<PAGE>                                                      EXHIBIT 13
                             FINANCIAL HIGHLIGHTS


Earnings Per Share: (Page 18)

      Earnings per share of common stock were $2.99 in 1996
compared to $2.74 in 1995.  This $.25 or 9% increase in earnings
per share resulted primarily from increased electric and gas net
operating revenues caused largely by an increase in usage by
residential customers.  Partially offsetting this increase in
earnings in 1996 was the 1995 non-recurring gain from the sale of
long-term stock investments.  Earnings were also reduced due to
an increase in employee wages and associated fringe benefits,
which the Company has been controlling through the steady
reduction of its workforce.

Dividends Per Share: (Page 28)

      The quarterly dividend rate was increased to $.53 per share,
effective June 28, 1996.  This represented an increase of 1% over
the previous quarterly rate of $.525 per share.  Dividends paid
to shareholders in 1996 were $2.11 per share as compared to $2.09
per share in 1995.  No portion of the 1996 dividend constitutes a
return of capital.

Economy:

      The Company's involvement with the expanded economic
development efforts of local and state development corporations
has continued to help attract diversified employment
opportunities to meet the needs of the Hudson Valley's qualified
labor force.  A number of employers have relocated to or expanded
within the Company's service territory during 1996, including
various manufacturers and service organizations, adding
approximately 600 full-time positions and 3,800 seasonal and
part-time positions.  In addition, the United States Postal
Service recently increased its employee count by 1,000 in
Southern Dutchess County.

Electric Sales: (Page 21)

      Sales of electricity within the Company's service territory
increased 3% in 1996.  This increase in sales of electricity is
due largely to an increase in usage by residential customers.

Gas Sales: (Page 21)

      Firm sales of natural gas increased 12% in 1996 due to an 



                                      -1-
<PAGE>
increase in usage by residential, commercial and industrial
customers, and the unseasonable hot and/or cold weather
experienced in 1996 when compared to the weather conditions of
1995.  Interruptible gas sales decreased 78% due to a significant
decrease in boiler gas usage at the Company's Roseton Electric
Generating Plant.

Rate Proceeding - Electric: (Page 16)

      By Order, issued and effective May 20, 1996, the PSC
required the Company to submit, by October 1, 1996, the Company's
plan for the transition of the State's electric industry from a
highly regulated industry to a competitive market.
      On October 1, 1996, the Company responded to the Order with
the following key objectives: 1) maintaining the reliability of
electric service, 2) providing electric prices which are
competitive, 3) offering customers choices in selecting their
electric supplier, and 4) keeping the Company financially strong.

Rate Proceeding - Gas: (Page 16)

      By Opinion and Order, issued and effective October 3, 1996,
the PSC authorized no increase in the Company's base gas rates. 
The Order recognized a $500,000 revenue requirement deficiency,
but eliminates such deficiency through rate moderation by the use
primarily of previously retained profits from interruptible gas
sales.

Common Stock: (Note 5)

      In May 1996, the Company converted its Automatic Dividend
Reinvestment and Stock Purchase Plan and its Customer Stock
Purchase Plan from original issues of common stock to open market
purchase.  This change was made because the Company achieved its
target common equity ratio of 52%.  At the end of 1996, a share
of common stock was selling at $30.375 while the book value per
share was $26.87.  The Company plans to repurchase approximately
250,000 shares of its common stock during 1997.

Financing Program: (Notes 5 & 6)

      On January 1, 1996, the Company optionally redeemed its
7.72% Series Cumulative Preferred Stock at a redemption price of
$101.00 per share.  The $13.1 million redemption price paid and
associated costs were funded through internal sources.  
      On May 1, 1996, the Company redeemed $30 million of the
Company's First Mortgage Bonds, 8 3/4% Series due 2001 at a
redemption price of 102.07% of the principal amount.  The $30.6
million total cash requirements were financed with a combination
of cash and short-term borrowings.

                                      -2-
<PAGE>
      By Order, issued and effective December 4, 1996, the PSC has
authorized the future issuance and sale of certain debt and
equity securities of the Company.

Taxes: 

      In 1996, the Company incurred $98.8 million for operating
taxes levied by federal, state and local governments representing
19 cents of every dollar of revenues.










































                                      -3-
<PAGE>
<TABLE>
FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS AND SELECTED FINANCIAL DATA*  
(Thousands of Dollars)
<CAPTION>                                                1996          1995            1994           1993          1992
<S>                                                  <C>           <C>            <C>            <C>           <C>
Operating Revenues                                   
  Electric.................................          $  418,761    $  409,445     $  411,082      $  422,925   $  427,436
  Gas......................................              95,210       102,770        104,586          94,448       96,121
    Total..................................             513,971       512,215        515,668         517,373      523,557
Operating Expenses
  Operations...............................             267,779       274,665        274,497         274,477      283,787
  Maintenance..............................              28,938        29,440         32,716          34,486       34,226
  Depreciation and amortization............              42,580        41,467         40,380          39,682       39,596
  Taxes, other than income tax.............              66,145        66,709         66,899          65,564       66,339
  Federal income tax.......................              32,700        29,040         28,043          28,603       25,111
    Total..................................             438,142       441,321        442,535         442,812      449,059
Operating Income...........................              75,829        70,894         73,133          74,561       74,498
Other Income
  Allowance for equity funds
   used during construction................                 466           986            866             934          596
  Federal income tax.......................               1,632           353          1,237           1,445          748
  Other - net..............................               4,815         8,886          6,296           5,167        4,427
    Total..................................               6,913        10,225          8,399           7,546        5,771
Income before Interest Charges.............              82,742        81,119         81,532          82,107       80,269
Interest Charges...........................              26,660        28,397         30,603          31,717       32,581
Net Income.................................              56,082        52,722         50,929          50,390       47,688
Premium on Preferred Stock Redemption-Net..                 378           169           -               -             -
Dividends Declared on 
 Cumulative Preferred Stock................               3,231         4,903          5,127           5,562        5,544
Income Available for Common Stock..........              52,473        47,650         45,802          44,828       42,144
Dividends Declared on Common Stock.........              37,127        36,459         35,541          34,497       31,545
Amount Retained in the Business............              15,346        11,191         10,261          10,331       10,599
Retained Earnings - beginning of year......              90,475        79,284         69,023          58,692       48,093
Retained Earnings - end of year............          $  105,821    $   90,475     $   79,284      $   69,023   $   58,692

                                                                       -4-
</TABLE>
<PAGE>
<TABLE>
FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS AND SELECTED FINANCIAL DATA* (CON'T)
(Thousands of Dollars)
<CAPTION>                                                             
                                                         1996          1995            1994           1993          1992
<S>                                                  <C>           <C>            <C>            <C>           <C>
Common Stock
  Average shares outstanding (000s)........              17,549        17,380         17,102         16,725        15,901

  Earnings per share on 
   average shares outstanding..............               $2.99         $2.74          $2.68          $2.68         $2.65
  Dividends declared per share.............              $2.115        $2.095         $2.075         $2.045         $1.98
  Book value per share (at year-end).......              $26.87        $25.96         $25.34         $24.65        $23.60

Total Assets...............................          $1,249,106    $1,250,092     $1,250,781     $1,264,240    $1,167,124
Long-term Debt.............................             362,040       389,245        389,364        391,810       441,096
Cumulative Preferred Stock.................              56,030        69,030         81,030         81,030        81,030
Common Equity..............................             471,709       454,239        436,731        417,846       378,214





* This summary should be read in conjunction with the Consolidated Financial Statements and Notes 
  thereto included in the "Financial Section" of this Annual Report.









                                                                       -5-
</TABLE>
<PAGE>
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


COMPETITION  

General

      The Company is subject to regulation by the Public Service
Commission of the State of New York (PSC) and by the Federal
Energy Regulatory Commission (FERC).  These agencies have each
adopted policies that focus on competition in gas and electric
markets.  As a result, the public utility industry is facing
increasing competition and deregulation initiatives across the
country and in New York State. 
      The Company expects that such initiatives will produce
significant changes in gas and electric markets; however, the
Company cannot predict the scope, timing or consequences of these
changes. 
      Due to the rapid change in the utility industry, the Company
has considered and will continue to consider various strategies
designed to enhance its competitive position and to adapt to
anticipated changes in its business.  The Company's goal is to be
the energy and energy services provider of competitive choice to
its customers. In order to achieve this goal, the Company has
implemented, and will continue to implement, appropriate cost-
reduction measures.
      Currently, the Company is the lowest cost electric provider
in New York State and, through strategies and cost-reduction
measures such as those described below, will strive to remain in
that position.  The Company seeks to reduce the costs of capital
and to enhance shareholder value by redeeming or refinancing debt
or preferred stock or by repurchasing its common stock.  Measures
which have been put into place to improve the Company's position
in a competitive electric marketplace also include: operating 
certain of its generating units on alternating six-month
intervals and/or the placement of certain of its generating units
on "ready reserve"; extending routine production maintenance
cycles to 24 months; satisfying a portion of its power
requirements with purchased power from energy providers outside
the Company's service territory when it can be obtained at a
lower cost than if such power were generated by the Company;
reducing contractor costs by redeploying its own workforce; and
reducing its workforce through attrition.
      In its gas operations in 1996, the Company began selling gas
for resale to local distribution companies (LDCs) not in the
Company's system.  In 1995, the Company entered into a five-year
agreement to sell natural gas to an electric generating plant in 



                                      -6-
<PAGE>
Massachusetts.  Another strategy implemented is capacity release. 
LDCs, such as the Company, are permitted to offer their
unutilized firm transportation service to others for a fee.  This
program, which was used at various times in 1996, gives the
Company an opportunity to defray some or all of the monthly fixed
charges when its firm gas transportation capacity is not fully
utilized and reduces the costs billed to the Company's firm gas
customers.  The above initiatives resulted in savings of $1.5
million to the Company's firm gas customers in 1996.

Recent Developments

            FERC - Electric
            On April 24, 1996, the Federal Energy Regulatory
Commission released Order Nos. 888 and 889, promoting wholesale
competition between public utilities by providing open access,
non-discriminatory transmission services.  The Orders have the
effect of (i) requiring electric utilities to open their
transmission lines to wholesale competitors, while allowing
recovery of certain "stranded costs," (ii) requiring electric
utilities to establish electronic systems to share information
about available transmission capacity, subject to certain
standards of conduct, and requiring certain "functional
separation" of power marketing from other operations.  The
Company duly filed its open access transmission (OAT) tariff with
FERC, as required by Order No. 888. The OAT tariff has been
suspended by FERC subject to its administrative review process,
which is currently on-going. Under the pending OAT, the Company
must offer transmission service to wholesale customers on a basis
that is comparable to that which it provides itself.  The Company
is also required to offer and/or provide certain ancillary
services which contribute to the reliability and security of the
transmission system.  Pending completion of the administrative
process, the Company can make no prediction as to the effect of
its OAT.  On December 30, 1996, the New York Power Pool (NYPP),
of which the Company is a member, filed an interim restructuring
plan with FERC in response to the requirements of Order No. 888. 
On January 31, 1997, the NYPP filed an additional restructuring
filing, which includes proposals to establish an Independent
System Operator, a Power Exchange, and a New York State
Reliability Council.  Pending the outcome of such proceedings as
the FERC may require in response to such filings, the Company can
make no prediction as to the effect on it of these filings, or of
compliance with FERC Order Nos. 888 or 889.  

            New York - Electric 

            Competitive Opportunities Proceeding:  In August 1994,
the PSC instituted an investigation of issues related to a
restructuring of the electric industry in New York State 

                                      -7-
<PAGE>
(Competitive Opportunities Proceeding).  The overall objective of
the Competitive Opportunities Proceeding is to identify
regulatory and rate-making practices that will assist in the
transition to a more competitive electric industry.  
      On May 20, 1996, the PSC issued its Order (Order) related to
a restructuring of the electric industry in New York State in the 
Competitive Opportunities Proceeding.  The Order sets forth the
PSC's vision and goals for the future of the electric industry in
New York State.  The Order calls for implementation of a
competitive wholesale power market in early 1997 and the
introduction of retail access for all electric customers in early
1998.  In addition, the Order calls for reducing rates of
consumers, increasing customer choice, continuing reliability of
service, continuing programs that are in the public interest,
allaying concerns about market power, continuing customer
protections and the obligation to serve.  In the Order, the PSC
strongly encourages divestiture, particularly of generation
assets, but does not require it.  The Order states that
incentives for divestiture will be developed individually for
each utility in conjunction with its rate and restructuring plan
submission, which was due on October 1, 1996.  The Order also
states that utilities should have a reasonable opportunity to
seek recovery of strandable costs, which are those costs which
may not be recoverable in competitive markets, consistent with
the goals of reducing rates, fostering economic development,
increasing customer choices and maintaining reliable service. 
Certain aspects of the restructuring envisioned by the PSC,
particularly the PSC's apparent determinations that it can deny a
reasonable opportunity to recover prudent past investments made
on behalf of the public, order retail wheeling, require
divestiture of generation assets and deregulate certain sectors
of the energy market could, if implemented, have a negative
effect on the operations of New York State's investor-owned
electric utilities, including the Company.
      On September 18, 1996, the Company joined with six other New
York State utilities and the Energy Association of New York State
(Petitioners) in filing a lawsuit in the New York State Supreme
Court in Albany (Court) to annul the Order.  The lawsuit
contended, among other things, that the PSC (i) failed to follow
proper procedures for reaching a decision in the Competitive
Opportunities Proceeding, and (ii) lacked the statutory or legal
authority to (a) disallow a reasonable opportunity for utilities
to recover past expenditures prudently incurred to fulfill their
legal obligation to provide electricity service to the public,
(b) mandate retail wheeling, (c) deregulate the rates charged by
electricity generators or the energy services sector, and (d)
order divestiture of the utilities' assets.  The lawsuit sought a
declaration that the Order is unlawful, or in the alternative,
that the Court clarify that the PSC's statements in the Order
constitute a policy statement with no binding effect.  By a 

                                      -8-
<PAGE>
Decision and Order, dated November 25, 1996, the Court denied
Petitioners' request to invalidate the Order.  Although the Court
stated that most of the Order was a non-binding statement of
policy, the Court rejected the Petitioners' substantive
challenges to the Order.  On December 24, 1996, Petitioners filed
a Notice of Appeal to the Third Department of the Appellate
Division of the Supreme Court of New York State with respect to
the Court's Decision and Order.  Oral argument in the Appellate
Division has not yet been scheduled, but a decision is expected
by the end of 1997.
      Despite the commencement by Petitioners of said lawsuit, the
Company was obligated to comply with the provision of the Order
which required the Company and four other electric utilities to
file a response to such Order incorporating its plan for the
transition of New York State's electric industry from a highly
regulated industry to a competitive market.
      On October 1, 1996, the Company responded to the provision
of the Order.  The Company's response addressed its plan for the
transition of New York State's electric industry from a highly
regulated industry to a competitive market.  The Company's
October 1, 1996, filing identified four key objectives for its
transition to a competitive environment: (i) the maintenance of
the reliability of electric service, (ii) the provision of
competitive electric prices, (iii) the offering of choice to
customers in selecting their electric supplier, and (iv) keeping
the Company financially strong.  The key provisions of the
Company's submission were: (i) maintaining stable electric base
prices for all customers for three years, (ii) exploration of
opportunities to offer discounts to the Company's largest
industrial and commercial customers in considerations for their
commitment to purchase their full energy requirements from the
Company, (iii) the provision through 1999 to maintain all
services currently provided to all customers, and (iv) the
exploration of the development of a pilot program to provide
customers with a choice of continuing to receive full electric
service from the Company or to purchase electric energy from
other suppliers.
      On October 9, 1996, the PSC issued an order establishing
procedures for a completion of discovery and settlement
negotiations regarding the utilities' October 1, 1996
submissions, and, in the absence of settlement, for
administrative litigation before a PSC Administrative Law Judge. 
As later amended, the procedures require that any hearings, as
well as the submission of briefs and the closing of the record,
must be completed no later than March 8, 1997.  The Company has
been meeting with the PSC staff and active parties to this
proceeding for the purpose of exploring whether a settlement is
possible, and is not able to predict the outcome of these
discussions.
      Given the uncertainties regarding the Competitive 

                                      -9-
<PAGE>
Opportunities Proceeding and the Petitioners' lawsuit to annul
the Order in the Competitive Opportunities Proceeding, the
Company is unable to predict the outcome of this proceeding or
its ultimate effect on the Company's financial position or
results of operations.  

