ITEM 1. BUSINESS
On March 18, 1999, Niagara Mohawk Power Corporation (“Niagara Mohawk”) was reorganized into a holding company structure in accordance with its Agreement and Plan of Exchange between Niagara Mohawk and Niagara Mohawk Holdings, Inc. (“Holdings”). Niagara Mohawk’s outstanding common stock was exchanged on a share-for-share basis for Holdings common stock. Niagara Mohawk’s preferred stock and debt were not exchanged as part of the share exchange and continue as shares and debt of Niagara Mohawk. To complete the holding company structure, Niagara Mohawk, on March 31, 1999, distributed its ownership in the stock of Opinac North America, Inc. (“Opinac”) as a dividend to Holdings. As a result, Holdings has two subsidiaries, (1) Niagara Mohawk, which is primarily a regulated electric and gas utility, and (2) Opinac, which is mainly involved in unregulated activities in the energy business.
Niagara Mohawk was organized in 1937 under the laws of New York State and is engaged principally in the regulated energy delivery business in New York State. Niagara Mohawk provides electric service to approximately 1,500,000 electric customers in the areas of eastern, central, northern and western New York and sells, distributes, and transports natural gas to approximately 540,000 gas customers in areas of central, northern and eastern New York State.
On January 31, 2002, Holdings became a wholly owned subsidiary of National Grid. National Grid owns and operates the high voltage transmission system in England and Wales. National Grid, through another subsidiary, National Grid USA, also has substantial transmission and distribution operations in the United States following its acquisitions of New England Electric System and Eastern Utilities Associates in early 2000. The combination of Niagara Mohawk and National Grid more than doubled the size of National Grid’s U.S. operations, with an electric customer base of approximately 3.3 million.
The MRA and the Power Choice agreement that were entered into in 1998 provided Niagara Mohawk with financial stability and created an improved platform upon which it could build value. The MRA and the Power Choice agreement were the results of negotiations that Niagara Mohawk entered into to terminate, amend or restate a substantial portion of above market PPAs in an effort to mitigate the escalating cost of these PPAs as well as to prepare Niagara Mohawk for a more competitive environment. Niagara Mohawk entered into these state-mandated PPAs at costs far exceeding Niagara Mohawk’s avoided costs. Avoided costs are the costs Niagara Mohawk would have otherwise incurred to generate power if it did not purchase electricity from these sources.
Niagara Mohawk and the PSC agreed to a five-year rate plan, the Power Choice agreement, and Niagara Mohawk agreed to divest its fossil and hydro generation assets, representing 4,217 MW of capacity and approximately $1.1 billion of net book value. As agreed upon under Power Choice, Niagara Mohawk made available to all customers retail access during 1999. This means that all of Niagara Mohawk’s customers are now able to choose both their electricity and gas supplier. However, Niagara Mohawk will be the provider of last resort for those customers who do not exercise their right to choose a new supplier. With the Power Choice agreement, Niagara Mohawk lowered electric prices beginning on September 1, 1998 for its industrial, commercial and residential electric customers for a period of three years. On August 29, 2001, the PSC approved rate changes to cover the final two years of the Power Choice agreement. The PSC approved the merger rate filing that superseded the Power Choice agreement on January 31, 2002, the closing of the merger with National Grid. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Regulatory Agreements and the Restructuring of the Regulated Electric Business - Merger Rate Plan” for a detailed discussion of this rate plan.
As part of the MRA, Niagara Mohawk terminated during 1998 18 PPAs for 1,092 MW, restated 8 PPAs for 535 MW and amended 1 PPA for 42 MW in exchange for $3.934 billion in cash and 20.5 million shares of Niagara Mohawk common stock. The primary objective of the MRA was to convert a large and growing off-balance sheet payment obligation that threatened the financial viability of Niagara Mohawk into a fixed and manageable capital obligation. The lower contractual obligations resulting from the MRA significantly improved cash flow which is primarily dedicated to reduce indebtedness incurred to fund the MRA. With the improved cash flow and proceeds from the generation asset sales, Niagara Mohawk reduced debt by approximately $1.9 billion from 1999 through 2001. Niagara Mohawk has pursued other opportunities to reduce its payments to IPPs that were not party to the MRA. The Power Choice agreement and the MRA facilitated the creation of a competitive electricity supply market in Niagara Mohawk’s service territory.
For a discussion of additional events that occurred during 2001 and 2002, including the restructuring of the regulated electric utility business, other federal and state regulatory initiatives, and Niagara Mohawk’s efforts to address deregulation and its financial condition, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following topics are discussed under the general heading of “Business.” Where applicable, the discussions make reference to the various other items of this Form 10-K.
TOPIC
Regulation and Rates
Electric Supply Planning
Fuel for Electric Generation
Electric Delivery Planning
Gas Supply
Gas Delivery
Environmental Matters
Research and Development
Construction Program
Insurance
Employee Relations
Seasonality
In addition, for a discussion of Niagara Mohawk’s properties, see Item 2.
ITEM 2. PROPERTIES
ELECTRIC SUPPLY PROPERTIES
Niagara Mohawk: During 1999, Niagara Mohawk completed the sale of its coal-fired generation plants, its hydroelectric plants, and its oil and gas-fired plant in Oswego. Niagara Mohawk completed the sale of its oil and gas-fired generation plant at Albany during 2000 and its 25 percent interest in the Roseton Steam Station in early 2001. In the fourth quarter 2001, Niagara Mohawk completed the sale of its nuclear generation assets. See Part II, Item. 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Agreements and the Restructuring of the Regulated Electric Utility Business, for a further discussion of the sales of Niagara Mohawk’s generation assets.
Niagara Mohawk does not own any other electric supply facilities and meets its electric supply requirements through PPAs and open market purchases from the NYISO.
ELECTRIC DELIVERY PROPERTIES
Niagara Mohawk: As of January 31, 2002, Niagara Mohawk’s electric delivery transmission and distribution systems were composed of:
•
748 substations with a rated transformer capacity of approximately 22,800,000 kilo-voltamperes
• approximately 9,400 circuit miles of overhead and underground transmission lines
• approximately 36,100 conductor miles of overhead distribution lines
• about 5,000 cable miles of underground distribution cables
Only a part of Niagara Mohawk’s transmission and distribution lines are located on property owned by Niagara Mohawk. With respect to Niagara Mohawk’s transmission and distribution lines that are located on property not owned by Niagara Mohawk, Niagara Mohawk’s practice is to obtain right of way agreements.
There is seasonal variation in electric customer load. In 2000 and 2001, Niagara Mohawk’s maximum hourly demand occurred in the summer.
The electric system of Niagara Mohawk is directly interconnected with other electric utility systems in New York, Massachusetts, Vermont and Pennsylvania, and indirectly interconnected with most of the electric utility systems through the Eastern Interconnection of the United States.
GAS DELIVERY
Niagara Mohawk distributes gas purchased from suppliers and transports gas owned by others. As of December 31, 2001, Niagara Mohawk’s natural gas delivery system was comprised of approximately 8,300 miles of pipelines and mains. Only a part of these natural gas pipelines and mains are located on property owned by Niagara Mohawk. With respect to natural gas pipelines and mains that are not located on property owned by Niagara Mohawk, Niagara Mohawk’s practice is to obtain right of way agreements.
SUBSIDIARIES
Niagara Mohawk has the following subsidiaries:
(a)
NM Uranium, Inc. - has an interest in a uranium mining operation in Live Oak County, Texas, which is now in the process of reclamation and restoration.
(b)
NM Properties, Inc. - engages in real estate development and divestiture of property formerly owned by Niagara Mohawk. NM Properties, Inc. owns several subsidiaries and has interests in several joint ventures in carrying out its activities.
(c)
NM Receivables - facilitates the sale of an undivided interest in a designated pool of customer receivables, including accrued unbilled revenues. NM Receivables, LLC is owned by Niagara Mohawk (over 99.99 percent) and by NM Receivables Corp. II, which is a wholly owned subsidiary of Niagara Mohawk.
NATIVE AMERICAN MATTERS
There are five Native American Nations with reservations located in the vicinity of Niagara Mohawk’s service territory and facilities. Niagara Mohawk has held discussions and has been involved in legal proceedings with Native American Nations involving Niagara Mohawk’s high voltage transmission facilities on Nation lands, provision of electric service to customers on Nation lands, and the Nations’ land claims.
In June 2000, Niagara Mohawk entered into a 40-year agreement with the Seneca Nation to settle issues related to approximately 50 miles of high voltage transmission facilities located on the Seneca Nation’s Cattaraugus and Allegheny Reservations. Niagara Mohawk has entered into Electric Service Agreements with the Onondaga, Tuscarora and Seneca-Tonawanda Nations governing the provision of electric service to customers on their lands. These agreements are pending federal approval. Niagara Mohawk intends to seek similar agreements with the Oneida and Mohawk Nations to supplement existing federally approved agreements. Niagara Mohawk’s facilities are affected by land claim litigation involving the Cayuga, Oneida, Mohawk and Seneca Nations. A court has awarded damages to the Cayuga Nation that are payable by the State of New York. The land claim matters involving the Cayuga, Oneida, Mohawk and Seneca Nations have not been completely and finally resolved. Niagara Mohawk will continue to monitor the land claim litigation and where necessary defend its interests, but is unable to predict the timing or outcome of these matters.
MORTGAGE LIENS
Substantially all of Niagara Mohawk’s operating properties are subject to a mortgage lien securing its mortgage debt.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
For a detailed discussion of additional legal proceedings, see Part II, Item 8. Financial Statements and Supplementary Data - Note 8. Commitments and Contingencies, “Environmental Contingencies.” See also Item 1. Business - Environmental Matters - Solid/Hazardous Waste, Item 2. Properties - Native American Matters, and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Agreements and the Restructuring of the Regulated Electric Utility Business. Niagara Mohawk is unable to predict the ultimate disposition of the matters referred to below. In addition, consistent with its rate agreements, Niagara Mohawk believes that it is probable that it will be able to recover prudently incurred expenditures in cost-of-service based rates. See also Part II, Item 8. Financial Statements and Supplementary Data - Note 3. Rate and Regulatory Issues and Contingencies.
1.
On June 22, 1993, Niagara Mohawk and 20 other industrial entities, as well as the former owner/operator of the Pfohl Brothers Landfill near Buffalo, New York, were sued in New York State Supreme Court, Erie County, by a group of residents living in the area surrounding the landfill. The plaintiffs seek compensation for alleged economic loss and property damage claimed to have resulted from exposure to contamination associated with the landfill. In addition, since January 18, 1995, Niagara Mohawk has been named as a defendant or third party defendant in a series of toxic tort actions filed in federal or state courts in the Buffalo area. These actions allege exposure on the part of plaintiffs or plaintiffs’ decedents to toxic chemicals associated with the landfill, resulting in the alleged causation of property damage and/or physical injury. The plaintiffs seek compensatory and punitive damages. Niagara Mohawk has filed answers responding to the claims put forth in these suits, denying liability as to any of the claimed conditions or damages and will vigorously defend against each claim.
Niagara Mohawk is unable to predict at this time the probable outcome of these proceedings, which at present remain in the discovery stage (although the discovery process has been held in abeyance pending the outcome of the appeal of dismissal of certain of the actions on a statute of limitations basis). Niagara Mohawk, through participation in the Pfohl Brothers Landfill Steering Committee, is participating in the implementation of a remedial program as required pursuant to a DEC administrative order on consent executed in April 2001. Remedial construction is expected to be complete by the end of July 2002, with total construction costs projected to reach $23.5 million. In the context of a formal remedial cost allocation proceeding conducted on behalf of the Committee, it has been determined that Niagara Mohawk’s potential contribution of industrial wastes to the landfill was minor. Further, it is Niagara Mohawk’s position that any materials attributable to Niagara Mohawk, which may have been disposed of at the landfill, are not causally related to any physical condition alleged or other harm alleged to have been incurred by plaintiffs in the various lawsuits associated with the landfill. Niagara Mohawk does not believe that the outcome of these proceedings will have a material adverse effect on its results of operations or financial condition.
2.
In November 1993, Fourth Branch Associates Mechanicville (“Fourth Branch”) filed an action against Niagara Mohawk and several of its officers and employees in the New York State Supreme Court, seeking compensatory damages of $50 million, punitive damages of $100 million, and injunctive and other related relief. The lawsuit grows out of Niagara Mohawk’s termination of a contract for Fourth Branch to operate and maintain a hydroelectric plant Niagara Mohawk owned in the town of Halfmoon, New York. Fourth Branch’s complaint also alleges claims based on the inability of Fourth Branch and Niagara Mohawk to agree on terms for the purchase of power from a new facility that Fourth Branch hoped to construct at the Mechanicville site. In January 1994, Niagara Mohawk filed a motion to dismiss Fourth Branch’s complaint. By order dated November 7, 1995, the Court granted Niagara Mohawk’s motion to dismiss the complaint in its entirety. Fourth Branch filed an appeal from the Court’s order. On January 30, 1997, the Appellate Division modified the November 7, 1995 court decision by reversing the dismissal of the fourth and fifth causes of action set forth in Fourth Branch’s complaint. Discovery proceedings have been completed. Fourth Branch filed a Trial Term Note of Issue on August 30, 2001 placing the case on the Albany County Supreme Court trial calendar. A pre-trial conference was held on October 9, 2001 and the case was assigned a trial date of April 1, 2002 in the Albany County Supreme Court. A motion for summary judgment on behalf of Niagara Mohawk was filed on November 15, 2001. Fourth Branch has opposed the motion and filed a cross-motion for summary judgment on its breach of contract claim. A pre-trial conference was held in Albany County Supreme Court on March 19, 2002. In view of the fact that the motion for summary judgment was still pending, the court rescheduled the trial date to June 24, 2002.
Niagara Mohawk and Fourth Branch had also entered into negotiations under a FERC mediation process. As a result of these negotiations, Niagara Mohawk had proposed to sell the hydroelectric plant to Fourth Branch for an amount which would not be material. In addition, the proposal included a provision that would require the discontinuance of all litigation between the parties.
Attempts to implement this proposal were unsuccessful, and Niagara Mohawk informed FERC that its participation in the mediation efforts was concluded. On January 14, 1997, the FERC Administrative Law Judge issued a report to FERC recommending that the mediation proceeding be terminated.
During July 1998, Fourth Branch commenced a condemnation proceeding in Federal District Court to obtain title to the project property and also made a unilateral offer of settlement before FERC. Niagara Mohawk served an answer with various affirmative defenses. On July 30, 1998, Fourth Branch moved for Summary Judgment. Niagara Mohawk opposed Fourth Branch’s motion and cross-moved for summary judgment in favor of Niagara Mohawk. The Court granted Niagara Mohawk’s motion for summary judgment on September 1, 1999.
On September 10, 1999, Fourth Branch filed an amended unilateral offer of settlement with FERC. On September 30, 1999, Niagara Mohawk filed its response and objection to the amended offer of settlement. On November 23, 1999, FERC issued a comprehensive order rejecting Fourth Branch’s unilateral offer of settlement, dismissing Fourth Branch’s complaint of anti-competitive conduct against Niagara Mohawk and determining that there has been an implied surrender by Fourth Branch and Niagara Mohawk of the FERC license for the Mechanicville Project. On December 23, 1999, Fourth Branch filed a petition for rehearing of the Commission’s decision. On March 16, 2000, FERC denied the petition for rehearing. On April 21, 2000, Fourth Branch filed an appeal of FERC’s decision to the United States Court of Appeals in Washington, D.C. On June 19, 2001, the Court of Appeals denied Fourth Branch’s appeal. FERC has also initiated proceedings related to site closure and restoration plans, or alternatives thereto. On February 28, 2002, FERC issued an order accepting license surrender and directing the implementation of Niagara Mohawk’s closure plan.
Niagara Mohawk is unable to predict the ultimate disposition of the lawsuit and FERC case referred to above.
3.
On May 25, 2000, the DEC issued an air pollution notice of violation to Niagara Mohawk regarding the operation of its two formerly owned coal-fired generation plants (Huntley and Dunkirk). The notice of violation was also issued to NRG Energy, Inc. (“NRG”), the current owner and operator of both plants. The notice alleges violations of the federal Clean Air Act and the New York State Environmental Conservation Law resulting from the alleged failure of the companies to obtain permits for plant modifications and the alleged failure to install air pollution control equipment. While no specific relief was sought in the notice of violation, the DEC and the New York State Attorney General indicated in meetings with Niagara Mohawk and NRG that they will be seeking substantial fines against Niagara Mohawk and NRG as well as the imposition of pollution controls. The New York State Attorney General also indicated that they will be pursuing mitigation of alleged environmental harm. It is Niagara Mohawk’s position that the cost of pollution controls and mitigation should be borne by NRG.
In May 2001, the New York State Attorney General advised Niagara Mohawk and NRG of its intent to file suit, alleging that the plants are in violation of the federal Clean Air Act.
On July 13, 2001, Niagara Mohawk filed a declaratory judgment action against NRG in New York State Supreme Court. Niagara Mohawk is seeking a declaratory judgment that NRG is responsible for any control upgrades and mitigation resulting from the above-referenced enforcement action. On August 31, 2001, NRG filed its answer, affirmative defenses and counterclaims in response to Niagara Mohawk’s complaint seeking a declaratory judgment. On September 24, 2001, Niagara Mohawk served its reply to NRG’s counterclaims. The litigation is presently in the discovery phase.
On January 10, 2002, the state of New York and Erin M. Crotti, as Commissioner of the DEC, filed on a civil action against Niagara Mohawk and NRG Energy in U.S. District Court for the Western District of New York for alleged violations of the federal Clean Air Act at the Dunkirk and Huntley power plants. NMPC is in the process of reviewing the complaint. A response from Niagara Mohawk is due by March 29, 2002. Niagara Mohawk is unable to predict whether or not the results of this enforcement action will have an adverse material effect on its financial position and results of operation or whether Niagara Mohawk's action against NRG will be successful.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2001.
EXECUTIVE OFFICERS OF REGISTRANTS
All executive officers of Niagara Mohawk are elected on an annual basis at the organizational meeting of the Board of Directors or upon the filling of a vacancy. There are no family relationships between any of the executive officers. There are no arrangements or understandings between any of the officers listed below and any other person pursuant to which he or she was selected as an officer.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANTS’ COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Holding Company Formation. On March 18, 1999, Niagara Mohawk Power Corporation (“Niagara Mohawk”) was reorganized into a holding company structure in accordance with its Agreement and Plan of Exchange between Niagara Mohawk and Niagara Mohawk Holdings, Inc. (“Holdings”). Holdings was incorporated on April 2, 1998, as a wholly owned subsidiary of Niagara Mohawk. Niagara Mohawk’s outstanding common stock was exchanged on a share-for-share basis for Holdings’ common stock. Niagara Mohawk’s preferred stock and debt were not exchanged as part of the share exchange and continue as obligations of Niagara Mohawk. Upon the share exchange on March 18, 1999, shares originally issued to Niagara Mohawk were cancelled. On January 31, 2002, the merger of Holdings and National Grid was completed. Niagara Mohawk will maintain its existing name and will remain an indirect wholly owned subsidiary of National Grid. See Item 8. Financial Statements and Supplementary Data, - (Unaudited). Subsequent Event - Merger with National Grid for further discussion of the merger.
Niagara Mohawk Common Stock. Niagara Mohawk is authorized to issue 250 million shares of common stock with a par value of $1.00. As of December 31, 2001, Niagara Mohawk has 187,364,863 shares outstanding, which are all held by Holdings and are not traded.
The indenture securing Niagara Mohawk’s mortgage debt provides that retained earnings shall be reserved and held unavailable for the payment of dividends on common stock to the extent that expenditures for maintenance and repairs plus provisions for depreciation do not exceed 2.25 percent of depreciable property as defined therein. Such provisions have never resulted in a restriction of Niagara Mohawk’s retained earnings.
Niagara Mohawk Preferred Stock. The share exchange and the formation of the holding company structure did not, and the merger with National Grid does not, change the rights of holders of the outstanding shares of Niagara Mohawk’s preferred stock. Niagara Mohawk’s preferred stock continues to rank senior to Niagara Mohawk’s common stock (all of which is held by Holdings and indirectly by National Grid) as to dividends and as to distribution of Niagara Mohawk’s assets upon any liquidation.
On December 21, 2001, National Grid announced that it will, within a year of closing the acquisition of Holdings (which occurred on January 31, 2002), have Niagara Mohawk or an affiliate make offers to purchase all of the then outstanding preferred stock of Niagara Mohawk. Such offers will be made at prices that are customary for a tender offer to purchase similar preferred stock and will be determined at the time the offers are made. Such determination of prices will be made by National Grid based on advice of an investment banking firm. National Grid’s commitment will not affect the ability of Niagara Mohawk to voluntarily redeem or otherwise call its preferred stock. The making of such offers in the future will also be subject to receiving all regulatory approvals required for preferred stock offerings.
On February 5, 2002, Niagara Mohawk announced that it will redeem all remaining outstanding shares of the following series of preferred stock:
6.10% Series ($100 par value), at the redemption price of $101.00 per share;
7.45% Series ($100 par value), at the redemption price of $100.73 per share;
7.72% Series ($100 par value), at the redemption price of $102.36 per share;
Adjustable Rate Series A ($25 par value), at the redemption price of $25 per share;
Adjustable Rate Series B ($25 par value), at the redemption price of $25 per share;
Adjustable Rate Series C ($25 par value), at the redemption price of $25 per share.
These preferred stock series have been called for redemption on March 4, 2002, at the above indicated redemption prices together with accrued and unpaid dividends through March 4, 2002.
Whenever dividends on Niagara Mohawk’s preferred stock are in default in an amount equivalent to four full quarterly dividends and thereafter until all dividends thereon are paid or declared and set aside for payment, the holders of such preferred stock can elect a majority of the Board of Directors of Niagara Mohawk. Whenever dividends on any preference stock are in default in an amount equivalent to six full quarterly dividends and thereafter until all dividends thereon are paid or declared and set aside for payment, the holders of such stock can elect two members to the Board of Directors of Niagara Mohawk. No dividends on preferred stock are now in arrears and no preference stock is now outstanding.
Niagara Mohawk paid preferred dividends on March 31, June 30, September 30, and December 31, 2001. Niagara Mohawk estimates that none of the 2001 preferred stock dividends will constitute a return of capital, and therefore, all of such dividends are subject to federal tax as ordinary income.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected financial information for Niagara Mohawk for each of the five years during the period ended December 31, 2001, which have been derived from the audited financial statements of Niagara Mohawk, and should be read in connection therewith. As discussed in Item 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In recent years, federal and state regulatory initiatives have sought to provide separation of the vertically integrated energy generation, transmission and distribution functions and promote competition and lower prices. This unbundling of services has led to some restructuring throughout the industry. Niagara Mohawk’s response to these developments was to formulate a restructuring strategy and a multi-year rate plan which provided for its exit of the generation business, reduction in the amount of its future over-market purchase power obligations, recovery of its stranded costs and lower prices to customers. Implementation of the restructuring strategy commenced in 1998 with the regulatory approval of the Power Choice rate plan and the consummation of the MRA, and 1999 through 2001 were years punctuated by the further execution of the restructuring strategy.
The year 2000 was a year in which the companies experienced even more significant changes, since Holdings entered into a merger agreement with National Grid, whereby Niagara Mohawk has become an indirect wholly-owned subsidiary of National Grid, effective January 31 2002. In 2001 and 2002, major accomplishments were made in the implementation of the restructuring strategy. The key events in 2001 and 2002 were:
•
On January 19, 2001, Holdings’ shareholders approved the merger.
•
On January 29, 2001, National Grid shareholders approved the merger.
•
On January 30, 2001, Niagara Mohawk sold its share of the Roseton power plant.
•
On August 29, 2001, the PSC approved rate plan changes to cover the final two years of the Power Choice agreement. The Merger Rate Plan superceded this filing.
•
On November 7, 2001, Niagara Mohawk sold Nine Mile Point Unit 1 and its share of Unit 2 to a subsidiary of Constellation Energy Group, Inc. (“Constellation”).
•
On November 28, 2001, the PSC approved Niagara Mohawk’s ten-year Merger Rate Plan.
•
On January 16, 2002, the SEC approved the merger.
•
On January 31, 2002, the merger was consummated.
MERGER WITH NATIONAL GRID
On January 31, 2002, the acquisition of Holdings by National Grid was completed for a value of approximately $3.0 billion in cash and American Depositary Shares. The acquisition is being accounted for by the purchase method, the application of which, including the recognition of goodwill, is being recognized on the books of Niagara Mohawk, the most significant subsidiary of Holdings. The merger transaction resulted in over $1 billion of goodwill, which will be subject to SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill’s impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. See “Merger Rate Plan” for a discussion of the anticipated future results on Niagara Mohawk and Item 8. Financial Statements and Supplementary Data, - Note 2. Subsequent Event - Merger with National Grid (Unaudited) for further discussion of the merger.
