fixed Charges without AFC and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends for the Twelve Months Ended June 30, 1997. Exhibit 15 - Accountants' Acknowledgement Letter. Exhibit 27 - Financial Data Schedule. 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 during March 1996. The total amount of long-term debt authorized under such agreement does not exceed 10 percent of the total consolidated assets of the Company and its subsidiaries. (b) Reports on Form 8-K: Form 8-K Reporting Date - July 9, 1997 Item reported - Item 5. Other Events. Registrant filed information concerning the MRA. NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NIAGARA MOHAWK POWER CORPORATION (Registrant) Date: August 12, 1997 By /s/ Steven W. Tasker ____________________________ Steven W. Tasker Vice President-Controller and Principal Accounting Officer NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10-1 NMPC Officers' Long Term Incentive Compensation Plan - Plan Document. 10-2 CEO Award Plan. 10-3 Amendment to Employment Agreement between NMPC and David J. Arrington, Albert J. Budney, Jr., William E. Davis, Darlene D. Kerr, Gary J. Lavine, John W. Powers and B. Ralph Sylvia, dated June 9, 1997. 11 Computation of the Average Number of Shares of Common Stock Outstanding for the Three Months and Six Months Ended June 30, 1997 and 1996. 12 Statement Showing Computations of Ratio of Earnings to Fixed Charges, Ratio of Earnings to Fixed Charges without AFC and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends for the Twelve Months Ended June 30, 1997. 15 Accountants' Acknowledgement Letter. 27 Financial Data Schedule. NIAGARA MOHAWK POWER CORPORATION EXHIBIT 10-1 LONG TERM INCENTIVE PLAN Article 1. Establishment, Purpose and Duration 1.1 Establishment of the Plan. Niagara Mohawk Power Corporation, a New York corporation (hereinafter referred to as the "Company"), hereby establishes an incentive compensation plan to be known as the "Niagara Mohawk Power Corporation Long Term Incentive Plan" (hereinafter referred to as the "Plan"), as set forth in this document. The Plan permits the grant of SAR's, Stock Units and Dividend Equivalents, as defined herein. The Plan became effective as of September 25, 1996 (the "Effective Date"). This amendment and reinstatement of the Plan shall become effective as of June 10, 1997 and shall remain in effect as provided in Section 1.3 herein. 1.2 Purpose of the Plan. The purpose of the Plan is to promote the success and enhance the value of the Company through the retention and continued motivation of Participants, focusing their efforts toward the execution of business strategies directed toward improving financial returns to shareholders. 1.3 Duration of the Plan. The Plan shall commence on the Effective Date, as described in Section 1.1 herein, and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 14 herein, until September 24, 2006. The applicable terms of the Plan and any terms and conditions applicable to SARs or Stock Units, including any deferral elections, granted prior to such date shall survive the termination of the Plan. Article 2. Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below and, when such meaning is intended, the initial letter of the word is capitalized: 2.1 "Award" means, individually or collectively, a grant under the Plan of SARs or Stock Units. 2.2 "Award Agreement" means an agreement entered into by each Participant and the Company, setting forth the terms and provisions applicable to an Award granted to a Participant under the Plan. 2.3 "Base Value" of an SAR shall have the meaning set forth in Section 6.2 herein. 2.4 "Board" or "Board of Directors" means the Board of Directors of the Company. 2.5 "Cause" means: (i) a material default or other material breach by a Participant of his obligations under any Employment Agreement he may have with the Company, (ii) failure by a Participant diligently and competently to perform his duties under any Employment Agreement he may have with the Company, or otherwise, or (iii) misconduct, dishonesty, insubordination or other act by a Participant detrimental to the good will of the Company or damaging the Company's relationships with its customers, suppliers or employees. "Cause" shall be determined in good faith by the Committee. 2.6 "Change in Control" of the Company shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied: (1) The acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding Shares of the Company or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subparagraph (3) below are satisfied; or (2) Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75 % of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors are then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Shares and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions as their ownership immediately prior to such reorganization, merger or consolidation, of the Outstanding Shares and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Shares or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (4) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Shares and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership immediately prior to such sale or other disposition of the Outstanding Shares and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Shares or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company; provided, however, that the implementation of the corporate restructuring contemplated by the Company's PowerChoice proposal filed with the New York Public Service Commission on October 6, 1995, or any substantially similar corporate restructuring (as determined by the Committee) shall not be deemed to be a "Change in Control". 2.7 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.8 "Committee" means the committee, as specified in Article 3, appointed by the Board to administer the Plan with respect to grants of Awards. 2.9 "Company" means Niagara Mohawk Power Corporation, a New York corporation, or any successor thereto as provided in Article 16 herein. 2.10 "Director" means any individual who is a member of the Board of Directors of the Company. 2.11 "Disability" shall have the meaning ascribed to such term under Section 22(e)(3) of the Code. 2.12 "Dividend Equivalent" means, with respect to Shares underlying a Stock Unit, an amount equal to all cash and stock dividends declared on an equal number of outstanding Shares on all common stock dividend payment dates occurring during the Vesting Period. 2.13 "Eligible Employee" means an Employee who is eligible to participate in the Plan, as set forth in Section 5.1 herein. 2.14 "Employee" means any full-time employee of the Company, who is not covered by any collective bargaining agreement to which the Company is a party. Directors who are not otherwise employed by the Company shall not be considered Employees under the Plan. For purposes of the Plan, transfer of employment of a Participant from the Company to any one of its Subsidiaries shall not be deemed a termination of employment. 2.15 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. 