      Niagara Mohawk Proposal:  On October 6, 1995, as publicly
reported by Niagara Mohawk Power Corporation (Niagara Mohawk),
Niagara Mohawk filed a proposal with the PSC which provides for a
corporate restructuring designed to create an open, competitive
retail electricity market, deregulate electricity generation in
Niagara Mohawk's service area, allow its customers, by year 2000,
to choose their electricity supplier and freeze or reduce
electricity prices over the next five years.  The proposal was
subsequently amended on August 1, 1996 by Niagara Mohawk.  As
amended, the restructuring would place Niagara Mohawk's non-
nuclear power plants (which would include Niagara Mohawk's
interest in the Roseton Steam Electric Generating Plant, Roseton
Plant) and unregulated generator contracts in a separate
generating company.  Niagara Mohawk has also proposed that its
nuclear generation (which would include Niagara Mohawk's interest
in Unit 2 of the Nine Mile Point Nuclear Station, Nine Mile 2
Plant) and electric transmission and distribution business
continue to be rate-regulated on a cost-of-service basis.
      Niagara Mohawk has stated that if it appears that such a
proposal were unachievable, Niagara Mohawk could not rule out the
possibility of a restructuring under Chapter 11 of the United
States Bankruptcy Code.  
      The Company has intervened in the proceeding but cannot
predict whether Niagara Mohawk's proposal will be effected or, if
effected, what impact, if any, Niagara Mohawk's proposal would
have on the gas and electric utility business in New York State,
including the Company's franchise area, or what effect Niagara
Mohawk's proposal and/or a restructuring under Chapter 11 of the
United States Bankruptcy Code would have on the Company's
interest in the Roseton Plant or the Company's interest in the
Nine Mile 2 Plant. 

            Mergers in the Electric Industry

      In response to the increasingly competitive environment,
utilities across the country have been reorganizing to better
position themselves financially in their market areas for the
future.  Thus, mergers and possible mergers have been reported in
the news media throughout the past year, including the public
announcement of the proposed merger between Long Island Lighting
Company and Brooklyn Union Gas Company.  The Company cannot
predict at this time what effect these mergers or future mergers
will have on the utility industry in New York State.


                                     -10-
<PAGE>
            New York - Natural Gas  

      On March 28, 1996, the PSC issued an Opinion and Order
adopting policies to address the restructuring of the natural gas
market in New York State, designed to open local natural gas
markets to competition and thereby allow residential, small
business and commercial/industrial users the ability to purchase
their gas supplies from sources other than the local utility. 
Among other provisions of the restructuring plan, smaller
customers, such as residential and small business customers, may
join together, or "aggregate," to purchase their gas supplies
from third parties.  The Company filed tariffs, complying with
the PSC's directives, on April 26, 1996 which were subsequently
amended October 11, 1996.  Such tariffs became effective on
October 14, 1996.  For 1996, transported gas revenues represented
a very small percentage of the Company's total gas revenues (1.3%
in 1996 and .7% in 1995).  

Continuing Applicability of SFAS No. 71

      The Company's electric and gas rates, currently subject to
approval by the PSC, are designed to recover the Company's costs
of providing electric and gas services to its customers.  A
primary difference between a rate regulated entity and an
unregulated entity is the timing of recognizing certain assets
and expenses for financial reporting purposes.  The Statement of
Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS No. 71), prescribes
the method to be used to record the financial transactions of a
regulated entity.  The criteria for applying SFAS No. 71 include
(i) rates are set by an independent third party regulator, (ii)
approved rates are intended to recover the specific costs of the
regulated products or services, (iii) rates are reasonable and
likely to be collected.  If the Company were to determine as a
result of competitive changes in New York State, PSC Orders or
otherwise that its business, or a portion of its business, fails
to meet any of these three criteria of SFAS No. 71, it would have
to eliminate from its financial statements the related
transactions prescribed by the regulators that would not have
been recognized if it had been a non-regulated company, which
could result in an impairment of or write-off of utility assets. 
Currently, such transactions are included in the Company's
consolidated financial statements as regulatory assets and
liabilities, as described in Note 1 of the Notes to the Company's
Consolidated Financial Statements for the years ended December
31, 1996 and 1995 (Notes).  An unfavorable impact on the
financial results of the Company would occur if the Company
determined that it could no longer apply SFAS No. 71.  The
Company believes, however, that it continues to meet the criteria
for operating as a rate regulated entity, as prescribed by SFAS
No. 71.
                                     -11-
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY

CONSTRUCTION PROGRAM 
      As shown in the Consolidated Statement of Cash Flows, the
cash expenditures related to the Company's construction program
amounted to $49.4 million in 1996, a $100,000 increase from the
$49.3 million expended in 1995.  As shown in the table below,
cash construction expenditures for 1997 are estimated to be $49.2
million, a decrease of $200,000 compared to 1996 expenditures. 
Internal sources funded 100% of the 1996 cash construction
expenditures and are presently estimated to fund 100% of the
forecasted cash construction expenditures for 1997.
      In 1997, the Company expects to satisfy its external funding
requirements, if any, through issuances of additional debt
securities, the amount and type of which cannot be predicted.




































                                     -12-
<PAGE>
<TABLE>
      Estimates of construction expenditures, internal funds available, mandatory and optional redemption of long-term
securities, and working capital requirements for the five-year period 1997-2001 are set forth by year in the following
table:
<CAPTION>                                                                                                             Total
                                                   1997        1998         1999        2000          2001      1997-2001
                                                                          (Thousands of Dollars)

                           
<S>                                              <C>         <C>          <C>         <C>           <C>         <C>     
                                                                                                            
Construction Expenditures*............           $49,200     $60,300      $54,200     $56,800       $ 47,300    $267,800

Internal Funds Available..............            55,700      57,400       59,800      64,500         70,800     308,200

Excess of Construction
 Expenditures over Internal Funds.....            (6,500)      2,900       (5,600)     (7,700)       (23,500)    (40,400)

Mandatory Redemption of Long-term 
 Securities:
 Long-term debt.......................               100         100       20,100      35,100            100      55,500

Optional Redemption or Purchase of 
 Securities:
 Long-term debt.......................              -         16,700         -           -            70,000      86,700
 Common stock.........................             7,500         -           -           -              -          7,500
         Total........................             7,500      16,700         -           -            70,000      94,200

Other Cash Requirements...............             3,000       3,000        3,000       3,000          3,000      15,000

Total Cash Requirements...............           $ 4,100     $22,700      $17,500     $30,400       $ 49,600    $124,300


* Excluding the equity portion of Allowance for Funds Used During Construction (AFDC), a noncash item.

                                                                      -13-
</TABLE>
<PAGE>
     Estimates of construction expenditures are subject to
continuous review and adjustment, and actual expenditures may
vary from estimates.  These construction expenditures include
capitalized overheads, nuclear fuel and the debt portion of AFDC. 
     Included in the construction expenditures are expenditures
which are required to comply with the Clean Air Act and related
Amendments of 1990.  
     As shown in the table above, it is presently estimated that
funds available from internal sources will finance over 100% of
the Company's cash construction expenditures for the five-year
period 1997-2001.  During this same five-year period, total
external financing requirements are projected to amount to $124.3
million, of which $55.5 million is related to the mandatory
redemption of long-term securities and $94.2 million is related
to the optional redemption of long-term securities and the
repurchase of common stock.

CAPITAL STRUCTURE 

     Over the past few years, the Company has substantially
increased its common equity ratio through retention of a portion
of its earnings, offerings of its common stock to the public, 
original issuances of its common stock under its Automatic
Dividend Reinvestment and Stock Purchase Plan and its Customer
Stock Purchase Plan (both of which have since been superseded,
effective January 1, 1997, by the Company's Stock Purchase Plan
which is described below under the caption "Financing Program"
and in Note 5 of the Notes under the caption entitled
"Capitalization - Capital Stock") and redemption of debt and
preferred stock.  One result of these recent increases in its
common equity ratio has been a significant improvement in its
interest coverage ratios (as shown under "Financial Indices" on
page 27 of this Report).  The Company's interest coverage ratios
have also been improved by the refinancing of a portion of its
debt at lower interest rates.  Despite a tightening of bond
rating criteria applied to the electric utility industry, the
Company has maintained or improved its bond ratings since 1991. 
During 1996, Duff & Phelps Credit Rating Co., upgraded the
Company's senior debt rating from "A-" to "A."  The Company's
other bond ratings, which were affirmed during 1996, are "A" by
Fitch Investors Service and "A-" or equivalent by Standard &
Poor's Corporation and Moody's Investors Service, Inc.  The
Company's long-term goal is to achieve and maintain bond ratings
at the "A" level.







                                     -14-
<PAGE>
     Set forth below is certain information with respect to the
Company's capital structure at the end of 1996, 1995 and 1994:

                                         Year-end Capital Structure   
                                    1996             1995             1994
Long-term debt ..........           40.1%            42.8%            43.0%
Short-term debt .........            1.7               -                .3 
Preferred stock .........            6.2              7.5              8.9
Common equity ...........           52.0             49.7             47.8
                                   100.0%           100.0%           100.0%

FINANCING PROGRAM 

     The Company optionally redeemed on January 1, 1996 its 7.72%
Series Cumulative Preferred Stock (par value $100 per share) at a
redemption price of $101.00 per share.  The $13.1 million
redemption price paid and associated costs were funded through
internal sources.        
     On May 1, 1996, the Company redeemed $30 million of its
First Mortgage Bonds, 8 3/4% Series due 2001 at a redemption
price of 102.07% of the principal amount.  The $30.6 million
total cash requirements were financed with a combination of cash
and short-term borrowings. 
     By an Order issued and effective December 4, 1996, the PSC
granted the Company authorization to issue and sell through
December 31, 1999, up to an additional $40 million of securities. 
This $40 million can be comprised of medium term notes or common
stock solely or a combination of medium term notes and common
stock.  That Order also authorizes the Company to acquire,
through December 31, 1999, not more than 2.5 million shares of
its issued and outstanding common stock, of which the Company
plans to repurchase approximately 250,000 shares during 1997. 
The Company also received approval to combine its Automatic
Dividend Reinvestment and Stock Purchase Plan (DRP), its Customer
Stock Purchase Plan (CSPP) and its Employee Stock Purchase Plan
into a new Stock Purchase Plan, effective January 1, 1997.  For
more information with respect to such Order and the Company's
financing program in general, see Notes 5 and 6 of the Notes.
     During 1996, the Company issued 58,936 additional shares of
common stock through the DRP and CSPP.  Effective May 1, 1996,
the Company converted such plans from original issue to open
market purchase.  This change was made because the Company has
achieved its target common equity ratio after several years of
issuing new shares through such Plans.  The Company has improved
its common equity ratio from 35.4% at December 31, 1987 to 52.0%
currently, which level the Company feels is deemed appropriate at
this time.  
     On December 1, 1995, the Company paid in full at maturity
its 4.85% Promissory Notes.  The $2.6 million principal amount
was funded through internal sources.

                                     -15-
<PAGE>
     The Company redeemed its 7.44% Series Cumulative Preferred
Stock (par value $100 per share) on October 1, 1995, at a
redemption price of $101.22 per share.  The $12.1 million total
redemption price paid and associated costs were funded through
internal sources and from the original issuance of 257,587
additional shares of common stock during 1995 through the DRP and
CSPP.

SHORT-TERM DEBT  

     As more fully discussed in Note 4 of the Notes, the Company
has a revolving credit agreement with four commercial banks for
borrowing up to $50 million through October 23, 2001.  In
addition, the Company has several committed and uncommitted bank
facilities ranging from $.5 million to $50 million from which it
may obtain short-term financing.  Such agreements give the
Company competitive options to minimize its cost of short-term
borrowing.  Authorization from the PSC limits the amount the
Company may have outstanding at any time under all of its short-
term borrowing arrangements to $52.0 million in the aggregate.

RATE PROCEEDINGS 

          ELECTRIC:  The Company's most recent completed electric
rate case was filed November 12, 1992 and, by Order Determining
Revenue Requirement and Rate Design issued and effective February
11, 1994, the PSC permitted the Company to increase its electric
base rates by $5.133 million (or approximately 1.3% on an annual
basis), based on a 10.6% return on common equity, and an 8.58%
return on total invested capital.  See the caption "Competition -
Recent Developments - New York - Electric" and the subcaption
"Competitive Opportunities Proceeding" thereunder, for a
discussion related to the Company's October 1, 1996 filing in
that proceeding.
          GAS:  On November 10, 1995, the Company filed a request
with the PSC to increase its base rates for firm natural gas
service to produce a net increase in firm gas revenues of $2.422
million based on projected operations during the rate year
comprised of the period November 1, 1996 through October 31,
1997.  This represented an overall requested increase in firm gas
revenues of 3%.
     The higher rates were requested to cover projected rate year
increases in capital and operating costs.  The Company's filing
reflected an 11.50% return on common equity and a 9.22% return on
total invested capital.  
     The PSC, on October 3, 1996, issued its Order and Opinion
(Order) regarding the Company's request to increase its natural
gas prices.  The Order provides for no increase in base prices,
but rather recognizes a projected revenue deficiency of $500,000
which will be eliminated through rate moderation by the use 

                                     -16-
<PAGE>
primarily of previously retained profits from interruptible sales
of gas.  The PSC determined that a 10% return on common equity is
appropriate at this time for the Company's gas business, as
compared to the existing 10.6% authorized for the Company's
electric operations.  The PSC's determination of the projected
amount of labor expense is approximately $1.3 million less than
the Company's projections.  This labor determination will be an
impediment to the Company's achieving the authorized 10% return
level.  However, the Company expects to offset this shortfall
through continued productivity gains.