REGULATORY AGREEMENTS AND THE RESTRUCTURING OF THE REGULATED ELECTRIC UTILITY BUSINESS
Merger Rate Plan. On November 28, 2001, the PSC approved the Merger Rate Plan. This rate plan became effective on January 31, 2002, the closing of the merger. Key terms of the plan are as follows:
°
Net customer savings of about $1 billion over the next 10 years, compared with rates projected without the merger. This includes a $152 million reduction in delivery charges compared to rates approved in Niagara Mohawk’s current rate agreement, followed by stabilized delivery charges for 10 years, subject to limited adjustments. This equals an expected reduction in Niagara Mohawk electricity delivery rates of more than eight percent, which results in a projected five percent decrease in overall electricity bills, including a projected commodity cost, which will continue to be borne by customers.
°
Price-stabilized commodity service for residential and commercial customers for several years, giving those customers significant protection from severe fluctuations in the generation marketplace.
°
Agreement to forgo the collection of an estimated $850 million in nuclear-related costs that otherwise would have been collected in rates.
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Ability to recover a return on the remaining MRA regulatory asset.
°
Also, as part of the agreement, Niagara Mohawk would expand its annual upstate New York economic development efforts by $12.5 million.
°
The extension by 16 months of the existing multi-year gas rate settlement agreement, resulting in a freeze in natural gas delivery rates through December 2004.
°
Extension of the Low Income Customer Assistance Program and introduction of a special low-income rate.
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Establishment of a Service Quality Assurance Program that calls for up to $24 million in annual penalties or more under certain conditions, if defined customer service goals are not achieved.
°
The continuation of the stranded cost recovery provisions under Power Choice with slight modifications.
Although rates will be lower under the Merger Rate Plan, Niagara Mohawk believes cost savings from the merger should enable it to improve its operating results.
Power Choice Rate Reductions and Retail Choice of Electricity Supplier. The PSC approved Niagara Mohawk’s Power Choice agreement on March 20, 1998 and the rate plan was implemented beginning September 1, 1998. The Power Choice agreement outlined Niagara Mohawk’s future structure in the regulated electric business.
The Power Choice agreement established a five-year electric rate plan that reduced class average residential and commercial prices by an aggregate of 3.2 percent over the first three years, beginning September 1, 1998. On September 1, 1999, Niagara Mohawk implemented its second phase of rate reductions and implemented its third phase of rate reductions on September 1, 2000. The reduction in prices included certain savings that resulted from approved reductions of the GRT. New York State tax law changes that further reduce the GRT rate for some customers and eliminate the GRT for others, are not reflected in the price reductions. The tax law changes are discussed in Item 8. Financial Statements and Supplementary Data, - Note 1. Summary of Significant Accounting Policies, “Basis of Presentation.”
Effective August 1, 1999, all of Niagara Mohawk’s customers were able to choose their electricity supplier. As of December 31, 2001, 9,169 (5.9 percent) of Niagara Mohawk’s commercial and industrial customers, or approximately 14.5 percent of eligible load, and 39,915 (2.9 percent) residential customers, or approximately 4.0 percent of eligible load, have chosen an electricity supplier other than Niagara Mohawk. See “FERC Order 888 Open Access” below for a discussion of open transmission access as a result of the formation of the NYISO. Niagara Mohawk will continue to distribute electricity through its transmission and distribution systems for all customers, regardless of supplier, and will be provider of last resort for those customers who do not exercise their right to choose a new electricity supplier. If a customer chooses an alternative supplier, Niagara Mohawk, as allowed under Power Choice, continued to charge the customer for delivery of the energy and for a non-bypassable CTC charge. Niagara Mohawk also gave a credit to the customer for any services provided by the alternative energy supplier that was provided by Niagara Mohawk in the past.
During the term of the Power Choice agreement, Niagara Mohawk was permitted to defer certain incremental costs associated primarily with environmental remediation and changes in laws, regulations, rules and orders. On August 29, 2001, the PSC approved rate plan changes to cover the final two years of the Power Choice agreement. The rate plan changes allow for implementation of the Power Choice agreement to pass-through certain commodity-related costs to customers beginning September 1, 2001. Electric commodity costs, which fluctuate with market conditions, are projected to be higher as a result of recent trends in commodity markets, increases in charges from the NYISO and the expiration of some Niagara Mohawk supply contracts. Partially offsetting the projected increase in commodity costs is a reduction in overall, system-wide rates for electric delivery service of 5.4 percent associated with a lowering of the competitive transition charge with respect to existing supply contracts. The overall average price increase was projected to be 4.9 percent, with the average residential bill increasing 7.9 percent. Such increases were dependent upon actual commodity market conditions. However, residential and commercial customers were provided with a partial price protection from severe fluctuations in the commodity prices through a delivery charge adjustment mechanism. The Merger Rate Plan described above superseded these rates on January 31, 2002, upon the closing of the merger and continues the pass-through of commodity costs.
The Power Choice agreement, which was implemented beginning on September 1, 1998, provided for the recovery of deferrals established in years one through four and the generation sale incentive. See Item 8. Financial Statements and Supplementary Data, Note 3. Rate and Regulatory Issues and Contingencies, “Deferred Loss on the Sale of Assets,” for a discussion of the generation sale incentive. The recovery of deferrals were limited and any remaining unamortized deferrals at the end of year five would have been recovered over a period not to exceed five years beginning in year six.
Beginning in year four of Power Choice, Niagara Mohawk was continuing to recover the cost variations in the indexed swap contracts entered into as part of the MRA, resulting from the indexing provisions of these contracts. As these indexed swap contracts and other contracts expire, the fluctuations in market price of unhedged energy were billed to customers through a commodity adjustment clause. Under the principles established in Power Choice, as these contracts expire, customers who buy electricity from Niagara Mohawk assumed the commodity price risk for energy associated with the expiring contracts. Increases in the cost of natural gas, primarily as it is used as a fuel in electricity generation, raises issues surrounding the ability for ratepayers to absorb such price volatility.
The Power Choice agreement further provided that Niagara Mohawk would have a reasonable opportunity to recover its stranded costs, including those associated with the MRA and the contracts entered into as part of the MRA, through a CTC and, under certain circumstances, through exit fees or in rates for back up service. See “FERC Order 888 - Stranded Cost Recovery in the Case of Municipalization” for a further discussion of stranded costs and exit fees. Niagara Mohawk’s rates under Power Choice were designed to permit recovery of the MRA regulatory asset and to permit recovery of, and a return on, the remainder of its assets, as appropriate.
Generation Asset Sales. During 1999, Niagara Mohawk completed the sale of its coal-fired generation plants, its hydro generation plants, and its oil and gas-fired generation plant at Oswego for $860 million. These assets had a combined net book value of approximately $957 million (including materials, supplies and fuel) at the time of their sale. In addition, there were purchase price adjustments of approximately $27 million, primarily due to a lower amount of fuel being delivered to the new owners of the Oswego generation assets than originally anticipated and provided for in the sales agreement. During 2000, Niagara Mohawk completed the sale of its oil and gas-fired plant at Albany for $47.5 million. The Albany plant had a net book value of approximately $36.4 million (including materials, supplies and fuel) at the time of the sale. On January 30, 2001, Niagara Mohawk completed the sale of its 25 percent interest in the Roseton Steam Station for approximately $83.9 million. Niagara Mohawk’s share of the Roseton plant had a net book value of approximately $38.3 million (which includes materials, supplies and fuel) at closing. On November 7, 2001, Niagara Mohawk sold its nuclear assets to Constellation pursuant to which Niagara Mohawk received approximately $271 million in cash and will receive five annual principal and interest payments totaling $332 million. Niagara Mohawk’s share of the plant had a net book value (which includes materials, supplies and fuel) of approximately $1.6 billion as of the closing, excluding the reserve for decommissioning costs.
For a further discussion of these sales, see Item 8. Financial Statements and Supplementary Data, Note 3. Rate and Regulatory Issues and Contingencies. For a discussion on how Niagara Mohawk used the proceeds from the sale of its generation assets, see “Liquidity and Capital Resources.”
Niagara Mohawk signed agreements with the buyers of the plants for energy and capacity at negotiated prices which are above market, based on current energy price forecasts. While the PPAs with the buyers of the formerly owned fossil and hydro assets, which were entered into as an integral part of the sales, are above market, they are designed to help Niagara Mohawk meet rate reduction and price cap commitments as well as expected demand as the provider of last resort. The PPAs converted to either swap agreements or swaptions (swap agreement with a call option.) These swaps act as hedges against a substantial rise in power costs. Niagara Mohawk also signed PPAs with Constellation to purchase energy at negotiated competitive prices for ten years and revenue sharing agreements. See Item 8. Financial Statements and Supplementary Data, Note 3. Rate and Regulatory Issues and Contingencies, Note 8. Commitments and Contingencies, and Note 9. Fair Value of Financial and Derivative Financial Instruments, for a further discussion of the terms of these agreements.
The Power Choice agreement provides for deferral and future recovery of net losses resulting from the sale of the fossil and hydro generation asset portfolio. In addition, Niagara Mohawk was not allowed to earn a return on the deferred loss during the Power Choice period. Niagara Mohawk did not begin recovery of the loss on the non-nuclear generation assets of approximately $122.5 million under Power Choice, which is included in Niagara Mohawk’s Consolidated Balance Sheets as “Deferred Loss on Sale of Assets.” The PSC has allowed Niagara Mohawk to offset the proceeds from the sale of the fossil and hydro generation assets by the net present value of the amount which the actual amount incurred on the hydro PPAs exceeds the forecasted amount reflected in Power Choice. Pursuant to the PSC Order approving the sale of the nuclear assets, dated October 24, 2001, Niagara Mohawk was required to write-off $123 million of nuclear investment. The PSC Order provides for the deferral and future recovery of the remaining nuclear stranded costs. Niagara Mohawk has already begun to amortize the regulatory asset related to the loss on the sale of the nuclear assets. As of December 31, 2001, Niagara Mohawk has a regulatory asset of $1,074.6 million for the net loss on the sale of its nuclear generation assets. The net loss is included in Niagara Mohawk’s balance sheet as “Deferred Loss on Sale of Assets.” The amount of this regulatory asset related to the sale of the nuclear assets is subject to change as a result of post closing adjustments on the sales, transaction costs, subsequent costs associated with contract clauses, the amount of severance and other costs, and PSC review of the amounts deferred. Under the Merger Rate Plan, Niagara Mohawk has agreed to forgo collection of an estimated $850 million in nuclear-related costs that otherwise would have been collected in rates. Remaining stranded costs related to the sale of all of the generation assets and the MRA regulatory asset will be amortized over ten years based upon a pattern established in the Merger Rate Plan. For a further discussion of the loss incurred on these sales, see Item 8. Financial Statements and Supplementary Data, Note 3. Rate and Regulatory Issues and Contingencies.
Niagara Mohawk has recorded a non-cash incentive as provided for in Power Choice of $18.6 million based on the asset sales of which $9.0 million is reflected in income in 1999, $2.8 million is reflected in income in 2000 and $6.8 million is reflected in income in 2001 in the “Other income (deductions)” line item of the Consolidated Income Statements. The incentive earned reflects PSC Staff recommended adjustments based on their review to date and is included in the other regulatory assets on the Consolidated Balance Sheets. The Power Choice agreement provides for recovery of the incentive beginning in 2001, over a period not to exceed five years. The Merger Rate Plan modifies the recovery period of stranded costs and incentives.
The MRA Agreement. As a result of various federal and state requirements, Niagara Mohawk was required to enter into contracts to purchase electricity from IPPs in quantities in excess of its own demand and at prices in excess of those available to it. In mid-1996, Niagara Mohawk began comprehensive negotiations to terminate, amend or restate a substantial portion of above-market PPAs in an effort to mitigate the escalating cost of these PPAs as well as to prepare Niagara Mohawk for a more competitive environment. These negotiations led to the MRA and the Power Choice agreement.
The MRA was consummated on June 30, 1998 with 14 IPPs. The MRA allowed Niagara Mohawk to terminate, restate or amend 27 PPAs which represented approximately three-quarters of its over-market purchased power obligations. Niagara Mohawk terminated 18 PPAs for 1,092 MW of electric generating capacity, restated 8 PPAs representing 535 MW of capacity and amended 1 PPA representing 42 MW of capacity. Niagara Mohawk paid the IPP Parties an aggregate of $3.934 billion in cash, of which $3.212 billion was obtained through a public market offering of senior unsecured debt, $303.7 million from the public sale of 22.4 million shares of common stock, and the remainder from cash on hand. In addition, Niagara Mohawk issued 20.5 million shares of common stock to the IPP Parties.
Power Choice provided that the MRA and the contracts executed as part of the MRA were prudent and accordingly, PSC approval of Power Choice allowed Niagara Mohawk to record a regulatory asset for the costs of the MRA, which is being amortized over a period generally not to exceed ten years. Niagara Mohawk’s rates under Power Choice were designed to permit recovery of the MRA regulatory asset. The Power Choice agreement had the effect of substantially depressing earnings during its term and substantially improving operating cash flow. The closing of the merger and the implementation of the Merger Rate Plan will impact the future results of Niagara Mohawk. See “Merger Rate Plan” for a further discussion of how the closing of the merger with National Grid will impact the future results of Niagara Mohawk.
The MRA had the effect of reducing Niagara Mohawk’s IPP payments by more than $500 million annually in 1998 and 1999 as compared to leaving the pre-existing contracts in place, net of purchases of power at market price. These savings have been partially reduced in 2000 and 2001 as a result of the increase in commodity prices. The resulting improvement in cash flow and the proceeds from the sale of the generation assets have allowed Niagara Mohawk to repay debt and repurchase Holdings’ common stock.
Under the terms of the MRA, Niagara Mohawk has no continuing obligation to purchase energy from the terminated IPP Parties. The restated contracts with eight PPAs reflect economic terms and conditions that are more favorable to Niagara Mohawk than the previous PPAs. See Item 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Niagara Mohawk is exposed to various market risks because of transactions conducted in the normal course of business. The financial instruments held or issued by Niagara Mohawk are used for investing, financing, hedging or cost control and not for trading.
Quantitative and qualitative disclosures are discussed by market risk exposure category:
Interest Rate Risk
Commodity Price Risk
Equity Price Risk
Foreign Currency Exchange Risk
An Exposure Management Committee (“EMC”) was set up to monitor and control efforts to manage these risks. The EMC issues and oversees the Financial Risk Management Policy (the “Policy”) that outlines the parameters within which corporate managers are to engage in, manage, and report on various areas of risk exposure. At the core of the Policy is a condition that Niagara Mohawk will engage in activities at risk only to the extent that those activities fall within commodities and financial markets to which it has a physical market exposure in terms and in volumes consistent with its core business. That core business is to deliver energy, in the form of electricity and natural gas, to customers within Niagara Mohawk’s service territory. The policies of Niagara Mohawk may be revised as its primary markets continue to change, principally as increased competition is introduced and the role of Niagara Mohawk in these markets evolves.
Interest Rate Risk. Niagara Mohawk’s exposure to changes in interest rates is due to its financing through a senior debt facility, several series of adjustable rate promissory notes and adjustable rate preferred stock. See Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A. FINANCIAL STATEMENTS
•
Niagara Mohawk Power Corporation - Overview of Entity
•
Report of Independent Accountants
•
Consolidated Statements of Income (Loss) and Retained Earnings for each of the three years in the period ended December 31, 2001
•
Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended December 31, 2001
•
Consolidated Balance Sheets at December 31, 2001 and 2000
•
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001
•
Notes to Consolidated Financial Statements
NIAGARA MOHAWK POWER CORPORATION - OVERVIEW OF ENTITY
Niagara Mohawk Power Corporation (“Niagara Mohawk”), is a wholly owned subsidiary of Holdings (which is a wholly owned subsidiary of National Grid). Niagara Mohawk was organized in 1937 under the laws of New York State and is engaged principally in the regulated energy delivery business in New York State. Niagara Mohawk provides electric service to approximately 1,500,000 electric customers in the areas of eastern, central, northern and western New York and sells, distributes, and transports natural gas to approximately 540,000 gas customers in areas of central, northern and eastern New York State. Niagara Mohawk is subject, for certain purposes, to the jurisdiction of the PSC, the FERC and the SEC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Niagara Mohawk Power Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income (loss) and retained earnings, of comprehensive income and of cash flows present fairly, in all material respects, the financial position of Niagara Mohawk Power Corporation and its subsidiaries (“Niagara Mohawk”) at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Niagara Mohawk’s management our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Syracuse, New York
January 23, 2002, except Note 2
as to which the date is January 30, 2002
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME(LOSS) AND RETAINED EARNINGS
For the year ended December 31, 2001 2000 1999 ----------- ----------- ----------- (in thousands of dollars) Operating revenues: Electric $3,401,890 $3,207,447 $3,247,757 Gas 721,501 658,502 579,583 ----------- ----------- ----------- 4,123,391 3,865,949 3,827,340 ----------- ----------- ----------- Operating expenses: Electricity purchased 1,304,242 1,144,117 807,038 Fuel for electric generation 37,162 74,340 189,657 Gas purchased 419,324 357,524 267,202 Other operation and maintenance 954,568 888,067 911,746 Disallowed nuclear investment costs 123,000 - - Amortization/accretion of MRA/IPP buyout costs 363,578 375,487 363,374 Amortization of nuclear regulatory assets 29,558 - - Depreciation and amortization 292,224 311,803 344,930 Other taxes (Note 1) 234,346 283,511 411,842 ----------- ----------- ----------- 3,758,002 3,434,849 3,295,789 ----------- ----------- ----------- Operating income 365,389 431,100 531,551 Other deductions (15,558) (24,755) (5,539) ----------- ----------- ----------- Income before interest charges 349,831 406,345 526,012 Interest charges 392,406 437,274 485,240 ----------- ----------- ----------- Income (loss) before income taxes (42,575) (30,929) 40,772 Income tax expense (benefit) (Note 1) (72,096) (9,526) 19,026 ----------- ----------- ----------- Income (loss) before extraordinary item 29,521 (21,403) 21,746 Extraordinary item - Loss from the extinguishment of debt, net of income taxes ( Note 4) - (909) (23,807) ----------- ----------- ----------- Net income (loss) 29,521 (22,312) (2,061) Dividends on preferred stock 30,850 31,437 36,808 ----------- ----------- ----------- Balance available for common stock (1,329) (53,749) (38,869) Retained earnings at beginning of year 299,106 398,987 646,040 Dividend of Opinac to Holdings (Note 1) - - 144,465 Dividend to Holdings 37,160 46,132 63,719 ----------- ----------- ----------- Retained earnings at end of year $ 260,617 $ 299,106 $ 398,987 =========== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(LOSS)
For the year ended December 31, 2001 2000 1999 ----------- ----------- ----------- (in thousands of dollars) Net income(loss) $ 29,521 $ (22,312) $ (2,061) ----------- ----------- ----------- Other comprehensive income (loss): Unrealized gains(losses) on securities, (net of a tax benefit of $612) (857) (657) 113 Foreign currency translation adjustment - - 1,309 Hedging activity (net of a tax benefit of $3,790) (5,127) - - Additional minimum pension liability (4,202) (1,649) (5,967) ----------- ----------- ----------- Other comprehensive loss: (10,186) (2,306) (4,545) ----------- ----------- ----------- Comprehensive income(loss) $ 19,335 $ (24,618) $ (6,606) =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 2000 ------------ ------------ (in thousands of dollars) ASSETS Utility plant (Note 1): Electric plant $ 4,903,758 $ 7,179,329 Nuclear fuel - 672,259 Gas plant 1,345,785 1,310,649 Common plant 359,634 349,751 Construction work in progress 202,791 289,634 ------------ ------------ Total utility plant 6,811,968 9,801,622 Less-Accumulated depreciation and amortization 2,194,273 4,019,282 ------------ ------------ Net utility plant 4,617,695 5,782,340 ------------ ----------- Other property and investments 105,083 428,515 ------------ ------------ Current assets: Cash, including temporary cash investments of $100,953 and $50,168, respectively 125,979 77,070 Accounts receivable (less allowance for doubtful accounts of $56,000 and $59,100, respectively) (Notes 1 and 8) 390,277 390,452 Notes receivable 49,956 - Materials and supplies, at average cost: Gas storage 56,111 50,947 Other 19,482 93,431 Assets from price risk management activities (Note 1) - 65,052 Prepaid taxes 11,245 7,882 Other 5,530 21,026 ------------ ------------ 658,580 705,860 ------------ ------------ Regulatory assets (Note 3): MRA regulatory asset 2,836,254 3,175,594 Swap contracts regulatory asset 733,487 778,229 Regulatory tax asset 179,809 408,303 IPP restructuring costs 196,879 234,117 Deferred environmental restoration costs (Note 8) 305,000 285,000 Deferred loss on sale of assets 1,197,180 158,333 Postretirement benefits other than pensions 41,244 45,084 Unamortized debt expense 35,381 39,823 Other 301,531 191,524 ------------ ------------ 5,826,765 5,316,007 ------------ ------------ Other assets 277,403 77,235 ------------ ------------ $11,485,526 $12,309,957 ============ ============
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 2000 ------------ ------------ (in thousands of dollars) CAPITALIZATION AND LIABILITIES Capitalization (Note 4): Common stockholders' equity Common stock, issued and outstanding 187,364,863 shares $ 187,365 $ 187,365 Repurchase of Holdings' common stock, at cost (407,193) (407,193) Capital stock premium and expense 2,363,854 2,362,404 Accumulated other comprehensive loss (17,645) (7,459) Retained earnings 260,617 299,106 ------------ ------------ 2,386,998 2,434,223
Non-redeemable preferred stock 440,000 440,000 Mandatorily redeemable preferred stock 50,700 53,750 Long-term debt 4,419,822 4,678,963 ------------ ------------ Total capitalization 7,297,520 7,606,936 ------------ ------------ Current liabilities: Short-term debt (Note 5) - 110,000 Long-term debt due within one year (Note 4) 546,858 628,325 Sinking fund requirements on redeemable preferred stock (Note 4) 3,050 7,620 Accounts payable 205,013 404,115 Payable on outstanding bank checks 26,912 28,536 Customers' deposits 18,884 16,900 Accrued taxes 8,543 10,867 Accrued interest 82,272 98,408 Accrued vacation pay 29,441 34,607 Liabilities from price risk management activities (Note 1) 12,270 2,719 Deferred gain on futures contracts (Note 1) - 17,409 Other 113,182 112,574 ------------ ------------ 1,046,425 1,472,080 ------------ ------------ Regulatory and other liabilities: Accumulated deferred income taxes (Notes 1 and 6) 1,457,875 1,479,032 Liability for swap contracts (Note 9) 733,487 778,229 Employee pension and other benefits (Note 7) 271,628 218,569 Deferred gain on swap hedges - 66,405 Other 373,591 403,706 ------------ ------------ 2,836,581 2,945,941 ------------ ------------ Commitments and contingencies (Notes 2 and 8): Liability for environmental restoration 305,000 285,000 ------------ ------------ $11,485,526 $12,309,957 ============ ============
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
For the year ended December 31, 2001 2000 1999 ---------- ----------- ------------ (in thousands of dollars) Cash flows from operating activities: Net income (loss) $ 29,521 $ (22,312) $ (2,061) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization/accretion of MRA/IPP buyout costs 363,578 375,487 363,374 Depreciation and amortization 292,224 311,803 344,930 Amortization of nuclear fuel 23,095 29,379 28,285 Amortization of nuclear regulatory asset 29,558 - - Extraordinary loss on extinguishment of debt, net of taxes - 887 9,627 Disallowed nuclear investment costs 123,000 - - Provision for deferred income taxes (1,998) (16,282) (23,643) Reversal of deferred nuclear investment tax credits (79,711) Net accounts receivable (net of changes in accounts receivable sold) (7,525) (59,230) 84,683 Notes receivable (249,777) - - Materials and supplies (7,636) (9,819) 22,355 Accounts payable and accrued expenses (163,126) 135,172 21,715 Accrued interest and taxes (13,282) 35,436 (48,666) Changes in MRA and IPP buyout costs regulatory assets 48,249 36,132 (193,172) Changes in deferred loss on sale of assets (152,558) - - Deferral of MRA interest rate savings 15,009 20,469 28,006 Refundable federal income taxes - - 130,411 Changes in other assets and liabilities (42,772) 41,811 33,696 ---------- ----------- ------------ Net cash provided by operating activities 205,849 878,933 799,540 ---------- ----------- ------------ Cash flows from investing activities: Construction additions (249,430) (231,892) (271,973) Nuclear fuel (3,822) (41,938) (26,108) Less: Allowance for other funds used during construction 2,296 2,450 5,366 ---------- ----------- ------------ Acquisition of utility plant (250,956) (271,380) (292,715) Materials and supplies related to construction (935) (930) 1,586 Accounts payable and accrued expenses related to construction (40,782) 33,793 5,428 Proceeds from the sale of generation assets 353,785 47,500 860,080 Other investments 323,207 (71,983) 42,434 Other 30,574 6,713 (20,866) ---------- ----------- ------------ Net cash provided by (used in) investing activities 414,893 (256,287) 595,947 ---------- ----------- ------------ Cash flows from financing activities: Proceeds from long-term debt 534,152 260,000 - Proceeds from preferred stock - - 150,000 Reductions of preferred stock (3,050) (7,620) (157,620) Reductions in long-term debt (916,746) (653,086) (1,134,020) Net change in short-term debt (110,000) 110,000 - Corporate restructuring to establish holding company - - (89,618) Preferred dividends paid (30,850) (31,437) (36,808) Common stock dividend paid to Holdings (37,160) (46,132) (63,719) Repurchase of Holdings' common stock - (250,026) (157,167) Other (8,179) (1,041) (7,244) ---------- ----------- ------------ Net cash used in financing activities (571,833) (619,342) (1,496,196) ---------- ----------- ------------ Net increase (decrease) in cash 48,909 3,304 (100,709) Cash at beginning of year 77,070 73,766 174,475 ---------- ----------- ------------ Cash at end of year $ 125,979 $ 77,070 $ 73,766 ========== =========== ============ Supplemental disclosures of cash flow information: Interest paid $ 373,100 $ 367,297 $ 512,735 Income taxes paid (refunded) $ 51 $ 14,416 $ (119,999) Supplemental schedule of noncash financing activities: On March 18, 1999, Niagara Mohawk's outstanding common stock was exchanged on a share-for-share basis for Holdings' common stock. On March 31, 1999, Niagara Mohawk distributed the stock of Opinac as a dividend to Holdings, which included cash of $89.6 million.