2.16 "Exercise Period" means the period during which an SAR is exercisable, as set forth in the related Award Agreement. 2.17 "Fair Market Value" means the average of the daily opening and closing sale prices as reported in the consolidated transaction reporting system. 2.18 "Participant" means an Employee of the Company who has outstanding an Award granted under the Plan. 2.19 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as used in Sections 13(d) and 14(d) thereof, including usage in the definition of a "group" in Section 13(d) thereof. 2.20 "Retirement" means (i) ascribed to such term in the tax-qualified defined benefit pension plan maintained by the Company for the benefit of some or all of its non-represented employees and (ii) retirement from the Company or its subsidiaries with the approval of the Committee. 2.21 "Shares" means the shares of common stock of the Company, par value $1. 2.22 "Stock Appreciation Right" or "SAR" means a right, designated as an SAR, to receive a payment on the day the right is exercised, pursuant to the terms of Article 6 herein. Each SAR shall be denominated in terms of one Share. 2.23 "Stock Unit" means a right, designated as a Stock Unit, to receive a payment as soon as practicable following the last day of a Vesting Period, pursuant to the terms of Article 7 herein. Each Stock Unit shall be denominated in terms of one Share. 2.24 "Subsidiary" means any corporation that is a "subsidiary corporation" of the Company as that term is defined in Section 424(f) of the Code. 2.25 "Valuation Period" means the 12 trading day period ending on and including the relevant date. 2.26 "Vesting Period" means the period during which Stock Units are not yet payable, as set forth in the related Award Agreement. Article 3. Administration 3.1 The Committee. The Plan shall be administered by the Compensation and Succession Committee of the Board, or by any other Committee appointed by the Board consisting of not less than two (2) non-employee Directors. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. 3.2 Authority of the Committee. The Committee shall have full power except as limited by law, the Articles of Incorporation and the Bylaws of the Company, subject to such other restricting limitations or directions as may be imposed by the Board and subject to the provisions herein, to determine the size and types of Awards; to determine the terms and conditions of such Awards in a manner consistent with the Plan; to construe and interpret the Plan and any agreement or instrument entered into under the Plan; to establish, amend or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 14 herein) to amend the terms and conditions of any outstanding Award. Further, the Committee shall make all other determinations that may be necessary or advisable for the administration of the Plan. As permitted by law, the Committee may delegate its authorities as identified hereunder. 3.3 Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its shareholders, Employees, Participants and their estates and beneficiaries. 3.4 Costs. The Company shall pay all costs of administration of the Plan. Article 4. Adjustments in Authorized Shares In the event of any merger, reorganization consolidation, recapitalization, separation, liquidation, stock dividend, split-up, share combination or other change in the corporate structure of the Company affecting the Shares, such adjustment shall be made in the number of SARs and Stock Units that may be granted under the Plan, and in the number and/or price of outstanding Awards granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of SARs and Stock Units subject to an Award shall always be a whole number. Article 5. Eligibility and Participation 5.1 Eligibility. Persons eligible to participate in the Plan include all key Employees of the Company, as determined by the Committee. 5.2 Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees those to whom Awards shall be granted and shall determine the nature and amount of each Award. Article 6. Stock Appreciation Rights 6.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Eligible Employees at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of SARs granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs. 6.2 Base Value. The Base Value of an SAR shall equal the Fair Market Value of a Share determined for the 12 trading day period immediately preceding the date of the grant, or for such other period as the Compensation Committee, in its sole discretion, shall determine at the time of grant. 6.3 Exercise and Payment of SARs. A Participant may exercise an SAR at any time during the Exercise Period. SARs shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of SARs being exercised. Upon exercise of an SAR, a Participant shall be entitled to receive payment in cash from the Company in an amount equal to the product of: (a) the excess of (i) the Fair Market Value of a Share on the date of exercise over (ii) the Base Value of the SAR, multiplied by (b) the number of Shares with respect to which the SAR is exercised. 6.4 SAR Award Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall specify the number of SARs granted, the Base Value, the Exercise Period, the expiration date and such other provisions as the Committee shall determine. 6.5 Lapse of SARs. Subject to the provisions of Article 9, an SAR will lapse upon the earlier of (i) ten (l0) years from the date of grant and (ii) the expiration of the Exercise Period as set forth in the grant. Article 7. Stock Units 7. 1 Grant of Stock Units. Subject to the terms and conditions of the Plan, Stock Units may be granted to Eligible Employees at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Stock Units granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such Stock Units. 7.2 Vesting of Stock Units. The Vesting Period of Stock Units granted under the Plan shall be determined by the Committee, in its sole discretion, as set forth in the related Award Agreement. 7.3 Payment of Stock Units. After the applicable Vesting Period has ended, the holder of Stock Units shall be entitled to receive, for each Stock Unit held, payment in cash from the Company in an amount equal to the Fair Market Value of one Share determined as of the Valuation Period ending on the last day of the Vesting Period. Payment shall be made as soon as practicable following the last day of the Vesting Period. 