OTHER DEVELOPMENTS

     Electric Sales to IBM: The Company's largest customer is
International Business Machines Corporation (IBM), which
accounted for approximately 10%, 10% and 12% of the Company's
total electric revenues for the years ended December 31, 1996,
1995 and 1994, respectively.  In 1996, electric sales to IBM
remained stable when compared to the prior year.  The latest
published reports indicate that IBM reduced its employment in the
Company's service territory to 9,800 employees as of December 31,
1996, as compared to the peak level of IBM employment in excess
of 30,000 in 1985.  This downsizing of IBM is the main
contributor to the 18% decline of electric sales to IBM in 1995,
and the declines in electric sales to IBM in 1994 and 1993 of 17%
and 20%, respectively.  
     New Accounting Standards: In February 1996, the Financial
Accounting Standards Board (FASB) issued an exposure draft
entitled "Accounting for Certain Liabilities Related to Closure
and Removal of Long-Lived Assets," which includes nuclear plant
decommissioning.  If the accounting standard proposed in such
exposure draft were adopted, it could result in higher annual
provisions for decommissioning to be recognized earlier in the
operating life of nuclear units and an accelerated recognition of
the decommissioning obligation.  The FASB is deliberating this
issue and the resulting final pronouncement could be different
from that proposed in the exposure draft.  The Company can make
no prediction at this time as to the ultimate form of such
proposed accounting standard, assuming it is adopted, nor can it
make any prediction as to its ultimate effect(s) on the financial
condition of the Company.
     Other Issues: On an ongoing basis, the Company assesses
environmental issues which could impact the Company and its
ratepayers.  Notes 1, 2 and 8 of the Notes discuss current
environmental issues affecting the Company, including (i) the
1995 decommissioning study of the Nine Mile 2 Plant, (ii) the
Clean Water Act and Clean Air Act Amendments of 1990, which
require control of emissions from fossil-fueled electric
generating units, (iii) asbestos litigation cases, and (iv) a
legal action filed in 1995 against the Company by the City of 

                                     -17-
<PAGE>
Newburgh, New York after that City discovered allegedly hazardous
coal-tar material on its property, in 1994, allegedly migrating
from a former manufactured gas plant facility of the Company
located in Newburgh, New York.

FORWARD LOOKING STATEMENTS

     This Annual Report may contain statements which, to the
extent they are not recitations of historical fact, constitute
"forward-looking statements" within the meaning of the Securities
Litigation Reform Act of 1995 (Reform Act).  All such forward-
looking statements are intended to be subject to the safe harbor
protection provided by the Reform Act.  A number of important
factors affecting the Company's business and financial results
could cause actual results to differ materially from those stated
in the forward-looking statements.  Those factors include
developments in the legislative, regulatory and competitive
environment, electric and gas industry restructuring and certain
environmental matters.

RESULTS OF OPERATIONS

     The following discussion and analysis includes an
explanation of the significant changes in revenues and expenses
when comparing 1996 to 1995 and 1995 to 1994.  Additional
information relating to changes between these years is provided
in the Notes on pages 41 through 72 of this Report.

EARNINGS

     Earnings per share of common stock are shown after provision
for dividends on preferred stock and are computed on the basis of
the average number of common shares outstanding during the year. 
The number of common shares, the earnings per share and the rate
of return earned on average common equity are as follows:

                                                1996       1995        1994
Average shares outstanding (000s)..            17,549     17,380      17,102 
Earnings per share.................            $ 2.99     $ 2.74      $ 2.68 
Return earned on common equity 
 per books*........................             11.1%      10.5%       10.7% 

* Return on equity for regulatory rate-making purposes differs    
   from these figures.


     Earnings per share in 1996 increased $.25 per share over
1995 resulting primarily from increased electric and gas net
operating revenues caused largely by an increase in usage by
residential customers, and the unseasonable hot and/or cold 

                                     -18-
<PAGE>
weather conditions experienced in 1996 when compared to 1995. 
Heating degree days were 17% higher in 1996 than in the prior
year.  Also contributing to the increase in 1996 were the
optional redemption of the Company's 7.44% Series Cumulative
Preferred Stock in October 1995, 7.72% Series Cumulative
Preferred Stock in January 1996 and 8 3/4% Series $30 million
First Mortgage Bonds in May 1996.  
     This 1996 increase in earnings per share was partially
offset by increased employee wages and associated fringe benefits
and the 1995 non-recurring gain from the sale of long-term stock
investments.  Various other items unfavorably impacted earnings
per share including increased depreciation costs associated with
the Company's plant and equipment, decreased interest and
dividend income and increased uncollectible accounts.
     Earnings per share in 1995 increased $.06 per share over
1994 results primarily because of a decrease in maintenance costs
of the Company's electric generating plants and gas distribution
and transmission system in 1995.  A decrease in operation and
maintenance costs associated with the Nine Mile 2 Plant
contributed to the total 1996 decrease in operation and
maintenance costs as well.  Also contributing to the increase in
1995 earnings was reduced interest expense in 1995 resulting
primarily from the 1994 retirement at maturity of $50 million
aggregate principal amount of its First Mortgage Bonds, 8 1/8%
Series, increased earnings related to PSC incentive programs
related to fuel costs and energy efficiency, and an $.08 per
share gain from the sale of long-term stock investments in June
and December of 1995.
     Partially offsetting these 1995 increases in earnings were
significant decreases in electric and gas net operating revenues
attributable primarily to decreased sales from the warmer winter
weather experienced in the first quarter of 1995, as compared to
the same period of 1994, as well as decreased sales to a large
industrial customer (IBM) in 1995.  The earnings per share in
1995 were also unfavorably impacted by increased depreciation
expense on the Company's plant and equipment, increased property
taxes and an increase in the number of shares of common stock
outstanding. 













                                     -19-
<PAGE>
<TABLE>
OPERATING REVENUES

     Total operating revenues increased $1.8 million (.3%) in 1996 as compared to 1995 and
decreased $3.5 million (.7%) in 1995, as compared to 1994.

See the table below for details of the variations:
<CAPTION>

                                            Increase or (Decrease) from Prior Year 
                                               1996                          1995                          
                                    Electric   Gas       Total     Electric    Gas      Total             
                                                      (Thousands of Dollars)
<S>                                 <C>     <C>        <C>               <C>      <C>      <C>
Customer sales.............         $ 9,784  $(8,368)  $ 1,416           $(7,711)   $ 4,779   $(2,932) 
Sales to other utilities...             330    2,475     2,805             2,017        -       2,017  
Fuel cost adjustment.......          (1,248)  (2,497)   (3,745)            3,346     (6,564)   (3,218) 
Deferred revenues..........             677      840     1,517             1,374         21     1,395  
Miscellaneous..............            (227)     (10)     (237)             (663)       (52)     (715) 
       Total...............         $ 9,316  $(7,560)  $ 1,756           $(1,637)   $(1,816)  $(3,453) 














                                                    -20-

</TABLE>
<PAGE>
SALES
     
     The Company's sales vary seasonally in response to weather. 
Generally electric revenues peak in the summer and gas revenues
peak in the winter.
     Sales of electricity within the Company's service territory
increased 3% in 1996 and decreased 2% in 1995.  In 1996, electric
sales increased largely from an increase in usage by residential
customers, and the unseasonable hot and/or cold weather
experienced throughout 1996 when compared to the weather
conditions of 1995.  The decline in sales experienced in 1995 was
primarily the result of unusually warm winter weather experienced
in the first quarter of 1995 when compared to the same period in
1994.  This 1995 sales decrease was also impacted by the
declining usage by a large industrial customer.  
     Firm sales of natural gas increased 12% in 1996 due to an
increase in usage by residential, commercial and industrial
customers. In 1995, firm sales of natural gas decreased 5%
largely because of a decrease in usage by residential customers. 
     Interruptible gas sales decreased 78% in 1996, due
substantially to a decrease in natural gas sold for use as a
boiler fuel at the Roseton Plant.  The use of gas as a boiler
fuel at the Roseton Plant is dependent upon its economic benefit
as compared to the use of oil for generation or the purchase of
electricity to meet the Company's load requirements.  In 1995,
interruptible gas sales increased 70%, as compared to 1994 due
primarily to the increased sale of natural gas to the Roseton
Plant for use as a boiler fuel.  Due to sharing arrangements, as
described in the caption "Sharing Arrangements," that are in
place for interruptible gas sales, variations from year to year
have a minimal impact on earnings.
     Changes in firm sales by major customer classification are
set forth below:

                                                 % Increase (Decrease)
                                                    from Prior Year  
                                                       Electric       

                                                    1996          1995  
Residential.........................                  5           ( 2)
Commercial..........................                  1             1 
Industrial..........................                  3           ( 6)   

                                                          Gas             
                                                   1996           1995  
Residential.........................                16            (10)
Commercial..........................                12            ( 1)      
Industrial..........................                15              - 



                                     -21-
<PAGE>
     Residential and Commercial Sales:  Residential electric and
gas sales are primarily affected by the growth in the number of
customers and the change in customer usage.  In 1996, residential
and commercial electric and gas sales increased primarily due to
an increase in customer usage partly caused by unseasonable hot
and/or cold weather experienced throughout 1996 in the Company's
service territory.  Heating degree days were 17% higher in 1996
than in the prior year.  
     In 1995, residential electric sales and residential and
commercial gas sales decreased primarily from a decrease in
customer usage largely due to the warmer winter weather
experienced in the Company's service territory in the first
quarter of 1995.  Heating degree days were 22% lower in this
quarter of 1995 than in the same quarter of 1994.

     Industrial Electric Sales:  In 1996, as compared to 1995,
industrial electric sales increased 3% largely because of an
increase in usage by a large industrial customer. In 1995, as
compared to 1994, industrial electric sales decreased 6%, due
primarily to an 18% decline in usage by a large industrial
customer (IBM).

     Industrial Gas Sales:  Firm gas sales to industrial
customers for 1996 increased 15% substantially because of
increased usage by several large industrial customers.  In 1995,
firm gas sales to industrial customers remained stable when
compared to the prior year.

NUCLEAR OPERATIONS

     The Nine Mile 2 Plant is owned, as tenants in common, by the
Company, Niagara Mohawk, New York State Electric & Gas
Corporation, Long Island Lighting Company and Rochester Gas and
Electric Corporation (Rochester).  Niagara Mohawk operates the
Nine Mile 2 Plant.
     The Company owns a 9% interest of the Nine Mile 2 Plant,
which is discussed in Note 2 of the Notes under the caption
entitled "Nine Mile 2 Plant."  The operations of this Plant have
continued to improve.  The actual capacity factor of 86.6% for
1996 exceeded the targeted capacity factor of 73% included in the
Company's electric fuel adjustment clause.  This resulted in a
favorable impact on earnings.
     The operating expenses, taxes and depreciation pertaining to
the operation of the Nine Mile 2 Plant are included in the
Company's financial results.  For both 1996 and 1995, the actual
cost of operations was less than the allowable Nine Mile 2 Plant
operation and maintenance expenses provided in Supplement Nos. 4
(1995) and 5 (1996) to the 1990 Settlement Agreement, as approved
by the PSC.  In 1996, the underruns were entirely deferred for
the future benefit of customers and in 1995 the underruns were 

                                     -22-
<PAGE>
shared between the Company's customers and shareholders.
     The Company has continued to participate actively on the
management, operations and accounting committees for the Nine
Mile 2 Plant and expects to continue to do so in the future.
     On or about October 12, 1996, Niagara Mohawk and Rochester
announced plans that they would form a joint nuclear operation
company to support and manage the operations of Rochester's Ginna
Nuclear Plant, the Nine Mile 2 Plant and Niagara Mohawk's Unit
No. 1 of the Nine Mile Point Nuclear Station.  Such plans
reportedly include the initial formation of a nuclear services
company to provide support services.
     The Company has insufficient information to make an
assessment of such plans or whether it would consent to such
plans to the extent that the Nine Mile 2 Plant is affected, and
until such assessment can be made, the Company can take no
position with respect to such plans.
     The Nine Mile 2 Plant completed its fifth refueling outage
November 2, 1996.  The Nine Mile 2 Plant is scheduled to commence
its sixth refueling outage in July 1998, with a targeted 35-day
duration.
     A decommissioning study for the Nine Mile 2 Plant was
completed in 1995.  The study's estimate of the cost to
decommission the Nine Mile 2 Plant is significantly higher than
previous estimates.  The Company believes that decommissioning
costs, if higher than currently estimated, will ultimately be
recovered in rates, although no such assurance can be given. 
However, future developments in the utility industry, including
the effects of deregulation and increasing competition could
change this conclusion.  The Company cannot predict the outcome
of these developments.  For further information on
decommissioning refer to Note 2 of the Notes.
     In October 1996, Niagara Mohawk, as operating cotenant for
the Nine Mile 2 Plant, along with other companies that operate
nuclear plants, received a letter from the Nuclear Regulatory
Commission (NRC), requiring them to provide the NRC with
information on the "adequacy and availability" of design basis
documentation on their nuclear plants within 120 days.  Such
information will be used by the NRC to verify that companies are
in compliance with the terms and conditions of their license(s)
and NRC regulations.  In addition, it will allow the NRC to
determine if other inspection activities or enforcement actions
should be taken on a particular company.
     The Company believes that the NRC is becoming more stringent
as indicated by this letter and that there may be direct cost
impact on companies with nuclear plants as a result.  The Company
is unable to predict how a higher risk operating environment may
affect its results of operations or financial condition.  Niagara
Mohawk plans to respond to the NRC by the February 9, 1997 due
date.


                                     -23-
<PAGE>
SHARING ARRANGEMENTS

     Pursuant to certain incentive formulas approved by the PSC,
the Company shares, with its customers, certain revenues and/or
cost savings exceeding defined predetermined levels.  These
incentive formulas, in some cases, include penalty provisions for
shortfalls from the targeted levels.
     Incentive formulas are in place for fuel cost variations,
sales of electricity and gas to other utilities, interruptible
gas sales, capacity release transactions and the Company's Energy
Efficiency Program.
     The net results of these incentive formulas was to increase
pretax earnings by $4.6, $4.7 and $2.2 million during 1996, 1995
and 1994, respectively.