The accompanying notes are an integral part of these financial statements.
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HOLDING COMPANY FORMATION: On March 18, 1999, Niagara Mohawk Power Corporation (“Niagara Mohawk”) was reorganized into a holding company structure in accordance with its Agreement and Plan of Exchange between Niagara Mohawk and Niagara Mohawk Holdings, Inc. (“Holdings”). Holdings was incorporated on April 2, 1998 as a wholly-owned subsidiary of Niagara Mohawk. Niagara Mohawk’s outstanding common stock was exchanged on a share-for-share basis for Holdings’ common stock. Niagara Mohawk’s preferred stock and debt were not exchanged as part of the share exchange and continue as obligations of Niagara Mohawk. Upon the share exchange on March 18, 1999, Holdings shares originally issued to Niagara Mohawk were cancelled. The reorganization was accounted for at net book value.
MERGER: On January 31, 2002, the merger of Holdings and National Grid was completed. The acquisition is being accounted for by the purchase method, the application of which, including the recognition of goodwill, is being recognized on the books of Niagara Mohawk, the most significant subsidiary of Holdings. The merger transaction resulted in over $1 billion of goodwill, which will be subject to SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill’s impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. Niagara Mohawk will maintain its existing name and will remain a wholly owned subsidiary of Holdings and indirectly, National Grid.
SUBSIDIARIES: On March 31, 1999, Niagara Mohawk distributed its ownership in the stock of Opinac North America, Inc. (“Opinac”) as a dividend to Holdings, which was accounted for using the net book value of Opinac. As a result, the net assets and accumulated other comprehensive income of Opinac are no longer included in Niagara Mohawk’s consolidated balance sheet. The dividend completed the holding company structure, such that Holdings owned 100 percent of the common stock of its two subsidiaries, Niagara Mohawk and Opinac.
BASIS OF PRESENTATION: Niagara Mohawk is subject to regulation by the PSC and FERC with respect to its rates for service under a methodology, which establishes prices, based on Niagara Mohawk’s cost. Niagara Mohawk’s accounting policies conform to GAAP, including the accounting principles for rate-regulated entities with respect to Niagara Mohawk’s nuclear, transmission, distribution and gas operations (regulated business), and are in accordance with the accounting requirements and ratemaking practices of the regulatory authorities.
Niagara Mohawk’s consolidated financial statements include its accounts as well as those of its wholly owned subsidiaries. Inter-company balances and transactions have been eliminated.
The closing of the MRA, which occurred on June 30, 1998, and the implementation of Power Choice on September 1, 1998, have depressed earnings under Power Choice. The closing of the merger with National Grid and the related push down and allocation of the purchase price will have a significant effect on the reported results of Niagara Mohawk prospectively. See Note 2 for a discussion of the approved rate plan in connection with the merger. The closing on the sale of the fossil and hydro and nuclear generation assets at various times during 1999 through 2001 has also affected the comparability of the financial statements. See Note 3 for a further discussion of the MRA and the generation asset sales.
The following table outlines the components of the line item “Amortization/Accretion of MRA/IPP Buyout Costs:”
Year Ended December 31, ----------------------------------- 2001 2000 1999 ---------- ---------- ---------- (in thousands) Amortization of MRA regulatory asset $ 386,499 $ 386,499 $ 386,499 Accretion to MRA regulatory asset (Senior Discount Note) (31,733) (29,199) (26,867) Other MRA related amortization (28,031) (17,914) (7,955) Amortization of other IPP buyout costs 36,843 36,101 11,697 ---------- ---------- ---------- $ 363,578 $ 375,487 $ 363,374 ========== ========== ==========
The income statements, balance sheet and cash flow statements for Niagara Mohawk reflect the accounting and ratemaking treatment as directed by the PSC as a result of May 2000 New York State tax law changes, whereby a portion of the gross receipts tax has been replaced by a state income tax retroactive to January 1, 2000. The PSC issued an order December 21, 2000 that requires the deferral and pass back of any net tax reduction savings to customers. Accordingly, Niagara Mohawk reduced miscellaneous electric revenues by $31.1 million and miscellaneous gas revenues by $7.3 million for the year ended December 31, 2000 and recorded a corresponding liability to customers of $38.8 million (including $0.4 million in carrying charges), which is reflected in the “Other” current liabilities line item on the balance sheet for the year ended December 31, 2000. Additional carrying charges were accrued in 2001 in the amount of $3.7 million. On October 31, 2001, the PSC directed Niagara Mohawk to pass back $17.7 million of this liability to customers during 2002.
In addition, the income statements also reflect the reclassification of $5.6 million for the year ended December 31, 2000 from the “Other taxes” line item to the “Income taxes” line item. Niagara Mohawk provides for federal and state income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” See Note 6. Federal, State and Foreign Income Taxes for the impact of the application of SFAS No. 109, for the year ended December 31, 2000 and 2001 on accumulated deferred income taxes. The cash flow statements for Niagara Mohawk reflect the above-mentioned income statement and balance sheet changes.
The consolidated cash flow statements for Niagara Mohawk have been presented to reflect the closings of the sales of the generation assets, such that certain individual line items are net of the effects of the sales.
ESTIMATES: In order to conform with GAAP, management is required to use estimates in the preparation of Niagara Mohawk’s financial statements. Actual results could differ from those estimates.
UTILITY PLANT: The cost of additions to utility plant and replacements of retirement units of property are capitalized. Costs include direct material, labor, overhead and AFC. Replacement of minor items of utility plant and the cost of current repairs and maintenance are charged to expense. Whenever utility plant is retired, its original cost, together with the cost of removal, less salvage, is charged to accumulated depreciation.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION: Niagara Mohawk capitalizes AFC in amounts equivalent to the cost of funds devoted to plant under construction for its regulated business. AFC rates are determined in accordance with FERC and PSC regulations. The AFC rate in effect at December 31, 2001 was 8.61 percent. AFC is segregated into its two components, borrowed funds and other funds, and is reflected in the “Interest charges” and “Other income” sections, respectively, in Niagara Mohawk’s Consolidated Statements of Income. The amount of AFC credits recorded in each of the three years ended December 31, in thousands of dollars, was as follows:
Other Income $2,296
$2,450
$5,366
Interest Charges 2,728
3,161
7,252
The above amounts include capitalized interest for generation of $0.8 million for 2001, $1.7 million for 2000 and 1999.
DEPRECIATION, AMORTIZATION AND NUCLEAR GENERATION PLANT DECOMMISSIONING COSTS: For accounting and regulatory purposes, Niagara Mohawk’s depreciation is computed on the straight-line basis using the license lives for the nuclear class of depreciable property and the average service lives for all other classes. Niagara Mohawk performs depreciation studies to determine service lives of classes of property and adjusts the depreciation rates when necessary.
The weighted average service life in years for each asset category are presented in the table below:
Asset Category
Electric
Gas
Common
REVENUES: Niagara Mohawk bills its customers on a monthly cycle basis at approved tariffs based on energy delivered and a minimum customer service charge. Revenues are determined based on these bills plus an estimate for unbilled energy delivered between the cycle billing date and the end of the accounting period. The unbilled revenues included in accounts receivable at December 31, 2001 and 2000 were $136.6 million and $153.6 million, respectively.
In accordance with Power Choice, Niagara Mohawk recognizes changes in accrued unbilled electric revenues in its results of operations. Pursuant to Niagara Mohawk’s 2000 three-year gas settlement, changes in accrued unbilled gas revenues are deferred. At December 31, 2001 and 2000, $11.8 million and $18.9 million, respectively, of unbilled gas revenues remain unrecognized in results of operations. Niagara Mohawk cannot predict when unbilled gas revenues will be allowed to be recorded as revenues.
Prior to September 1, 1998, Niagara Mohawk’s tariffs included an electric fuel adjustment clause, such that electricity costs above or below the levels allowed in approved rate schedules, were billed or credited to customers. Niagara Mohawk, as authorized by the PSC, charged operations for electricity cost variances in the period of recovery. On August 29, 2001, the PSC approved rate plan changes to cover the final two years of the Power Choice agreement. The changes allow for implementation of the Power Choice agreement to pass-through certain commodity-related costs to customers beginning September 1, 2001. At the same time, a transmission revenue adjustment mechanism was implemented which reconciles actual and rate forecast transmission revenues for pass-back to or recovery from customers.
The PSC approved a three-year gas rate settlement agreement on July 19, 2000 that includes a provision for the continuation of a full gas cost collection mechanism, effective August 1, 2000. This gas cost collection mechanism was originally reinstated in an interim agreement that became effective November 1, 1999. The Niagara Mohawk gas cost collection mechanism provides for the collection or pass back of increases or decreases in purchased gas costs.
FEDERAL AND STATE INCOME TAXES: As directed by the PSC, Niagara Mohawk defers any amounts payable pursuant to the alternative minimum tax rules. Deferred investment tax credits are amortized over the useful life of the underlying property. Deferred investment tax credits related to the generation assets that were sold were taken into income in accordance with IRS rules. Holdings and its United States’ subsidiaries file a consolidated federal and state income tax return. Income taxes are allocated to each company based on its taxable income. Regulated federal and state income taxes are recorded under the provisions of SFAS No. 109. As a result of the merger with National Grid on January 31, 2002, Holdings and its United States’ subsidiaries will be filed within National Grid’s consolidated federal tax returns for the period subsequent to the closing of the merger. Holdings and its New York State business subsidiaries will continue to file a combined New York State tax return.
STATEMENTS OF CASH FLOWS: Niagara Mohawk considers all highly liquid investments, purchased with an original maturity of three months or less, to be cash equivalents.
TREASURY STOCK: In 1999 and 2000 Niagara Mohawk repurchased Holdings’ common stock. The cost to acquire Holdings’ common stock by Niagara Mohawk is presented as the “Repurchase of Holdings’ common stock” in Niagara Mohawk’s financial statements.
DERIVATIVES: The FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. SFAS No. 137 changed the implementation date for this standard to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No.138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133” which, among other changes, modified the type and number of transactions to which the new standard would need to be applied.
The basic requirements of SFAS No. 133 are that companies identify all derivative instruments in use, record all derivatives on the balance sheet as assets or liabilities measured at fair value, and adjust the fair value at each financial reporting period. Depending on the use of the derivative and its qualification as a hedge, the changes in fair value will either be recorded directly in earnings or deferred and matched with the settlement of the transaction being hedged. Niagara Mohawk’s derivatives are listed on the Consolidated Balance Sheets as “Assets from price risk management activities” and “Liabilities from price risk management activities.” Amounts shown at December 31, 2000 and Niagara Mohawk’s amount for “Deferred gain on futures contracts” and “Deferred gain on swap hedges” represent the accounting treatment under the previous standard, SFAS No. 80, “Accounting for Futures Contracts.”
Niagara Mohawk adopted this standard beginning January 1, 2001. Upon implementation, Niagara Mohawk designated several financial instruments as derivatives and qualified certain of these instruments as hedges. Those derivative instruments that did not qualify for hedge accounting were the result of regulatory rulings and therefore, the earnings impact of the adoption of SFAS No. 133 was offset by regulatory assets or liabilities as directed by SFAS No. 71. The result was no impact on earnings for the adoption of SFAS No. 133 by Niagara Mohawk.
SALE OF CUSTOMER RECEIVABLES: Niagara Mohawk established a single-purpose financing subsidiary, NM Receivables LLC (“NMR”), to purchase and resell a financial interest in a pool of Niagara Mohawk customer receivables. See Note 8 for a complete description of the operations of NMR. Niagara Mohawk adopted SFAS No. 140 in 2001. Niagara Mohawk’s program for selling its accounts receivable meets the requirements outlined in SFAS No. 140 for recognition and accounting as a sale transaction. As a result, the adoption of this new standard did not have an impact on the reported financial information of Niagara Mohawk.
NEW ACCOUNTING STANDARDS: In June 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations be accounted for under the purchase method for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill’s impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. On January 31, 2002, the merger of Holdings and National Grid was completed. See Note 2 for a discussion of the accounting related to the merger.
In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 defines a legal obligation as an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the entity either settles the obligation for the amount recorded or incurs a gain or loss. The provisions of SFAS No. 143 will be effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. Niagara Mohawk is currently evaluating the effect of this statement on Niagara Mohawk’s results of operations and financial position.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” related to the disposal of a segment of a business. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves significant implementation issues related to SFAS No. 121. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Niagara Mohawk is currently evaluating the impact of SFAS No. 144 on its financial position and results of operations.
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) is the change in the equity of a company, not including those changes that result from shareholder transactions. While the primary component of comprehensive income (loss) is reported net income or loss, the other components of comprehensive income (loss) relate to additional minimum pension liability recognition, deferred gains and losses associated with hedging activity and unrealized gains and losses associated with certain investments held as available for sale.
POWER PURCHASE AGREEMENTS: Niagara Mohawk accounts for its power purchase agreements as executory contracts. Niagara Mohawk assesses several factors in determining how to account for its power purchase contracts. These factors include:
°
the term of the contract compared to the economic useful life of the facility generating the electricity;
°
the involvement, if any, that Niagara Mohawk has in operating the facility;
°
the amount of any fixed payments Niagara Mohawk must make, even if the facility does not generate electricity; and
°
the level of control Niagara Mohawk has over the amount of electricity generated by the facility, and who bears the risk in the event the facility is unable to generate.
RECLASSIFICATIONS: Certain amounts from prior years have been reclassified on the accompanying Consolidated Financial Statements to conform with the 2001 presentation.
NOTE 2. SUBSEQUENT EVENT - MERGER WITH NATIONAL GRID (UNAUDITED)
On January 31, 2002, the acquisition of Holdings by National Grid was completed for a value of approximately $3.0 billion in cash and American Depositary Shares. The acquisition is being accounted for by the purchase method, the application of which, including the recognition of goodwill, is being recorded on the books of Niagara Mohawk, the most significant subsidiary of Holdings. The merger transaction resulted in over $1 billion of goodwill, which will be subject to SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill’s impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives.
Coincident with the merger, Niagara Mohawk implemented the Merger Rate Plan which includes the following key provisions:
°
Net customer savings of about $1 billion over the next 10 years, compared with rates projected without the merger. This includes a $152 million reduction in delivery charges compared to rates approved in Niagara Mohawk’s current rate agreement, followed by stabilized delivery charges for 10 years, subject to limited adjustments. This equals an expected reduction in Niagara Mohawk electricity delivery rates of more than eight percent, which results in a projected five percent decrease in overall electricity bills, including a projected commodity cost, which will continue to be borne by customers.
°
Price-stabilized commodity service for residential and commercial customers for several years, giving those customers significant protection from severe fluctuations in the generation marketplace.
°
Agreement to forgo the collection of an estimated $850 million in nuclear-related costs that otherwise would have been collected in rates.
°
Ability to recover a return on the remaining MRA regulatory asset.
°
Also, as part of the agreement, the companies would expand Niagara Mohawk’s annual upstate New York economic development efforts by $12.5 million.
°
The extension by 16 months of the existing multi-year gas rate settlement agreement, resulting in a freeze in natural gas delivery rates through December 2004.
°
Extension of the Low Income Customer Assistance Program and introduction of a special low-income rate.
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Establishment of a Service Quality Assurance Program that calls for up to $24 million in annual penalties or more under certain conditions, if defined customer service goals are not achieved.
°
The continuation of the stranded cost recovery provisions under Power Choice with slight modifications.
The application of the purchase accounting and implementation of the Merger Rate Plan results in substantial changes to Niagara Mohawk’s balance sheet, principally in the recording of goodwill, the write-down of regulatory assets, and the increase in Niagara Mohawk’s capital structure.
On December 21, 2001, National Grid announced that it will, within a year of closing the acquisition of Holdings (which occurred on January 31, 2002), have Niagara Mohawk or an affiliate make offers to purchase all of the then outstanding preferred stock of Niagara Mohawk. Such offers will be made at prices that are customary for a tender offer to purchase similar preferred stock and will be determined at the time the offers are made. Such determination of prices will be made by National Grid based on advice of an investment banking firm. National Grid’s commitment will not affect the ability of Niagara Mohawk to voluntarily redeem or otherwise call its preferred stock. The making of such offers in the future will also be subject to receiving all regulatory approvals required for preferred stock offerings.
On February 5, 2002, Niagara Mohawk announced that it will redeem all remaining outstanding shares of the following series of preferred stock:
6.10% Series ($100 par value), at the redemption price of $101.00 per share;
7.45% Series ($100 par value), at the redemption price of $100.73 per share;
7.72% Series ($100 par value), at the redemption price of $102.36 per share;
Adjustable Rate Series A ($25 par value), at the redemption price of $25 per share;
Adjustable Rate Series B ($25 par value), at the redemption price of $25 per share;
Adjustable Rate Series C ($25 par value), at the redemption price of $25 per share.
These preferred stock series have been called for redemption on March 4, 2002, at the above indicated redemption prices together with accrued and unpaid dividends.
Upon the closing of the merger, Niagara Mohawk recorded $0.5 million in compensation expense related to stock options and $10.6 million in compensation expense related to stock appreciation rights and stock units. See Note 10. Stock Based Compensation for more detailed information on this.
NOTE 3. RATE AND REGULATORY ISSUES AND CONTINGENCIES
Niagara Mohawk’s financial statements conform to GAAP, including the accounting principles for rate-regulated entities with respect to its regulated operations. Niagara Mohawk discontinued application of regulatory accounting principles to its fossil and hydro generation business as of December 31, 1996. Substantively, SFAS No. 71 permits a public utility, regulated on a cost-of-service basis, to defer certain costs, which would otherwise be charged to expense, when authorized to do so by the regulator. These deferred costs are known as regulatory assets, which in the case of Niagara Mohawk, are approximately $5.8 billion at December 31, 2001. These regulatory assets are probable of recovery under Niagara Mohawk’s Power Choice and Gas Multi-Year Rate and Restructuring Agreement. See Note 2 for a further discussion of the impact of the Merger Rate Plan on the regulatory assets.
MRA REGULATORY ASSET Under Power Choice, a regulatory asset was established for the costs of the MRA and represents the cost to terminate, restate, or amend IPP Party contracts. This regulatory asset is being amortized generally over ten years, beginning September 1, 1998. Niagara Mohawk’s rates under Power Choice have been designed to permit recovery of the MRA regulatory asset.
SWAP CONTRACTS REGULATORY ASSET: The swap contract regulatory asset represents the expected future recovery of the swap contract liabilities. The swap contract liabilities are the present value of the forecasted over-market payments in the restated PPA contracts and the financial swaps associated with the sale of various generation plants. The regulatory asset associated with the restated IPP contracts will amortize over ten years ending in June 2008 as notional quantities are settled. The part of this regulatory asset associated with the generating plants will be amortized over the remaining terms of these contracts ending September 30, 2003. See Note 8 and Note 9 for a further discussion of the several PPAs and other financial agreements that Niagara Mohawk has entered into as part of the MRA and the sale of its generation assets. The amount of this regulatory asset will fluctuate as estimates of future market and contract prices change over the terms of the contracts and will decline as the remaining contract periods shorten. Payments under these arrangements are included in the “Electricity Purchased” line item in the Consolidated Statements of Income and Retained Earnings.
IPP RESTRUCTURING COSTS: Niagara Mohawk is also permitted to defer and amortize the cost of any additional IPP contract buyouts. Through 2001, there have been 13 IPP contracts for approximately 161 MW terminated for a total consideration (cash and/or notes) of $242.1 million. Deferred costs associated with IPP buyouts will generally be amortized over five years in accordance with Power Choice, unless PSC approval is obtained for a different amortization period. Niagara Mohawk retains the annual net savings of the buyouts during the remaining term of Power Choice to offset the amortization expense.
DEFERRED ENVIRONMENTAL RESTORATION COSTS: The deferred environmental restoration costs regulatory asset represents Niagara Mohawk’s share of the estimated costs to investigate and perform certain remediation activities at both Niagara Mohawk-owned sites and non-owned sites with which it may be associated. Niagara Mohawk has recorded a regulatory asset representing the remediation obligations to be recovered from ratepayers. Power Choice and Niagara Mohawk’s gas rates decisions provide for specific rate allowances, with variances deferred for future recovery or pass-back to customers. Niagara Mohawk believes future costs, beyond the settlement periods, will continue to be recovered in rates.
DEFERRED LOSS ON THE SALE OF ASSETS: Power Choice requires Niagara Mohawk to divest its portfolio of fossil and hydro generation assets. During 1999, Niagara Mohawk completed the sale of its hydroelectric generation plants, its coal-fired generation plants and its Oswego oil and gas-fired plant for $860 million. These assets had a combined net book value of approximately $957 million (including materials, supplies and fuel) at the time of their sale. In addition, there were purchase price adjustments of approximately $27 million, primarily due to a lower amount of fuel being transferred to the new owners of the Oswego generation assets than originally anticipated and provided for in the sales agreement.
On May 12, 2000, Niagara Mohawk completed the sale of its Albany oil and gas-fired plant to PSEG Power LLC (“PSEG”) for $47.5 million. The Albany plant had a net book value of approximately $36.4 million (including materials, supplies and fuel) at the time of the sale. There may also be future receipts or payments relating to redevelopment of the facility and the level of property taxes, which would adjust stranded costs to be recovered from customers.
On January 30, 2001, Niagara Mohawk sold its 25 percent interest in the Roseton Steam Station to Dynegy Inc. (“Dynegy”), pursuant to which Niagara Mohawk received approximately $83.9 million. Niagara Mohawk’s share of the plant had a net book value of approximately $38.3 million (which includes materials, supplies and fuel) as of the closing. The gains from the sale of the Albany plant and the Roseton Steam Station were used to partially offset the losses from the sale of the coal-fired generation assets and the hydroelectric generation plants.
The Power Choice agreement provides for deferral and future recovery of net losses resulting from the sale of the fossil and hydro generation asset portfolio. In addition, the PSC has allowed Niagara Mohawk to offset the proceeds from the sale of the fossil and hydro generation assets by the net present value of the amount which the actual amount incurred on the hydro PPAs exceeds the forecasted amount reflected in Power Choice, which was $36.4 million as of December 31, 2001. As of December 31, 2001, Niagara Mohawk has recorded a regulatory asset of $122.5 million for the net loss on the sale of its fossil and hydro generation assets. The net loss is included in Niagara Mohawk’s balance sheet as “Deferred loss on sale of assets.” In accordance with Power Choice, Niagara Mohawk will not earn a return on the deferred loss related to the sale of the fossil and hydro assets during Power Choice, and would begin recovery of this amount in 2003.
On November 7, 2001, Niagara Mohawk sold its nuclear assets to Constellation pursuant to which Niagara Mohawk received approximately $271 million in cash and will receive five annual principal and interest payments totaling $332 million. The current portion of the Notes Receivable from Constellation is approximately $50.0 million and is reflected in Current Assets. The non-current portion of the Notes Receivable is approximately $199.8 million and is reflected in the “Other Assets” line item of the Consolidated Balance Sheets. Niagara Mohawk’s share of the plant had a net book value (which includes materials, supplies and fuel) of approximately $1.6 billion as of the closing, excluding the reserve for decommissioning costs recovered in rates that was reflected in “Accumulated depreciation and amortization” on the balance sheet of $457.4 million. In addition, Niagara Mohawk transferred its external decommissioning trust fund of $357.1 million, which was included in “Other property and investments” to Constellation. Pursuant to the PSC Order approving the sale, dated October 24, 2001, Niagara Mohawk was required to write-off $123 million of its nuclear investment. The PSC Order provides for the deferral and future recovery of the remaining nuclear stranded costs over a period not to exceed eight years.
