NIAGARA MOHAWK
POWER CORPORATION
IPP MASTER RESTRUCTURING AGREEMENT
FORWARD LOOKING STATEMENTS
This presentation contains certain forward looking statements with
respect to the financial condition, results of operations and business of
Niagara Mohawk Power Corporation, including statements relating to (a) energy
cost savings that will be realized by consummation of the Master Restructuring
Agreement including, by implication, market prices for energy; (b) the impact of
the transaction on cash flow; and (c) management plans and objectives for the
Company's future operations. These forward looking statements involve certain
risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward looking statements include,
among others, the following possibilities: (1) failure of some independent power
producers to consummate the proposed transaction; (2) changes in market prices
for electric energy; (3) changes in financing costs; (4) federal income tax
treatment of the transaction; (5) changes in capital expenditures; (6) general
economic conditions, either nationally or in New York state, are less favorable
than expected; (7) regulatory treatment of the transaction, including a prudence
determination, establishing appropriate price levels, authorizing regulatory
assets and stranded cost recovery; or (8) legislative or regulatory changes
adversely affect the business in which the Company would be engaged.
INTRODUCTION
o October 1995 - POWERCHOICE proposal put focus on mandated payments to
IPPs. Contracts need to be dramatically restructured, or NM will require
substantial rate increases to cover rising annual IPP obligations
o August 1996 - NM proposes to buy out 44 contracts from 19 developers
representing about 90% of above-market IPP costs
o March 1997 - NM reaches Agreement-in-Principle with 19 developers to
terminate or restructure 44 contracts
o July 1997 - NM signs Master Restructuring Agreement (MRA) with 16
developers to terminate or restructure 29 contracts
SUMMARY OF AGREEMENT
o Master Restructuring Agreement with 16 developers representing 29 IPP
contracts
o improves NM's cash flow and financial position
o addresses over 80% of above-market IPP costs
o will pursue separate settlements with 3 developers representing 15
hydro contracts
o the agreement-in-principle with these developers was comprised
solely of restructured contracts
o their departure from the MRA does not change the amount of
cash and stock in the agreement
SUMMARY OF AGREEMENT (continued)
o 29 IPP contracts terminated or restructured in exchange for:
o $3.6 billion cash
o Up to $3.2 billion raised through sale of NM senior unsecured debt
o Balance from cash on hand and tax refund
o 46 million shares of NM common stock
o 25% of pro forma shares outstanding
SUMMARY OF AGREEMENT (continued)
o New electric contracts
o financial and physical contracts
o shorter terms
o more market-drive pricing
o provide price hedge to deliver near-term price certainty and
to manage regulatory risk
CORPORATE GOVERNANCE
o Shareholder Agreement
o any IPP that holds more than 2% of NM stock will enter into
Shareholder Agreement
o 5-year standstill restrictions
o Board Representation
o NM will fill two recently vacated seats on its Board of Directors
o NM will select 2 individuals from a list of 10 candidates
mutually agreed to by the IPPs and NM
CONDITIONS TO CONSUMMATION
o Each party has the right to withdraw from the agreement based on a broad
set of conditions:
o anticipated economic outcome must be reasonably achieved
o required regulatory approvals must be obtained
o Stranded cost recovery is critical
o third party consents, releases and waivers must be obtained
CONDITIONS TO CONSUMMATION (continued)
o If not yet consummated, agreement will expire on April 1, 1998
unless extended by mutual agreement of the parties
o provides all parties with sufficient time to satisfy
conditions
KEY OBJECTIVES ACHIEVED
o Preserves Shareholder Value
o replaces problematic long-term IPP contracts with a manageable
obligation which amortizes over 7-8 yrs
o permanent solution for the majority of above-market IPP costs
o once debt is paid down, IPP problem will be resolved
o stabilizes annual cash flow by eliminating escalating IPP payments
in existing contracts
o allows management to focus on the core business
KEY OBJECTIVES ACHIEVED (continued)
o Protects creditors
o terms of first mortgage bonds unchanged
o provides funds to satisfy IPP contract claims
o Provides price reductions for all major classes of customers
o final levels subject to approval by the PSC
KEY OBJECTIVES ACHIEVED (continued)
o Restructured contracts facilitate transition to competitive generation
market
o over 1000 MW of purchased capacity will be terminated and replaced
with market purchases
o this represents over 50% of the capacity associated with the 29 IPP
contracts
FINANCIAL IMPLICATIONS
o Cash Flow