OPERATING EXPENSES

      Changes from the prior year in the components of the
Company's operating expenses are listed below:

                                           Increase or (Decrease)
                                               from Prior Year         

                                           1996              1995     
                                       Amount     %      Amount     % 

                                           (Dollars in Thousands)     
Operating Expenses:
  Fuel and purchased
   electricity...............        $  1,134     1        $  1,279       1  
  Purchased natural gas......         (11,703)  (19)          1,751       3  
  Other expenses of 
   operation.................           3,683     4          (2,862)     (3)
  Maintenance................            (502)   (2)         (3,276)    (10) 
  Depreciation and 
   amortization..............           1,113     3           1,087       3   
  Taxes, other than 
   income tax................            (564)   (1)           (190)      -   
  Federal income tax.........           3,660    13             997       4 
       Total.................        $ (3,179)   (1)        $(1,214)      - 
                                     

      The most significant elements of operating expenses are fuel
and purchased electricity in the Company's electric department
and purchased natural gas in the Company's gas department. 
Approximately 27% in 1996 and 28% in 1995 of every revenue dollar
billed in the Company's electric department was expended for the
combined cost of fuel used in electric generation and purchased
electricity.  The corresponding figures in the Company's gas
department for the cost of purchased gas were 53% and 61%,
respectively.  
                                     -24-
<PAGE>
      In an effort to keep the cost of electricity at the lowest 
reasonable level, the Company purchases energy from sources such
as other member companies of the New York Power Pool, Canadian
hydro sources and energy marketers, whenever such energy can be
purchased at a unit cost lower than the incremental cost of
generating the energy in the Company's plants.  
      In 1996, purchased natural gas decreased $11.7 million (19%)
primarily because of lower interruptible gas sales for usage as a
boiler fuel at the Roseton Plant.  In 1995, however, purchased
natural gas increased $1.8 million (3%) largely because of higher
interruptible gas sales including gas used as a boiler fuel at
the Roseton Plant. 
      Other expenses of operation increased $3.7 million (4%) in
1996 primarily due to increased employee wages and associated
fringe benefits and increased uncollectible accounts.  In 1995,
other expenses of operation decreased $2.9 million (3%) primarily
because of decreased costs of the Company's electric distribution
and transmission system.  
      Maintenance expenses for 1996 remained stable compared to
1995.  Maintenance expenses decreased $3.3 million (10%) in 1995
as compared to 1994 due largely to a $3.5 million decrease in
costs associated with the Company's electric generating plants
and a $1.6 million decrease in leak repair costs on the Company's
gas distribution and transmission system.  These decreases were
partially offset by a $2.0 million increase in the Company's
electric distribution and transmission system costs largely
resulting from increases to storm costs and tree trimming
expenses in 1995.  
      See Note 3 of the Notes for an additional analysis and
reconciliation of the federal income tax.

OTHER INCOME AND INTEREST CHARGES

      Other income (excluding AFDC) decreased $2.8 million (30%)
in 1996 and increased $1.7 million (23%) in 1995.  The 1996
decrease was largely due to the non-recurring gain of $2.1
million realized in 1995 from the sale of long-term stock
investments and the recording of one-time charges associated with
the optional redemption of $30 million 8 3/4% Series of First
Mortgage Bonds in May 1996.  The increase noted in 1995 was
substantially due to the gain from the sale of long-term stock
investments in June and December 1995.









                                     -25-
<PAGE>
      Total interest charges (excluding AFDC) decreased $1.7 
million (6%) in 1996 and $2.2 million (7%) in 1995.  The
following table sets forth some of the pertinent data on the
Company's outstanding debt:   
                                                  
                                            1996       1995        1994
                                             (Thousands of Dollars)     
Long-term debt:
  Debt retired................             $ 30,000  $  2,562  $ 50,000
  Outstanding at year-end*:  
    Amount (including current
    portion)..................              364,026   391,715   393,853       
   Effective rate.............                6.70%     7.00%     6.71%       
 Short-term debt:
  Average daily amount 
   outstanding ...............             $  5,477  $    103  $     16 
 Weighted average
    interest rate ............                5.59%     6.16%     6.69%       
 
*Including debt of subsidiaries of $7.6 million in 1996, $5.3
million in 1995 and $4.8 million in 1994.

See Notes 4 and 6 of the Notes for additional information on
short-term and long-term debt of the Company.



























                                     -26-
<PAGE>
<TABLE>
FINANCIAL INDICES
<CAPTION>

     Selected financial indices for the last five years are set forth in the following
table:

                                                                     1996    1995    1994    1993    1992  
<S>                                                                  <C>     <C>     <C>     <C>     <C>
Pretax coverage of 
 total interest charges:
     Including AFDC.....................................             4.08x   3.68x   3.38x   3.29x   3.07x 

     Excluding AFDC.....................................             3.83x   3.43x   3.15x   3.15x   2.95x 

     Funds from Operations..............................             5.29x   4.69x   4.24x   4.27x   4.04x

Pretax coverage of total interest 
 charges and preferred stock dividends..................             3.47x   2.97x   2.74x   2.65x   2.49x 

Percent of construction expenditures 
 financed from internal funds...........................              100%    100%    100%    100%    100% 

AFDC and Mirror CWIP* as a percentage 
 of income available for common stock...................               13%     16%     16%     11%     10% 

Effective tax rate......................................               36%     35%     35%     35%     34% 



* Refer to Note 1 of the Notes entitled "Summary of Significant Accounting Policies" under 
  subcaptions "Rates, Revenues and Regulatory Matters" - "Deferred Finance Charges -       
  Nine Mile 2 Plant" for a definition of Mirror CWIP.


                                                    -27-
</TABLE>
<PAGE>
COMMON STOCK DIVIDENDS AND PRICE RANGES


     The Company and its principal predecessors have paid
dividends on its common stock in each year commencing 1903, and
the common stock of the Company has been listed on the New York
Stock Exchange since 1945.  The price ranges and the dividends
paid for each quarterly period during the Company's last two
fiscal years are as follows:

                          1996                       1995        
                 High      Low     Dividend    High          Low   Dividend

1st Quarter    $31 1/2   $28 3/4   $.525        $27 5/8     $26       $.52  
2nd Quarter     31 1/4    28 7/8    .525         27 1/2      25 1/2    .52
3rd Quarter     31 1/4    29 1/2    .53          30 1/2      26 1/4    .525 
4th Quarter     31 1/2    29        .53          31 7/8      29 7/8    .525  

     On June 28, 1996, the Company increased its quarterly
dividend rate to $.53 per share from $.525 in 1995.  On June 23,
1995, the Company increased its quarterly dividend rate to $.525
per share from $.52 per share.  The Company presently intends to
increase future common stock dividends by a modest amount if and
to the extent supported by sustained earnings growth, while at
the same time gradually reducing the Company's payout ratio;
however, any determination of future dividend declarations, and
the amounts and dates of such dividends, will depend on the
circumstances at the time of consideration of such declaration.
     The number of registered holders of common stock as of
December 31, 1996 was 24,191.  Of these, 23,545 were accounts in
the names of individuals with total holdings of 6,020,776 
shares, or an average of 256 shares per account.  The 646 other
accounts, in the names of institutional or other non-individual
holders, for the most part, hold shares of common stock for the
benefit of individuals.
















                                     -28-
<PAGE>
Report of Independent Accountants

To the Board of Directors and Shareholders of Central Hudson Gas
& Electric Corporation

In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of income, of retained
earnings and of cash flows present fairly, in all material
respects, the financial position of Central Hudson Gas & Electric
Corporation and its subsidiaries at December 31, 1996 and 1995,
and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.  These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits.  We conducted our
audits of these financial statements in accordance with generally
accepted auditing standards 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 the opinion expressed above.










PRICE WATERHOUSE LLP

New York, New York
January 24, 1997










                                     -29-

<PAGE>
STATEMENT OF MANAGEMENT'S RESPONSIBILITY


Management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements of Central
Hudson Gas & Electric Corporation and its subsidiaries
(collectively, the Company) as well as all other information
contained in this Annual Report.  The consolidated financial
statements have been prepared in conformity with generally
accepted accounting principles and, in some cases, reflect
amounts based on the best estimates and judgements of the
Company's Management, giving due consideration to materiality.  

The Company maintains adequate systems of internal control to
provide reasonable assurance, that, among other things,
transactions are executed in accordance with Management's
authorization, that the consolidated financial statements are
prepared in accordance with generally accepted accounting
principles and that the assets of the Company are properly
safeguarded.  The systems of internal control are documented,
evaluated and tested by the Company's internal auditors on a
continuing basis.  Due to the inherent limitations of the
effectiveness of internal controls, no internal control system
can provide absolute assurance that errors will not occur. 
Management believes that the Company has maintained an effective
system of internal control over the preparation of its financial
information including the consolidated financial statements of
the Company as of December 31, 1996. 

Independent accountants were engaged to audit the consolidated
financial statements of the Company and issue their report
thereon.  The Report of Independent Accountants, which is
presented above, does not limit the responsibility of Management
for information contained in the consolidated financial
statements and elsewhere in the Annual Report. 
















                                     -30-
 <PAGE>
The Company's Board of Directors maintains a Committee on Audit
which is composed of Directors who are not employees of the
Company.  The Committee on Audit meets with Management, its
Internal Auditing Manager, and its independent accountants
several times a year to discuss internal controls and accounting
matters, the Company's consolidated financial statements, the
scope and results of the audits performed by the independent
accountants and the Company's Internal Auditing Department.  The
independent accountants and the Company's Internal Auditing
Manager have direct access to the Committee on Audit. 










JOHN E. MACK, III                            DONNA S. DOYLE
Chairman of the Board and                    Controller
Chief Executive Officer  




                                        January 24, 1997























                                     -31-
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
                                                                                     December 31,
                         ASSETS                                                    1996             1995
<CAPTION>
<S>                                                                             <C>             <C>
Utility Plant                                                                                   
  Electric.....................................................                 $1,171,798      $1,149,233
  Gas..........................................................                    145,375         140,341
  Common.......................................................                     87,591          83,220
  Nuclear fuel.................................................                     36,913          32,541
                                                                                 1,441,677       1,405,335
  Less: Accumulated depreciation...............................                    520,999         490,576
        Nuclear fuel amortization..............................                     29,748          26,435
                                                                                   890,930         888,324
  Construction work in progress................................                     48,699          48,770

    Net Utility Plant..........................................                    939,629         937,094

Investments and Other Assets
  Prefunded pension costs......................................                     10,672             922
  Other........................................................                     12,419          10,410
    Total Investments and Other Assets.........................                     23,091          11,332









                 The Notes to Consolidated Financial Statements are an integral part hereof.

                                                    -32-
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET  (CON'T)
(Thousands of Dollars)
<CAPTION>                                                                             December 31,    
                         ASSETS                                                     1996            1995

<S>                                                                             <C>             <C>
Current Assets
  Cash and cash equivalents......................................                    4,235          15,478
  Accounts receivable from customers - net of allowance for
    doubtful accounts; $3.2 million in 1996 and $2.5 million
    in 1995......................................................                   48,080          44,536
  Accrued unbilled utility revenues..............................                   16,042          15,806
  Other receivables..............................................                    2,896           4,674
  Materials and supplies, at average cost 
    Fuel.........................................................                   14,935          13,319
    Construction and operating...................................                   13,160          14,271
  Special deposits and prepayments...............................                   13,440          12,659
    Total Current Assets.........................................                  112,788         120,743

Deferred Charges                                                                 
  Regulatory assets (Note 1)....................................                   151,426         159,907
  Unamortized debt expense......................................                     5,393           6,080
  Other.........................................................                    16,779          14,936
    Total Deferred Charges......................................                   173,598         180,923

                         Total Assets                                           $1,249,106      $1,250,092


                 The Notes to Consolidated Financial Statements are an integral part hereof.




                                                    -33-

</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET  (CON'T)                                                  
(Thousands of Dollars)                                                              December 31,
              CAPITALIZATION AND LIABILITIES                                      1996          1995
<CAPTION>
Capitalization
<S>                                                                             <C>           <C>
  Common Stock Equity
    Common stock, $5 par value (Note 5).........................                $  87,775     $  87,480
    Paid-in capital (Note 5)....................................                  284,465       282,942
    Retained earnings...........................................                  105,821        90,475
    Capital stock expense.......................................                   (6,352)       (6,658)
      Total Common Stock Equity.................................                  471,709       454,239

  Cumulative Preferred Stock (Note 5)
    Not subject to mandatory redemption.........................                   21,030        21,030
    Subject to mandatory redemption.............................                   35,000        35,000
      Total Cumulative Preferred Stock..........................                   56,030        56,030

  Long-term Debt (Note 6).......................................                  362,040       389,245
      Total Capitalization......................................                  889,779       899,514

Current Liabilities
  Current redemption of preferred stock.........................                     -           13,000  
  Current maturities of long-term debt..........................                    1,362         1,577
  Notes payable.................................................                   15,600          -
  Accounts payable..............................................                   26,137        24,433
  Dividends payable.............................................                   10,112        10,244
  Accrued taxes and interest....................................                    5,347         7,824
  Accrued vacation .............................................                    4,251         4,157
  Customer deposits.............................................                    4,019         4,021
  Other.........................................................                    6,676         6,166
      Total Current Liabilities.................................                   73,504        71,422
                 The Notes to Consolidated Financial Statements are an integral part hereof.

                                                    -34-
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET  (CON'T)                                                    
(Thousands of Dollars)                                                                 December 31,
<CAPTION>     CAPITALIZATION AND LIABILITIES                                         1996          1995
<S>                                                                             <C>           <C>
Deferred Credits and Other Liabilities
  Regulatory liabilities (Note 1)...............................                    74,587        74,132
  Operating reserves............................................                     4,755         6,024
  Other.........................................................                     9,155         9,659
      Total Deferred Credits and Other Liabilities..............                    88,497        89,815

Accumulated Deferred Income Tax (Note 3)........................                   197,326       189,341

Commitments and Contingencies (Notes 2 and 8)...................                                        

              Total Capitalization and Liabilities                              $1,249,106    $1,250,092












                 The Notes to Consolidated Financial Statements are an integral part hereof.