After writing off $123 million of nuclear investment as a result of the sale of the nuclear assets as provided for in the nuclear settlement agreement, Niagara Mohawk recorded its nuclear stranded costs in the “Deferred loss on sale of assets” account. In addition, Niagara Mohawk reclassified its net regulatory assets of approximately $125.3 million to the “Deferred loss on sale of assets” account. The amount of the loss is subject to change as a result of post closing adjustments on the sales, transaction costs, subsequent costs associated with contract clauses, the amount of severance and other costs, and PSC review of the amounts deferred. Niagara Mohawk began to amortize the regulatory asset related to the loss on the sale of the nuclear assets, which is reflected in the “Amortization of nuclear regulatory assets” line item of the Consolidated Income Statements, leaving a nuclear stranded cost balance of $1,074.6 million at December 31, 2001. The remaining stranded costs related to the sale of all of the generation assets will be amortized over ten years based on a pattern established in the Merger Rate Plan.
Niagara Mohawk has recorded a non-cash incentive as provided for in Power Choice of $18.6 million based on the asset sales of which $9.0 million is reflected in income in 1999, $2.8 million is reflected in income in 2000 and $6.8 million is reflected in income in 2001 in the “Other income (deductions)” line item of the Consolidated Income Statements. The incentive earned reflects PSC Staff recommended adjustments based on their review to date and is included in the other regulatory assets on the Consolidated Balance Sheets.
REGULATORY TAX ASSET: The regulatory tax asset represents the expected future recovery from ratepayers of the tax consequences of temporary differences between the recorded book bases and the tax bases of assets and liabilities. This amount is primarily timing differences related to depreciation. These amounts are recovered and amortized as the related temporary differences reverse. The PSC required adoption of SFAS No. 109 on a revenue-neutral basis. The regulatory tax asset decreased by $228.5 million in 2001 primarily due to the reclassification of the SFAS No. 109 nuclear regulatory asset to the deferred loss on the sale of the assets.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: The postretirement benefits other than pensions regulatory asset represents the excess of such costs recognized in accordance with SFAS No. 106 over the amount received in rates. In accordance with a PSC policy statement, postretirement benefit costs other than pensions were phased into rates generally over a five-year period and amounts deferred are being amortized and recovered over a period of approximately 15 years.
UNAMORTIZED DEBT EXPENSE: The unamortized debt expense regulatory asset represents the costs to issue and redeem certain long-term debt securities, which were retired prior to maturity. These amounts are amortized as interest expense ratably over the lives of the related issues in accordance with PSC directives.
OTHER: Included in the other regulatory asset is the accumulation of numerous miscellaneous regulatory deferrals, uncollectible accounts receivable, income earned on gas rate sharing mechanisms, the incentive earned on the sale of the fossil and hydro generation assets and certain NYISO costs that were deferred for future recovery.
SFAS NO. 71 AND OTHER ACCOUNTING MATTERS: The Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on Issue No. 97-4, “Deregulation of the Pricing of Electricity - Issues Related to the Application of SFAS No. 71” and SFAS No. 101,” “Regulated Enterprises - Accounting for the Discontinuance of Application of FASB Statement No. 71” in 1997. EITF 97-4 does not require a company to earn a return on regulatory assets that arise from a deregulating transition plan in assessing the applicability of SFAS No. 71. Niagara Mohawk believes that the regulated cash flows to be derived from prices it will charge for electric service in the future, including the CTC and assuming no unforeseen reduction in demand or bypass of the CTC or exit fees, will be sufficient to recover the MRA regulatory asset over its planned amortization period and to provide recovery of and a return on the remainder of its assets, as appropriate. Under the Merger Rate Plan, Niagara Mohawk will earn a return on all of its regulatory assets. In the event Niagara Mohawk determines, as a result of lower than expected revenues and/or higher than expected costs, that its net regulatory assets are not probable of recovery, it can no longer apply the principles of SFAS No. 71 and would be required to record an after-tax, non-cash charge against income for any remaining unamortized regulatory assets and liabilities. If Niagara Mohawk could no longer apply SFAS No. 71, the resulting charge would be material to Niagara Mohawk’s reported financial condition and results of operations and adversely affect Niagara Mohawk’s ability to pay dividends.
Under Power Choice and the Merger Rate Plan, Niagara Mohawk’s remaining electric business (electric transmission and distribution business) continues to be rate-regulated on a cost-of-service basis and, accordingly, Niagara Mohawk continues to apply SFAS No. 71 to these businesses. Also, Niagara Mohawk’s IPP contracts, including those restructured under the MRA, as well as the PPAs entered into in connection with the generation divestiture, continue to be the obligations of the regulated business.
NOTE 4. CAPITALIZATION
Niagara Mohawk is authorized to issue 250,000,000 shares of common stock, $1 par value; 3,400,000 shares of preferred stock, $100 par value; 19,600,000 shares of preferred stock, $25 par value; and 8,000,000 shares of preference stock, $25 par value. The table below summarizes changes in the capital stock issued and outstanding and the related capital accounts for 1999, 2000, and 2001:
Preferred Stock (e) ---------------------------------------------------------------------------- Accumlated Repurchased Capital Stock Other Holdings' Non- Non- Premium and Comprehensive Common Shares Amount* Shares Redeemable* Redeemable* Shares Redeemable* Redeemable* Expense (Net)* Loss* Stock* --------------------- ----------- -------- ---------- ---------- ----------- -------------- ----------- ----------- ------------- -------------- ---------- December 31, 1998 187,364,863 $187,365 2,304,000 $210,000 $20,400(a) 11,448,403 $230,000 $56,210 (a) $2,362,531 ($25,794) Issued - - - 3,000,000 (b) 150,000 - (1,479) Redemptions (18,000) - (1,800) (6,232,801)(b) (150,000) (5,820) 87 Repurchased Holdings' Common stock (157,167) Dividend of Opinac 25,186(c) Other comprehensive income adjustments (4,545) ----------- -------- ---------- ---------- ----------- -------------- ----------- ----------- ----------- ------------- ---------- December 31, 1999 187,364,863 $187,365 2,286,000 $210,000 $18,600(a) 8,215,602 $230,000 $50,390 (a) $2,361,139 ($5,153) (157,167) Amortization (d) 1,178 Redemptions (18,000) - (1,800) (232,801) - (5,820) 87 Repurchased Holdings' Common stock (250,026) Other comprehensive income adjustments (2,306) ----------- -------- ---------- ---------- ----------- -------------- ----------- ----------- ----------- ------------- ---------- December 31, 2000 187,364,863 $187,365 2,268,000 $210,000 $16,800(a) 7,982,801 $230,000 $44,570 (a) $2,362,404 ($7,459) ($407,193) Amortization (d) 1,363 Redemptions (18,000) - (1,800) (232,801) - (5,820) 87 Other comprehensive income adjustments (10,186) ----------- -------- ---------- ---------- ----------- -------------- ----------- ----------- ----------- ------------ ----------- December 31, 2001 187,364,863 $187,365 2,250,000 $210,000 $15,000(a) 7,750,000 $230,000 $38,750 (a) $2,363,854 ($17,645) ($407,193) =========== ======== ========== ========== =========== ============== =========== =========== =========== ============ ===========
* In thousands of dollars
(a)
Includes sinking fund requirements due within one year.
(b)
The fixed-adjustable rate preferred stock issued during 1999 has a $25 par value with a $50 liquidation preference.
(c)
On March 31, 1999, Niagara Mohawk distributed its ownership interested in the stock of Opinac as a dividend to Holdings. As a result, the accumulated other comprehensive income of Opinac of $25,186 million, which is entirely made up of foreign currency translation adjustment, is no longer included in Niagara Mohawk’s “Accumulated Other Comprehensive Income.” (See Note 1).
(d)
Pursuant to a 1999 PSC rate order, Niagara Mohawk is amortizing the capital stock expense of the Adjustment Rate Series D preferred stock over five years (ends in 2004).
(e)
See Note 2 for a detailed discussion of the preferred stock that Niagara Mohawk has announced that it will redeem.
The components of other comprehensive loss include the cumulative amount of unrealized loss on securities was $700, the additional minimum pension liability was $11,818 and the loss on the hedging activity was $5,127 at December 31, 2001. Included in Accumulated Other Comprehensive Income (Loss) are the following amounts from the activity of cash flow hedges for the year ended December 31, 2001.
All of the instruments representing the deferred losses at year end will be settled within the next 12 months and the resulting gains or losses recorded in income.
(in thousands of dollars) Gas Supply Electric Supply Total ---------- --------------- --------- Derivatives designated as cash flow hedges at January 1, 2001 $ (12,967) $ (4,442) $(17,409) Changes in fair value recognized in 2001 29,342 (1,469) 27,873 Reclassifications to expense (7,458) 5,911 (1,547) ---------- --------------- --------- Total hedging activity included in Accumulated other comprehensive income at December 31, 2001 $ 8,917 $ - $ 8,917 ========== =============== =========
Purchase of Holdings’ Common Stock - Niagara Mohawk purchased 10 million shares of Holdings’ common stock through December 31, 1999 for $157.2 million.
Niagara Mohawk purchased 17,125,045 additional shares for approximately $250 million in 2000. Niagara Mohawk has suspended the program to repurchase Holdings’ common stock as a result of the merger (See Note 2).
NIAGARA MOHAWK NON-REDEEMABLE PREFERRED STOCK
Niagara Mohawk had certain issues of preferred stock, which provide for redemption at the option of Niagara Mohawk at December 31, as follows:
Redemption price per share In thousands of dollars (Before adding Series Shares 2001 2000 accumulated dividends) --------------------------------------------------------------------- Preferred $100 par value:
3.40% 200,000 $ 20,000 $ 20,000 $103.50 3.60% 350,000 35,000 35,000 104.85 3.90% 240,000 24,000 24,000 106.00 4.10% 210,000 21,000 21,000 102.00 4.85% 250,000 25,000 25,000 102.00 5.25% 200,000 20,000 20,000 102.00 6.10% 250,000 25,000 25,000 101.00 7.72% 400,000 40,000 40,000 102.36
Preferred $25 par value:
Adjustable Rate - Series A 1,200,000 30,000 30,000 25.00 Series C 2,000,000 50,000 50,000 25.00 Series D 3,000,000 150,000 150,000 50.00* ------- ------- $440,000 $440,000 ======== ========
* Not redeemable prior to December 31, 2004.
NIAGARA MOHAWK MANDATORILY REDEEMABLE PREFERRED STOCK
At December 31, Niagara Mohawk had certain issues of preferred stock, as detailed below, which provide for mandatory and optional redemption. These series require mandatory sinking funds for annual redemption and provide optional sinking funds through which Niagara Mohawk may redeem, at par, a like amount of additional shares (limited to 120,000 shares of the 7.45 percent series).
Redemption price per share (Before adding accumulated dividends) Shares In thousands of dollars Eventual Series 2001 2000 2001 2000 2000 Minimum ------------------------------------------------------------------------------------------------------ Preferred $100 par value: 7.45% 150,000 168,000 $ 15,000 $ 16,800 $100.73 $100.00 Preferred $25 par value: 7.85% - 182,801 - 4,570 25.00 25.00 Adjustable Rate - Series B 1,550,000 1,600,000 38,750 40,000 25.00 25.00 -------- -------- 53,750 61,370 Less sinking fund requirements 3,050 7,620 -------- -------- $ 50,700 $ 53,750 ======== ========
Niagara Mohawk’s five-year mandatory sinking fund redemption requirements for preferred stock are as follows:
NIAGARA MOHAWK LONG-TERM DEBT
Long-term debt at December 31, consisted of the following debt:
In thousands of dollars In thousands of dollars Series Due 2001 2000 Series 2001 2000 ------------------------------------------------- ------------------------------------------------- First Mortgage Bonds: Promissory notes: 6 7/8% 2001 - $210,000 2015 $100,000 $100,000 9 1/4% 2001 - 100,000 2023 69,800 69,800 5 7/8% 2002 $230,000 230,000 2025 75,000 75,000 6 7/8% 2003 85,000 85,000 2026 50,000 50,000 7 3/8% 2003 220,000 220,000 2027 25,760 25,760 8% 2004 232,425 232,425 2027 93,200 93,200 6 5/8% 2005 110,000 110,000 Revolving Credit Facility - 60,000 9 3/4% 2005 137,981 137,981 Other 175,350 180,363 7 3/4% 2006 275,000 275,000 Unamortized premium (discount) (9,055) (10,651) ---------------------- 6 5/8%* 2013 45,600 45,600 Total Long-Term Debt 4,966,680 5,307,288 8 3/4% 2022 119,012 119,012 Less long-term debt due 8 1/2% 2023 122,020 122,020 within one year 546,858 628,325 ---------------------- 7 7/8% 2024 170,257 170,257 $4,419,822 $4,678,963 5.15%* 2025 75,000 75,000 ====================== 7.2%* 2029 115,705 115,705 -------------------- Total First Mortgage Bonds 1,938,000 2,248,000 -------------------- Senior Notes: 7 1/8% 2001 - 302,439 7 1/4% 2002 302,439 302,439 7 3/8% 2003 302,439 302,439 5 3/8% 2004 300,000 - 7 5/8% 2005 302,439 302,439 8 7/8% 2007 200,000 200,000 7 3/4% 2008 600,000 600,000 8 1/2% 2010 500,000 500,000 Unamortized discount on 8 1/2% Senior Note (58,692) (93,940) --------------------- Total Senior Notes $2,448,625 $2,415,816 ---------------------
* Tax exempt pollution control related issues.
Niagara Mohawk’s long-term debt increased significantly upon the closing of the MRA on June 30, 1998. The MRA was primarily financed through the Senior Notes.
Niagara Mohawk was obligated to use 85 percent of the net proceeds of the sales of the generation assets to reduce its senior debt outstanding within 180 days after the receipt of such proceeds, which requirement was satisfied in 2001. To date, Niagara Mohawk has received $1,261.4 million in cash proceeds on the sale of its generation assets. During 1999 through 2001, Niagara Mohawk’s net reduction in debt was approximately $1.9 billion using the proceeds from the assets sales and from improved cash flow.
Several series of First Mortgage Bonds and Promissory Notes were issued to secure a like amount of tax-exempt revenue bonds issued by NYSERDA. Approximately $414 million of such securities bear interest at a daily adjustable interest rate (with an option to convert to other rates, including a fixed interest rate which would require Niagara Mohawk to issue First Mortgage Bonds to secure the debt) which averaged 2.50 percent for 2001, 4.06 percent for 2000 and 3.23 percent for 1999 and are supported by bank direct pay letters of credit. Pursuant to agreements between NYSERDA and Niagara Mohawk, proceeds from such issues were used for the purpose of financing the construction of certain pollution control facilities at Niagara Mohawk’s generation facilities or to refund outstanding tax-exempt bonds and notes (see Note 4).
Other long-term debt in 2001 consists of obligations under capital leases of approximately $15.6 million, a liability to the DOE for nuclear fuel disposal of approximately $139.1 million, a liability for IPP contract restructurings not related to the MRA of approximately $16.5 million and promissory notes to the co-tenants of Unit 2 related to the sale of the nuclear assets of $4.2 million. The aggregate maturities of long-term debt for the five years subsequent to December 31, 2001, excluding capital leases, in millions, are approximately $543.8, $611.8, $533.0, $550.6 and $275.0, respectively. Niagara Mohawk retained the liability to the DOE for nuclear fuel disposal as part of the sale of the nuclear assets. See Note 8 for a further discussion of the nuclear fuel disposal liability to the DOE.
EARLY EXTINGUISHMENT OF DEBT
During 2000 and 1999, Niagara Mohawk redeemed approximately $95 million and $822 million, respectively, in long-term debt prior to its scheduled maturity. Niagara Mohawk charged to earnings, as an extraordinary item approximately $0.9 million and $23.8 million, after tax, for redemption premiums incurred, and unamortized debt expense and issuance costs.
NOTE 5. BANK CREDIT ARRANGEMENTS
Niagara Mohawk has a senior bank facility agreement that provides Niagara Mohawk with $846.9 million of credit consisting of a $322.9 million, 364 day revolving credit facility (expires May 31, 2002, with the option to convert up to $280.0 million loans outstanding at the termination date to a one-year term loan), a five-year $100 million revolving credit facility (expires May 31, 2005), and $424 million for letters of credit with a three-year term (expires June 2, 2003). The letter of credit facility provides credit support for Niagara Mohawk’s adjustable rate pollution control revenue bonds issued through the New York State Energy Research and Development Authority, discussed in Note 4. As of December 31, 2001, Niagara Mohawk has no loans outstanding under the revolving credit facilities. The senior bank facility will be available for Niagara Mohawk subsequent to the merger with National Grid.
Niagara Mohawk had short-term debt of $110 million outstanding at December 31, 2000 and no short-term debt outstanding at December 31, 2001. The interest rate applicable to the facility is variable based on certain rate options available under the agreement and approximated 7.8 percent at December 31, 2000.
NOTE 6. FEDERAL, STATE AND FOREIGN INCOME TAXES
Components of United States and foreign income before income taxes:
In thousands of dollars 2001 2000 1999 ---------------------------- --------- --------- -------- United States $(42,575) $(30,929) $40,629 Income before income taxes and preferred dividend --------- --------- -------- requirement of subsidiary $(42,575) $(30,929) $40,629 ========= ========= ========
Following is a summary of the components of federal, state and foreign income tax and a reconciliation between the amount of federal income tax expense reported in the Consolidated Statements of Income and the computed amount at the statutory tax rate:
In thousands of dollars 2001 2000 1999 ------------------------ --------- -------- -------- Components of federal, state and foreign income taxes: Current tax expense: Federal $ 3,559 $18,350 $25,350 State (a) 386 468 143 --------- -------- -------- 3,945 18,818 25,493 --------- -------- -------- Deferred tax expense: Federal (78,971) (22,409) (6,467) State (a) 2,930 (5,935) - --------- -------- -------- (76,041) (28,344) (6,467) --------- -------- -------- Total (b) $(72,096) $(9,526) $19,026 ========= ======== ========
(a)
Effective date of New York State income tax implementation for Niagara Mohawk was January 1, 2000.
(b)
Does not include the tax benefits of $0.489 million and $12.819 million associated with the extraordinary item for the loss on the extinguishment of debt in 2000 and 1999, respectively.
Reconciliation between federal and foreign income taxes and the tax computed at prevailing U.S. statutory rate on income before income taxes:
2001 2000 1999 --------- --------- -------- Computed tax $(14,901) $(10,825) $14,220 ------------------------------------------------------------------------------ Increase (reduction) including those attributable to flow-through of certain tax adjustments: Depreciation 18,620 27,366 21,380 Cost of removal (6,441) (6,936) (6,809) Allowance for funds used during construction 929 (254) (2,442) State income taxes (a) 3,316 (5,467) (143) Expiring foreign tax credits - - 692 Pension settlement amortization - - (278) Debt premium & mortgage recording tax 664 806 14,402 Real estate taxes (414) (5,860) 3,540 Amortization of capital stock 548 634 99 Dividends exclusion - federal income tax returns (468) (517) (449) Vacation pay adjustment 76 420 (36) Provided at other than statutory rate 1 (1,186) 1,185 Supplemental Executive Retirement trust fund - (446) (268) Settlement of IRS exams - (1,852) - Voluntary Early Retirement Plan 11,272 - - Subsidiaries (1,115) 3 (876) Reserve for Hydra-Co sale expenses - - (1,181) Deferred investment tax credit reversal (c) (86,034) (6,110) (23,539) Other 1,851 698 (471) --------- --------- -------- (57,195) 1,299 4,806 --------- --------- -------- Federal and foreign income taxes (b) $(72,096) $ (9,526) $19,026 ========= ========= ========
(a)
Effective date of New York State income tax implementation for Niagara Mohawk was January 1, 2000.
(b)
Does not include the tax benefits of $0.489 million and $12.819 million associated with the extraordinary item for the loss on the extinguishment of debt in 2000 and 1999, respectively.
(c)
Deferred investment tax credits of $79.7 million, $0.8 million and $16.2 million related to the generation assets that have been sold have been taken into income in 2001, 2000 and 1999, respectively, in accordance with IRS rules.
At December 31, the deferred tax liabilities (assets) were comprised of the following:
In thousands of dollars 2001 2000 --------------------------------- ------------ ------------ Alternative minimum tax $ (95,899) $ (93,228) Unbilled revenues (23,052) (13,964) Non-utilized NOL carryforward (638,316) (805,261) Other (317,444) (430,257) ------------ ------------ Total deferred tax assets (1,074,711) (1,342,710) ------------ ------------ Depreciation related 781,730 1,285,180 Investment tax credit related 23,026 62,734 MRA terminated IPP contracts 901,832 1,037,106 Loss on sale of nuclear assets 468,773 - Other 357,225 436,722 ------------ ------------ Total deferred tax liabilities 2,532,586 2,821,742 ------------ ------------ Accumulated deferred income taxes $ 1,457,875 $ 1,479,032 ============ ============
In December 1998, Niagara Mohawk received a ruling from the IRS which provided that the amount of cash and the value of common stock that was paid by Niagara Mohawk to the subject terminated IPP Parties was deductible in 1998 which resulted in Niagara Mohawk not paying any regular federal income taxes for 1998, and further generated a substantial net operating loss for federal income tax purposes. Niagara Mohawk carried back a portion of the unused NOL to the years 1996 and 1997, and also for the years 1988 through 1990, which resulted in federal income tax refunds of $135 million that were received in January 1999. As a result of the merger with National Grid, Niagara Mohawk is now part of the consolidated tax return filing group of National Grid. National Grid anticipates that the consolidated tax filing group will be able to utilize the remaining NOL carryforward prior to its expiration in 2019. The amount of the NOL carryforward as of December 31, 2001 is $1.811 billion. National Grid’s ability to utilize the NOL carryforward generated as a result of the MRA and the utilization of alternative minimum tax credits, could be limited under the rules of Section 382 of the Internal Revenue Code.
NOTE 7. PENSION AND OTHER RETIREMENT PLANS
Niagara Mohawk has a non-contributory defined benefit pension plan covering substantially all employees. The plan includes a cash balance benefit in which the participant has an account to which amounts are credited based on qualifying compensation and with interest determined annually based on average annual 30-year Treasury bond yield. Supplemental non-qualified, non-contributory executive retirement programs provide additional defined pension benefits for certain officers. In addition, Niagara Mohawk, provides certain contributory health care and life insurance benefits for active and retired employees and dependents.
The changes in benefit obligations, plan assets and plan funded status for these pension and other retirement plans as of, and for the year ended December 31, are summarized as follows:
In thousands of dollars Pension Benefits Other Retirement Benefits ------------------------ -------------------------- 2001 2000 2001 2000 ----------- ----------- ---------- ---------- Change in benefit obligation: Benefit obligation at January 1 $1,183,775 $1,111,833 $ 562,594 $ 519,058 Service cost 32,046 32,502 11,265 11,784 Interest cost 88,315 86,262 41,664 39,601 Benefits paid to participants (125,038) (92,313) (47,695) (40,528) Plan amendments 37,092 390 22,960 - Curtailments (18,603) (178) (16,016) (1,514) Settlements (21,199) (12,728) - Actuarial (gain) loss 70,232 58,007 76,651 34,193 ----------- ----------- ---------- ---------- Benefit obligation at December 31 1,246,620 1,183,775 651,423 562,594 ----------- ----------- ---------- ---------- Change in plan assets: Fair value of plan assets at January 1 1,256,720 1,344,647 271,973 245,090 Contributions 4,000 29,247 - Net return on plan assets (59,838) (10,856) (3,233) 26,883 Benefits paid to participants (124,605) (91,085) - Settlements - (15,233) - ----------- ----------- ---------- ---------- Fair value of plan assets at December 31 1,076,277 1,256,720 268,740 271,973 ----------- ----------- ---------- ---------- Funded status (170,342) 72,945 (382,683) (290,621) Unrecognized initial obligation 6,800 10,253 119,790 130,680 Unrecognized net gain from actual return on plan assets (92,527) (249,756) - Unrecognized net loss (gain) from past experience different from that assumed 77,107 39,939 96,681 9,262 Unrecognized prior service cost 86,894 73,290 14,606 (6,166) Intangible Asset (16,136) (391) Accumulated other comprehensive income (11,818) (8,004) - ----------- ----------- ---------- ---------- Benefits liability on Niagara Mohawk's consolidated balance sheet $ (120,022) $ (61,724) $(151,606) $(156,845) =========== =========== ========== ==========
In 2001, Niagara Mohawk experienced a net curtailment/settlement loss of $31.9 million due to the employee transfers associated with the sale of the nuclear assets and change of control payments under the supplemental executive retirement plan. Of the 2001 loss, $11.2 million is recorded in the deferred loss on the sale of assets, $6.0 million is due from co-tenants for their allocation of the plant ownership and $14.7 million was charged to expense. In 2000, Niagara Mohawk experienced a net pension curtailment/settlement gain of $2.8 million due to the employee transfers associated with the sales of the Oswego and Albany generating plants. These gains/losses are included in the deferred loss on the sale of the assets. In 1999, there was a net curtailment/settlement gain of $35.3 million due to employee transfers associated with generation asset sales and normal terminations.