o results in annual energy cost savings of approximately $600 million
o the additional cash flow will allow the new debt to be retired on an
aggressive basis over the next 7 to 8 years
Pro Forma IPP Cash Flow Savings
($ millions)
FOR THE YEAR ENDED DECEMBER 31, 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Existing IPP Payments (1) 1,186 1,227 1,250 1,319 1,348 1,388 1,434 1,459 1,473 1,366
Equivalent Energy Payment
Post-Restructuring (1) 601 621 625 670 681 761 888 925 948 930
---------------------------------------------------------------------------------------------
ENERGY COST SAVINGS 585 606 625 649 667 627 546 534 525 436
=============================================================================================
Less New Financing Costs (2)
Interest Expense 272 245 218 190 163 136 109 82 54 27
Amortization of Principal 320 320 320 320 320 320 320 320 320 320
---------------------------------------------------------------------------------------------
Total New Financing Costs 592 565 538 510 483 456 429 402 374 347
NET CASH FLOW AVAILABLE (7) 41 87 139 184 171 117 132 151 89
Cash on Balance Sheet (3) (7) 34 121 260 444 615 732 864 1,015 1,104
Unsecured Notes 3,200 2,880 2,560 2,240 1,920 1,600 1,280 960 640 320 -
<FN>
Notes:
(1) Based on Company's forecast of IPP generation and future market prices
(2) Assumes the new debt will have an average cost of 8.5% and will be amortized over ten years for illustrative
purposes only
(3) Does not reflect the Company's opening cash balance, nor the cash flow generated by the underlying business
</FN>
FINANCIAL IMPLICATIONS (continued)
o NM is seeking approval to record a regulatory asset for the IPP buyout and
amortize the asset over a ten-year period
o the non-cash amortization of the regulatory asset will reduce
reported book earnings by approximately $250 million per year, but
will have no impact on cash flow
FINANCIAL IMPLICATIONS (continued)
o Pro forma valuation
o NM believes that as the electric utility industry transitions to
competition, cash flow valuation parameters will becomes more
relevant
o NM reported earnings will be depressed by the non-cash amortization
of the regulatory asset and the interest costs associated with
additional leverage
o earnings will become less meaningful and less predictable
making cash flow a better valuation metric
FINANCIAL IMPLICATIONS (continued)
o given the recurring non-cash charges resulting from the
agreement (amortization of the regulatory asset), NM believes
the best way to measure its value is by using cash flow-EBITDA
(Earnings Before Interest, Taxes, Depreciation and
Amortization)
PRO FORMA EBITDA/CASH FLOW
($ millions)
ACTUAL Pro Forma Pro Forma %
-------------------------------------------------
Operating Revenues $3,991 $3,991(6)
IPP Payments 1,089 (585)(1) 504 -54%
Other Operating Expenses 2,050 2,050
------------- ------------ ----------- -------
EBITDA 852 585 1,437 69%
Less: Cash Interest
Expense 286 272(2) 558 95%
Less: Cash Fit 96 (77)(3) 19 -80%
Less: Capital
Expenditures 297 297
Less: Preferred Stock
Dividends 38 38
Plus: Other Non-Cash
Items 23 23
------------- ------------ ----------- -------
CASH FLOW AVAILABLE FOR
DEBT REPAYMENT 158 390 548 247%
Cash Balance 325 115(4) 440
Debt 3,526 3,200(5) 6,726
Preferred Stock 527 527
NOTES:
(1) Energy cost savings resulting from IPP contract restructuring,
reflecting reduced IPP payments net of new market purchases
(2) Interest costs associated with $3.2 billion of debt at an assumed
interest rate of 8.5%
(3) Lower FIT expense resulting from IPP agreement
(4) Increase in cash net of: cash paid to IPPs, decrease in energy costs,
lower FIT, higher interest costs, debt insurance costs, and tax refund
related to the net operating loss carryback
(5) Reflects the issuance of $3.2 billion of unsecured debt
(6) Operating revenues do not reflect anticipated retail customer price
reductions
PRO FORMA FINANCIAL VALUATION
($ Millions)
Actual
EBITDA Based Valuation 1996 Pro Forma 1996
- ---------------------- ------ ---------------------
Current NMK Stock Price $8.50
NMK Shares Outstanding (millions) 144.4 190.4
----- -----
NMK Equity Market Capitalization 1,227
First Mortgage Bonds and Other 3,201 3,086
Unsecured Notes - 3,200
Preferred Stock 527 527
----- -----
Net Debt and Preferred Stock 3,728 6,813
----- -----
Enterprise Value 4,955
EBITDA 852 1,437
Enterprise Value / EBITDA (1) 5.8x
NOTE:
(1) Actual 1996 Enterprise Value/EBITDA multiple reflects the current market
price of NMK and year end balance sheet data. Comparable companies in the
industry trade at an average of 7.0x.
FINANCIAL IMPLICATIONS (continued)
o Dividend Considerations
o NM's Board of Directors recognizes the significance of a dividend to
its equity investors
o upon completion of the POWERCHOICE restructuring, the Board will
regularly review its dividend policy in light of likely constraints
and will take action as appropriate.