                                                    -35-

</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
<CAPTION>

                                                                   Year ended December 31,
<S>                                                            1996              1995             1994
Operating Revenues                                          <C>               <C>               <C>
  Electric...................................               $418,761          $409,445           $411,082
  Gas........................................                 95,210           102,770            104,586
    Total Operating Revenues.................                513,971           512,215            515,668

Operating Expenses                                                         
  Operation:                                                               
    Fuel used in electric generation.........                 58,874            60,940             67,899
    Purchased electricity....................                 55,523            52,323             44,085
    Purchased natural gas....................                 50,636            62,339             60,588
    Other expenses of operation..............                102,746            99,063            101,925
  Maintenance................................                 28,938            29,440             32,716
  Depreciation and amortization (Note 1).....                 42,580            41,467             40,380
  Taxes, other than income tax...............                 66,145            66,709             66,899
  Federal income tax (Note 3)................                 32,700            29,040             28,043
    Total Operating Expenses.................                438,142           441,321            442,535
                                                                           
Operating Income.............................                 75,829            70,894             73,133

Other Income 
  Allowance for equity funds used during 
   construction (Note 1).....................                    466               986                866
  Federal income tax (Note 3)................                  1,632               353              1,237
  Other - net................................                  4,815             8,886              6,296
    Total Other Income.......................                  6,913            10,225              8,399

Income before Interest Charges...............                 82,742            81,119             81,532
        The Notes to Consolidated Financial Statements are an integral part hereof.
                                                    -36-
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME (CON'T)                       
(Thousands of Dollars)
<CAPTION>                                                           Year ended December 31,
                                                              1996               1995             1994
<S>                                                         <C>               <C>               <C>
Interest Charges
  Interest on long-term debt.................                 23,617            25,925            27,541
  Other interest.............................                  2,626             1,917             1,784
  Allowance for borrowed funds used
   during construction (Note 1)..............                   (523)             (514)             (515)
  Amortization of expense on debt............                    940             1,069             1,793
    Total Interest Charges...................                 26,660            28,397            30,603

Net Income...................................                 56,082            52,722            50,929

Premium on Preferred Stock Redemptions-Net...                    378               169              -
Dividends Declared on Cumulative
 Preferred Stock.............................                  3,231             4,903             5,127
Income Available for Common Stock............               $ 52,473          $ 47,650          $ 45,802

Common Stock:
  Average shares outstanding (000s)..........                 17,549            17,380            17,102
  Earnings per share on
   average shares outstanding................                  $2.99             $2.74             $2.68




                 The Notes to Consolidated Financial Statements are an integral part hereof.




                                                    -37-
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS                    
(Thousands of Dollars)
<CAPTION>                                                           Year ended December 31,
                                                              1996               1995             1994



<S>                                                         <C>               <C>               <C>
Balance at beginning of year.................               $ 90,475          $ 79,284           $ 69,023 
Net Income...................................                 56,082            52,722             50,929
Premium on preferred stock redemption-net....                    378               169               _ 
Dividends declared:
  On cumulative preferred stock..............                  3,231             4,903              5,127
  On common stock ($2.115 per share 1996; 
   $2.095 per share 1995; $2.075 per share
   1994).....................................                 37,127            36,459             35,541
       Total dividends declared..............                 40,358            41,362             40,668
Balance at end of year.......................               $105,821          $ 90,475           $ 79,284













                 The Notes to Consolidated Financial Statements are an integral part hereof.

                                                    -38-

</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
<CAPTION>
                                                                         Year ended December 31,
<S>                                                                  1996           1995          1994
Operating Activities                                              <C>           <C>           <C>
  Net Income..........................................            $ 56,082      $  52,722      $ 50,929
  Adjustments to reconcile net income to net cash 
   provided by operating activities:  
     Depreciation and amortization including nuclear  
      fuel amortization...............................              47,073         45,388        44,616
     Deferred income taxes............................              17,901         14,146        12,970
     Allowance for equity funds used during
      construction....................................                (466)          (986)         (866)
     Nine Mile 2 Plant deferred finance charges, net..              (4,855)        (4,855)       (4,855)
     Provisions for uncollectibles....................               4,336          3,220         3,306
     Accrued pension costs............................              (6,757)       (10,627)       (2,028)
     Gain on sale of long-term investment.............                 -           (2,104)         -
     Deferred gas costs...............................              (4,861)         5,302         3,256
     Deferred gas refunds.............................              (1,556)        (1,784)        2,616
     Other - net......................................               3,986         11,466         4,376
     Changes in current assets and
      liabilities, net:
        Accounts receivable and unbilled utility
         revenues.....................................              (6,338)        (3,300)       (2,604)
        Materials and supplies........................                (505)         5,799         2,028
        Special deposits and prepayments..............                (781)          (567)         (724)
        Accounts payable..............................               1,704         (5,008)          887
        Accrued taxes and interest....................              (2,477)           995           219
        Other current liabilities.....................                 602            944         1,396

  Net cash provided by operating activities...........             103,088        110,751       115,522

                 The Notes to Consolidated Financial Statements are an integral part hereof.
                                                    -39-
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS (CON'T)
(Thousands of Dollars)<CAPTION>                                        1996          1995        1994
<S>                                                               <C>           <C>           <C>
Investing Activities
  Additions to plant..................................               (49,860)      (50,269)      (58,045)
  Allowance for equity funds used during construction.                   466           986           866
  Net additions to plant..............................               (49,394)      (49,283)      (57,179)
  Roseton Plant restoration costs related to fire.....
   damage.............................................                  -             -             (853)
  Insurance recoveries related to 
   Roseton Plant restoration..........................                  -             -            4,371
  Nine Mile 2 Plant decommissioning trust fund........                (1,734)       (1,895)         (895)
  Proceeds from sale of long-term investments.........                  -            2,879          -   
  Other - net.........................................                   200        (1,161)       (2,648)
  Net cash used in investing activities...............               (50,928)      (49,460)      (57,204)
Financing Activities
  Proceeds from issuance of:
    Long-term debt....................................                 3,090         1,000           230
    Common stock......................................                 1,817         7,064         7,783
  Net borrowings (repayments) of short-term debt......                15,600        (3,000)        3,000
  Retirement and redemption of long-term debt.........               (30,779)       (3,139)      (50,273)
  Retirement and redemption of cumulative preferred
   stock..............................................               (13,000)      (12,000)         -   
  Premium on preferred stock redemption...............                  (378)         (146)         -
  Dividends paid on cumulative preferred and common 
   stock..............................................               (40,489)      (41,364)      (40,328)
  Issuance and redemption costs.......................                   736           (20)         (110)
  Net cash used in financing activities...............               (63,403)      (51,605)      (79,698)
Net Change in Cash and Cash Equivalents...............               (11,243)        9,686       (21,380)
Cash and Cash Equivalents at Beginning of Year........                15,478         5,792        27,172
Cash and Cash Equivalents at End of Year..............             $   4,235     $  15,478     $   5,792
Supplemental Disclosure of Cash Flow Information
    Interest paid.....................................             $  25,184     $  26,738     $  28,681
    Federal income taxes paid.........................                15,875        14,100        12,100
The Notes to Consolidated Financial Statements are an integral part hereof.
</TABLE>                                            -40-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General:

  The Company is subject to regulation by the Public Service
Commission of the State of New York (PSC) and the Federal Energy
Regulatory Commission (FERC) with respect to its rates for
service and the maintenance of its accounting records.  The
Company's accounting policies conform to generally accepted
accounting principles as applied to regulated public utilities
and are in accordance with the accounting requirements and rate-
making practices of the regulatory authorities having
jurisdiction.
  Certain amounts from prior years have been reclassified in the
consolidated financial statements to conform with the 1996
presentation.  Preparation of the financial statements includes
the use of estimates and assumptions made by management that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements and reported amount of revenues and
expenses during the reporting period.  Actual results may differ
from those estimates.

Principles of Consolidation:

  The consolidated financial statements include the accounts of
the Company and its subsidiaries.  Intercompany balances and
transactions have been eliminated.
  The Company's subsidiaries are each wholly owned and are
comprised of landholding, cogeneration or energy management
companies.  The net income of the Company's subsidiaries is
reflected in the Consolidated Statement of Income as other non-
operating income.
  On June 30, 1996, Central Hudson Cogeneration, Inc. merged into
Central Hudson Enterprises Corporation, with the latter being the
surviving corporation. 

Utility Plant:

  The costs of additions to utility plant and replacements of
retired units of property are capitalized at original cost.  The
Company's share of the costs of the Nine Mile 2 Plant are
capitalized at original cost, less the disallowed investment of
$169.3 million which was recorded in 1987.  Costs include labor,
materials and supplies, indirect charges for such items as
transportation, certain taxes, pension and other employee
benefits and an allowance for the cost of funds used during
construction (AFDC).  Replacement of minor items of property is
included in maintenance expenses.
                                     -41-
<PAGE>
  The original cost of property, together with removal cost, less
salvage, is charged to accumulated depreciation at such time as
the property is retired and removed from service.

Jointly Owned Facilities:

  The Company has a 9%, or 103 MW, undivided interest in the
1,143 MW Nine Mile 2 Plant (see Note 2) and a 35%, or 420 MW,
undivided interest in the 1,200 MW Roseton Steam Electric
Generating Plant (Roseton Plant) (see Note 8 caption "Roseton
Plant").
  The Company's share of the respective investments in the Nine
Mile 2 Plant and the Roseton Plant, as included in its
Consolidated Balance Sheet at December 31, 1996 and 1995, were:

                                                 1996            1995
                                              (Thousands of Dollars)
      Nine Mile 2 Plant
       Plant in service..............         $314,270         $315,423
       Construction work in progress.            1,894              594
       Accumulated depreciation......          (61,708)         (55,319)
     Roseton Plant
       Plant in service..............         $135,026         $133,741
       Construction work in progress.              745            1,872
       Accumulated depreciation......          (74,963)         (71,880)

Allowance For Funds Used During Construction:

      The Company includes in plant costs AFDC approximately
equivalent to the cost of funds used to finance construction
expenditures.  The concurrent credit for the amount so
capitalized is reported in the Consolidated Statement of Income
as follows:  the portion applicable to borrowed funds is reported
as a reduction of interest charges while the portion applicable
to other funds (the equity component, a noncash item) is reported
as other income.  The AFDC rate was 7.5% in 1996 and 8.5% in 1995
and 1994.

Depreciation and Amortization:

      For financial statement purposes, the Company's depreciation
provisions are computed on the straight-line method using rates
based on studies of the estimated useful lives and estimated net
salvage of properties, with the exception of the Nine Mile 2
Plant which is depreciated on a remaining life amortization
method.  The year 2026, which is the year in which the Nine Mile
2 Plant operating license expires, is used as the end date in the
development of the remaining life amortization.  The Company
performs depreciation studies on a continuing basis and, upon
approval by the PSC, periodically adjusts the rates of its 

                                     -42-
<PAGE>
various classes of depreciable property.  The most recent study
was performed in 1993.  The provision for depreciation of
transportation equipment is charged indirectly to various asset
and expense accounts.
      The Company's composite rates for depreciation were 3.13% in
1996, 3.14% in 1995 and 3.15% in 1994 of the original cost of
average depreciable property.  The ratio of the amount of
accumulated depreciation to the cost of depreciable property at
December 31 was 36.5% in 1996, 35.3% in 1995 and 34.5% in 1994.
      For federal income tax purposes, the Company uses an
accelerated method of depreciation and generally uses the
shortest life permitted for each class of assets.

Amortization of Nuclear Fuel:

      The cost of the Nine Mile 2 Plant nuclear fuel assemblies
and components is amortized to operating expense based on the
quantity of heat produced for the generation of electric energy. 
Niagara Mohawk, on behalf of the Nine Mile 2 Plant cotenants, has
entered into an agreement with the U.S. Department of Energy
(DOE) for the ultimate disposal and storage of spent nuclear
fuel.  The cotenants are assessed a fee for such disposal based
upon the kilowatt-hours generated by the Nine Mile 2 Plant. 
These costs are charged to operating expense and recovered from
customers through base rates or through the electric fuel cost
adjustment clause described below.  The Company cannot now
determine whether such arrangements with the DOE will ultimately
provide for the satisfactory permanent disposal of such waste
products. 

Cash and Cash Equivalents:

      For purposes of the Consolidated Statement of Cash Flows,
the Company considers temporary cash investments with an original
maturity of three months or less to be cash equivalents.

Federal Income Tax:

      The Company and its wholly owned subsidiaries file a
consolidated federal income tax return.  Federal income taxes are
allocated to operating expenses and other income and deductions
in the Consolidated Statement of Income.  Federal income taxes
are deferred under the liability method in accordance with
Financial Accounting Standard No. 109, "Accounting for Income
Taxes."  Under the liability method, deferred income taxes are
provided for all differences between financial statement and tax
basis of assets and liabilities.  Additional deferred income
taxes and offsetting regulatory assets or liabilities are
recorded to recognize that income taxes will be recoverable or
refundable through future revenues.

                                     -43-
<PAGE>
Rates, Revenues and Regulatory Matters:

      Electric and gas retail rates, including fuel and gas cost
adjustment clauses, applicable to intrastate service (other than
contractually established rates for service to municipalities and
governmental bodies) are regulated by the PSC.  Transmission
rates, facilities charges and rates for electricity sold for
resale in interstate commerce are regulated by the FERC.
      Revenues are recognized on the basis of cycle billings
rendered monthly or bimonthly.  Estimated revenues are accrued
for those customers billed bimonthly whose meters are not read in
the current month.  
      The Company's tariff for retail electric service includes a
fuel cost adjustment clause pursuant to which electric rates are
adjusted to reflect changes in the average cost of fuels used for
electric generation and in certain purchased power costs, from
the average of such costs included in base rates.  The Company's
tariff for gas service contains a comparable clause to adjust gas
rates for changes in the price of purchased natural gas and
certain costs of manufactured gas.
      Reference is made to the caption "Rate Proceedings" in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" for details of the Company's 1996 Rate
Order for its gas rate case.

      Regulatory Assets and Liabilities:  The Company's accounting
policies reflect the effects of the rate-making process in
accordance with Statement of Financial Accounting Standards 71, 
"Accounting for the Effects of Certain Types of Regulation" (SFAS
No. 71).  Accordingly, certain utility expenses and credits
normally reflected currently in income are deferred on the
balance sheet as regulatory assets and liabilities and are
recognized in income as the related amounts are included in
service rates and recovered from or refunded to customers in
utility revenues as permitted by the regulators.  If the Company
were no longer subject to the provision of SFAS 71, the Company
would be required to write-off related regulatory assets and
liabilities.  Based on current regulation, the Company believes
that its use of regulatory accounting continues to be
appropriate.