The non-qualified executive pension plan has no plan assets due to the nature of the plan, and therefore, has an accumulated benefit obligation in excess of plan assets of $17.3 million and $16.5 million at December 31, 2001 and 2000, respectively.
The following table summarizes the components of the net annual benefit costs.
In thousands of dollars Pension Benefits Other Retirement Benefits ------------------------------- ------------------------------- 2001 2000 1999 2001 2000 1999 --------- --------- --------- --------- --------- --------- Service cost $ 32,046 $ 32,502 $ 34,743 $ 11,265 $ 11,784 $ 15,367 Interest cost 88,315 86,262 85,821 41,664 39,601 35,555 Expected return on plan assets (94,247) (95,399) (97,151) (24,436) (21,277) (17,501) Amortization of the initial obligation 2,240 2,381 2,526 10,890 10,890 10,890 Amortization of gains and losses (1,122) (5,028) (1,574) 7,101 4,841 10,695 Amortization of prior service costs 8,464 7,230 7,675 (7,207) (9,244) (10,271) --------- --------- --------- --------- --------- --------- Net benefit cost before curtailments and settlements 35,696 27,948 32,040 39,277 36,595 44,735
Curtailment (gain) loss 14,063 1,025 6,470 3,179 (1,635) 5,370 Settlement (gain) loss 14,689 (2,232) (47,102) - - --------- --------- --------- --------- --------- --------- Net benefit cost (1) $ 64,448 $ 26,741 $ (8,592) $ 42,456 $ 34,960 $ 50,105 ========= ========= ========= ========= ========= =========
(1) A portion of the benefit costs relates to construction labor, and accordingly, is allocated to construction projects.
Niagara Mohawk also has a defined contribution pension plan (employee savings fund plan) that covers substantially all employees. Employer matching contributions of $10.0 million, $10.2 million and $10.8 million were expensed in 2001, 2000 and 1999 respectively.
Pension Benefits Other Retirement Benefits 2001 2000 2001 2000 ------ ------ ------ ------ Weighted average assumptions as of December 31: Discount rate 7.25% 7.75% 7.25% 7.75% Expected return on plan assets 9.50 9.50 9.25 9.50 Rate of compensation increase (plus merit increases) 2.50 2.50 N/A N/A Health care cost trend rate: Under age 65 N/A N/A 9.00 9.00 Over age 65 N/A N/A 9.00 9.00
The assumed health cost trend rates decline to five percent in 2006 and remain at that level thereafter. The assumed health cost trend rates can have a significant effect on the amounts reported for the health care plans.
A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease ----------- ----------- Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $ 5,286 $ (4,270)
Effect on the health care component of the accumulated postretirement benefit obligation $ 52,429 $ (48,383)
Niagara Mohawk recognizes the obligation to provide post-employment benefits if the obligation is attributable to employees’ past services, rights to those benefits are vested, payment is probable and the amount of the benefits can be reasonably estimated. At December 31, 2001 and 2000, Niagara Mohawk’s post-employment benefit obligation is approximately $22.4 million and $21.5 million, respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
LONG-TERM CONTRACTS FOR THE PURCHASE OF ELECTRIC POWER: Niagara Mohawk has several types of long-term contracts for the purchase of electric power. Niagara Mohawk’s commitments under these long-term contracts, as of January 1, 2002, excluding its commitments with NYPA, which are shown separately, are summarized in the table below. Following the table are descriptions of the different types of these long-term contracts. For a detailed discussion of the financial swap agreements that Niagara Mohawk has entered into as part of the MRA and the sale of its generation assets (the sale of the Huntley and Dunkirk coal-fired generation plants and the sale of the Albany oil and gas-fired generation plant) which are not included in the table below, see Note 9.
(In thousands of dollars) Estimated Estimated Estimated Estimated Fixed Costs Variable Costs Purchased Purchased Capacity, Capacity Energy Year Capacity Energy and Taxes ** Total (in MW) (in MWh) ------------------------------------------------------------------------------ 2002 $54,390 $ 530,244 $ 584,634 3,265 12,521,063 2003 41,490 522,499 563,989 3,243 12,336,571 2004 20,708 484,569 505,277 2,023 11,439,765 2005 15,354 390,410 405,764 1,394 9,172,294 2006 15,532 384,290 399,822 1,393 9,276,528 2007-2016 63,966 2,133,644 2,197,610 1,351 * 41,399,639
* MW value represents the average annual quantity of purchased capacity ** Does not include puts (see below)
PURPA Contracts
Under the requirements of PURPA, Niagara Mohawk is required to purchase power generated by IPPs, as defined therein. Niagara Mohawk has 107 PPAs with 115 IPP facilities, amounting to approximately 500 MW of capacity at December 31, 2001. All of this capacity amount is considered firm and excludes PPAs that provide energy only. The table above includes the estimated payments for fixed costs (capacity) and variable costs (capacity, energy and related taxes) that Niagara Mohawk estimates it will be obligated to make under these 107 IPP contracts, excluding the put contracts (see below) and the financial obligation under the swap contracts. The payments to the IPPs are subject to the tested capacity and availability of the facilities, scheduling and price escalation. These payments have been significantly reduced by the consummation of the MRA and additional IPP restructurings made in 1999 and 2000. See Note 3 for a further discussion of the additional IPP restructurings made in 1999 and 2000.
Fixed capacity costs (in the table above) relate to three contracts as follows: 1) a contract with an IPP, 2) a contract entered into along with the sale of the Oswego generation assets as discussed further below, and 3) the contract entered into along with the sale of the hydroelectric generation assets as discussed further below. With respect to the IPP contract, Niagara Mohawk is required to make capacity payments, including payments when the facility is not operating but available for service. The terms of this contract allow Niagara Mohawk to schedule energy deliveries and then pay for the energy delivered. Contracts relating to the remaining IPP facilities in service at December 31, 2001 require Niagara Mohawk to pay only when energy is delivered. Niagara Mohawk paid approximately $320.8 million, $415.6 million and $435.2 million in 2001, 2000 and 1999 for 3,340,000 MWh, 5,077,000 MWh and 6,768,000 MWh, respectively, of electric power under all IPP contracts.
Fossil/Hydro Contracts
As part of the sale of Niagara Mohawk’s fossil and hydro generation assets, Niagara Mohawk entered into PPAs with the buyers of these assets for the purchase of capacity and energy as discussed in more detail below. The table above includes the estimated payments for variable costs and quantities (capacity and energy) associated with the PPAs that Niagara Mohawk estimates it will make under these contracts. Niagara Mohawk paid approximately $108.6 million in 2001, $137.0 million in 2000 and $123.7 million in 1999 for 2,945 MW, 1,948 MW and 2,409 MW of capacity and 2,573,000 MWh, 3,274,000 MWh and 3,490,000 MWh of electric power, respectively, under these PPAs.
The hydro PPA calls for the purchase of all energy and capacity through September 2004 at prices that approximate forecasted future market prices. Niagara Mohawk anticipates that the energy and capacity to be purchased under the hydro PPA to be at quantities approximating historical generation levels, subject to the effects of water flow availability. The Oswego PPA is primarily a contract for capacity with a nominal amount of energy at prices above forecasted future market prices.
Nuclear Contracts
The table above includes the estimated payments for variable costs and quantities (capacity and energy) associated with the PPAs entered into with the buyers of the nuclear generation assets. As part of the agreement with Constellation to sell its nuclear generation assets, Niagara Mohawk entered into PPAs to purchase 90 percent of the actual hourly nuclear plant output for its percentage interest of the nuclear plants at negotiated competitive prices for approximately 10 years. Niagara Mohawk pays only for delivered output from the units. Upon the expiration of the PPA for Unit 2, there is a revenue sharing agreement whereby Niagara Mohawk is entitled to future payments from Constellation over a ten-year period if electric energy and capacity market prices exceed certain amounts during the ten-year sharing period. Niagara Mohawk would not be required to buy energy from Constellation, LLC under the revenue sharing agreement. Purchases under the nuclear PPAs began in November 2001. Niagara Mohawk paid approximately $38.0 million for 1,266,072 MWh of electric power and 1,086 MW of capacity in 2001.
Put Contracts
As a part of the MRA, Niagara Mohawk signed agreements with eight of the IPP Parties whereby the IPP Parties have an option to sell the physical delivery of electric power to Niagara Mohawk at market prices. These agreements would have been in effect until the earlier of the NYISO meeting certain volume and capacity conditions for a consecutive six-month period or until June 2008. Although the volume and capacity conditions have not yet been met in all of the contracts, Niagara Mohawk has negotiated to terminate the requirement to purchase electric power from the eight IPP Parties with put agreements. Consequently, there is no further obligation to purchase electric power under these contracts and information related to such contracts is not included in the table above. Niagara Mohawk paid approximately $1.4 million in 2001, $46.4 million in 2000 and $75.9 million in 1999 for 13,844 MWh, 898,037 MWh and 2,782,678 MWh, respectively, of electric power received as part of these put agreements.
While the PPAs for the fossil/hydro asset sales, which were entered into as an integral part of the generation sales, are above market, they are designed to help Niagara Mohawk meet the objectives of rate reduction and price cap commitments as well as meet expected demand as the “provider of last resort” as outlined in the Power Choice agreement.
At January 1, 2002, Niagara Mohawk had long-term contracts to purchase electric power from the following generation facilities owned by NYPA:
Expiration Purchased Estimated date of capacity annual Facility contract in MW capacity cost ------------------------------------------------------------------ Niagara - hydroelectric project 2007 903 $28,398,000 St. Lawrence - hydroelectric project 2007 104 1,248,000 Blenheim-Gilboa - pumped storage generating station 2002 270 7,452,000 ------------------------ 1,277 $37,098,000 ========================
The purchase capacities shown above are based on the contracts currently in effect. The estimated annual capacity costs are subject to price escalation and are exclusive of applicable energy charges. The total cost of purchases under these contracts, plus other miscellaneous NYPA purchases, was approximately, in millions, $141.1, $144.3 and $112.4 for the years 2001, 2000 and 1999, respectively. Niagara Mohawk continues to have a contract with NYPA’s Fitzpatrick nuclear facility to purchase for resale up to 46 MW of power for NYPA’s economic development customers.
In addition to the contractual commitments described above, Niagara Mohawk entered into a four-year contract, expiring in June 2003, that gives it the option to buy additional power at market prices from the Huntley coal-fired generation plant, now owned by a new owner. If Niagara Mohawk needs any additional energy to meet its load it can purchase the electricity from other IPPs, other utilities, other energy merchants or through the NYISO at market prices.
GAS SUPPLY, STORAGE AND PIPELINE COMMITMENTS: In connection with its regulated gas business, Niagara Mohawk has long-term commitments with a variety of suppliers and pipelines to purchase gas commodity, provide gas storage capability and transport gas commodity on interstate gas pipelines.
The table below sets forth Niagara Mohawk’s estimated commitments at December 31, 2001, for the next five years, and thereafter.
(In thousands of dollars) Gas Storage/ Year Gas Supply Pipeline ------------------------------------- 2002 $81,872 $63,914 2003 40,881 60,877 2004 40,881 60,877 2005 40,881 32,401 2006 34,057 6,106 Thereafter - 31,661
With respect to firm gas supply commitments, the amounts are based upon volumes specified in the contracts giving consideration for the minimum take provisions. Commodity prices are based on New York Mercantile Exchange quotes and reservation charges, when applicable. Storage and pipeline capacity commitments’ amounts are based upon volumes specified in the contracts, and represent demand charges priced at current filed tariffs. At December 31, 2001, Niagara Mohawk’s firm gas supply commitments extend through October 2006, while the gas storage and transportation commitments extend through October 2012.
SALE OF CUSTOMER RECEIVABLES: Niagara Mohawk has established a single-purpose, financing subsidiary, NM Receivables LLC (“NMR”), whose business consists of the purchase and resale of an undivided interest in a designated pool of Niagara Mohawk customer receivables, including accrued unbilled revenues. For receivables sold, Niagara Mohawk has retained collection and administrative responsibilities as agent for the purchaser. As collections reduce previously sold undivided interests, new receivables are customarily sold. NMR has its own separate creditors which, upon liquidation of NMR, will be entitled to be satisfied out of its assets prior to any value becoming available to Niagara Mohawk. The sale of receivables are in fee simple for a reasonably equivalent value and are not secured loans. Some receivables have been contributed in the form of a capital contribution to NMR in fee simple for reasonably equivalent value, and all receivables transferred to NMR are assets owned by NMR in fee simple and are not available to pay Niagara Mohawk’s creditors.
At December 31, 2001 and 2000, $132.3 million and $230.1 million, respectively, of receivables had been sold by NMR to a third party. The undivided interest in the designated pool of receivables was sold with limited recourse. The agreement provides for a formula based loss reserve pursuant to which additional customer receivables are assigned to the purchaser to protect against bad debts. At December 31, 2001, the amount of additional receivables assigned to the purchaser, as a loss reserve, was approximately $47.9 million.
To the extent actual loss experience of the pool receivables exceeds the loss reserve, the purchaser absorbs the excess. Concentrations of credit risk to the purchaser with respect to accounts receivable are limited due to Niagara Mohawk’s large, diverse customer base within its service territory. Niagara Mohawk generally does not require collateral (i.e. customer deposits).
From the fourth quarter of 1999 through April 2000, and in September 2000 through December 2000, and during February 2001, NMR was not in compliance with a certain statistical ratio relating to the pool of receivables sold. The purchaser granted waivers for this period. NMR was in compliance with the ratio for the months of May through August 2000, January 2001 and March through May 2001. The amount of receivables sold at June 30, 2001 was $290 million, which exceeded the amount that could be supported by the then outstanding accounts receivable. Subsequently, the amount of receivables sold has been reduced to bring Niagara Mohawk back into compliance.
ENVIRONMENTAL CONTINGENCIES: The public utility industry typically utilizes and/or generates in its operations a broad range of hazardous and potentially hazardous wastes and by-products. Niagara Mohawk believes it is handling identified wastes and by-products in a manner consistent with federal, state, and local requirements and has implemented an environmental audit program to identify any potential areas of concern and aid in compliance with such requirements. Niagara Mohawk is also currently conducting a program to investigate and remediate, as necessary, to meet current environmental standards, certain properties associated with former gas manufacturing and other properties which Niagara Mohawk has learned may be contaminated with industrial waste, as well as investigating identified industrial waste sites as to which it may be determined that Niagara Mohawk has contributed. Niagara Mohawk has also been advised that various federal, state, or local agencies believe certain properties require investigation and has prioritized the sites based on available information in order to enhance the management of investigation and remediation, if necessary.
Niagara Mohawk is currently aware of 121 sites with which it may be associated, including 62 which are Niagara Mohawk-owned. With respect to non-owned sites, Niagara Mohawk may be required to contribute some proportionate share of remedial costs. Although one party can, as a matter of law, be held liable for all of the remedial costs at a site, regardless of fault, in practice costs are usually allocated among PRPs. Niagara Mohawk has denied any responsibility at certain of these PRP sites and is contesting liability accordingly.
Investigations at each of the Niagara Mohawk-owned sites are designed to (1) determine if environmental contamination problems exist; (2) if necessary, determine the appropriate remedial actions; and (3) where appropriate, identify other parties who should bear some or all of the cost of remediation. Legal action against such other parties will be initiated where appropriate. As site investigations are completed, Niagara Mohawk expects to determine site-specific remedial actions and to estimate the attendant costs for restoration. However, since investigations and regulatory reviews are ongoing for most sites, the estimated cost of remedial action is subject to change.
Estimates of the cost of remediation and post-remedial monitoring are based upon a variety of factors, including identified or potential contaminants, location, size and use of the site, proximity to sensitive resources, status of regulatory investigation, and knowledge of activities at similarly situated sites. Additionally, Niagara Mohawk’s estimating process includes an initiative where these factors are developed and reviewed using direct input and support obtained from the New York State Department of Environmental Conservation (“DEC”). Actual Niagara Mohawk expenditures are dependent upon the total cost of investigation and remediation and the ultimate determination of Niagara Mohawk’s share of responsibility for such costs, as well as the financial viability of other identified responsible parties since clean-up obligations are joint and several.
As a consequence of site characterizations and assessments completed to date and negotiations with other PRPs or with the appropriate environmental regulatory agency, Niagara Mohawk has accrued a liability in the amount of $305 million, which is reflected in Niagara Mohawk’s Consolidated Balance Sheets at December 31, 2001. The potential high end of the range is presently estimated at approximately $525 million. Niagara Mohawk increased its environmental liability $20 million in 2001 as compared to 2000 primarily as a result of the availability of information on certain sites resulting from the progress made on the remediation of one site and the issuance of a feasibility study on another site in October 2001. Such information revealed that the extent of soil contamination on the site being remediated was greater than originally anticipated. The probabilistic method was used to determine the amount to be accrued for 20 of Niagara Mohawk’s largest sites. The amount accrued for Niagara Mohawk’s remaining sites is determined through feasibility studies or engineering estimates, Niagara Mohawk’s estimated share of a PRP allocation or where no better estimate is available, the low end of a range of possible outcomes is used. In response to an October 1999 request for information, Niagara Mohawk informed the DEC of 24 additional former manufactured gas plant sites that it may be associated with, including two sites that are currently owned by Niagara Mohawk. Niagara Mohawk has executed a voluntary clean-up order with the DEC for the investigation and, as required, the remediation of these additional sites. The order is awaiting execution by the DEC. Niagara Mohawk has included amounts for only the investigation of these sites in the estimated liability. Niagara Mohawk is currently unable to estimate the costs to remediate these additional sites, since they primarily relate to non-owned sites that have been owned and operated by other parties, as well as by some former manufactured gas plant-related predecessor companies of Niagara Mohawk, and because they have not been subjected to site investigations.
Niagara Mohawk has recorded a regulatory asset representing the investigation, remediation and monitoring obligations to be recovered from ratepayers. Power Choice and the gas rate settlements provide for the continued application of deferral accounting for variations in spending from amounts provided in rates. As a result, Niagara Mohawk does not believe that site investigation and remediation costs will have a material adverse effect on its results of operations or financial condition.
Based on previously submitted feasibility studies and the DEC’s ongoing regulatory review process for Niagara Mohawk’s Harbor Point site, the estimated total cost range for this site consists of a high end of $83.8 million, with an expected value calculation of $60.3 million, which is included in the amounts accrued at December 31, 2001. The DEC has categorized this site into three operating units. With respect to one operating unit, the DEC issued a record of decision (“ROD”) in March 2001. Based on this ROD and legal settlement efforts with respect to another responsible party, the estimated range for this operating unit consists of a high end of $15.3 million and an expected value calculation of $13.2 million. With respect to another operating unit, the DEC is expected to issue a proposed remedial action plan by mid-2002. Currently, the high end of his unit is estimated to be $63.5 million, with an expected value calculation of $43.2 million. With respect to the last operating unit, the DEC is requiring additional investigations and a feasibility study. Currently, the high end of this unit is estimated to be $5.0 million, with an expected value calculation of $3.9 million. The estimated costs for the latter two operating units do not consider contributions from other PRPs, the amount of which Niagara Mohawk is unable to estimate.
NUCLEAR CONTINGENCIES: On November 7, 2001, Niagara Mohawk sold its nuclear assets to Constellation. However, Niagara Mohawk remains liable for certain nuclear matters after the sale, including the obligation to pay all decommissioning and decontamination fees established by the Energy Policy Act of 1992 (the “Act”). Such fees support decommissioning and decontamination associated with pre-existing conditions at DOE gaseous diffusion plants. The Act authorized annual deposits for 15 years. Niagara Mohawk has made 10 payments to date and has a remaining liability of $11.0 million.
Niagara Mohawk had nuclear property insurance with Nuclear Electric Insurance Limited (“NEIL”) prior to the sale of its nuclear assets. NEIL insurance is subject to retrospective premium adjustment under which Niagara Mohawk could be assessed up to approximately $12.1 million per loss. Niagara Mohawk is still liable for retrospective premium adjustments that are associated with NEIL losses that occurred prior to the date of the sale for up to a period of six years following the sale. Likewise Niagara Mohawk would also be entitled to refunds of premiums paid, if any. As of December 31, 2001, Niagara Mohawk has not been made aware of any material retrospective premium adjustments.
As of December 31, 2001, Niagara Mohawk has a liability of $139.1 million in other long-term debt for the disposal of nuclear fuel irradiated prior to 1983. In January 1983, the Nuclear Waste Policy Act of 1982 (the “Nuclear Waste Act”) established a cost of $.001 per KWh of net generation for current disposal of nuclear fuel and provides for a determination of Niagara Mohawk’s liability to the DOE for the disposal of nuclear fuel irradiated prior to 1983. The Nuclear Waste Act also provides three payment options for liquidating such liability and Niagara Mohawk has elected to delay payment, with interest, until the year in which Constellation, the new owners of Niagara Mohawk’s nuclear assets, initially plans to ship irradiated fuel to an approved DOE disposal facility. Progress in developing the DOE facility has been slow and it is anticipated that the DOE facility will not be ready to accept deliveries until at least 2010.
CONSTRUCTION PROGRAM: Niagara Mohawk is committed to an ongoing construction program to assure transmission and delivery of its electric and gas services. Niagara Mohawk presently estimates that the construction program for the years 2002 through 2004 will require approximately $623 million. For the years 2002 through 2004, the estimates, in millions, are $205, $212, and $206, respectively.
NOTE 9. FAIR VALUE OF FINANCIAL AND DERIVATIVE FINANCIAL INSTRUMENTS
The financial instruments held or issued by Niagara Mohawk are used for investing, financing, hedging or cost control. Niagara Mohawk does not engage in trading activity. There is a separate section for a discussion of “INVESTMENTS IN DEBT AND EQUITY SECURITIES.” In the sections following the table below is a description of the instruments and the methods and assumptions used to estimate the fair value of each class of financial instruments. The carrying amount and estimated fair values of all other financial instruments are as follows:
December 31, 2001 December 31, 2000 (in thousands of dollars) (in thousands of dollars) Carrying Fair Carrying Fair At December 31, Amount Value Units Amount Value Units ------------------------------------------------------------------------------------------------------- Non-Derivative Instruments Cash and temporary cash investments $ 125,979 $ 125,979 $ 77,070 $ 77,070 Mandatorily redeemable preferred stock 53,750 57,799 61,370 60,684 Long-term debt: First Mortgage Bonds 1,938,000 2,053,852 2,248,000 2,265,265 Senior Notes 2,448,625 2,565,129 2,415,816 2,420,143 Promissory Notes 413,760 413,760 413,760 413,760 Other 159,694 159,694 331,535 331,535
Derivative Instruments - Not Qualified as Hedges
Liability for Swap Contracts (733,487) (733,487) (778,229) (778,229) Gas Futures - IPP Swaps (6,191) (6,191) 3270 Dth 44,882 44,882 16460 Dth Gas Futures - Non-MRA IPP (595) (595) 310 Dth 5,262 5,262 1930 Dth Gas Basis Swaps - - 2,486 2,486 20170 Dth Oil Commodity Swap - - (2,719) (2,719) 7720 bbl
Derivative Instruments - Cash Flow Hedges
Gas Futures - Gas Supply (5,484) (5,484) 3060 Dth 8,000 8,000 1600 Dth Electric Swaps - - 4,442 4,442 714 MWh
NON-DERIVATIVE INSTRUMENTS
CASH AND TEMPORARY CASH INVESTMENTS: The carrying amount approximates fair value because of the short maturity of the financial instruments.
LONG-TERM DEBT AND MANDATORILY REDEEMABLE PREFERRED STOCK: The fair value of fixed rate long-term debt and redeemable preferred stock is estimated using quoted market prices where available or discounting remaining cash flows at Niagara Mohawk’s incremental borrowing rate. The carrying value of NYSERDA bonds and other long-term debt is considered to approximate fair value.
DERIVATIVE INSTRUMENTS - NOT QUALIFIED AS HEDGES
The fair value of futures and swap contracts are determined using quoted market prices or broker quotes, where available, and various financial modeling tools. Prior to January 1, 2001 derivatives and hedging contracts were accounted for under SFAS No. 80, “Accounting for Futures Contracts” at January 1, 2001 Niagara Mohawk adopted SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities. Hedges and other derivative instruments are recorded at fair value as assets or liabilities. If the contracts qualify for hedge accounting gains and losses are included in Other Comprehensive Income, net of applicable deferred taxes, until the hedge month occurs. Instruments not qualifying for hedge accounting fall under regulatory rulings, and therefore, gains or losses have been deferred as regulatory liabilities or assets.
LIABILITY FOR SWAP CONTRACTS: Niagara Mohawk has eight IPP indexed swap contracts that resulted from the Master Restructuring Agreement (MRA) and three swap contracts from the sale of Niagara Mohawk’s Huntley, Dunkirk and Albany electric generating stations. Niagara Mohawk recorded a liability for these contractual obligations and recorded a corresponding regulatory asset because payments under these contracts are authorized and are being recovered under the Power Choice rate agreement. The amount of the liability and regulatory asset will fluctuate as estimates of future market and contract prices change over the term of the contracts, and will decrease over the life of the contracts as notional quantities are settled. Significant terms of the contracts are as follows.