7.4 Stock Unit Award Agreement. Each Stock Unit grant shall be evidenced by an Award Agreement that shall specify the number of Stock Units granted, the Vesting Period and such other provisions as the Committee shall determine. Article 8. Dividend Equivalents Simultaneously with the grant of Stock Units, the Participant shall be granted Dividend Equivalents, to be credited to a bookkeeping entry account, on each common stock dividend payment date with respect to the Shares subject to such Award. In the case of cash dividends, the number of Dividend Equivalents credited on each common stock dividend payment date shall equal the number of Shares (including fractional Shares) that could be purchased on the dividend payment date, based on the average of the opening and closing sale price, as reported in the consolidated transaction reporting system on that date, with cash dividends that would have been paid on Awards of Stock Units and on Dividend Equivalents previously credited to such bookkeeping entry account, if such Stock Units or Dividend Equivalents were Shares. In the case of stock dividends, the number of Dividend Equivalents credited on each stock dividend payment date shall be equal to the number of Shares (including fractional Shares) that would have been issued as a stock dividend in respect of the Participant's Stock Units and on Dividend Equivalents previously credited to such bookkeeping entry account, if such Stock Units or Dividend Equivalents were Shares. Participants shall receive cash payment from the Company of the Fair Market Value of the Dividend Equivalents, if and when they receive payment of the related Stock Units, the Fair Market Value of such Dividend Equivalents to be determined in the same manner as for the related Stock Units. The Committee may, in its discretion, establish such rules and procedures governing the crediting of Dividend Equivalents, including timing and payment contingencies that apply to the Dividend Equivalents, as the Committee deems necessary or appropriate in order to comply with applicable law. Article 9. Termination of Employment; Transferability 9.1 Disability; Involuntary Termination. In the event the employment of a Participant is terminated by reason of Disability or involuntarily by the Company (other than for Cause): (i)during a Vesting Period for Stock Units, the Participant shall receive a full payout of the Stock Units and related Dividend Equivalents, as and when provided in Section 7.3 herein; (ii)before the Exercise Period commences for SARs subject to an Award, such SARs may be exercised in full at any time during the one year period commencing on the day the Exercise Period begins; and (iii)during the Exercise Period for SARs, but before exercise, such SARs may be exercised in full at any time during the one year period after such termination, but in no event after the Exercise Period for such SARs has expired. 9.2 Death. In the event the employment of a Participant is terminated by reason of death: (i) during the Vesting Period for Stock Units, the Participant's beneficiary or estate shall receive a full payout of the Stock Units and related Dividend Equivalents. The payout shall be made promptly based on the Fair Market Value of a Share on the date of death; and (ii) before the Exercise Period commences for SARs subject to an Award or during the Exercise Period, but before exercise, the Participant's beneficiary or estate shall receive a full payout of all SARs subject to an Award, to the extent the Fair Market Value of a Share exceeds the Base Value of the SAR on the date of death. 9.3 Corporate Restructuring. In the event (i) the corporate restructuring as contemplated by the Company's PowerChoice proposal filed with the New York Public Service Commission on October 6, 1995, or any substantially similar corporate restructuring (determined by the Committee), is implemented and (ii) the employment of a Participant with the Company is terminated (other than for Cause), then with respect to Awards granted prior to implementation of the restructuring, (i) during a Vesting Period for Stock Units, the Participant shall receive a full payout of Stock Units and related Dividend Equivalents, as and when provided in Section 7.3 herein; (ii) before the Exercise Period commences for SARs subject to an Award, such SARs may be exercised in full at any time during the one year period commencing on the day the Exercise Period begins; and (iii)during the Exercise Period for SARs, but before exercise, such SARs may be exercised in full at any time during the one year period after such termination, but in no event after the Exercise Period for such SARs has expired. 9.4 Retirement. In the event the employment of a Participant is terminated by reason of Retirement: (i)during a Vesting Period for Stock Units, the Participant shall receive a prorated payout of the Stock Units and related Dividend Equivalents. The prorated payout shall be determined by the Committee, shall be based upon the length of time that the Participant held the Stock Units during the Vesting Period and shall be made as and when provided in Section 7.3 herein; (ii)before the Exercise Period commences for SARs subject to an Award, the number of SARs subject to an Award shall be prorated by the Committee, based upon the length of time that the Participant held the SARs before Retirement; after the Exercise Period commences, the prorated SARs may be exercised at any time in full or in part from time to time during the Exercise Period, and (iii)during the Exercise Period for SARs, but before exercise, such SARs may be exercised at any time in full or in part from time to time during the Exercise Period. Other than as set forth in Article 13, in the event that a Participant's employment terminates for any reason other than as set forth in Sections 9.l, 9.2, 9.3 and 9.4, above, all Stock Units, SARs and Dividend Equivalents shall be forfeited by the Participant to the Company . 9.5 Nontransferability of Awards. Notwithstanding the foregoing, the Committee may in its discretion authorize a participant to transfer all or a portion of any award to the participant's family members on such terms prescribed by the Committee. No Award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all Awards granted to a Participant under the Plan shall be exercisable/payable during his or her lifetime only by or to such Participant or his or her legal representative. 9.6 Right of Committee. Subject to the provisions of Section 14.2 herein, all provisions in this Article 9 are subject to the Committee's right, at any time, to make such other determinations as it may choose, in its sole discretion. Furthermore, should more than one section of Article 9 and/or Article 13 apply to a situation, the Committee shall have the right, in its sole discretion, to determine which section and/or article to apply. Article 10. Beneficiary Designation Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his death before he receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during the Participant's lifetime. In the absence of any such designation , benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. The spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of beneficiary or beneficiaries other than the spouse. Article 11. Deferrals The Committee may permit a Participant to defer such Participant's receipt of the payment of cash that would otherwise be due to such Participant. If any such deferral election is permitted, the Committee shall, in its sole discretion, establish such rules and procedures as it deems necessary or desirable for such payment deferrals. Article 12. Rights of Employees 12.1 Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, for any reason or no reason, in the Company's sole discretion, nor confer upon any Participant any right to continue in the employ of the Company. 