                                     -44-
<PAGE>
      The following table sets forth the Company's regulatory
assets and liabilities:
At December 31,                              1996        1995 

Regulatory Assets (Debits):                           (In thousands)
Deferred finance charges - 
  Nine Mile 2 Plant.....................            $ 69,615      $ 70,760
Income taxes recoverable
  through future rates..................              55,791        65,723
Deferred energy efficiency costs........               8,894        11,046
Other...................................              17,126        12,378
  Total Regulatory Assets...............            $151,426      $159,907

Regulatory Liabilities (Credits):                       
Deferred finance charges - 
  Nine Mile 2 Plant.....................            $ 22,431      $ 28,431
Income taxes refundable.................              29,077        29,093
Deferred Nine Mile 2 Plant costs........               6,322         3,094
Deferred OPEB costs over collection.....               4,778         3,600
Deferred unbilled gas revenues..........               4,357         4,030
Other...................................               7,622         5,884
  Total Regulatory Liabilities..........            $ 74,587      $ 74,132
     Net Regulatory Assets..............            $ 76,839      $ 85,775
      Some of the significant regulatory assets and liabilities
include:

      Deferred Finance Charges - Nine Mile 2 Plant:  During the
construction of the Nine Mile 2 Plant, the PSC authorized the
inclusion in rate base of increasing amounts of the Company's
investment in that Plant.  The Company did not accrue AFDC on any
of the Nine Mile 2 Plant construction work in progress (CWIP)
which was included in rate base and for which a cash return was
being allowed; however, the PSC ordered, effective January 1,
1983, that amounts be accumulated in deferred debit and credit
accounts equal to the amount of AFDC which was not being accrued
on the CWIP included in rate base (Mirror CWIP).  The balance in
the deferred credit account is available to reduce future revenue
requirements by amortizing portions of the deferred credit to
other income or by the elimination through writing off other
deferred balances as directed by the PSC.  The Company expects
such application of the deferred credit will occur over a period
substantially shorter than the life of the Nine Mile 2 Plant. 
When amounts of such deferred credit are applied in order to
reduce revenue requirements, amortization is started for a
corresponding amount of the deferred debit, which amortization
continues on a level basis over the remaining life of the Nine
Mile 2 Plant resulting in recovery of such corresponding amount
through rates.  Mirror CWIP is expected to be exhausted by the
end of the useful life of the Nine Mile 2 Plant either through
the amortization or write-off procedures described above or 

                                     -45-
<PAGE>
through the write-off of the remaining debit and credit as
directed by the PSC.  The net effect of this procedure is that at
the end of the amortization period for the deferred credit, the
accounting and rate-making treatment will be the same as if the
Nine Mile 2 Plant CWIP had not been included in rate base during
the construction period.
      Pursuant to a PSC Order issued and effective February 11,
1994 in an electric rate proceeding, the Company was authorized
to amortize $6.0 million annually of the deferred credit
beginning in December 1993.  
      The $6.0 million amortization of the deferred credit will be
continued unless changed by a future PSC rate order or until it
is exhausted.  The current level of the deferred debit
amortization of $1.145 million is based on the level of deferred
credits that have been utilized through the most recent rate
year, which has ended.  Credit amounts utilized subsequently are
included in the deferred debit amortization level at the time of
the next PSC rate order for the new rate year based on the then
remaining life of the Nine Mile 2 Plant.

      Income Taxes Recoverable/Refundable:  The adoption of SFAS
109, "Accounting for Income Taxes," in 1993 increased the
Company's net deferred tax obligation.  As it is probable that
the increase will be recovered from customers, the Company
established a net regulatory asset.

      Deferred Energy Efficiency Costs:  The PSC has required
utilities to adopt comprehensive long-range planning which
includes demand side management and energy conservation (Energy
Efficiency Program).  The Company's 1996 Energy Efficiency
Program was approved by the PSC.  The Energy Efficiency Program
costs are deferred and amortized over either five or ten years,
as directed by the PSC.
      In addition to the deferral of Energy Efficiency Program
costs, the Company recovers lost net revenues that result from
the Program.  Incentive earnings related to the achievement of
energy efficiency goals are recovered through the electric fuel
cost adjustment clause as discussed below.  The Company's 1997
Demand Side Management (DSM) Plan, filed with the PSC on November
15, 1996, proposes the elimination of the incentive mechanism and
no recognition, by the Company, of incremental lost net revenues
resulting from either the implementation of additional DSM
measures or modifications to existing programs.  The Company
cannot predict the outcome of this filing.

Competition:

      The public utility industry is facing increasing competition
and deregulation initiatives across the country and in New York
State.  The PSC has a proceeding in process which may affect the 
                                     -46-
<PAGE>
Company and other investor-owned utilities operating in New York
State which is called the "Competitive Opportunities Proceeding." 
The Company's filing on October 1, 1996, in conjunction with the
PSC's Competitive Opportunities Proceeding, proposed no immediate
wholesale changes in the structure of its business.  In the
current settlement process associated with this filing, the
Company is looking to establish an orderly transition over an
extended period of time, from a regulated, vertically integrated,
franchised utility, which has the obligation to serve, to a
restructured entity which ultimately provides customers with
competitive choices for electric energy and related services.  It
also seeks to establish confirmation of its right for an
opportunity to recover all prudently incurred costs including
those costs which may not be recoverable in competitive markets. 
The Company is hopeful that an agreement will be reached with the
PSC and other parties in the Competitive Opportunities Proceeding
that will continue to provide it with every reasonable
opportunity to recover not only its costs of operation and plant
investments but also its net regulatory assets.
      Accordingly, it is management's estimation that the
financial statements and other financial information contained
herein have been prepared based on its best judgement as to the
continued applicability of SFAS No. 71 and that no significant
events have taken place that would alter that judgement regarding
regulatory assurances of costs recovery.  If, however, the
Company's business or a portion of its business no longer
qualified under SFAS No. 71, the Company would be required to
write-off to income its regulatory assets and regulatory
liabilities related to the non-regulated portion of the Company
(unless assumed by the regulated portion of the Company), which
could have a material adverse effect on the financial condition
of the Company.

New Accounting Standards:

      Impairment:  In March 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No.
121), which is applicable to the Company starting in 1996.  SFAS
No. 121 requires companies, including utilities, to assess the
need to recognize a loss whenever events or circumstances occur
which indicate that the carrying amount of an asset may not be
fully recoverable.  SFAS No. 121 also amends SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation," to
require the write-off of a regulatory asset if it is no longer
probable that future revenues will recover the cost of the asset. 
The adoption of SFAS No. 121 did not have a material impact on
the financial position or results of operations of the Company in


                                     -47-
<PAGE>
1996 based on the current regulatory treatment of its long-lived
and regulatory assets.  However, future developments in the
utility industry, including the effects of deregulation and
increasing competition, could change this conclusion.

      Plant Decommissioning:  The FASB is considering when a
liability for plant decommissioning or other long-lived asset
retirement should be recognized, how any such liability should be
measured, and whether a corresponding asset is created.  In an
exposure draft SFAS, issued February 1996, FASB has tentatively
concluded that a liability should be recognized for legal or
unavoidable constructive obligations for closure and removal of
facilities, such as the Nine Mile 2 Plant, as the obligation is
incurred.  The liability recognized for those closure and removal
obligations shall reflect the present value of estimated future
cash outflows currently expected to be required to satisfy those
obligations.  Initial recognition of a liability for closure and
removal obligations increases the cost of the related asset
because incurrence of the obligation is integral to or a
prerequisite for operating the asset.  Further, any securities or
other assets dedicated to future settlement of closure and
removal obligations, cannot be offset to those liabilities for
financial reporting purposes.  The FASB is deliberating this
issue and the resulting final pronouncement could be different
from that projected in the exposure draft.  The Company does not
believe that such changes, if required, would have an adverse
effect on results of operations due to its current belief that
decommissioning costs will continue to be recovered in rates. 
However, future developments in the utility industry, including
the effects of deregulation and increasing competition, could
change this conclusion.

NOTE 2 - NINE MILE 2 PLANT

General:

     The Nine Mile 2 Plant is located in Oswego County, New York,
and is operated by Niagara Mohawk.  The Nine Mile 2 Plant is
owned as tenants in common by the Company (9% interest), Niagara
Mohawk (41% interest), New York State Electric & Gas Corporation
(18% interest), Long Island Lighting Company (18% interest) and
Rochester Gas and Electric Corporation (14% interest).  The
output of the Nine Mile 2 Plant, which has a rated net capability
of 1,143 MW, is shared and the operating expenses of the Plant
are allocated to the cotenants in the same proportions as the
cotenants' respective ownership interests.  The Company's share
of direct operating expense for the Nine Mile 2 Plant is included
in the appropriate expense classifications in the accompanying
Consolidated Statement of Income.


                                     -48-
<PAGE>
      Under the Operating Agreement entered into by the cotenants,
Niagara Mohawk acts as operator of the Nine Mile 2 Plant, and all
five cotenants share certain policy, budget and managerial
oversight functions.  The Operating Agreement remains in effect
subject to termination on six months' notice.  

Radioactive Waste:

      Niagara Mohawk has contracted with the DOE for disposal of
high-level radioactive waste (spent fuel) from the Nine Mile 2
Plant.  The DOE has forecasted the start of operations of its
high-level radioactive waste repository to be no sooner than
2010.  The Company has been advised by Niagara Mohawk that the
Nine Mile 2 Plant Spent Fuel Storage Pool has a capacity for
spent fuel that is adequate until 2012.  If DOE schedule slippage
should occur, facilities that extend the on-site storage
capability for spent fuel at the Nine Mile 2 Plant beyond 2012
would need to be acquired.

Nuclear Plant Decommissioning Costs:

      The Company's 9% share of costs to decommission the Nine
Mile 2 Plant is estimated to be approximately $209.6 million
($75.1 million in 1996 dollars) and assumes that decommissioning
will begin in the year 2028.  This estimate is based upon a site-
specific study completed in December 1995.
      In order to assist the Company in meeting this obligation,
the Company has increased its annual funding to a qualified
external fund from $787,000 to $868,000.  This change became
retroactively effective for 1995.  The total annual amount
allowed in rates is $999,000, but the maximum annual tax
deduction allowed is $868,000.  Currently, the difference between
the rate allowance ($999,000) and the amount contributed to the
external qualified fund ($868,000) is recorded as an internal
reserve ($131,000), and the funds are held by the Company.
      The qualified external decommissioning trust fund at
December 31, 1996 and 1995 amounted to $8.1 million and $6.4
million, respectively, including net reinvested earnings to date
of $2.3 million.  The qualified external decommissioning trust
fund is reflected in the Company's Consolidated Balance Sheet in
"Investments and Other Assets."  At December 31, 1996, the
external decommissioning trust fund investments carrying value
approximated fair market value.  The amount of accumulated
decommissioning costs recovered through rates and the net
earnings of the external decommissioning trust fund are reflected
in accumulated depreciation in the Consolidated Balance Sheet and
amount to $9.6 million and $7.9 million at December 31, 1996 and
1995, respectively. 



                                     -49-
<PAGE>
      Reference is made to the caption "New Accounting Standards -
Plant Decommissioning" in Note 1 above for details of the
proposed changes in accounting for nuclear decommissioning costs.
      The Company believes that if decommissioning costs are
higher than currently estimated, such higher costs would be
recovered in rates.  However, future developments in the utility
industry, including the effects of deregulation and increasing
competition, could change this conclusion.

NOTE 3 - FEDERAL INCOME TAX

Components of Federal Income Tax:

      The following is a summary of the components of federal
income tax as reported in the Consolidated Statement of Income:

                                         1996       1995        1994 
                                          (Thousands of Dollars)
Charged to operating expense:                                 
  Federal income tax..........          $18,936    $19,245    $18,190
  Deferred income tax.........           13,764      9,795      9,853
    Income tax charged to
      operating expense.......           32,700     29,040     28,043

Charged (credited) to other 
 income and deductions:
  Federal income tax..........           (5,716)  (4,704)      (4,354)
  Deferred income tax.........            4,084      4,351      3,117  
    Income tax charged
      (credited) to other
      income and deductions...           (1,632)    (353)      (1,237)
    Total federal income tax..          $31,068    $28,687    $26,806



















                                     -50-
<PAGE>
Reconciliation:

The following is a reconciliation between the amount of federal
income tax computed on income before taxes at the statutory rate
and the amount reported in the Consolidated Statement of Income:


                                        1996        1995        1994 
                                         (Thousands of Dollars)

Net income....................        $56,082      $52,722     $50,929
Federal income tax............         13,220       14,541      13,836
Deferred income tax...........         17,848       14,146      12,970
  Income before taxes.........        $87,150      $81,409     $77,735

Computed tax @ 35%
 statutory rate...............        $30,503      $28,493     $27,207
Increase (decrease) to computed 
 tax due to:
  Tax depreciation............        (10,499)     (10,096)     (9,597)
  Deferred finance charges -
   Nine Mile 2 Plant..........         (1,699)      (1,701)     (1,700)
  Deferred gas costs..........         (1,703)       2,286       1,149 
  Deferred OPEB expense.......            167         (223)        713 
  Pension expense.............         (2,424)      (1,738)     (1,471)
  Alternative minimum tax.....         (2,262)      (2,958)     (1,544)
  Other.......................          1,137          478        (921) 
Federal income tax............         13,220       14,541      13,836
Deferred income tax...........         17,848       14,146      12,970
  Total federal income tax....        $31,068      $28,687     $26,806

 Effective tax rate...........          35.6%        35.2%       34.5%



















                                     -51-
<PAGE>
      The following is a summary of the components of accumulated
deferred income taxes at December 31, 1996 and 1995, as reported
in the Consolidated Balance Sheet:
                                                   1996          1995 
                                               (Thousands of Dollars)
Accumulated Deferred Income
  Tax Assets:
 Future tax benefits on
   investment tax credit basis
   difference.....................                $ 15,318    $ 16,073
 Alternative minimum tax..........                   8,398      10,530
 Tax depreciation - Nine Mile 2
   Plant disallowed investment....                    -          3,077
 Unbilled revenues................                   5,654       5,434
 Other............................                  26,891      22,444 
Accumulated Deferred Income Tax
 Assets...........................                $ 56,261    $ 57,558

Accumulated Deferred Income 
  Tax Liabilities:
 Tax depreciation.................                $176,522    $172,033
 Accumulated deferred investment
   tax credit.....................                  28,448      29,850
 Future revenues - recovery of
   plant basis differences........                  20,321      22,971
 Other............................                  28,296      22,045
Accumulated Deferred Income Tax
 Liabilities......................                $253,587    $246,899

Net Accumulated Deferred Income 
 Tax Liability....................                $197,326    $189,341

NOTE 4 - SHORT-TERM BORROWING ARRANGEMENTS

      The Company has in effect a revolving credit agreement with
four commercial banks which allows it to borrow up to $50.0
million through October 23, 2001 (Agreement).  The Agreement
gives the Company the option of borrowing at either the higher of
the prime rate or the sum of the federal funds rate plus 1/2%, or
three other money market rates if such rates are lower. 
Compensating balances are not required under the Agreement.  In
addition, the Company continues to maintain confirmed lines of
credit totaling $1.5 million with two regional banks.  There were
no outstanding loans under the Agreement or the lines of credit
at December 31, 1996 or 1995.  In order to diversify its sources
of short-term financing, the Company has entered into short-term
credit facilities agreements with several commercial banks.  At
December 31, 1996, the Company had outstanding short-term debt of
$15.6 million under such facilities with a weighted average
interest rate of 5.94%.  There was no outstanding short-term debt
at December 31, 1995 under such facilities.
                                     -52-
<PAGE>
      Authorization from the PSC limits the amount the Company may
have outstanding, at any time, under all of its short-term
borrowing arrangements to $52.0 million in the aggregate.