IPP Indexed Swap Contracts: Niagara Mohawk, as part of the MRA, entered into restated contracts with eight IPPs. The contracts began in July 1998 and expire in June 2008. They are structured as indexed swap contracts where Niagara Mohawk receives or makes payments based upon the difference between the contract price and a market reference price for electricity. As of December 31, 2001 and 2000, Niagara Mohawk has recorded a $689.3 million and $747.1 million in the liability for swap contracts, respectively, and has recorded a corresponding swap contracts regulatory asset.
The contract prices were fixed for the first two years and in July 2000 changed to an indexed pricing formula primarily related to natural gas prices. The indexed pricing structure ensures that the price paid for energy and capacity will fluctuate relative to the underlying market cost of gas and general indices of inflation. Contract quantities are fixed for each year of the full ten-year term of the contracts and average 4.1 million MWh.
The price of natural gas can fluctuate significantly over time. For example the NYMEX per dekatherm market price for February gas was $9.775 at 12/31/2000 and dropped to $2.570 at 12/31/2001. This volatility, when factored into the indexing formulas of the IPP swaps, creates a corresponding volatility in the anticipated contract prices. Because natural gas is a major fuel source for electric generation, the changes in gas costs also trigger changes in the price of electricity. Since the swap payment is based on the difference between the contract prices and referenced electricity prices, this has tended to mitigate the overall impact of the gas price volatility on the swap payments. Niagara Mohawk, in the latter part of 2000, began to further mitigate such volatility through the use of various financial instruments. See the discussion on the “Gas Futures - IPP Swaps” and “Gas Basis Swaps,” below.
Huntley, Dunkirk andAlbany Swap Contracts: Concurrent with the sale of the generating stations, Niagara Mohawk signed agreements to purchase capacity and energy from the new owners under contracts that converted to financial swaps upon certain criteria being met. The contracts are now financial only; no electricity is delivered under these agreements. Each month, the payment is the net of a fixed charge and a financial swap. The swap payment is based on the difference between contract prices and referenced market prices applied to notional quantities. For Huntley and Dunkirk, the contract prices and notional quantities are fixed. Quantities average 2.9 million MWh annually. These agreements expire in June 2003. The Albany contract is different in that contract price is indexed to either gas or oil costs and the monthly quantity is based on a call option by Niagara Mohawk with the total call quantity capped each year at 1,300 GWh. This contract expires in September 2003.
The anticipated overmarket payments under the swap contracts represent a liability of Niagara Mohawk. As of December 31, 2001 and 2000, Niagara Mohawk has recorded $44.2 million and $31.1 million, respectively and has recorded a corresponding swap contract regulatory asset. The asset and liability will be amortized over the remaining term of the swaps as nominal energy quantities are settled and may be adjusted as periodic reassessments are made of future energy prices.
The reason for the increase in the swap liability from December 31, 2000, is a decrease in the forecasted price of power over the remaining terms of the contracts. This was partially offset by the amortization of the contract quantities. During 2001, there were significant decreases in the cost of natural gas. This triggered a decrease in the forecast of the price of electricity. The contract prices that Niagara Mohawk pays for Huntley and Dunkirk are fixed and for Albany, while indexed to the cost of gas or oil, prices do not move precisely in step with the fuel cost. Therefore, since the swap payments are the difference between the contract prices (Niagara Mohawk pays) and referenced electricity prices (Niagara Mohawk receives), a decrease in forecasted electric prices relative to the contract prices would tend to increase the remaining liability.
At December 31, 2001, Niagara Mohawk projects that it will make the following payments in connection with the IPP, Huntley/Dunkirk and Albany swap contracts for the years 2002 to 2006, and thereafter subject to changes in market prices and indexing provisions:
Year
Projected
Payment
(in thousands
of dollars)
$ 142,647
139,883
146,289
149,360
153,622
Thereafter
263,341
Niagara Mohawk believes that the above-market payments under the IPP indexed swaps, Huntley, Dunkirk and Albany swaps, are, in aggregate, included within the forecast used in setting the Power Choice prices. However, through August 2001, prices for approximately three-quarters of its sales were fixed. Therefore, significant increases in the swap payments could pose a risk to earnings. The price of natural gas is the major component in the indexing of the IPP swap contracts. Natural gas or oil is the primary component of the indexing of the Albany swap. The prices for the Huntley and Dunkirk payments are fixed by the contracts. As noted in the discussion above on the various swap liabilities, increases in the price of natural gas have adversely impacted the payments Niagara Mohawk has and will continue to make. Beginning in 2000, Niagara Mohawk took steps to mitigate this risk by a combination of NYMEX gas futures, fixed for floating gas basis swaps, and an oil commodity swap.
Niagara Mohawk has also been making payments to a non-MRA IPP under a contract to buy power. The price for this power is indexed to natural gas. Recent increases in the price of gas have caused this contract to be more costly. Niagara Mohawk has purchased NYMEX gas futures contracts to mitigate the impact the price of gas has on this contract.
GAS FUTURES - IPP SWAPS: Beginning in July 2000, the payments Niagara Mohawk made on the eight IPP swap contracts began indexing with natural gas as the primary component of the indexing formula. Through renegotiations, Niagara Mohawk was able to remove the gas price risk on two of the IPP swaps. In August 2000, Niagara Mohawk began purchasing NYMEX gas futures to hedge all of the gas commodity component of the indexed contract payments for the remaining six IPP indexed swap contracts for the period September 2000 through August 2001. For the period following August 2001 through March 2002, Niagara Mohawk has continued to hedge approximately 50 percent of the anticipated impact that natural gas would have on the IPP swaps. Niagara Mohawk plans to extend this hedging program through year 2002, but as of the date of this report has not purchased any contracts beyond March 2002. At December 31, 2001 Niagara Mohawk recorded a deferred loss on these instruments of $9.5 million versus a deferred gain of $59.7 million at year-end 2000. The variance from the prior year is due to significantly lower natural gas futures prices at year-end. At year end 2001, the deferred loss was offset by in the balance sheet item Liabilities from Price Risk Management Activities for $6.2 million with $3.3 having settled through Cash for the hedge month of January 2002.
GAS FUTURES - NON-MRA IPP: One non-MRA IPP contract includes a provision which indexes the price Niagara Mohawk pays to the IPP to the price of natural gas. This is a physical delivery power contract and not a financial instrument. Commensurate with the program for hedging the IPP swaps (see above); Niagara Mohawk began purchasing NYMEX gas futures as a means to mitigate the gas price risk associated with this contract, also through August 2001. For the period following August 2001 through March 2002, Niagara Mohawk has continued to hedge approximately 50 percent of the anticipated impact that natural gas would have on the contract. Niagara Mohawk plans to extend this hedging program through year 2002, but as of February 19, 2002 has not purchased any contracts beyond March 2002. At December 31, 2001 Niagara Mohawk recorded a deferred loss on these instruments of $.9 million versus a deferred gain of $7.0 million at year-end 2000. The variance from the prior year is due to significantly lower natural gas futures prices at year-end. At year-end 2001, the deferred loss was offset by in the balance sheet item Liabilities from Price Risk Management Activities for $.6 million with $.3 having settled through Cash for the hedge month of January 2002.
GAS BASIS SWAPS: The gas factor in the indexing formula for each of the six IPPs designates a particular geographic pricing point for the referenced price of natural gas. NYMEX futures contracts are predicated on the commodity price of gas at the Henry Hub in Louisiana. The term “basis” refers to the price differential between the price of gas at the Henry Hub and the price at some other particular pricing point. The gas component to the indexing formula in each of the IPP contracts encompasses both the commodity price and the basis cost for gas to the particular pricing point identified in the contract.
To more fully hedge the impact that gas prices have on the indexed price, Niagara Mohawk entered into fixed for floating gas basis swap agreements with several counterparties. These contracts fix the basis cost of gas between the Henry Hub and each of the pricing points stated in the IPP swaps. This hedging was undertaken for the period of October 2000 through August 2001. The quantities hedged were the same quantities as determined for the NYMEX futures contracts used to hedge the commodity. Niagara Mohawk has not continued this hedging program beyond August 2001. At December 31, 2001 Niagara Mohawk has no open contracts versus a deferred gain of $2.5 million at year-end 2000.
OIL COMMODITY SWAP: The floating payment Niagara Mohawk makes on the Albany swap contract is indexed to the price of either natural gas or oil. Niagara Mohawk has the option of selecting which fuel is used in the calculation. Increases in gas and oil could adversely impact the cash flows of this contract. In order to mitigate the risk of exposure to the increased fuel cost, Niagara Mohawk chose to enter a fixed for floating swap on the price of oil for quantities that would offset the rise in the price of oil used in the Albany swap formula. If gas prices exceed oil prices, payments are based on oil prices, for which Niagara Mohawk has a hedge. If oil prices exceed gas prices, the swap payments will be based on gas prices.
Under the Oil Commodity swap, Niagara Mohawk pays a fixed price for a set quantity of oil in specific months between January and August 2001. The counterparty pays a market price for oil that is highly correlated with the oil price referenced in the Albany swap contract. Price movements in the oil swap are expected to correlate with changes in the cost of oil used in the Albany swap. The results should substantially offset the effects that oil price changes have on the indexed contract price. Niagara Mohawk has not continued this hedging program beyond August 2001. At December 31, 2001 Niagara Mohawk has no open contracts versus a deferred loss of $2.7 million at year-end 2000.
DERIVATIVE INSTRUMENTS - CASH FLOW HEDGES
The derivative financial instruments held by Niagara Mohawk are used for hedging or cost control and not for trading. Niagara Mohawk has an Exposure Management Committee (“EMC”) to monitor and control efforts to manage risks. The EMC oversees the Financial Risk Management Policy (the “Policy”) that outlines the parameters within which corporate managers are to engage in, manage, and report on various areas of risk exposure. At the core of the Policy is a condition that Niagara Mohawk will engage in activities at risk only to the extent that those activities fall within commodities and financial markets to which it has a physical market exposure in terms and volumes consistent with its core business.
Purchases of electricity and natural gas for distribution to its customers can expose Niagara Mohawk to price risk for those commodities. During 2000 and continuing into 2001, Niagara Mohawk took steps to mitigate these risks through the purchase of NYMEX gas futures and by entering into fixed for floating electric swaps. The following hedges meet the qualifications for hedge accounting under SFAS No. 133 and are accounted for as such. The fair value of the instruments represents as asset or liability with deferred gains or losses recorded in Other Comprehensive Income, net of applicable deferred taxes.
GAS FUTURES - GAS SUPPLY: For purchases of natural gas used to supply customers, Niagara Mohawk’s exposure to gas commodity price fluctuations is limited by a regulatory ruling that transfers the commodity price risk to the customer for prudently incurred commodity costs. Niagara Mohawk uses NYMEX gas futures as hedges to effectively and prudently manage those costs.
The item to be hedged, purchased natural gas, exposes Niagara Mohawk’s customers to commodity price volatility. The anticipated transactions being hedged are the purchases of natural gas for resale to customers, primarily for the winter heating season of November through March, but the hedging program does cover other months as well. The current contracts expire in March 2002, however, in the first quarter of 2002, Niagara Mohawk plans to begin hedging the remainder of 2002 and the winter season of 2002-2003.
At December 31, 2001, Niagara Mohawk recorded a deferred loss on these instruments of $8.9 million versus a deferred gain of $13.0 million at year-end 2000. The variance from the prior year is due to significantly lower natural gas futures prices at year-end. At year end 2001, the deferred loss was offset by in the balance sheet item “Liabilities from Price Risk Management Activities” for $5.5 million with $3.4 having settled through “Cash” for the hedge month of January 2002.
The transactions that result in the reclassification to earnings of the gains or losses from the cash flow hedges are the purchase of natural gas in the months hedged. Through December 31, 2001, Niagara Mohawk has recorded a increase of $7.5 million to “Gas Purchased” from the settlement of these cash flow hedges representing approximately 12.4 million Dth. This loss was offset by a corresponding decrease in the cost of a comparable amount of gas. The deferred loss at year end is recorded in “Accumulated other comprehensive income,” net of applicable deferred taxes. Since none of the open contracts extend beyond March 31, 2002, the net settlement gains or losses from these open contracts will be reclassified to earnings within the next twelve months. There were no gains or losses recorded during the year from the discontinuance of gas futures cash flow hedges.
ELECTRICITY SWAPS: During several months of 2001, Niagara Mohawk projected that it would be in a short position for electricity needed to supply customers. For those months, electricity was purchased through the NYISO at market prices. In order to maintain internal limits on exposure to market risks, Niagara Mohawk locked in the price for a portion of this shortage through fixed for floating swaps on electricity.
Niagara Mohawk paid fixed rates and the counterparty paid the NYISO market rate for contractually set quantities of on-peak and off-peak power through July 2001. Since Niagara Mohawk is purchasing power through the NYISO in those same quantities and for the same periods, these swaps will be highly effective in achieving offsetting cash flows. All of the electric swap contracts expired by July 31, 2001 and none remain open at year-end. Niagara Mohawk plans to use electric swaps as necessary in the future when projections show a short position in electricity. Niagara Mohawk has not continued this hedging program beyond July 2001. At December 31, 2001 Niagara Mohawk has no open contracts versus a deferred gain of $4.4 million at year-end 2000.
The transactions that result in the reclassification to earnings of the gains or losses from the cash flow hedges are the purchase of electricity in the months hedged. Through December 31, 2001, Niagara Mohawk has recorded a decrease of $5.9 million to “Electricity Purchased” from the settlement of these cash flow hedges representing approximately 1.3 million MWh. This gain was offset by a corresponding increase in the cost of a comparable amount of electricity. Because there were no open contracts at year end there are no net deferred gains or losses at December 31, 2001, if there had been they would be recorded in “Accumulated other comprehensive income,” net of applicable deferred taxes. There were no gains or losses recorded during the year from the discontinuance of electricity swap cash flow hedges.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
In 2000, Niagara Mohawk’s investments in debt and equity securities consisted primarily of trust funds for decommissioning of its nuclear stations and a trust fund for certain pension benefits. With the sale of the nuclear facilities on November 7, 2001 and transfer of all decommissioning funds to the new owners, the only instruments remaining at year-end are the trust funds for the pension benefits. Niagara Mohawk has classified all investments in debt and equity securities as available for sale and have recorded all such investments at their fair market value at December 31, 2001.
In anticipation of the sale of the nuclear assets, and to reduce the risk of a detrimental market shift affecting the funds, Niagara Mohawk converted all decommissioning assets to high grade, short-term commercial paper in late 1999. The instruments purchased had specified coupon rates and maturity dates of generally one to four months. Remaining cash was invested in an overnight, short-term investment fund. These actions tended to increase the sales activity for 1999 with lesser sales activity in 2000 and 2001. The proceeds from the sale of investments were $ 33.0 million, $177.7 million, and $463.9 million in 2001, 2000 and 1999, respectively. The decrease is due to the change in fund composition and ultimate sale of the nuclear decommissioning trust fund.
The recorded fair values and cost basis of Niagara Mohawk’s investments in debt and equity securities is as follows:
(In thousands of dollars) At December 31, 2001 2000 Gross Unrealized Fair Gross Unrealized Fair Security Type Cost Gain (Loss) Value Cost Gain (Loss) Value -------------------------------------------------------------------------------------------------- Commercial Paper $ - $ - $ - $ - $375,228 $1,982 $ - $377,210 Tax Exempt Obligations - - - - 8,588 308 (19) 8,877 Corporate Obligations 42,165 31 (1,249) 40,947 52,103 90 (108) 52,085 Other 3,353 - - 3,353 15,233 - - 15,233 ------------------------------------------------------------------------------ $45,518 $ 31 $(1,249) $44,300 $451,152 $2,380 $(127) $453,405 ==============================================================================
Using the specific identification method to determine cost, the gross realized gains and gross realized losses were:
(In thousands of dollars)
Year ended December 31, 2001 2000 1999 ----------------------------------------------------
Realized gains $258 $1,993 $26,609 Realized losses 115 26 15,140
The instruments open at December 31, 2001 in the trust fund for certain pension benefits are all equity type securities and do not have contractual maturity dates.
NOTE 10. STOCK BASED COMPENSATION
Under Holdings’ stock compensation plans, stock units and stock appreciation rights (“SARs”) were granted to officers, key employees and directors. In addition, Holdings’ plans allowed for the grant of stock options to officers. The table below sets forth the activity under Holdings’ stock compensation plans for the years 1999 through 2001. On March 18, 1999, Niagara Mohawk’s common stock was exchanged for Holdings’ common stock and the SARs, the stock units and the options were likewise exchanged. See Note 1. On January 31, 2002, the acquisition of Holdings by National Grid was completed. See Note 2.
Options Wtd. Avg. Exercise SARs Units Options Price ------------------------------------------------------------------------------ Outstanding at December 31, 1998 2,739,700 933,439 286,583 17.87 Granted 253,200 148,531 - Exercised (5,500) (173,991) - Forfeited (134,838) (42,985) (39,208) 18.56 ------------------------------------------ Outstanding at December 31, 1999 2,852,562 864,994 247,375 17.76 Granted 574,500 647,049 - Exercised (44,700) (478,470) - Forfeited (29,500) (29,097) (54,000) 17.94 ------------------------------------------ Outstanding at December 31, 2000 3,352,862 1,004,476 193,375 17.71 Granted - 662,281 - Exercised (190,611) (336,423) - Forfeited (5,347) (21,337) - - ------------------------------------------ Outstanding at December 31, 2001 3,156,904 1,308,997 193,375 17.50 ==========================================
Stock units are payable in cash at the end of a defined vesting period, determined at the date of the grant, based upon Holdings’ stock price for a defined period. SARs become exercisable, as determined at the grant date and are payable in cash based upon the increase in Holdings’ stock price from a specified level. As such, for these awards, compensation expense is recognized based upon the value of Holdings’ stock price over the vesting period of the award. Options granted over the period 1992 to 1995 are currently exercisable with expirations ten years from the grant date. The majority of these options are considered to be antidilutive for EPS calculations. Included in Niagara Mohawk’s results of operations for the years ending 2001, 2000 and 1999, is approximately $11.6 million, $11.0 million and $1.4 million, respectively, related to these plans.
Upon the closing of the merger, each stock option outstanding shall be cancelled and shall only entitle the holder to receive an amount in cash. Based on the number of stock options outstanding at December 31, 2001, Niagara Mohawk would have to record approximately $0.5 million in compensation expense at the time of the closing of the merger.
Niagara Mohawk’s SARs and Units provide for the acceleration of the vesting period upon the occurrence of certain events relating to a change in control, merger, sale of assets or liquidation of the company. Niagara Mohawk estimates that it will have to record approximately $10.6 million in compensation expense for these awards upon the consummation of the merger. See Note 2 for further information regarding the merger.
The following table provides certain information with respect to stock options outstanding and exercisable at December 31, 2001:
Stock Options Wtd. Avg. Wtd. Avg. Range of Outstanding Exercise Remaining Exercise Prices and Exercisable Price Contractual Life -------------------------------------------------------------
$10 - $15 61,125 14.63 3 years $15 - $20 132,250 18.83 2 years ------------------------------------------------------------- $10 - $20 193,375 17.50 3 years =============================================================
As permitted by SFAS No. 123 - “Accounting for Stock-Based Compensation” (“SFAS No. 123”), Holdings’ has elected to follow Accounting Principles Board Opinion No. 25 - “Accounting for Stock Issued to Employees” (“APB No. 25”) and related interpretations in accounting for its employee stock options. Since stock units and SARs are payable in cash, the accounting under APB No. 25 and SFAS No. 123 is the same. Therefore, the pro forma disclosure of information regarding net income, as required by SFAS No. 123, relates only to Holdings’ outstanding stock options, the effect of which is immaterial to the financial statements for the years ended 2001, 2000 and 1999.
NOTE 11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Operating revenues, operating income (loss), income (loss) before extraordinary item and net income (loss) by quarters from 2001, 2000 and 1999, respectively, are shown in the following table. Niagara Mohawk, in its opinion, has included all adjustments necessary for a fair presentation of the results of operations for the quarters. Due to the seasonal nature of the regulated utility business, the annual amounts are not generated evenly by quarter during the year. Niagara Mohawk’s quarterly results of operations reflect the seasonal nature of its business, with peak electric loads in summer and winter periods. Gas sales peak in the winter.
NIAGARA MOHAWK POWER CORPORATION
In thousands of dollars Income (Loss) Net Operating Operating Before Extra- Income Quarter Ended Revenues Income (Loss) ordinary Item (Loss) --------------------------------------------------------------------------- December 31, 2001 $ 987,588 $115,107 $ 2,163 $ 2,163 2000 975,315 39,696 (43,706) (43,706) 1999 933,562 95,797 (10,808) (10,811)
September 30, 2001 $1,009,946 $ 18,779 $ 14,351 $ 14,351 2000 909,537 128,772 13,247 13,247 1999 927,296 99,006 (10,389) (23,443)
June 30, 2001 $ 946,151 $ 74,796 $(22,242) $(22,242) 2000 907,204 77,532 (11,777) (12,686) 1999 870,461 82,464 (16,193) (27,663)
March 31, 2001 $1,179,706 $156,707 $ 35,249 $ 35,249 2000 1,073,893 185,100 20,833 20,833 1999 1,096,021 254,284 59,856 59,856
The third quarter of 2001 includes a non-cash write-off of $123 million to reflect the disallowed nuclear investment costs as part of a regulatory settlement agreement related to the sale of the nuclear assets and previously deferred investment tax credits related to the nuclear assets of $79.7 million. In the fourth quarter of 2000, Niagara Mohawk expensed $10.2 million for adjustments based on the regulatory review of the deferred costs related to the sale of the generation assets in 1999 and 2000. In the third quarter of 2000, Niagara Mohawk recorded earnings of $19.4 million of insurance proceeds and disaster relief associated with the January 1998 ice storm restoration effort.
NOTE 12. SUBSEQUENT EVENT (UNAUDITED)
On February 27, 2002, Niagara Mohawk commenced cash tender offers for any and all of the outstanding shares of the following series of its cumulative preferred stock at the purchase prices indicated below:
Fixed/Adjustable Rate Series D, at the purchase price of $53.76 per share;
3.40% Series, at the purchase price of $63.43 per share;
3.60% Series, at the purchase price of $67.16 per share;
3.90% Series, at the purchase price of $72.76 per share;
4.10% Series, at the purchase price of $76.49 per share;
4.85% Series, at the purchase price of $90.49 per share;
5.25% Series, at the purchase price of $93.58 per share.
The offer for any one series of preferred stock is not conditioned upon any minimum number of preferred shares of a series being tendered and is independent of the offer for any other series.
The offers will expire on March 27, 2002, unless extended or terminated by Niagara Mohawk. Payment for tendered securities will occur promptly after the expiration date.
ELECTRIC STATISTICS
2001 2000 1999 ---------------------------------------------------------------------------- (millions of KWh) Electric sales: Residential 9,835 9,840 10,227 Commercial 9,896 10,051 11,838 Industrial 5,416 5,934 6,985 Industrial-Special 4,653 4,285 4,506 Other 155 167 200 Distribution of energy (delivery only) 3,908 4,012 1,334 Other electric systems 6,068 2,017 1,666 ------------------------------------ Total electric sales 39,931 36,306 36,756 ====================================
(thousands of dollars) Electric revenues: Residential $1,211,354 $1,187,151 $1,250,295 Commercial 1,061,871 1,033,783 1,192,390 Industrial 448,277 453,430 485,009 Industrial-Special 65,393 62,805 65,178 Other 31,189 39,765 50,294 Other electric systems 230,960 112,970 47,851 Distribution of energy 176,896 179,821 56,068 Transmission of energy 128,560 117,269 100,455 Miscellaneous 47,390 20,453 217 ------------------------------------ Total electric revenue 3,401,890 3,207,447 3,247,757 ==================================== Electric customers (average) 1,524,162 1,532,140 1,550,225 ====================================
GAS STATISTICS
2001 2000 1999 --------------------------------------------------------------------- (thousands of Dth) Gas sales: Residential 48,896 54,299 51,624 Commercial 14,791 16,193 16,505 Industrial 394 493 453 ----------------------------------- Total sales 64,081 70,985 68,582 Other gas systems 12 13 10 Spot market - 592 1,834 Transportation of customer - owned gas 125,773 140,127 137,240 ----------------------------------- Total gas delivered 189,866 211,717 207,666 =================================== (thousands of dollars) Gas revenues: Residential $491,713 $457,929 $390,208 Commercial 141,931 126,853 107,669 Industrial 3,166 3,037 2,340 Other gas systems 84 105 57 Spot market - 1,604 4,277 Transportation of customer - owned gas 58,924 62,350 58,032 Miscellaneous 25,683 6,624 17,000 ----------------------------------- Total gas revenues 721,501 658,502 579,583 =================================== Gas customers (average) 548,007 544,070 541,956 ===================================
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Niagara Mohawk has nothing to report for this item.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Presently, the Board of Directors consists of five directors. The names of the directors of Niagara Mohawk, their ages, and a brief account of their business experience during the past five years appear below. Directors are elected to hold office until the next annual meeting of shareholders or special meeting in lieu thereof or until their respective successors are elected and have qualified.