12.2 Participation. No Employee shall have the right to be selected to receive an Award under the Plan, or, having been so selected, to be selected to receive a future Award. Article 13. Change in Control Upon the occurrence of a Change in Control, as defined herein, unless otherwise specifically prohibited by the terms of Article 17 herein: (a) Any and all SARs granted hereunder shall be deemed to have been exercised on the date such Change in Control occurs; (b) Any Vesting Period with respect to Stock Units shall be deemed to have expired, and there shall be paid out in cash to Participants within thirty (30) days following the effective date of the Change in Control the cash payment due with respect to such Stock Units and related Dividend Equivalents, with a Valuation Period ending on the effective date of the Change in Control. Article 14. Amendment, Modification and Termination 14.1 Amendment. Modification and Termination. The Board may, at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part. 14.2 Awards Previously Granted. No termination, amendment or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award, unless such termination, modification or amendment is required by applicable law. Article 15. Tax Withholding The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising out of or as a result of an Award made under the Plan. Article 16. Successors All obligations of the Company under the Plan, with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. Article 17. Legal Construction 17.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular and the singular shall include the plural. 17.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 17.3 Requirements of Law. The granting of Awards under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 17.4 Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with, and governed by, the laws of the State of New York, without regard to conflicts of law provisions. NIAGARA MOHAWK POWER CORPORATION EXHIBIT 10-2 CEO SPECIAL AWARD PLAN Article 1. Establishment, Purpose and Duration 1.1 Establishment of the Plan. Niagara Mohawk Power Corporation, a New York corporation (hereinafter referred to as the "Company"), hereby amends and restates the Niagara Mohawk Power Corporation CEO Special Award Plan (hereinafter referred to as the "Plan"), as set forth in this document. The amendment and restatement of the Plan shall become effective as of June 10, 1997 (the "Effective Date"). 1.2 Purpose of the Plan. The purpose of the Plan is to promote the success and enhance the value of the Company through awards to Participants which recognize contributions to a successful initiative which results in a major positive impact on the Company. 1.3 Duration of the Plan. The amendment and restatement of the Plan shall commence on the Effective Date and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 14 herein, until June 9, 2007. The applicable terms of the Plan and any terms and conditions applicable to any Awards granted prior to such date shall survive the termination of the Plan. Article 2. Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below and, when such meaning is intended, the initial letter of the word is capitalized: 2.1 "Award" means, individually or collectively, a grant under the Plan of SARs, Stock Units or cash. 2.2 "Award Agreement" means an agreement entered into by each Participant and the Company setting forth the terms and provisions applicable to an Award granted under the Plan. 2.3 "Base Value" of an SAR means the Fair Market Value of one Share determined for such period as the Committee shall determine at the time of grant. 2.4 "Board" or "Board of Directors" means the Board of Directors of the Company. 2.5 "Cause" means: (i) a material default or other material breach by a Participant of his obligations under any Employment Agreement he may have with the Company, (ii) failure by a Participant diligently and competently to perform his duties with the Company, (iii) misconduct, dishonesty, insubordination or other act by a Participant detrimental to the good will of the Company or damaging the Company's relationships with its customers, suppliers or employees. "Cause" shall be determined in good faith by the Committee. 2.6 "Change in Control" of the Company shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied: (1) The acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding Shares of the Company or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subparagraph (3) below are satisfied; or (2) Individuals who, as of the Effective Date, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors are then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively of the Outstanding Shares and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation, in substantially the same proportions as their ownership immediately prior to such reorganization, merger or consolidation, of the Outstanding Shares and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Pension beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Shares or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (4) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Shares and the Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership immediately prior to such sale or other disposition of the Outstanding Shares and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Shares or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company; provided, however, that the implementation of the corporate restructuring contemplated by the Company's PowerChoice proposal filed with the New York Public Service Commission on October 6, 1995, or any substantially similar corporate restructuring (as determined by the Committee) shall not be deemed to be a "Change in Control". 2.7 "Committee" means the committee, as specified in Article 3, appointed by the Board to administer the Plan. 2.8 "Company" means Niagara Mohawk Power Corporation, a New York corporation, or any successor thereto as provided in Article 16 herein. 2.9 "Dividend Equivalent" means, with respect to Shares underlying a Stock Unit, an amount equal to all cash and stock dividends declared on an equal number of outstanding Shares on all common stock dividend payment dates occurring during the Vesting Period. 2.10 "Eligible Employee" means an Employee who is eligible to participate in the Plan, as set forth in Section 4.1 herein. 2.11 "Employee" means any full-time employee of the Company or one of its subsidiaries who is not covered by any collective bargaining agreement to which the Company or such subsidiary is a party. 2.12 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. 2.13 "Exercise Period" means the period during which an SAR is exercisable, as set forth in the related Award Agreement. 2.14 "Fair Market Value" means the average of the daily opening and closing sale prices as reported in the consolidated transaction reporting system. 2.15 "Participant" means an Employee who has an outstanding Award granted under the Plan. 2.16 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as used in Sections 13(d) and 14(d) thereof, including usage in the definition of a "group" in Section 13(d) thereof. 