NOTE 5 - CAPITALIZATION - CAPITAL STOCK

Common Stock, $5 par value; 30,000,000 shares authorized:
Paid-In Capital:
                                        Common Stock              Paid-In
                                     Shares         Amount        Capital
                                   Outstanding      ($000)         ($000)
January 1, 1994                     16,953,147     $84,766       $270,848
 Issued under dividend
  reinvestment plan.........           227,772       1,139          5,104
 Issued under customer stock
  purchase plan.............            57,545         287          1,253
December 31, 1994                   17,238,464      86,192        277,205 
 Issued under dividend
  reinvestment plan.........           218,610       1,093          4,897
 Issued under customer stock
  purchase plan.............            38,977         195            879
 Redemption of preferred
  stock.....................             -            -               (39)
December 31, 1995                   17,496,051      87,480        282,942 
 Issued under dividend 
  reinvestment plan ........            49,023         245          1,278
 Issued under customer stock
  purchase plan ............             9,913          50            245
December 31, 1996                   17,554,987     $87,775       $284,465






















                                     -53-
<PAGE>
Cumulative Preferred Stock, $100 par value; 1,200,000 shares
authorized:
                       Final       Redemption        Shares Outstanding  
                     Redemption      Price               December 31,
            Series      Date        12/31/96          1996         1995
Not Subject
 to Mandatory
 Redemption:
            4 1/2%                     $107.00       70,300        70,300
            4.75%                       106.75       20,000        20,000
            4.35%                       102.00       60,000        60,000
            4.96%                       101.00       60,000        60,000
            7.72%         (a)           101.00         -          130,000
                                                    210,300       340,300
Subject to
 Mandatory
 Redemption:
            6.20%     10/1/08 (b)                   200,000       200,000
            6.80%     10/1/27 (b)                   150,000       150,000
                                                    350,000       350,000
                     Total                          560,300       690,300

(a)   Optionally redeemed January 1, 1996, at a redemption price
      of $101.00 per share.  Costs associated with this redemption
      were charged directly to retained earnings.
(b)   Cannot be redeemed prior to October 1, 2003.  

      Reference is made to the caption "Financing Program" in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" for details on issuances and redemptions
of capital stock.
      In May 1996, the Company converted its Automatic Dividend
Reinvestment and Stock Purchase Plan and its Customer Stock
Purchase Plan from original issue to open market purchase of
common shares.  Such plans have been superseded as of January 1,
1997 by the Company's Stock Purchase Plan, which is discussed
below.
      Expenses incurred on issuance of capital stock are
accumulated and reported as a reduction in common stock equity. 
These expenses are not being amortized, except that, as directed
by the PSC, certain issuance and redemption costs and unamortized
expenses associated with certain issues of preferred stock that
were redeemed have been deferred and are being amortized over the
remaining lives of the issues subject to mandatory redemptions.  
      By Order, issued and effective December 4, 1996, the PSC has
authorized the issuance and sale of certain debt and equity
securities of the Company.  
      The Order authorizes the Company, through December 31, 1999,
to: 1) issue and sell up to $40.0 million of new securities
comprised of common stock and/or medium term notes, 2) acquire 

                                     -54-
<PAGE>
not more than 2.5 million shares of its issued and outstanding
common stock of which the Company plans to repurchase
approximately 250,000 shares during 1997, and 3) effective
January 1, 1997, combine its existing Automatic Dividend
Reinvestment and Stock Purchase Plan, its Customer Stock Purchase
Plan and its Employee Stock Purchase Plan into a single plan. 
Such Plan may operate as an original issue or open market
purchase plan.

NOTE 6 - CAPITALIZATION - LONG-TERM DEBT

  Details of long-term debt are shown below:

                                                        December 31, 
                                                     1996         1995
                                                (Thousands of Dollars)
      Series         Maturity Date

First Mortgage Bonds (Net of Sinking Fund Requirements):

 6.10% (a)           April 28, 2000                   $10,000   $10,000
 7.70% (a)           June 12, 2000                     25,000    25,000
 8 3/4%(b)           May 1, 2001                         -       30,000
 7.97% (a)           June 11, 2003                      8,000     8,000
 7.97% (a)           June 13, 2003                      8,000     8,000
 6.46% (a)           August 11, 2003                   10,000    10,000
 6 1/4%(c)           June 1, 2007                       4,415     4,500
 9 1/4%              May 1, 2021                       70,000    70,000
 8.12% (a)           August 29, 2022                   10,000    10,000
 8.14% (a)           August 29, 2022                   10,000    10,000
 8.375%(c)           December 1, 2028                  16,700    16,700
                                                      172,115   202,200

Promissory Notes:

1984 Series A (7 3/8%)(d)    Oct. 1, 2014              16,700    16,700
1984 Series B (7 3/8%)(d)    Oct. 1, 2014              16,700    16,700
1985 Series A (Var. rate)(d) Nov. 1, 2020              36,250    36,250
1985 Series B (Var. rate)(d) Nov. 1, 2020              36,000    36,000
1987 Series A (Var. rate)(d) June 1, 2027              33,700    33,700
1987 Series B (Var. rate)(d) June 1, 2027               9,900     9,900
 5.38% (a)                   Jan. 15, 1999             20,000    20,000
 7.85% (a)                   July 2, 2004              15,000    15,000
                                                      184,250   184,250

Secured Notes Payable of Subsidiary                     6,299     3,688
Unamortized Discount on Debt                             (624)    (893)
               Total long-term debt                  $362,040  $389,245  



                                     -55-
<PAGE>
(a)  Issued under the Company's Medium Term Note Program.
(b)  Optionally redeemed May 1, 1996 at a redemption price of     
      102.07% of principle amount.
(c)  First Mortgage Bonds issued in connection with the sale by   
      the New York State Energy Research and Development          
      Authority  (NYSERDA) of tax-exempt pollution control        
      revenue bonds.
(d) Promissory Notes issued in connection with the sale by        
     NYSERDA of tax-exempt pollution control revenue bonds.

     Medium Term Notes:  By Order, issued and effective December
4, 1996, the PSC authorized the Company to issue and sell not
later than December 31, 1999, a combination of new debt
securities and/or common stock totaling not more than $40.0
million in the aggregate.

     NYSERDA:  The NYSERDA Pollution Control Revenue Bonds issued
in 1985 (Series A and B) and 1987 (Series A and B) (collectively,
the "1985 and 1987 NYSERDA Bonds") are variable rate obligations
subject to weekly repricing and investor tender.  The Company has
the right, exercisable independently with respect to each series
of the 1985 and 1987 NYSERDA Bonds, to convert the Bonds of each
such series to a fixed rate for the remainder of their term.  In
its rate orders, the PSC has authorized deferred accounting for
the interest costs on the Company's 1985 and 1987 Series A and B
Promissory Notes which were issued in connection with the sale of
the 1985 and 1987 NYSERDA Bonds.  The authorization provides for
full recovery of the variance between that portion of the actual
interest costs supporting utility operations and the interest
costs allowed in rates.  The percent of interest costs supporting
utility operations represents approximately 95% of the total
costs.  The deferred balances under such accounting were $2.4
million and $1.3 million at December 31, 1996 and 1995,
respectively, and were included in "Regulatory Assets" in the
Consolidated Balance Sheet.  Such deferred balances are to be
addressed in future rate cases.  By Order, issued and effective
December 4, 1996, the PSC authorized the Company to issue up to
$132.55 million of tax-exempt NYSERDA Pollution Control Revenue
Bonds for refunding purposes or for the purpose of refinancing,
if economical, a like amount of such bonds presently outstanding.

     Letters of Credit:  The Company has in place irrevocable
letters of credit which support certain payments required to be
made on the 1985 and 1987 NYSERDA Bonds.  Such letters of credit
expire in 1999.  The Company anticipates being able to extend
such letters of credit if the interest rate on the related series
of such bonds is not converted to a fixed interest rate.  If the
Company were unable to extend the letter of credit that is
related to a particular series of such bonds, that series would
have to be redeemed unless a fixed rate of interest became 

                                     -56-
<PAGE>
effective.  Payments made under the letters of credit in
connection with purchases of tendered 1985 and 1987 NYSERDA Bonds
are repaid with the proceeds from the remarketing of such Bonds. 
To the extent the proceeds are not sufficient, the Company would
be required to reimburse the bank that issued the letter of
credit for the amount of any resulting draw under the letter of
credit by the expiration date of the letter of credit.  The
letter of credit expiration date for the letters of credit
supporting the 1985 NYSERDA Bonds is November 16, 1999, and the
letter of credit expiration date for the letters of credit
supporting the 1987 NYSERDA Bonds is September 16, 1999.  By
Order, issued and effective December 4, 1996, the PSC authorized
the Company to replace its current letters of credit with an 
alternate credit assurance mechanism.  

     Interest Rate Cap:  By Order, issued and effective December
4, 1996, the PSC authorized the Company to employ interest rate
caps, collars and floors to manage interest rate risk associated
with its variable rate 1985 and 1987 NYSERDA Bonds and to
recognize the associated costs as interest expense for rate-
making purposes.  The Company entered into a three-year interest
rate cap agreement with a bank to manage exposure to upward
changes in interest rates on the 1985 and 1987 NYSERDA Bonds. 
Under this agreement, in the event a nationally recognized tax-
exempt bond interest rate index exceeds 8%, the Company will
receive a payment from such bank equal to the amount by which the
actual interest costs on such bonds exceeds 8% per annum.  This
agreement has the effect of limiting the interest rate the
Company must pay on such bonds (on a $115.9 million notional
amount) to the lesser of their actual rate or 8% per annum.  In
the event such bank failed to make any required payment under
such interest rate cap agreement, the Company's exposure would be
limited to a maximum interest rate of 15% per annum under the
terms of such bonds.

     Debt Expense:  Expenses incurred on debt issues and any
discount or premium on debt are deferred and amortized over the
lives of the related issues.  Expenses incurred on debt
redemptions prior to maturity have been deferred and are
generally being amortized over the shorter of the remaining lives
of the related extinguished issues or the new issues as directed
by the PSC.

     Debt Covenants:  Certain debt agreements require the
maintenance by the Company of certain financial ratios and
contain other restrictive covenants.

     Subsidiary Debt:  Secured notes payable of a subsidiary of
the Company consist of term loans to finance the installation of
energy conservation equipment at various host facilities, located

                                     -57-
<PAGE>
primarily in the Northeastern United States.  The majority of
such loans accrue interest at the prime lending rate.  Such loans
are secured principally by contractual rights to payments from
third parties and, in certain instances, security interests in
project assets.

NOTE 7 - POSTEMPLOYMENT BENEFITS

Retirement Income Plan:

     The Company has a non-contributory retirement income plan
(Retirement Plan) covering substantially all of its employees. 
The Retirement Plan provides pension benefits that are based on
the employee's compensation and years of service.  It has been
the Company's practice to provide periodic updates to the benefit
formula stated in the Retirement Plan.
     The Company's funding policy is to make annual contributions
equal to the amount of net periodic pension cost, but not in
excess of the maximum allowable tax-deductible contribution under
the federal income tax law nor less than the minimum requirement
under the Employee Retirement Income Security Act of 1974.
     The favorable return on plan assets has resulted in net
periodic pension income of which 25% was allocated to capital
projects in 1996 and 27% in 1995 and 1994.  This allocation
follows the payroll distribution.
     Net periodic pension income for 1996, 1995 and 1994 include
the following components: 
                                      1996         1995         1994
                                        (Thousands of Dollars)
Service cost - benefits earned
 during the period...........       $  4,556     $  3,877     $  5,876
Interest cost on projected
 benefit obligation..........         14,594       14,449       13,256
Actual return on Retirement 
 Plan assets.................        (30,772)     (38,849)      (6,947)
Net amortization and deferral          1,872        9,896      (14,213)
   Net periodic pension
    (income) ................       $ (9,750)    $(10,627)    $ (2,028)

      The net periodic pension income for 1996, 1995 and 1994 was
determined using a weighted average discount rate of 7.5%, 8.5%
and 6.25%, respectively, and a rate of increase in future
compensation levels of 4.5% for 1996 and 5.5% for 1995 and 1994. 
The expected long-term rate of return on Retirement Plan assets
used in determining the net periodic pension income was 
9.5%, 10.5%, and 8.5% for 1996, 1995, and 1994, respectively.  





                                     -58-
<PAGE>
     The following table sets forth the Retirement Plan's funded
status at October 1, 1996 and 1995 and amounts recognized in the
Company's Consolidated Balance Sheet at December 31, 1996 and
1995:
                                                   1996          1995
                                                 (Thousands of Dollars)
Actuarial present value of benefit
 obligations:
 Accumulated benefit obligation,
  including vested benefits 
  of $173,424 and $170,039.............          $176,631     $173,281

Projected benefit obligation for
 service rendered to date..............          $199,416     $196,038
Retirement Plan assets at market value.           268,615      250,246
Excess of Retirement Plan assets over
 projected benefit obligation..........            69,199       54,208
Unrecognized net gain..................           (58,464)     (52,846)
Prior service cost not yet recognized 
 in net periodic pension cost..........             3,273        3,531
Unrecognized net asset being amortized 
 over 15 years.........................            (3,336)      (3,971)
Prefunded Pension Cost recognized in the
 Consolidated Balance Sheet............          $ 10,672     $    922 


      Retirement Plan assets consist primarily of equities, real
estate and fixed income securities.  The Retirement Plan is
deemed to be fully funded for federal income tax purposes,
therefore, the Company did not make any contributions to the
Retirement Plan during 1996 or 1995.
      The actuarial present value of projected benefit obligations
for October 1, 1996 and 1995 was determined using a weighted
average discount rate of 7.75% and 7.5%, respectively, and an
assumed rate of increase in compensation of 4.5% for 1996 and
1995.  
      Pursuant to the PSC Statement of Policy and Order Concerning
the Accounting and Rate-making Treatment for Pensions and
Postretirement Benefits Other than Pensions (OPEB), issued
September 7, 1993 (Pension and OPEB Order), effective January 1,
1993 the Company began amortizing each year's experienced gain or
loss over ten years.  
      Pursuant to the Pension and OPEB Order, deferred accounting
has been granted by the PSC for any variation (above or below)
between actual costs of the Company's pension plans and those
costs allowed for rate-making purposes.  Such amounts are
included in regulatory liabilities in the Consolidated Balance
Sheet.