WILLIAM F. EDWARDS
•
President of Niagara Mohawk
•
Director since 2002
Mr. Edwards, age 45, was elected President of Niagara Mohawk, effective January 31, 2002. Prior to that, he served as Senior Vice President and Chief Financial Officer from 1997 through 2002 and was Vice President of Financial Planning from 1995 through 1997. He served as Senior Vice President and Chief Financial Officer of Niagara Mohawk Holdings, Inc. from 1999-2002 and Director of NM Properties, Inc., a wholly-owned subsidiary of the Company.
MICHAEL E. JESANIS
•
Executive Vice President and Chief Operating Officer of National Grid USA
•
Director since 2002
Mr. Jesanis, age 45, has been Executive Vice President and Chief Operating Officer of National Grid USA since 2000. Previously, he served as Senior Vice President and Chief Financial Officer of New England Electric System from 1998 through 2000 and was Vice President from 1997 to 1998 and Treasurer from 1992 through 1998. Director of Niagara Mohawk Holdings, Inc., now a wholly-owned subsidiary of National Grid USA, Opinac North America, Inc. (“Opinac NA”), and Niagara Mohawk Energy, Inc. (“NM Energy”). Opinac NA is a wholly-owned subsidiary of the Niagara Mohawk Holdings, Inc. and holds 100 percent of NM Energy, and through its subsidiary, Opinac Energy Corporation, a 50 percent interest in Canadian Niagara Power Company, Limited.
CLEMENT E. NADEAU
•
Senior Vice President of Niagara Mohawk
•
Director since 2002
Mr. Nadeau, age 50, was elected Senior Vice President of Niagara Mohawk, effective January 31, 2002. Prior to that, he served as Vice President-Electric Delivery from 1998 through 2002. Previously, he was Vice President-Marketing and Planning from 1996 through 1998.
KWONG O. NUEY, JR.
•
Vice President and Chief Information Officer of National Grid USA Service Company
•
Director since 2002
Mr. Nuey, age 53, was elected Vice President and Chief Information Officer of National Grid USA Service Company, effective January 31, 2002. Previously, he was the Vice President and Controller of National Grid USA Service Company from 2000 through 2002 and the Vice President and Director of Retail Information Services from 1997 through 2000.
ANTHONY C. PINI
•
Senior Vice President of Niagara Mohawk
•
Director since 2002
Mr. Pini, age 49, was elected Senior Vice President of Niagara Mohawk, effective January 31, 2002. Previously, he was President of NEES Communications, Inc. from 1997 through 2002 and Vice President and Director of Retail Customer Service of National Grid USA subsidiaries from 1993 through 1997.
The information regarding executive officers appears at the end of Part I of this Form 10-K Report.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The rules of the SEC require that Niagara Mohawk disclose late filings of reports of ownership and changes in ownership of the Company’s equity securities by its directors, executive officers and any other person subject to Section 16 of the Securities and Exchange Act of 1934. To the best of the Niagara Mohawk’s knowledge, there were no late filings during 2001.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows, for the last three fiscal years, cash and other compensation paid to the Chairman of the Board and Chief Executive Officer and to each of the other four most highly compensated executive officers of Niagara Mohawk for fiscal year ended December 31, 2001. In addition to the four most highly compensated executives, disclosure has been provided for John H. Mueller, as disclosure for Mr. Mueller would have been included had his employment not terminated effective December 14, 2001.
SUMMARY COMPENSATION TABLE
Fiscal Years 2001, 2000 and 1999
Annual Compensation Long-Term Compensation ----------------------------- ----------------------- Awards ----------------------- Other Restricted Securities Annual Stock Underlying All Other Name and Principal Salary Bonus Compensation Award(s) Options/ Compensation Position Year ($)(A) ($) ($)(B) ($)(C) SAR(#) ($)(D) ---- --------------------------------------------------------------------- W. E. Davis 2001 819,985 696,216 4,924 1,309,800 0 1,543,647 Chairman and CEO 2000 754,654 592,078 321 1,591,750 90,000 43,878 1999 652,993 78,580 0 0 0 39,003 --------------------- ---- ------- ------- ----- --------- ------ --------- D. D. Kerr 2001 499,991 365,019 4,955 725,700 0 3,044,838 President and COO 2000 428,881 164,596 250 830,563 40,000 15,573 1999 345,001 44,190 0 0 0 12,317 --------------------- ---- ------- ------- ----- --------- ------ --------- W. F. Edwards 2001 379,994 222,716 4,785 354,000 0 600,267 Senior Vice President 2000 331,663 142,816 0 425,938 25,000 80,699 1999 269,667 38,060 0 0 0 25,646 --------------------- ---- ------- ------- ----- --------- ------ --------- D. J. Arrington 2001 359,993 231,375 5,032 354,000 0 3,957,730 Senior Vice President 2000 319,997 131,144 456 425,938 25,000 12,085 1999 269,667 42,390 0 0 0 9,878 --------------------- ---- ------- --------- ----- --------- ------ --------- T. H. Baron 2001 278,297 138,752 4,785 354,000 0 968,742 Senior Vice President 2000 265,001 72,149 111 425,938 25,000 23,459 1999 236,001 28,425 0 0 0 9,196 --------------------- ---- ------- --------- ----- --------- ------ --------- J. H. Mueller 2001 329,514 178,480 4,785 0 0 1,355,935 Senior Vice President 2000 332,001 201,664 111 425,938 25,000 12,696 1999 309,001 20,040 0 0 0 9,961 --------------------- ---- ------- --------- ----- --------- ------ ---------
(A)
Includes all employee contributions to the Employees’ Savings Fund Plan.
(B)
Other Annual Compensation in 2001 for named executives represents amount reimbursed for taxes associated with financial planning services. For Messrs. Davis and Arrington and Ms. Kerr, included are amounts reimbursed for taxes associated with security systems and for Mr. Arrington, amounts reimbursed for taxes associated with spouse travel.
Other Annual Compensation in 2000 represent amounts not previously reported in error for reimbursement of taxes associated with security systems for Messrs. Davis, Arrington and Ms. Kerr and for spouse travel for Messrs. Davis, Arrington, Baron, and Mueller.
(C)
In 1999, no stock units were granted to the above named executive officers from the Long Term Incentive Plan (“LTIP”).
In 2000, the Board of Directors approved two distinct grants in accordance with the LTIP. The first grant was made in January for the four-year period 2000 through 2003 which consisted of 71,000 stock units to the above named executive officers. The value of these stock units was calculated by multiplying the number of stock units granted in January by the closing price of Holdings’ common stock on the date of the grant which was $12.625. The second grant was made in December for the four year period 2001 through 2004 which consisted of 195,000 stock units. Both grants of stock units vested upon the change in control of Holdings. The value of these stock units was calculated by multiplying the number of stock units granted in December by the closing price of Holdings’ common stock on the date of the grant which was $16.5625.
In December 2001, the Board of Directors approved a grant in accordance with the LTIP for the four year period 2002 through 2005 consisting of 175,000 stock units to the above named executive officers. Of these stock units, 25 percent vested and became payable upon the completion of the merger in 2002. The balance of the stock units were forfeited in accordance with the vesting schedule for this grant. The value of these stock units was calculated by multiplying the number of stock units granted by the closing price of Holdings’ common stock on the date of the grant which was $17.70.
As of the end of the 2001 fiscal year, based on a closing market price of $17.73, for grants made from the LTIP, Mr. Davis held 205,000 stock units having a market value of $3,634,650; Ms. Kerr held 102,000 stock units having a market value of $1,808,460; Mr. Edwards held 54,000 stock units having a market value of $957,420; Mr. Arrington held 54,000 stock units having a market value of $957,420; Mr. Baron held 53,000 stock units having a market value of $939,690 and Mr. Mueller held 34,000 stock units having a market value of $602,820.
(D)
Included in All Other Compensation for 2001 are partial payments of benefits accrued under the Niagara Mohawk Supplemental Executive Retirement Plan (“SERP”) which were accelerated at the request of the acquirer to minimize possible taxes associated with the merger transaction: Mr. Davis ($1,500,000), Ms. Kerr ($3,000,000), Mr. Edwards ($200,000), Mr. Arrington ($3,600,000) and Mr. Baron ($900,000). All Other Compensation for 2001 also includes: employer contributions to the Company’s Employees’ Savings Fund Plan: Mr. Davis ($5,100), Ms. Kerr ($5,100), Mr. Edwards ($5,100), Mr. Arrington ($5,100), Mr. Baron ($5,100), and Mr. Mueller ($5,100). Taxable portion of life insurance premiums: Mr. Davis ($6,048), Ms. Kerr ($3,289), Mr. Edwards ($1,522), Mr. Arrington ($4,292), Mr. Baron ($1,877) and Mr. Mueller ($2,398). Employer contributions to the Company’s Excess Benefit Plan: Mr. Davis ($19,499), Ms. Kerr ($9,899), Mr. Edwards ($6,299), Mr. Arrington ($5,699), Mr. Baron ($3,249), and Mr. Mueller ($4,785). Directors’ fees received from Canadian Niagara Power Corporation: Mr. Davis ($13,000). Payments of awards granted under the CEO Special Award Plan: Ms. Kerr ($26,550), Mr. Edwards ($387,346), Mr. Arrington ($342,639), Mr. Baron ($58,516) and Mr. Mueller ($134,123). Payment of contingent stock units granted under the LTIP: Mr. Mueller ($116,240). Severance benefits payable under the employment agreement with Niagara Mohawk: Mr. Mueller ($1,093,290).
In 2001 no Stock Appreciation Rights (“SARs”) or Stock Options were granted to the above-named officers.
The following table summarizes exercises of options by the Chairman of the Board and Chief Executive Officer, Mr. William E. Davis, and the other named executive officers, the number of unexercised SARs and options held by them and the spread (the difference between the current market price of the stock and the exercise price of the SAR or option, to the extent that market price at the end of the year exceeds exercise price) on those unexercised SARs or options for fiscal year ended December 31, 2001.
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values
Number of Securities Underlying Unexercised Value of Unexercised Options/SARS at Fiscal Options/SARS at Fiscal Options/ Year-End (#) Year-End ($)(A) SARs Value -------------------------- -------------------------- Exercised Realized Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable --------------- --------- -------- ----------- ------------- ----------- ------------- W. E. Davis 0 0 470,125 290,000 3,297,500 853,800 D. D. Kerr 0 0 107,000 120,000 750,705 358,400 W. F. Edwards 0 0 38,400 90,000 284,282 259,550 D. J. Arrington 0 0 52,000 90,000 291,740 259,550 T. H. Baron 0 0 29,900 80,000 189,717 235,850 J. H. Mueller 0 0 39,000 90,000 266,370 259,550 --------------- --------- -------- ----------- ------------- ----------- -------------
(A)
Calculated based on the closing market price of Holdings’ common stock on December 31, 2001 ($17.73).
Retirement Benefits and Employment Agreements
Niagara Mohawk Pension Plan
The Niagara Mohawk Pension Plan (“Basic Plan”) is a noncontributory, tax-qualified defined benefit plan and provides all employees of Niagara Mohawk with a minimum retirement benefit. This retirement benefit is related to compensation--that is, base salary or pay--subject to the maximum annual limits noted in the Retirement Benefits Table.
The participant’s Basic Plan retirement benefit is based on one of two formulas depending on age and years of service on July 1, 1998:
•
the cash balance formula; or
•
the highest five-year average compensation.
Effective July 1, 1998, the Basic Plan was amended to include a cash balance formula. Under a cash balance formula, a participant’s retirement benefit grows with pay credits (4% - 8% x salary) plus interest credits on a monthly basis. A non-represented (management) employee who was at least 45 years of age and has 10 years of service on July 1, 1998 or has at least 5 years of service and 50 points (age plus service) as of December 31, 1998 will receive the higher of the two formulas--the cash balance formula or the highest consecutive five-year compensation. All other non-represented employees’ Basic Plan benefit will be based on the cash balance formula only. Directors who are not employees are not eligible to participate in the Basic Plan.
Supplemental Executive Retirement Plan
The SERP is a noncontributory, nonqualified defined benefit plan that provides additional retirement benefits to officers of the Company who have obtained age 55 and who have 20 or more years of employment. The Committee may grant exceptions to the age and service requirements.
The SERP provides a benefit equal to the greater of:
(i)
60 percent of base salary averaged over the final 36 months of employment, reduced by benefits payable under the Basic Plan; retirement benefits accrued during previous employment and one-half of the maximum Social Security benefit to which the participant may be entitled at the time of retirement, or benefits payable under the Basic Plan without regard to the annual benefit limitations imposed by the Internal Revenue Code.
Provided certain established criteria are met, participants in the SERP may elect to receive their benefit in a lump sum payment. However, if plan participants cease to be employed by the Company or by National Grid after the effective date of the closing of the merger transaction with National Grid due to the participants involuntary termination or voluntary termination with “good reason,” the SERP benefit will be paid in the form of a lump sum.
The following table shows the maximum retirement benefit (adjusted for Social Security) an officer can earn in aggregate under both the Basic Plan and the SERP.
Annual Retirement Allowance
3-Year Average Years of Service Annual Salary -------------------------------------------------------------- 10* 15* 20 25 30 35 $150,000 $20,970 $33,705 $ 75,000 $ 75,000 $ 75,000 $ 75,000 250,000 23,000 36,960 135,000 135,000 135,000 135,000 350,000 23,000 36,960 195,000 195,000 195,000 195,000 450,000 23,000 36,960 255,000 255,000 255,000 255,000 550,000 23,000 36,960 315,000 315,000 315,000 315,000 650,000 23,000 36,960 375,000 375,000 375,000 375,000 750,000 23,000 36,960 435,000 435,000 435,000 435,000 850,000 23,000 36,960 495,000 495,000 495,000 495,000
* Basic Plan benefit only
The benefit calculations assume the officer has selected a straight life annuity and retired on December 31, 2001 at age 65. Annual compensation limits ($160,000 for 1999 and $170,000 for 2000 and 2001) under a tax-qualified plan will reduce the benefit amount collectible under the Basic Plan for some highly compensated officers.
As of December 31, 2001, the persons named in the Summary Compensation Table had the following estimated credited years of benefit service for purposes of the pension program:
Mr. Davis 12 years
Ms. Kerr 29 years
Mr. Mueller 6 years
Mr. Edwards 23 years
Mr. Arrington 11 years
Mr. Baron 35 years
Effective January 31, 2002, the benefits that participants have accrued in the Niagara Mohawk SERP Plan were frozen. No future benefits will be accrued for participants after this date and all active participants are vested in the plan.
Employment Agreements
Niagara Mohawk entered into employment agreements with Messrs. Arrington, Baron, Davis, Edwards, Mueller and Ms. Kerr. Messrs. Arrington, Baron, Davis and Mueller have received the change of control payments under the employment agreements on the terms outlined for Mr. Edwards below. Ms. Kerr’s employment agreement was terminated and replaced with an agreement with National Grid USA. Mr. Davis also has an agreement with National Grid USA. Mr. Edwards’ agreement will remain in effect for 36 months after January 31, 2002 (completion date of the merger between National Grid and Holdings). If Mr. Edwards’ employment is terminated by Niagara Mohawk without cause or by Mr. Edwards for good reason within 36 months after the completion of the merger, Mr. Edwards will be entitled to a lump sum severance benefit equal to four times his base salary. Mr. Edwards will also be entitled to employee benefit plan coverage for medical, prescription drug, dental and hospitalization benefits and life insurance for the remainder of his life with all related premiums paid by Niagara Mohawk, and coverage under other employee benefit plans will continue for four years. In the event that the payments to Mr. Edwards upon termination of employment would subject Mr. Edwards to the excise tax on excess parachute payments under the Internal Revenue Code, Niagara Mohawk will reimburse him for such excise tax (and the income tax and excise tax on such reimbursement). In the event of a dispute over Mr. Edwards’ rights under the agreement, Niagara Mohawk will pay Mr. Edwards’ reasonable legal fees with respect to the dispute unless Mr. Edwards’ claims are found to be frivolous.
The employment agreement also provides that Mr. Edwards’ benefits under the SERP will be based on Mr. Edwards’ salary, annual incentive awards and awards under the 1995 Stock Incentive Plan, as applicable. Further, if Mr. Edwards’ employment is terminated by Niagara Mohawk without cause at any time, or by Mr. Edwards for good reason, the agreement provides that Mr. Edwards will be deemed fully vested under the SERP without reduction for early commencement.
As used in the employment agreements, “good reason” generally means a materially adverse change in duties, reduction in salary or benefits or relocation by more than 50 miles, all as determined by the executive in good faith.
As used in the employment agreements, termination for “cause” generally arises upon willful failure to perform duties, commitment of a felony, gross neglect or willful misconduct resulting in material economic loss to Niagara Mohawk or breach of certain confidentiality and non-compete provisions. “Cause” must be determined by a vote of three-fourths of the Board of Directors after a meeting at which the executive and his or her legal counsel are entitled to be heard.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
National Grid USA owns 100 percent of the voting securities of Niagara Mohawk Power Corporation. As of January 31, 2002, there were no outstanding shares of common stock due to the completion of the merger with National Grid Group plc. All the shares of the Company’s common stock outstanding were exchanged for National Grid shares in the form of American Depositary Shares, which are listed on the New York Stock Exchange, and/or cash.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
Certain documents filed as part of the Form 10-K
(1)
INDEX OF FINANCIAL STATEMENTS
•
Report of Independent Accountants
•
Niagara Mohawk Power Corporation Consolidated Statements of Income and Retained Earnings for each of the three years in the period ended December 31, 2001
•
Niagara Mohawk Power Corporation Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2001
•
Niagara Mohawk Power Corporation Consolidated Balance Sheets at December 31, 2001 and 2000
•
Niagara Mohawk Power Corporation Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001
•
Notes to Consolidated Financial Statements
(2)
The following financial statement schedules of Niagara Mohawk for the years ended December 31, 2001, 2000 and 1999 are included:
•
Report of Independent Accountants on Financial Statement Schedules
•
Consolidated Financial Statement Schedules:
II--Valuation and Qualifying Accounts and Reserves -Niagara Mohawk
The Financial Statement Schedules above should be read in conjunction with the Consolidated Financial Statements in Part II, Item 8 (Financial Statements and Supplementary Data).
Schedules other than those mentioned above are omitted because the conditions requiring their filing do not exist or because the required information is given in the financial statements, including the notes thereto.
(3)
List of Exhibits:
See Exhibit Index.
(b)
Reports on Form 8-K
Niagara Mohawk Power Corporation
Form 8-K Reporting Date - November 7, 2001
Items reported:
(1)
Item 2. Disposition of Nuclear Assets
Registrant disposed of its nuclear assets.
(2)
Item 5. Other Events
Registrant filed a press release relating to the sale of its nuclear generation assets.
(3)
Item 7. Financial Statements
Registrant provided unaudited pro forma financial information on the sale of its nuclear assets.
Form 8-K Reporting Date - November 28, 2001
Items reported:
(1)
Item 5. Other Events
Registrant filed press release regarding New York State Public Service Commission approval of the Niagara Mohawk - National Grid merger proposal.
(2)
Item 7. Financial Statements and Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K.
Form 8-K Reporting Date - December 21, 2001
Items reported:
(1)
Item 5. Other Events
Registrant filed press release regarding the National Grid announcement that it will within a year of closing of the acquisition of Holdings, have Niagara Mohawk make offers to purchase all of its outstanding preferred stock.
(2)
Item 7. Financial Statements and Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K.
Form 8-K Reporting Date - January 17, 2002
Items reported:
(1)
Item 5. Other Events
The SEC approved the merger between National Grid and Holdings on January 16, 2002.
(2)
Item 7. Financial Statements and Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K.
Form 8-K Reporting Date - January 31, 2002
Items reported:
(1)
Item 5. Other Events
On January 31, 2002, the merger with National Grid and Holdings was completed.
(2)
Item 7. Financial Statements and Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K.
Form 8-K Reporting Date - February 5, 2002
Items reported:
(1)
Item 5. Other Events
On February 5, 2002, Niagara Mohawk announced redemption of six series of preferred stock.
(2)
Item 7. Financial Statements and Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K.
Form 8-K Reporting Date - February 21, 2002
Items reported:
(1)
Item 5. Other Events
On February 21, 2002, Niagara Mohawk filed certain financial information including financial statements for the year ended December 31, 2001.
(2)
Item 7. Financial Statements and Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K.
(3)
Item 8. Change of Fiscal Year
Niagara Mohawk will change its fiscal year from a calendar year ending December 31 to a fiscal year ending March 31 to align its fiscal year with that of its new parent, National Grid.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Niagara Mohawk Power Corporation
Our audits of the consolidated financial statements of Niagara Mohawk Power Corporation referred to in our report dated January 23, 2002, except Note 2, as to which the date is January 30, 2002, appearing in this Form 10-K also included an audit of the Financial Statement Schedules listed in Item 14(a)(2) of this Form 10- K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Syracuse, New York
January 23, 2002, except for Note 2,
as to which the date is January 30, 2002
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands of dollars) Column A Column B Column C Column D Column E Additions ---------------------- Balance at Charged to Charged to Balance Beginning Costs and Other Deductions at End Description of Period Expenses Accounts (a) of Period ------------------------------------------------------------------------------------- Allowance for Doubtful Accounts - Deducted from Accounts Receivable in the Consolidated Balance Sheets
2001 $59,085 $64,324 $ - (b) $ 67,401 56,008 2000 59,421 56,642 - (b) 56,978 59,085 1999 47,863 63,954 1,900(b) 54,296 59,421
(a)
Uncollectible accounts written off net of recoveries.
(b)
Niagara Mohawk has recorded a regulatory asset, which reflects the amount of doubtful accounts it expects to recover in rates. In 1999 the regulatory asset was increased by $1,900 to $27,100 and has remained unchanged in 2000 and 2001 at $27,100.
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands of dollars)
Column A Column B Column C Column D Column E Additions --------------------- Balance at Charged to Charged to Balance Beginning Costs and Other at End Description of Period Expenses Accounts Deductions of Period (c) --------------------------------------------------------------------------------- Miscellaneous Valuation Reserves
2001 $32,380 $194 - $23,139(d) 9,435 2000 31,680 700 - - 32,380 1999 33,063 546 - 1,929 31,680
(c)
The reserves in 2001 relates to non-rate base properties. In 1999 and 2000, the reserves related to certain materials and supplies inventory, non-rate in 2001 based properties and a write-down against an investment.
(d)
In 2001, Niagara Mohawk eliminated certain valuation reserves, including a materials and supplies inventory reserve as a result of the sale of its nuclear assets in November 2001.