2.17 "Shares" means the shares of common stock of the Company, par value $1. 2.18 "Stock Appreciation Right" or "SAR" means a right, designated as an SAR, to receive a payment on the day the right is exercised, pursuant to the terms of Article 5 herein. Each SAR shall be denominated in terms of one Share. 2.19 "Stock Unit" means a right, designated as a Stock Unit, to receive a payment as soon as practicable following the last day of a Vesting Period, pursuant to the terms of Article 6 herein. Each Stock Unit shall be denominated in terms of one Share. 2.20 "Vesting Period" means the period during which Stock Units are not yet payable, as set forth in the related Award Agreement. Article 3. Administration 3.1 The Committee. The Plan shall be administered by the Compensation and Succession Committee of the Board, or by any other Committee appointed by the Board consisting of not less than two (2) members of the Board who are "non-employee directors" within the meaning of Rule 16b-3 under the Exchange Act. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board. 3.2 Authority of the Committee. The Committee shall have full power except as limited by law, the Articles of Incorporation and the Bylaws of the Company, subject to such other restricting limitations or directions as may be imposed by the Board and the provisions of the Plan, to determine the amounts and types of Awards; to determine the terms and conditions of such Awards; to construe and interpret the Plan and any agreement or instrument entered into under the Plan; to establish, amend or waive rules and regulations for the Plan's administration; and to amend the terms and conditions of any outstanding Award. Further, the Committee shall make all other determinations that may be necessary or advisable for the administration of the Plan. As permitted by law, the Committee may delegate its authorities as identified hereunder. 3.3 Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its shareholders, Employees, Participants and their estates and beneficiaries. 3.4 Costs. The Company shall pay all costs of administration of the Plan. Article 4. Eligibility and Participation 4.1 Eligibility. All officers of the Company and other key Employees, as determined by the Committee, are eligible to participate in the Plan. 4.2 Actual Participation. The Committee may, from time to time, select which Eligible Employees shall be granted Awards and shall determine the type and amount of each Award. Article 5. Stock Appreciation Rights 5.1 Grants. SARs may be granted to Eligible Employees at any time and from time to time by the Committee, which shall have complete discretion in determining the number of SARs granted, the Exercise Period of such SARs and the other terms and conditions pertaining to such SARs. 5.2 Exercise and Payment. A Participant may exercise an SAR at any time during the Exercise Period by the delivery of a written notice of exercise to the Company, setting forth the number of SARs being exercised. Upon exercise of an SAR, a Participant shall be entitled to receive payment in cash from the Company in an amount equal to the excess of (i) the Fair Market Value of one Share on the date of exercise over (ii) the Base Value of the SAR. 5.3 Award Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall specify the number of SARs granted, the Base Value, the Exercise Period, the expiration date and such other provisions as the Committee shall determine. Article 6. Stock Units 6.1 Grant. Stock Units may be granted to Eligible Employees at any time and from time to time by the Committee, which shall have complete discretion in determining the number of Stock Units granted, the Vesting Period of such Stock Units and the other terms and conditions pertaining to such Stock Units. 6.2 Payment. After the applicable Vesting Period has ended, the holder of Stock Units shall be entitled to receive, for each Stock Unit held, payment in cash from the Company in an amount equal to the Fair Market Value of one Share on the last day of the Vesting Period. Payment shall be made as soon as practicable following the last business day of the Vesting Period. 6.3 Award Agreement. Each Stock Unit grant shall be evidenced by an Award Agreement that shall specify the number of Stock Units granted, the Vesting Period and such other provisions as the Committee shall determine. Article 7. Dividend Equivalents Simultaneously with the grant of Stock Units, the Committee may grant the Participant Dividend Equivalents, to be credited to a bookkeeping entry account, on each common stock dividend payment date with respect to the Shares subject to such Award. In the case of cash dividends, the number of Dividend Equivalents credited on each common stock dividend payment date shall equal the number of Shares (including fractional Shares) that could be purchased on the dividend payment date, based on the average of the opening and closing sale price, as reported in the consolidated transaction reporting system on that date, with cash dividends that would have been paid on Awards of Stock Units and on Dividend Equivalents previously credited to such bookkeeping entry account, if such Stock Units or Dividend Equivalents were Shares. In the case of stock dividends, the number of Dividend Equivalents credited on each stock dividend payment date shall be equal to the number of Shares (including fractional Shares) that would have been issued as a stock dividend in respect of the Participant's Stock Units and on Dividend Equivalents previously credited to such bookkeeping entry account, if such Stock Units or Dividend Equivalents were Shares. Participants shall receive cash payment from the Company of the Fair Market Value of the Dividend Equivalents, if and when they receive payment of the related Stock Units, the Fair Market Value of such Dividend Equivalents to be determined in the same manner as for the related Stock Units. The Committee may, in its discretion, establish such rules and procedures governing the crediting of Dividend Equivalents, including timing and payment contingencies that apply to the Dividend Equivalents, as the Committee deems necessary or appropriate in order to comply with applicable law. Article 8. Cash Awards The Committee may, at any time and from time to time, make an Award to an Eligible Employee payable in the form of a lump sum in cash in such amount as determined by the Committee. Each such Award shall be payable at such time as the Committee shall determine and, if applicable, as evidenced by an Award Agreement that shall specify such provisions as the Committee shall determine. Article 9. Beneficiary Designation; Nontransferability of Awards 9.1 Designation of Beneficiary. Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his death before he receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. 