RESTRUCTURED CONTRACTS
o Role of New Contracts
o replaces existing contracts with a balanced portfolio of new
contracts, amended contracts and market purchases
o allocates risks between generators and customers
o provides stability in purchased power costs to support retail price
goals
o transitions generating assets from regulation to competitive market
RESTRUCTURED CONTRACTS (continued)
o Types of contracts:
o Solid Fuel Contracts
o 17-year contracts
o market-based prices
o Indexed Gas Contracts
o 10-year contracts
o energy prices are responsive to gas market prices
o includes both financial and physical contract structures
RESTRUCTURED CONTRACTS (continued)
o Fixed Price Gas Contracts (Financial Swaps)
o 7-year contracts starting in 2003
o energy prices are fixed, IPPs bear gas price risk
CONTRACT SCHEDULE
ADDITIONAL FINANCIAL
COAL AND WASTE GAS CONTRACTS (GAS)
--------------------- ---------------------- ----------------------
QUANTITY PRICE(1) QUANTITY PRICE(2) QUANTITY PRICE(1)
YEAR GWH $/MWH GWH $/MWH GWH $/MWH
- ----- -------- -------- -------- -------- -------- --------
1 353 28.50 4,640 46.40 -- --
2 353 29.40 4,640 46.79 -- --
3 353 30.30 4,640 43.86 -- --
4 353 31.20 4,730 45.92 -- --
5 353 32.10 4,736 47.22 -- --
6 353 33.10 4,755 49.59 2,000 54.58
7 353 34.10 4,765 51.51 3,000 56.51
8 353 35.10 4,778 53.02 4,000 58.01
9 353 36.10 4,786 55.49 4,000 60.48
10 353 37.20 4,798 60.21 4,000 62.30
11 353 38.30 -- -- 8,000 61.99
12 353 39.50 -- -- 8,000 62.06
13 353 40.70 -- -- -- --
14 353 41.90 -- -- -- --
15 353 43.20 -- -- -- --
16 353 44.50 -- -- -- --
17 176 45.84 -- -- -- --
18 -- -- -- -- -- --
19 -- -- -- -- -- --
20 -- -- -- -- -- --
- ---------------
(1) Fixed price schedule.
(2) Fixed price schedule for years 1-2 with years 3-10 indexed.
REGULATORY APPROVAL
o Within 2 weeks, NM will file the MRA in the context of a revised
POWERCHOICE proposal
o Several issues are critical to the approval of the MRA:
o determination that IPP agreement is prudent
o establishment of price levels going forward
o authorization to record a regulatory asset for the buyout
REGULATORY APPROVAL (continued)
o establishment of non-bypassable transition cost recovery mechanism
o authorization to do financing necessary to complete the IPP
agreement
REGULATORY APPROVAL (continued)
o Will seek to obtain risk protection mechanisms
o non-bypassable transition cost recovery
o EBITDA coverage floor
o force majeure
o Hope to obtain regulatory approval during the 4th quarter
TIMING OF NEXT STEPS
o IPPs hope to complete 3rd party negotiations during the 4th quarter
o Will seek shareholder approvals following receipt of regulatory approval
o Hope to close transaction by early 1998
CORPORATE BUSINESS STRATEGY
o Overview
o IPP settlement repositions the company, providing it with improved
cash flow and the resources to rebuild shareholder value
o IPP settlement gives Niagara Mohawk the opportunity to concentrate
on its business and capitalize on its opportunities
ENERGY DELIVERY BUSINESS
Wires and pipes company will be the economic foundation going forward, providing
the bulk of the revenue and cash flow and providing a mechanism for recovering
stranded costs
o Basic strategy is to provide high quality, low-cost delivery services
(high reliability, excellent customer service)
o Two-year re-engineering effort to focus on customer processes and field
operations
GENERATION BUSINESS
o Fossil/Hydro Assets
o we will explore several options for maximizing shareholder value
while minimizing bondholder issues
o sale of assets
o spin-off into a separate company
o retained in a wholly owned subsidiary
o primary strategy has been to become the low-cost producer of energy,
capacity and ancillary services
GENERATION BUSINESS (continued)
o Nuclear Assets
o will remain regulated for now
o strategy is to ensure safe operation while maximizing output and
minimizing costs
o working on forming a state-wide nuclear operating company - NYNOC
PLUM STREET ENTERPRISES
o Unregulated subsidiary focused on participation in evolving markets
o Current geographic scope: Northeastern U.S. and Canada with niche
opportunities in international markets
o Primary products and services:
o energy marketing and brokering
o new technology development and international opportunities
o mass market business development and energy services
SUMMARY
o MRA improves NM's cash flow and financial position
o Allows NM to focus on core business and complete POWERCHOICE plan
o Energy delivery business will be the economic foundation of the company
going forward
o NM recognizes the significance of a common stock dividend to its equity
investors