NIAGARA MOHAWK POWER CORPORATION
EXHIBIT INDEX
In the following exhibit list, Holdings refers to Niagara Mohawk Holdings, Inc., Niagara Mohawk refers to Niagara Mohawk Power Corporation and CNYP refers to Central New York Power Corporation, a predecessor company of Niagara Mohawk. Each document referred to below is incorporated by reference to the files of the Commission, unless the reference to the document in the list is preceded by an asterisk. As permitted by Item 10(d) of Regulation S-K, certain exhibits are incorporated herein by reference to periodic reports filed by Niagara Mohawk more than five years ago which have not been disposed of by the Commission pursuant to its Records Control Schedule. As set forth below, each of such periodic reports is located in Commission file number 0-1. Previous filings with the Commission are indicated as follows:
Reference
Report Name
A
Niagara Mohawk Registration Statement No. 2-8214
C
Niagara Mohawk Registration Statement No. 2-8634
F
CNYP Registration Statement No. 2-3414
G
CNYP Registration Statement No. 2-5490
V
Niagara Mohawk Registration Statement No. 2-10501
X
Niagara Mohawk Registration Statement No. 2-12443
Z
Niagara Mohawk Registration Statement No. 2-13285
CC
Niagara Mohawk Registration Statement No. 2-16193
DD
Niagara Mohawk Registration Statement No. 2-18995
GG
Niagara Mohawk Registration Statement No. 2-25526
HH
Niagara Mohawk Registration Statement No. 2-26918
II
Niagara Mohawk Registration Statement No. 2-29575
KK
Niagara Mohawk Registration Statement No. 2-38083
Niagara Mohawk Registration Statement No. 2-49570
QQ
Niagara Mohawk Registration Statement No. 2-51934
TT
Niagara Mohawk Registration Statement No. 2-54017
VV
Niagara Mohawk Registration Statement No. 2-59500
CCC
Niagara Mohawk Registration Statement No. 2-70860
III
Niagara Mohawk Registration Statement No. 2-90568
OOO
Niagara Mohawk Registration Statement No. 33-32475
PPP
Niagara Mohawk Registration Statement No. 33-38093
QQQ
Niagara Mohawk Registration Statement No. 33-47241
RRR
Niagara Mohawk Registration Statement No. 33-59594
SSS
Niagara Mohawk Registration Statement No. 33-49541
TTT
Niagara Mohawk Registration Statement No. 333-49769
b
Niagara Mohawk Annual Report on Form 10-K for year ended December 31, 1990
d
Niagara Mohawk Annual Report on Form 10-K for year ended December 31, 1993
e
Niagara Mohawk Annual Report on Form 10-K for year ended December 31, 1994
f
Niagara Mohawk Annual Report on Form 10-K for year ended December 31, 1995
h
Niagara Mohawk Annual Report on Form 10-K for year ended December 31, 1997
i
Niagara Mohawk Annual Report on Form 10-K for year ended December 31, 1998
j
Niagara Mohawk Annual Report on Form 10-K for year ended December 31, 1999
k
Niagara Mohawk Annual Report on Form 10-K for year ended December 31, 2000
l
Niagara Mohawk Quarterly Report on Form 10-Q for quarter ended March 31, 1993, located in Commission file number 0-1
m
Niagara Mohawk Quarterly Report on Form 10-Q for quarter ended September 30, 1993, located in Commission file number 0-1
n
Niagara Mohawk Quarterly Report on Form 10-Q for quarter ended June 30, 1995
o
Niagara Mohawk Quarterly Report on Form 10-Q for quarter ended June 30, 1997
p
Niagara Mohawk Quarterly Report on Form 10-Q for quarter ended March 31, 1998
q
Niagara Mohawk Quarterly Report on Form 10-Q for quarter ended June 30, 1998
r
Niagara Mohawk Quarterly Report on Form 10-Q for quarter ended September 30, 1998
s
Niagara Mohawk Quarterly Report of Form 10-Q for quarter ended March 31, 1999
t
Niagara Mohawk Quarterly Report on Form 10-Q for quarter ended June 30, 1999
u
Niagara Mohawk Quarterly Report on Form 10-Q for quarter ended June 30, 2000
v
Niagara Mohawk Quarterly Report on Form 10-Q for quarter ended September 30, 2001
w
Niagara Mohawk Current Report on Form 8-K dated July 9, 1997
x
Niagara Mohawk Current Report on Form 8-K dated October 10, 1997
y
Niagara Mohawk Current Report on Form 8-K dated March 18, 1999
z
Niagara Mohawk Current Report on Form 8-K dated November 30, 1999
aa
Niagara Mohawk Current Report on Form 8-K dated May 9, 2000
bb
Niagara Mohawk Current Report on Form 8-K dated September 4, 2000
cc
Niagara Mohawk Current Report on Form 8-K dated September 25, 2001
In accordance with Paragraph 4(iii) of Item 601 (b) of Regulation S-K, Niagara Mohawk agrees to furnish to the Securities and Exchange Commission, upon request, a copy of the agreements comprising the $804 million senior bank financing that Niagara Mohawk completed with a bank group on June 1, 2000, and subsequently amended. The total amount of long-term debt authorized under such agreement does not exceed ten percent of the total consolidated assets of Niagara Mohawk and its subsidiaries.
INCORPORATION BY REFERENCE
PREVIOUS PREVIOUS EXHIBIT
EXHIBIT NO.
FILING
DESIGNATION
DESCRIPTION OF INSTRUMENT
2 TTT 2(a) Agreement and Plan of Exchange between Niagara Mohawk and Holdings
3(a)(1) e 3(a)(1) Certificate of Consolidation of New York Power and Light Corporation, Buffalo Niagara Electric Corporation and Central New York Power Corporation, filed in the office of the New York Secretary of State, January 5, 1950
3(a)(2) e 3(a)(2) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk, filed in the office of the New York Secretary of State, January 5, 1950
3(a)(3) e 3(a)(3) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk pursuant to Section 36 of the Stock Corporation Law of New York, filed August 22, 1952, in the office of the New York Secretary of State
3(a)(4) e 3(a)(4) Certificate of Niagara Mohawk pursuant to Section 11 of the Stock Corporation Law of New York filed May 5, 1954 in the office of the New York Secretary of State
3(a)(5) e 3(a)(5) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk pursuant to Section 36 of the Stock Corporation Law of New York, filed January 9, 1957 in the office of the New York Secretary of State
3(a)(6) e 3(a)(6) Certificate of Niagara Mohawk pursuant to Section 11 of the Stock Corporation Law of New York, filed May 22, 1957 in the office of the New York Secretary of State
3(a)(7) e 3(a)(7) Certificate of Niagara Mohawk pursuant to Section 11 of the Stock Corporation Law of New York, filed February 18, 1958 in the office of the New York Secretary of State
3(a)(8) e 3(a)(8) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed May 5, 1965 in the office of the New York Secretary of State
3(a)(9) e 3(a)(9) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed August 24, 1967 in the office of the New York Secretary of State
3(a)(10) e 3(a)(10) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed August 19, 1968 in the office of the New York Secretary of State
3(a)(11) e 3(a)(11) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed September 22, 1969 in the office of the New York Secretary of State
3(a)(12) e 3(a)(12) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed May 12, 1971 in the office of the New York Secretary of State
3(a)(13) e 3(a)(13) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed August 18, 1972 in the office of the New York Secretary of State
3(a)(14) e 3(a)(14) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed June 26, 1973 in the office of the New York Secretary of State
3(a)(15) e 3(a)(15) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed May 9, 1974 in the office of the New York Secretary of State
3(a)(16) e 3(a)(16) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed March 12, 1975 in the office of the New York Secretary of State
3(a)(17) e 3(a)(17) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed May 7, 1975 in the office of the New York Secretary of State
3(a)(18) e 3(a)(18) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed August 27, 1975 in the office of the New York Secretary of State
3(a)(19) e 3(a)(19) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed May 7, 1976 in the office of the New York Secretary of State
3(a)(20) e 3(a)(20) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed September 28, 1976 in the office of the New York Secretary of State
3(a)(21) e 3(a)(21) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed January 27, 1978 in the office of the New York Secretary of State
3(a)(22) e 3(a)(22) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed May 8, 1978 in the office of the New York Secretary of State
3(a)(23) e 3(a)(23) Certificate of Correction of the Certificate of Amendment filed May 7, 1976 of the Certificate of Incorporation under Section 105 of the Business Corporation Law of New York, filed July 13, 1978 in the office of the New York Secretary of State
3(a)(24) e 3(a)(24) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed July 17, 1978 in the office of the New York Secretary of State
3(a)(25) e 3(a)(25) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed March 3, 1980 in the office of the New York Secretary of State
3(a)(26) e 3(a)(26) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed March 31, 1981 in the office of the New York Secretary of State
3(a)(27) e 3(a)(27) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed March 31, 1981 in the office of the New York Secretary of State
3(a)(28) e 3(a)(28) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed April 22, 1981 in the office of the New York Secretary of State
3(a)(29) e 3(a)(29) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed May 8, 1981 in the office of the New York Secretary of State
3(a)(30) e 3(a)(30) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed April 26, 1982 in the office of the New York Secretary of State
3(a)(31) e 3(a)(31) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed January 24, 1983 in the office of the New York Secretary of State
3(a)(32) e 3(a)(32) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed August 3, 1983 in the office of the New York Secretary of State
3(a)(33) e 3(a)(33) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed December 27, 1983 in the office of the New York Secretary of State
3(a)(34) e 3(a)(34) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed December 27, 1983 in the office of the New York Secretary of State
3(a)(35) e 3(a)(35) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed June 4, 1984 in the office of the New York Secretary of State
3(a)(36) e 3(a)(36) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed August 29, 1984 in the office of the New York Secretary of State
3(a)(37) e 3(a)(37) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed April 17, 1985 in the office of the New York Secretary of State
3(a)(38) e 3(a)(38) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed May 3, 1985 in the office of the New York Secretary of State
3(a)(39) e 3(a)(39) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed December 24, 1986 in the office of the New York Secretary of State
3(a)(40) e 3(a)(40) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed June 1, 1987 in the office of the New York Secretary of State
3(a)(41) e 3(a)(41) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed July 20, 1987 in the office of the New York Secretary of State
3(a)(42) e 3(a)(42) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed May 27, 1988 in the office of the New York Secretary of State
3(a)(43) e 3(a)(43) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed September 27, 1990 in the office of the New York Secretary of State
3(a)(44) e 3(a)(44) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed October 18, 1991 in the office of the New York Secretary of State
3(a)(45) e 3(a)(45) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed May 5, 1994 in the office of the New York Secretary of State
3(a)(46) e 3(a)(46) Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed August 5, 1994 in the office of the New York Secretary of State
3(a)(47) q 3 Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed June 29, 1998 in the office of the New York Secretary of State
3(a)(48) s 3 Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed March 19, 1999 in the office of the New York Secretary of State
3(a)(49) z 3.1 Certificate of Amendment of Certificate of Incorporation of Niagara Mohawk under Section 805 of the Business Corporation Law of New York, filed November 29, 1999 in the office of the New York Secretary of State
3(b)(1) p 3(i) By-Laws of Niagara Mohawk, as amended April 23, 1998
4(a) e 4(b) Agreement to furnish certain debt instruments
4(b)(1) F ** Mortgage Trust Indenture dated as of October 1, 1937 between Niagara Mohawk (formerly CNYP) and Marine Midland Bank, N.A. (formerly named The Marine Midland Trust Company of New York), as Trustee
(** Filed October 15, 1937 after effective date of Registration Statement No. 2-3414)
4(b)(2) VV 2-3 Supplemental Indenture dated as of December 1, 1938, supplemental to Exhibit 4(1)
4(b)(3) VV 2-4 Supplemental Indenture dated as of April 15, 1939, supplemental to Exhibit 4(1)
4(b)(4) VV 2-5 Supplemental Indenture dated as of July 1, 1940, supplemental to Exhibit 4(1)
4(b)(5) G 7-6 Supplemental Indenture dated as of October 1, 1944, supplemental to Exhibit 4(1)
4(b)(6) VV 2-8 Supplemental Indenture dated as of June 1, 1945, supplemental to Exhibit 4(1)
4(b)(7) VV 2-9 Supplemental Indenture dated as of August 17, 1948, supplemental to Exhibit 4(1)
4(b)(8) A 7-9 Supplemental Indenture dated as of December 31, 1949, supplemental to Exhibit 4(1)
4(b)(9) A 7-10 Supplemental Indenture dated as of January 1, 1950, supplemental to Exhibit 4(1)
4(b)(10) C 7-11 Supplemental Indenture dated as of October 1, 1950, supplemental to Exhibit 4(1)
4(b)(11) C 7-12 Supplemental Indenture dated as of October 19, 1950, supplemental to Exhibit 4(1)
4(b)(12) V 4-16 Supplemental Indenture dated as of February 20, 1953, supplemental to Exhibit 4(1)
4(b)(13) X 4-19 Supplemental Indenture dated as of April 25, 1956, supplemental to Exhibit 4(1)
4(b)(14) CC 2-23 Supplemental Indenture dated as of March 15, 1960, supplemental to Exhibit 4(1)
4(b)(15) GG 2-27 Supplemental Indenture dated as of October 1, 1966, supplemental to Exhibit 4(1)
4(b)(16) HH 4-29 Supplemental Indenture dated as of July 15, 1967, supplemental to Exhibit 4(1)
4(b)(17) HH 4-30 Supplemental Indenture dated as of August 1, 1967, supplemental to Exhibit 4(1)
4(b)(18) II 2-30 Supplemental Indenture dated as of August 1, 1968, supplemental to Exhibit 4(1)
4(b)(19) VV 2-39 Supplemental Indenture dated as of March 15, 1977, supplemental to Exhibit 4(1)
4(b)(20) CCC 4(b)(40) Supplemental Indenture dated as of August 1, 1977, supplemental to Exhibit 4(1)
4(b)(21) CCC 4(b)(42) Supplemental Indenture dated as of March 1, 1978, supplemental to Exhibit 4(1)
4(b)(22) CCC 4(b)(46) Supplemental Indenture dated as of June 15, 1980, supplemental to Exhibit 4(1)
4(b)(23) III 4(b)(64) Supplemental Indenture dated as of November 1, 1985, supplemental to Exhibit 4(1)
4(b)(24) OOO 4(b)(73) Supplemental Indenture dated as of October 1, 1989, supplemental to Exhibit 4(1)
4(b)(25) PPP 4(b)(74) Supplemental Indenture dated as of June 1, 1990, supplemental to Exhibit 4(1)
4(b)(26) PPP 4(b)(75) Supplemental Indenture dated as of November 1, 1990, supplemental to Exhibit 4(1)
4(b)(27) QQQ 4(b)(76) Supplemental Indenture dated as of March 1, 1991, supplemental to Exhibit 4(1)
4(b)(28) QQQ 4(b)(77) Supplemental Indenture dated as of October 1, 1991, supplemental to Exhibit 4(1)
4(b)(29) QQQ 4(b)(78) Supplemental Indenture dated as of April 1, 1992, supplemental to Exhibit 4(1)
4(b)(30) RRR 4(b)(79) Supplemental Indenture dated as of June 1, 1992, supplemental to Exhibit 4(1)
4(b)(31) RRR 4(b)(80) Supplemental Indenture dated as of July 1, 1992, supplemental to Exhibit 4(1)
4(b)(32) RRR 4(b)(81) Supplemental Indenture dated as of August 1, 1992, supplemental to Exhibit 4(1)
4(b)(33) l 4(b)(82) Supplemental Indenture dated as of April 1, 1993, supplemental to Exhibit 4(1)
4(b)(34) m 4(b)(83) Supplemental Indenture dated as of July 1, 1993, supplemental to Exhibit 4(1)
4(b)(35) m 4(b)(84) Supplemental Indenture dated as of September 1, 1993, supplemental to Exhibit 4(1)
4(b)(36) j 4(b)(36) Supplemental Indenture dated as of March 1, 1994, supplemental to Exhibit 4(1)
4(b)(37) e 4(86) Supplemental Indenture dated as of July 1, 1994, supplemental to Exhibit 4(1)
4(b)(38) n 4(87) Supplemental Indenture dated as of May 1, 1995, supplemental to Exhibit 4(1)
4(b)(39) SSS 4(a)(39) Supplemental Indenture dated as of March 20, 1996, supplemental to Exhibit 4(1)
4(b)(40) j 4(b)40 Supplemental Indenture dated as of November 1, 1998, supplemental to Exhibit 4(1)
4(b)(41) G 7-23 Agreement dated as of August 16, 1940, among CNYP, The Chase National Bank of the City of New York, as Successor Trustee, and The Marine Midland Trust Company of New York, as Trustee
4(c) SSS 4(a)(41) Form of Indenture relating to the Senior Notes dated June 30, 1998
4(d)(1) aa Exhibit 1.2 Indenture, dated as of May 12, 2000, between Niagara Mohawk Power Corporation, a New York Corporation, and The Bank of New York, a New York banking corporation, as Trustee.
4(d)(2) aa Exhibit 1.3 First Supplemental Indenture, dated as of May 12, 2000, between Niagara Mohawk Power Corporation, a New York corporation, and The Bank of New York, a New York banking corporation, as Trustee.
4(d)(3) cc Exhibit 1.2 Form of Second Supplemental Indenture, between Niagara Mohawk Power Corporation and The Bank of New York, as Trustee.
10-1 Z 13-11 Agreement dated March 1, 1957 between the Power Authority of the State of New York and Niagara Mohawk as to sale, transmission, and disposition of St. Lawrence power
10-2 DD 13-6 Agreement dated February 10, 1961 between the Power Authority of the State of New York and Niagara Mohawk as to sale, transmission, and disposition of St. Lawrence power
10-3 DD 13-7 Agreement dated July 26, 1961 between the Power Authority of the State of New York and Niagara Mohawk supplemental to Exhibit 10-2
10-4 OO 5-8 Agreement dated March 23, 1973 between the Power Authority of the State of New York and Niagara Mohawk as to the sale, transmission, and disposition of Blenheim-Gilboa power
10-5 w 10.28 Master Restructuring Agreement dated July 9, 1997 among Niagara Mohawk and the 16 independent power producers signatory thereto
10-6 x 99-9 Power Choice settlement filed with the PSC on October 10, 1997
10-7 h 10-13 PSC Opinion and Order regarding approval of the Power Choice settlement agreement with PSC, issued and effective March 20, 1998
10-8 h 10-14 Preferred Consent, December 1997
10-9 p 10(c) Amendments to the Master Restructuring Agreement
10-10 j 10-14 Independent System Operator Agreement dated December 2, 1999
10-11 j 10-15 Agreement between New York Independent System Operator and Transmission Owners dated December 2, 1999
10-12 k 10-42a Agreement between Niagara Mohawk Power Corporation and Constellation Energy Group, Inc. to sell Nine Mile Point Nuclear Station Unit No. 1
10-13 k 10-42b Agreement among Niagara Mohawk Power Corporation, NYSEG, RG&E, CH and Constellation Energy Group, Inc. to sell Nine Mile Point Nuclear Station Unit No. 2
10-14 v 10-9 PSC Opinion and Order regarding approval of the sale of Nine Mile Point Nuclear Station Units No. 1 and No. 2
10-15 v 10-10 Merger Rate Agreement reached among Niagara Mohawk, the PSC staff and other parties, filed with the PSC on October 11, 2001
(A)10-16 j 10-23 Amendment to exhibit (A)10-24 to change the agreement for the Holdings structure.
(A)10-17 s 10-1 Employment contract among Holdings, Niagara Mohawk and William E. Davis, Chairman of the Board & Chief Executive Officer, dated March 17, 1999
(A)10-18 s 10-3 Employment contract among Holdings, Niagara Mohawk and Darlene D. Kerr, Executive Vice President and Chief Operating Officer, dated March 17, 1999
(A)10-19 s 10-4 Amended employment contract among Holdings, Niagara Mohawk and David J. Arrington, Senior Vice President-Human Resources and Chief Administrative Officer, dated March 17, 1999
(A)10-20 s 10-4 Employment contract among Holdings, Niagara Mohawk and David J. Arrington, Senior Vice President-Human Resources and Chief Administrative Officer, dated March 17, 1999
(A)10-21 s 10-5 Amended employment contract among Holdings, Niagara Mohawk and Thomas H. Baron, Senior Vice President-Field Operations, dated March 17, 1999
(A)10-22 s 10-5 Employment contract among Holdings, Niagara Mohawk and Thomas H. Baron, Senior Vice President-Field Operations, dated March 17, 1999
(A)10-23 s 10-6 Employment contract among Holdings, Niagara Mohawk and Edward J. Dienst, Senior Vice President- Asset Management and Energy Delivery, dated March 17, 1999
(A)10-24 s 10-7 Employment contract among Holdings, Niagara Mohawk and William F. Edwards, Senior Vice President and Chief Financial Officer, dated March 17, 1999
(A)10-25 s 10-9 Employment contract among Holdings, Niagara Mohawk and John H. Mueller, Senior Vice President and Chief Nuclear Officer, dated March 17, 1999
(A)10-26 s 10-10 Employment contract among Holdings, Niagara Mohawk and Theresa A. Flaim, Vice President - Strategic Planning, dated March 17, 1999
(A)10-27 s 10-11 Employment contract among Holdings, Niagara Mohawk and Kapua A. Rice, Corporate Secretary, dated March 17, 1999
(A)10-28 s 10-12 Employment contract among Holdings, Niagara Mohawk and Steven W. Tasker, Vice President-Controller, dated March 17, 1999
(A)10-29 k 10-40 Amendment to employment contracts among Holdings, Niagara Mohawk and William E. Davis, A. J. Budney, D. D. Kerr, D. J. Arrington, W. F. Edwards, J. H. Mueller, G. J. Lavine, E. J. Dienst and T. H. Baron, dated September 27, 2000
(A)10-30 k 10-43 Amendment to employment contracts among Holdings, Niagara Mohawk and T. A. Flaim, K. A. Rice, and S. W. Tasker, dated September 27, 2000
*12 Statements showing computations of certain financial ratios
*21 Subsidiaries of the Registrants
*23 Consent of PricewaterhouseCoopers LLP, independent accountants
(A)
Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
NIAGARA MOHAWK POWER CORPORATION
(Registrant)
Date: March 26, 2002
By: /s/ Steven W. Tasker
Steven W. Tasker, Treasurer, Authorized
Senior Vice President-Distribution New York and
Principal Financial Officer
NIAGARA MOHAWK POWER CORPORATION
(Registrant)
Date: March 26, 2002
By: /s/ Edward A. Capomacchio
Edward A. Capomacchio, Authorized Officer
and Vice President-Controller and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrants and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ William F. Edwards
Senior Vice President-National Grid USA and President-Niagara Mohawk
Power Corporation and Principal Executive Officer
March 26, 2002
William F. Edwards
/s/ Michael E. Jesanis
Director
Chief Operating Officer-National Grid USA
March 26, 2002
Michael E. Jesanis
/s/ Clement E. Nadeau
Director
Senior Vice President-Operations
March 26, 2002
Clement E. Nadeau
/s/ Kwong E. Nuey
Director
Vice President-Information Technology and Chief Information Officer
March 26, 2002
Kwong E. Nuey
/s/ Anthony C. Pini
Director
Senior Vice President-Customer Service New York
March 26, 2002
Anthony C. Pini
EXHIBIT 12
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT SHOWING COMPUTATIONS OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(in thousands of dollars)
Year Ended December 31, -------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------------- A. Net Income (Loss) per Statements of Income $ 29,521 $(22,312) $ (2,061) $(120,825) $183,335 B. Taxes Based on Income or Profits (72,096) (10,015) 6,207 (66,728) 126,595 -------------------------------------------------------------- C. Earnings, Before Income Taxes (42,575) (32,327) 4,146 (187,553) 309,930 D. Fixed Charges (a) 418,471 464,068 518,165 433,313 304,451 -------------------------------------------------------------- E. Earnings Before Income Taxes and Fixed Charges 375,896 431,741 522,311 245,760 614,381 ============================================================== Preferred Dividend Factor: F. Preferred Dividend Requirements $ 30,850 $ 31,437 $ 36,808 $ 36,555 $ 37,397 ============================================================== G. Ratio of Pre-Tax Income to Net Income (C/A) N/A N/A N/A N/A 1.69 H. Preferred Dividend Factor (FxG) $ 30,850 $ 31,437 $ 36,808 $ 36,555 $ 63,201 I. Fixed Charges 418,471 464,068 518,165 433,313 304,451 -------------------------------------------------------------- J. Fixed Charges and Preferred Dividends Combined $449,321 $495,505 $554,973 $469,868 $367,652 ============================================================== K. Ratio of Earnings to Fixed Charges (E/D) 0.90 (b) 0.93 (b) 1.01 0.57 (b) 2.02 ============================================================== L. Ratio of Earnings to Fixed Charges and Preferred Dividends Combined (E/J) 0.84 (c) 0.87 (c) 0.94 (c) 0.52 (c) 1.67 ==============================================================
2001 2000 1999 1998 1997 -------------------------------------------------------------- (a) Interest Expense $392,406 $437,274 $485,240 $397,178 $273,906 Interest Factor on Rentals 23,337 23,633 25,673 25,907 26,149 Allowance for Funds Used During Construction 2,728 3,161 7,252 10,228 4,396 -------------------------------------------------------------- $418,471 $464,068 $518,165 $433,313 $304,451 ==============================================================
(b) Fixed charges exceed earnings before income taxes and fixed charges by $42.6 million in 2001, $32.3 million in 2000 and by $187.6 million in 1998.
(c) Fixed charges and preferred dividends combined, exceed earnings before income taxes and fixed charges by $73.4 million in 2001, $63.8 million in 2000,
$32.7 million in 1999 and $224.1 million in 1998.
N/A Not applicable due to net loss displayed in line A or negative earnings before income taxes on line C.
EXHIBIT 21
NIAGARA MOHAWK POWER CORPORATION
SUBSIDIARIES OF THE REGISTRANT
Name of Company State of Organization
NM Uranium, Inc. Texas
NM Properties, Inc. (Note 1) New York
NM Receivables Corp. II New York
NM Receivables LLC New York
Note 1: At December 31, 2001, NM Properties, Inc. owns Salmon Shores, Inc.; Moreau Park, Inc.; Riverview, Inc.; Hudson Pointe, Inc.; Upper Hudson Development, Inc.;
Land Management & Development, Inc.; Oprop Co., Inc.; and Landwest, Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Niagara Mohawk Power Corporation Registration Statements on Form S-8 (Nos. 33-36189 and 33-42771) and in the Registration Statements on Form S-3 (Nos. 33-50703, 33-54827 and 33-55546) and in the Registration Statement on Form S-4 (No. 333-49769) of our report dated January 23, 2002, except Note 2, as to which the date is January 30, 2002, relating to the financial statements, which appears in this form 10-K. We also consent to the incorporation by reference of our report dated January 23, 2002, except for Note 2, as to which the date is January 30, 2002, relating to the financial statement schedules, which appear in this Form 10-K.
Yours very truly,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Syracuse, New York
March 26, 2002