9.2 Nontransferability of Awards. No Award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all Awards granted to a Participant under the Plan shall be exercisable/payable during his or her lifetime only by or to such Participant or his or her legal representative. Notwithstanding the foregoing, the Committee may in its discretion authorize a participant to transfer all or a portion of any award to the participant's family members on such terms prescribed by the Committee. Article 10. Deferrals The Committee may permit a Participant to defer such Participant's receipt of the payment of cash that would otherwise be due to such Participant. If any such deferral election is permitted, the Committee shall, in its sole discretion, establish such rules and procedures as it deems necessary or desirable for such payment deferrals. Article 11. Adjustments in Awards In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, share combination or other change in the corporate structure of the Company affecting the Shares, such adjustment shall be made to the number of SARs and Stock Units under outstanding Awards granted under the Plan and the Base Value of SARs, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of SARs and Stock Units subject to an Award shall always be a whole number. Article 12. No Rights of Employees 12.1 Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, for any reason or no reason, in the Company's sole discretion, nor confer upon any Participant any right to continue in the employ of the Company. 12.2 Awards. No Employee shall have the right to be selected to receive an Award under the Plan, or, having been so selected, to be selected to receive a future Award. Article 13. Corporate Restructuring; Change in Control 13.1 Corporate Restructuring. In the event (i) the corporate restructuring as contemplated by the Company's PowerChoice proposal filed with the New York Public Service Commission on October 6, 1995, or any substantially similar corporate restructuring (determined by the Committee), is implemented and (ii) the employment of a Participant with the Company is terminated (other than for Cause), then with respect to Awards granted prior to implementation of the restructuring, (a) during a Vesting Period for Stock Units, the Participant shall receive a full payout of Stock Units and related Dividend Equivalents, as and when provided in Article 7; (b) before the Exercise Period commences for SARs subject to an Award, such SARs may be exercised in full at any time during the one year period commencing on the day the Exercise Period begins; (c) during the Exercise Period for SARs, but before exercise, such SARs may be exercised in full at any time during the one year period after such termination, but in no event after the Exercise Period for such SARs has expired; and (d) all outstanding cash Awards shall be paid in full within 30 days following termination. 13.2 Change in Control. Upon the occurrence of a Change in Control: (a) Any and all SARs granted hereunder shall be deemed to have been exercised on the date such Change in Control occurs; (b) Any Vesting Period with respect to Stock Units shall be deemed to have expired, and there shall be paid out in cash to Participants within thirty (30) days following the effective date of the Change in Control the cash payment due with respect to such Stock Units and related Dividend Equivalents based on the Fair Market Value of one Share on the effective date of the Change in Control; and (c) All outstanding cash Awards shall be paid in full within 30 days following the effective date of the Change in Control. Article 14. Amendment, Modification and Termination 14.1 Amendment, Modification and Termination. The Board may, at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part. 14.2 Awards Previously Granted. No termination, amendment or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award, unless such termination, modification or amendment is required by applicable law. Article 15. Tax Withholding The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state and local income and employment taxes required by law to be withheld with respect to any taxable event arising out of or as a result of an Award made under the Plan. Article 16. Successors All obligations of the Company under the Plan, with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. Article 17. Legal Construction 17.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular and the singular shall include the plural. 17.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 17.3 Requirements of Law. The granting of Awards under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 17.4 Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with, and governed by, the laws of the State of New York, without regard to conflicts of law provisions. AMENDMENT TO EXHIBIT 10-3 EMPLOYMENT AGREEMENT Agreement made as of the 9th day of June, 1997, between NIAGARA MOHAWK POWER CORPORATION (the "Company") and William E. Davis (the "Executive"). WHEREAS, the Company and the Executive have entered into an Agreement made as of December 20, 1996 (the "Employment Agreement") with respect to the terms and conditions of the Executive's employment; and WHEREAS, the Company and the Executive desire to amend the Employment Agreement in a certain respect. NOW, THEREFORE, the Company and the Executive hereby agree that the Employment Agreement is amended by the addition of the following at the end of Section 4 thereof: l. Notwithstanding anything contained in this Section 4 to the contrary, upon termination of the Executive's employment after completion of eight (8) years of continuous service with the Company (as determined pursuant to the SERP), the Executive and his eligible dependents shall be entitled to receive medical, prescription drug, dental and hospitalization benefits equal to those provided by the Company to the Executive on March 26, 1997 for the remainder of the Executive's life, the cost of which shall be paid in full by the Company (if applicable, on the same after-tax basis to the executive as if the Executive had continued participation in the Company's employee benefit plans providing such benefits). If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive such benefits upon attaining age 55 and prior thereto the Executive, if applicable, shall be entitled to the medical, prescription drug, dental and hospitalization benefits provided by paragraphs 4f or g above. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. NIAGARA MOHAWK POWER CORPORATION ______________________________ William E. Davis By:_______________________________________ David J. Arrington Senior Vice President - Human Resources AMENDMENT TO EMPLOYMENT AGREEMENT Agreement made as of the 9th day of June, 1997, between NIAGARA MOHAWK POWER CORPORATION (the "Company") and Albert J. Budney, Jr. (the "Executive"). WHEREAS, the Company and the Executive have entered into an Agreement made as of December 20, 1996 (the "Employment Agreement") with respect to the terms and conditions of the Executive's employment; and WHEREAS, the Company and the Executive desire to amend the Employment Agreement in a certain respect. NOW, THEREFORE, the Company and the Executive hereby agree that the Employment Agreement is amended by the addition of the following at the end of Section 4 thereof: l. Notwithstanding anything contained in this Section 4 to the contrary, upon termination of the Executive's employment after completion of eight (8) years of continuous service with the Company (as determined pursuant to the SERP), the Executive and his eligible dependents shall be entitled to receive medical, prescription drug, dental and hospitalization benefits equal to those provided by the Company to the Executive on March 26, 1997 for the remainder of the Executive's life, the cost of which shall be paid in full by the Company (if applicable, on the same after-tax basis to the executive as if the Executive had continued participation in the Company's employee benefit plans providing such benefits). If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive such benefits upon attaining age 55 and prior thereto the Executive, if applicable, shall be entitled to the medical, prescription drug, dental and hospitalization benefits provided by paragraphs 4f or g above. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. NIAGARA MOHAWK POWER CORPORATION ______________________________ Albert J. Budney, Jr. By:_______________________________________ David J. Arrington Senior Vice President - Human Resources AMENDMENT TO EMPLOYMENT AGREEMENT Agreement made as of the 9th day of June, 1997, between NIAGARA MOHAWK POWER CORPORATION (the "Company") and B. Ralph Sylvia (the "Executive"). WHEREAS, the Company and the Executive have entered into an Agreement made as of December 20, 1996 (the "Employment Agreement") with respect to the terms and conditions of the Executive's employment; and WHEREAS, the Company and the Executive desire to amend the Employment Agreement in a certain respect. NOW, THEREFORE, the Company and the Executive hereby agree that the Employment Agreement is amended by the addition of the following at the end of Section 4 thereof: l. Notwithstanding anything contained in this Section 4 to the contrary, upon termination of the Executive's employment after completion of eight (8) years of continuous service with the Company (as determined pursuant to the SERP), the Executive and his eligible dependents shall be entitled to receive medical, prescription drug, dental and hospitalization benefits equal to those provided by the Company to the Executive on March 26, 1997 for the remainder of the Executive's life, the cost of which shall be paid in full by the Company (if applicable, on the same after-tax basis to the executive as if the Executive had continued participation in the Company's employee benefit plans providing such benefits). If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive such benefits upon attaining age 55 and prior thereto the Executive, if applicable, shall be entitled to the medical, prescription drug, dental and hospitalization benefits provided by paragraphs 4f or g above. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. NIAGARA MOHAWK POWER CORPORATION ______________________________ B. Ralph Sylvia By:_______________________________________ David J. Arrington Senior Vice President - Human Resources AMENDMENT TO EMPLOYMENT AGREEMENT Agreement made as of the 9th day of June, 1997, between NIAGARA MOHAWK POWER CORPORATION (the "Company") and David J. Arrington (the "Executive"). WHEREAS, the Company and the Executive have entered into an Agreement made as of December 20, 1996 (the "Employment Agreement") with respect to the terms and conditions of the Executive's employment; and WHEREAS, the Company and the Executive desire to amend the Employment Agreement in a certain respect. NOW, THEREFORE, the Company and the Executive hereby agree that the Employment Agreement is amended by the addition of the following at the end of Section 4 thereof: l. Notwithstanding anything contained in this Section 4 to the contrary, upon termination of the Executive's employment after completion of eight (8) years of continuous service with the Company (as determined pursuant to the SERP), the Executive and his eligible dependents shall be entitled to receive medical, prescription drug, dental and hospitalization benefits equal to those provided by the Company to the Executive on March 26, 1997 for the remainder of the Executive's life, the cost of which shall be paid in full by the Company (if applicable, on the same after-tax basis to the executive as if the Executive had continued participation in the Company's employee benefit plans providing such benefits). If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled o receive such benefits upon attaining age 55 and prior thereto the Executive, if applicable, shall be entitled to the medical, prescription drug, dental and hospitalization benefits provided by paragraphs 4f or g above. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. NIAGARA MOHAWK POWER CORPORATION ______________________________ David J. Arrington By:_______________________________________ William E. Davis Chief Executive Officer AMENDMENT TO EMPLOYMENT AGREEMENT Agreement made as of the 9th day of June, 1997, between NIAGARA MOHAWK POWER CORPORATION (the "Company") and Gary J. Lavine (the "Executive"). WHEREAS, the Company and the Executive have entered into an Agreement made as of December 20, 1996 (the "Employment Agreement") with respect to the terms and conditions of the Executive's employment; and WHEREAS, the Company and the Executive desire to amend the Employment Agreement in a certain respect. NOW, THEREFORE, the Company and the Executive hereby agree that the Employment Agreement is amended by the addition of the following at the end of Section 4 thereof: l. Notwithstanding anything contained in this Section 4 to the contrary, upon termination of the Executive's employment after completion of eight (8) years of continuous service with the Company (as determined pursuant to the SERP), the Executive and his eligible dependents shall be entitled to receive medical, prescription drug, dental and hospitalization benefits equal to those provided by the Company to the Executive on March 26, 1997 for the remainder of the Executive's life, the cost of which shall be paid in full by the Company (if applicable, on the same after-tax basis to the executive as if the Executive had continued participation in the Company's employee benefit plans providing such benefits). If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive such benefits upon attaining age 55 and prior thereto the Executive, if applicable, shall be entitled to the medical, prescription drug, dental and hospitalization benefits provided by paragraphs 4f or g above. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. NIAGARA MOHAWK POWER CORPORATION ______________________________ Gary J. Lavine By:_______________________________________ David J. Arrington Senior Vice President - Human Resources AMENDMENT TO EMPLOYMENT AGREEMENT Agreement made as of the 9th day of June, 1997, between NIAGARA MOHAWK POWER CORPORATION (the "Company") and Darlene D. Kerr (the "Executive"). WHEREAS, the Company and the Executive have entered into an Agreement made as of December 20, 1996 (the "Employment Agreement") with respect to the terms and conditions of the Executive's employment; and WHEREAS, the Company and the Executive desire to amend the Employment Agreement in a certain respect. NOW, THEREFORE, the Company and the Executive hereby agree that the Employment Agreement is amended by the addition of the following at the end of Section 4 thereof: l. Notwithstanding anything contained in this Section 4 to the contrary, upon termination of the Executive's employment after completion of eight (8) years of continuous service with the Company (as determined pursuant to the SERP), the Executive and his eligible dependents shall be entitled to receive medical, prescription drug, dental and hospitalization benefits equal to those provided by the Company to the Executive on March 26, 1997 for the remainder of the Executive's life, the cost of which shall be paid in full by the Company (if applicable, on the same after-tax basis to the executive as if the Executive had continued participation in the Company's employee benefit plans providing such benefits). If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive such benefits upon attaining age 55 and prior thereto the Executive, if applicable, shall be entitled to the medical, prescription drug, dental and hospitalization benefits provided by paragraphs 4f or g above. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. NIAGARA MOHAWK POWER CORPORATION ______________________________ Darlene D. Kerr By:_______________________________________ David J. Arrington Senior Vice President - Human Resources AMENDMENT TO EMPLOYMENT AGREEMENT Agreement made as of the 9th day of June, 1997, between NIAGARA MOHAWK POWER CORPORATION (the "Company") and John W. Powers (the "Executive"). WHEREAS, the Company and the Executive have entered into an Agreement made as of December 20, 1996 (the "Employment Agreement") with respect to the terms and conditions of the Executive's employment; and WHEREAS, the Company and the Executive desire to amend the Employment Agreement in a certain respect. NOW, THEREFORE, the Company and the Executive hereby agree that the Employment Agreement is amended by the addition of the following at the end of Section 4 thereof: l. Notwithstanding anything contained in this Section 4 to the contrary, upon termination of the Executive's employment after completion of eight (8) years of continuous service with the Company (as determined pursuant to the SERP), the Executive and his eligible dependents shall be entitled to receive medical, prescription drug, dental and hospitalization benefits equal to those provided by the Company to the Executive on March 26, 1997 for the remainder of the Executive's life, the cost of which shall be paid in full by the Company (if applicable, on the same after-tax basis to the executive as if the Executive had continued participation in the Company's employee benefit plans providing such benefits). If the Executive is less than age 55 at the date of such termination of employment, the Executive shall be entitled to receive such benefits upon attaining age 55 and prior thereto the Executive, if applicable, shall be entitled to the medical, prescription drug, dental and hospitalization benefits provided by paragraphs 4f or g above. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. NIAGARA MOHAWK POWER CORPORATION ______________________________ John W. Powers By:_______________________________________ David J. Arrington Senior Vice President - Human Resources EXHIBIT 11 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- Computation of the Average Number of Shares of Common Stock Outstanding For the Three and Six Months Ended June 30, 1997 and 1996 (4) Average Number of Shares Outstanding As Shown on Consolidated Statement (1) (2) (3) of Income Shares of Number Share (3 divided by Common of Days Days number of Days Stock Outstanding (2 x 1) in Period) --------- ----------- ------- --------------- FOR THE THREE MONTHS ENDED JUNE 30: APRIL 1 - JUNE 30, 1997 144,390,619 91 13,139,546,329 144,390,619 =========== ============== =========== April 1 - June 30, 1996 144,332,855 91 13,134,289,805 Shares issued - Acquisition - Syracuse Suburban Gas Company, Inc. - June 11 16,984 20 339,680 ----------- -------------- 144,349,839 13,134,629,485 144,336,588 =========== ============== =========== FOR THE SIX MONTHS ENDED JUNE 30: JANUARY 1 - JUNE 30, 1997 144,365,214 181 26,130,103,734 SHARES ISSUED AT VARIOUS TIMES DURING THE PERIOD - ACQUISITION - SYRACUSE SUBURBAN GAS COMPANY, INC. - JANUARY 6 25,405 176 4,471,280 ----------- -------------- 144,390,619 26,134,575,014 144,389,917 =========== ============== =========== January 1 - June 30, 1996 144,332,123 182 26,268,446,386 Shares issued at various times during the period - Acquisition - Syracuse Suburban Gas Company, Inc. 17,716 * 447,284 ----------- -------------- 144,349,839 26,268,893,670 144,334,581 =========== ============== =========== NOTE: Earnings per share calculated on both a primary and fully diluted basis are the same due to the effects of rounding. * Number of days outstanding not shown as shares represent an accumulation of weekly and monthly issues throughout the period. Share days for shares issued are based on the total number of days each share was outstanding during the period. EXHIBIT 12 NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------- Statement Showing Computation of Ratio of Earnings to Fixed Charges, Ratio of Earnings to Fixed Charges without AFC and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends for the Twelve Months Ended June 30, 1997 (in thousands of dollars). A. Net Income (a) $105,047 B. Taxes Based on Income or Profits 80,226 ------- C. Earnings, Before Income Taxes 185,273 D. Fixed Charges (b) 308,360 ------- E. Earnings Before Income Taxes and Fixed Charges 493,633 F. Allowance for Funds Used During Construction (AFC) 9,316 ------- G. Earnings Before Income Taxes and Fixed Charges without AFC $484,317 ======= PREFERRED DIVIDEND FACTOR: H. Preferred Dividend Requirements $ 37,938 ------- I. Ratio of Pre-tax Income to Net Income (C/A) 1.764 ------- J. Preferred Dividend Factor (HxI) $ 66,923 K. Fixed Charges as Above (D) 308,360 ------- L. Fixed Charges and Preferred Dividends Combined $375,283 ======= M. Ratio of Earnings to Fixed Charges (E/D) 1.60 ======= N. Ratio of Earnings to Fixed Charges without AFC (G/D) 1.57 ======= O. Ratio of Earnings to Fixed Charges and Preferred Dividends Combined (E/L) 1.32 ======= (a) Includes the extraordinary item of $67,364 recorded in December 1996 for the discontinuance of regulatory accounting principles, net of income taxes of $36,273. (b) Includes a portion of rentals deemed representative of the interest factor ($26,534). /TABLE EXHIBIT 15 - ---------- August 7, 1997 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Dear Sirs: We are aware that Niagara Mohawk Power Corporation has included our report dated August 7, 1997 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) in the Registration Statements on Form S-8 (Nos. 33-36189, 33-42771 and 333-13781) and in the Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 33-50703, 33-51073, 33- 54827 and 33-55546). We are also aware of our responsibilities under the Securities Act of 1933. Yours very truly, /s/ Price Waterhouse LLP - ------------------------ PRICE WATERHOUSE LLP