                                     -59-
<PAGE>
Other Postretirement Benefits:

       The Company provides certain health care and life insurance
benefits for retired employees through its postretirement benefit
plan (Benefit Plan).  Substantially all of the Company's
employees may become eligible for these benefits if they reach
retirement age while working for the Company.  These and similar
benefits for active employees are provided through insurance
companies whose premiums are based on the benefits paid during
the year.  In order to recover a portion of the costs of these
benefits, the Company requires employees who retire on or after
October 1, 1994 to contribute toward the cost of such benefits.
      Net periodic postretirement benefit cost for 1996, 1995 and
1994 includes the following components:

                                              1996        1995        1994  
                                                (Thousands of Dollars)
  Service cost - benefits 
   attributed to the period.......          $ 1,875     $ 1,384     $ 2,392 
  Interest cost on accumulated
   postretirement benefit 
   obligation.....................            5,149       4,613       4,654
  Actual return on Benefit Plan
   assets.........................           (1,335)       (875)       (426)
  Amortization of Transition 
   Obligation.....................            3,114       3,114       3,114
  Net amortization and deferral...             (784)     (1,837)        928
  Net periodic postretirement 
   benefit cost...................          $ 8,019     $ 6,399     $10,662



     The Company is amortizing the unfunded accumulated
postretirement benefit obligation (Transition Obligation) at
January 1, 1993 over a 20-year period.  
     The net periodic postretirement benefit cost of the Benefit
Plan for 1996, 1995 and 1994 was determined using a weighted
average discount rate of 7.5%, 8.5% and 6.25%, respectively, and
a rate of increase in future compensation levels of 4.5% for 1996
and 5.5% for 1995 and 1994.  The expected long-term rate of
return of Benefit Plan assets used in determining the net
periodic postretirement benefit cost was 6.6% for 1996, 6.7% for
1995 and 6.6% for 1994.








                                     -60-
<PAGE>
     The Benefit Plan's funded status reconciled with the
Company's Consolidated Balance Sheet is as follows:

                                                    December 31,  
                                               1996               1995   
                                               (Thousands of Dollars)
  Accumulated postretirement 
   benefit obligation:
    Retirees......................           $(33,427)           $(31,899)
    Fully eligible employees......             (4,632)             (4,706)
    Other employees...............            (33,422)            (31,495)
                                              (71,481)            (68,100)
  Benefit Plan assets at fair
   value..........................             31,402              22,899

  Excess of accumulated post-
   retirement benefit obligation 
   over Benefit Plan assets.......            (40,079)            (45,201)
  Unrecognized net gain...........            (11,419)             (8,922)

  Prior service cost not yet 
   recognized in net periodic 
   postretirement benefit cost....               (149)               (160)

  Unrecognized Transition 
   Obligation.....................             49,807              52,921

  Postretirement benefit liability 
   recognized in the
   Consolidated Balance Sheet.....           $ (1,840)           $ (1,362)

     The accumulated postretirement benefit obligation under the
Benefit Plan at December 31, 1996 and 1995 was determined using a
weighted average discount rate of 7.75% and 7.5%, respectively
and a rate of increase in future compensation levels of 4.5% for
both 1996 and 1995, respectively.  The expected long-term rate of
return of Benefit Plan assets used in determining the periodic
postretirement benefit cost was 6.6% for 1996 and 6.7% for 1995. 
     The assumed health care cost trend is 11% in the early years
and trends down to an ultimate rate of 5.5% by the year 2010.  A
1% increase in health care cost trend rate assumptions would
produce an increase in the accumulated postretirements benefit
obligation at December 31, 1996 and 1995 of $9.4 and $8.9
million, respectively, and an increase in the aggregate service
and interest cost of the net periodic postretirement benefit cost
of $1 million and $873,000 for 1996 and 1995, respectively.
     The Company has established a qualified funding vehicle
for such retirement benefits for collective bargaining employees
and a similar vehicle for management employees in the form of
qualified Voluntary Employee Beneficiary Association (VEBA) 

                                     -61-
<PAGE>
trusts.  The Company funded the VEBA trusts in 1996, 1995 and
1994 with tax-deductible contributions totaling $7.4 million,
$7.2 million and $8.3 million, respectively.  The VEBA trusts
consists primarily of equities and fixed income securities.  

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Construction Program:

     Reference is made to "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for information
regarding the Company's construction program for the five-year
period 1997-2001.

Roseton Plant:

     The Company is acting as agent for the cotenant owners with
respect to operation of the Roseton Plant.  Generally, the owners
share the costs and expenses of the operation of the Roseton
Plant in accordance with their respective ownership interests. 
The Company's share of direct operating expense for the Roseton
Plant is included in the appropriate expense classification in
the accompanying Consolidated Statement of Income.
     The Company, under a 1968 Agreement (Basic Agreement), has
the option to purchase the interests of Niagara Mohawk (25%) and
of Consolidated Edison Company of New York, Inc. (Con Edison)
(40%) in the Roseton Plant in December 2004.  The exercise of
this option is subject to PSC approval.  
     On March 30, 1994, Niagara Mohawk and the Company entered
into a Letter of Understanding which, among other things,
provides for:
     (1)  consideration by the Company, Niagara Mohawk and Con
Edison for staggering the operation of the two units of the
Roseton Plant in order to take advantage of current market costs
for energy and capacity; and
     (2)  during the period May 1997 through April 2004, the
Company may from time to time issue requests for proposals to
purchase energy and capacity on the open market.  Niagara Mohawk,
among others, will be requested by the Company to bid on these
future purchases.
     (3)  Subject to regulatory approval, Niagara Mohawk and the
Company may enter into agreements, which would cover (i) the
purchase by the Company of the following electric capacity and
associated energy from Niagara Mohawk if needed: 15 MW each year,
subject to a reservation charge, commencing in 1998 through 2004,
up to a total of 75 MW, and up to an additional 150 MW in the
period 2001 through 2004 not subject to a reservation charge;
(ii) the option of Niagara Mohawk to bid competitively for the
Company's long-term purchases of capacity and energy during the
period May 1997 through April 2004 as indicated in Item (2) and 

                                     -62-
<PAGE>
(iii) a revision in the Company's 1968 option to purchase Niagara
Mohawk's 25% interest in the Roseton Plant in 2004 which would
give Niagara Mohawk an option to retain said 25% interest.  The
Company and Niagara Mohawk have not yet entered into any such
agreements.
     Entering into the agreements contemplated by the Letter of
Understanding will result in capital and operating and
maintenance cost savings.  The Company's option to buy Con
Edison's interest in the Roseton Plant is not affected by the
Letter of Understanding.  

Nuclear Liability and Insurance:

     The Price-Anderson Act is a federal law which limits the
public liability which can be imposed with respect to a nuclear
incident at a licensed nuclear electric generating facility. 
Such Act also provides for assessment of owners of all licensed
nuclear units in the United States for losses in excess of
certain limits due to a nuclear incident at any such licensed
unit.  Under the provisions of the Price-Anderson Act, the
Company's potential assessment (based on its 9% ownership
interest in the Nine Mile 2 Plant and assuming that the other
Nine Mile 2 Plant cotenants were to contribute their
proportionate shares of the potential assessments) would be $6.8
million (subject to adjustment for inflation) and the Company
could be assessed $339,800 (subject to adjustment for inflation)
in respect to an additional surcharge, but would be limited to a
maximum assessment of $900,000 in any year with respect to any
nuclear incident.  The public liability insurance coverage of
$200 million required under the Price-Anderson Act for the Nine
Mile 2 Plant is provided through Niagara Mohawk.
     The Company also carries insurance to cover the additional
costs of replacement power (under a Business Interruption and/or
Extra Expense Insurance Policy) incurred by the Company in the
event of a prolonged accidental outage of the Nine Mile 2 Plant. 
This insurance arrangement provides for payments of up to
$233,200 per week if the Nine Mile 2 Plant experiences a
continuous accidental outage which extends beyond 21 weeks.  Such
payments will continue for 52 weeks after expiration of the 21-
week deductible period, and thereafter the insurer shall pay 80%
of the weekly indemnity for a second and third 52-week period. 
Subject to certain limitations, the Company may request
prepayment, in a lump sum amount, of the insurance payments which
would otherwise be paid to it with respect to said third 52-week
period, calculated on a net present value basis.
     The Company is insured as to its respective interest in the
Nine Mile 2 Plant under property damage insurance provided
through Niagara Mohawk.  The insurance coverage provides $500
million of primary property damage coverage for Units 1 and 2 of
the Nine Mile Point Nuclear Station and $2.25 billion of excess 

                                     -63-
<PAGE>
property damage coverage for the Nine Mile 2 Plant.  Such
insurance covers decontamination costs, debris removal and repair
and/or replacement of property.
     The Company intends to maintain, or cause to be maintained,
insurance against such risks at the Nine Mile 2 Plant, provided
such coverage can be obtained at an acceptable cost.

Natural Gas Supply:

     The Company presently has in place five firm contracts
(Contracts) for the supply of an aggregate of 10,497,708 Mcf. of
natural gas, all of which are with third-party gas suppliers
(Suppliers).  Under the Contracts, the Suppliers deliver the gas
to interstate pipeline companies (Pipelines) and the Pipelines
deliver the gas to the Company's gas transmission system under
separate firm transportation contracts which the Company has in
place with such Pipelines.  With the exception of 20,000 Mcf. per
day of gas purchased from Canadian sources under contracts which
expire in January 2012, or approximately 30% of total gas
purchases, all of the above gas supply contracts will terminate
in 1997 after the 1996-1997 winter heating season and will be
replaced before the next winter heating season.
     The Company has in aggregate, gas storage capability of
39,604 Mcf. per day under long-term contracts.  The Company has a
firm gas peaking service, under contract, for the supply of 9,804
Mcf. per day for 15 days during the period November 1-March 31. 
This contract became effective November 1, 1995 and will remain
in effect through March 31, 1998.  
     In addition to the above, the Company has an option for the
supply of up to 100,000 Mcf. per day of gas during April through
October of each year for use as boiler gas at the Roseton Plant. 
The Company is in the process of discussing option modifications
that allow for greater market flexibility.
     In 1992, FERC issued its final rule (Order 636) regarding
the unbundling of natural gas supply services from transportation
and storage services.  These changes require the Company to pay a
share of certain transition costs incurred by the Pipelines as a
result of Order 636.  
     The Company has been billed $4.3 million of transition costs
through December 31, 1996 by the Pipelines.  The Public Service
Commission Order issued December 20, 1994 in Case 93-G-0932
allows New York State Utilities to collect transition costs from
firm sales and firm transportation customers.  As a result of the
PSC's Order, the Company collects all transition costs incurred
which are applicable to the firm residential, commercial and
industrial customers through the gas adjustment clause and
collects the transition costs applicable to the firm
transportation customers through a surcharge factor billed
directly to the firm transportation customers.  The aggregate
amount of transition costs which will be incurred and collected 

                                     -64-
<PAGE>
by the Company will depend on the outcome of FERC proceedings. 
The Company projects that the aggregate amount of transition
costs could reach $6.0 million over the next several years.  The
Company expects to continue to recover such costs through its gas
cost adjustment clause.

Environmental Matters:

     General:  On an ongoing basis, the Company assesses
environmental issues which could impact the Company and its
ratepayers.

     Clean Water Act Compliance:  The Company is a party to a
proceeding before the New York State Department of Environmental
Conservation related to the processing of permit renewal
applications for the Company's generating stations under the
State Pollution Discharge Elimination System.  At this stage of
the proceeding, the Company can make no determination as to the
outcome of the proceeding or the impact, if any, on the Company's
financial position.

     Clean Air Act Amendments:  The Clean Air Act Amendments of
1990 (CAA Amendments) added several new programs which address
attainment and maintenance of national ambient air quality
standards.  These include control of emissions from fossil-fueled
electric power plants that affect "acid rain" and ozone.
     The Phase II "acid rain" emissions reduction requirements do
not apply to the Company's generating plants until January 1,
2000; however, the Company has elected to have the Roseton Plant
covered under the Phase I acid rain regulation 40 CFR Part 72
which went into effect in 1995.  More specifically, the Roseton
Plant has been conditionally identified as a substitute for a
Phase I plant.  Such a substitution, if implemented by the
Company, would result in additional emissions allowances for the
Roseton Plant.  Emission allowances that are not needed for
current year emissions may be held for use in future years or
sold.  Allowances currently held by the Company have a present
market value of approximately $1.8 million.  A decision by the
Company to implement a substitution plan must be made each year
by December 1.  The Company has made such election in December
1996 and 1995.
     The Company's emissions of nitrogen oxides were subject to
additional controls effective May 31, 1995 under Title I of the
CAA Amendments.  The Company has installed appropriate controls
in compliance with this requirement.  The Northeast Ozone
Transport Commission, of which New York State is a member, has
agreed that additional reductions of nitrogen oxides emissions
will be required in 1999 and, possibly, in the year 2003. 
Because regulations have not yet been promulgated by New York
State to implement this agreement, the specific reductions 

                                     -65-
<PAGE>
required at the Company's facilities have not been determined.
     The Company expects that it will have adequate financial
resources to comply with the requirements of the CAA Amendments.

     Former Manufactured Gas Plant Facilities:  In May 1995, the
City of Newburgh, New York (City) filed suit against the Company
in the United States District Court for the Southern District of
New York.  The City alleges that the Company has released certain
allegedly hazardous substances without a permit from the site of
the Company's former coal gasification plant (Central Hudson
Site) in Newburgh, New York into the ground at the Central Hudson
Site and into adjacent and nearby property of the city, in
violation of the federal Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), the federal Resource
Conservation and Recovery Act (RCRA) and the federal Emergency
Planning and Community Right to Know Act (EPCRA).  The City also
alleges a number of nuisance, trespass, damage and
indemnification claims pursuant to New York State law.  
     The City seeks injunctive relief against such alleged
disposal, storage or release of hazardous substances at the
Central Hudson Site, remediation and abatement of the conditions
alleged to lead to endangerment of the City's property, payment
of restitution of clean-up costs and money damages of at least
$70 million, assessment of certain civil penalties under RCRA,
CERCLA and EPCRA, and recovery of the City's costs and attorneys'
fees in such action.
     In its answer to the City's complaint, the Company denied
liability and asserted affirmative defenses and counterclaims
against the City.  The Company also filed a third-party complaint
against "John Doe" defendants whose identities are presently
unknown but who may be responsible for some or all of the
contamination that is alleged to exist on the City's property.
     In October 1995, the Company and the New York State
Department of Environmental Conservation (NYSDEC) entered into an
Order on Consent regarding the development and implementation of
an investigation and remediation program for the Central Hudson
Site and the City's adjacent and nearby property.  Following
approval of the workscope of the investigation and remediation
program in June 1996, studies were initiated in July 1996 in
fulfillment of the Company's obligation under the Order of
Consent.  Preliminary results of these studies indicate the
presence of tar-like substance in portions of the study area,
which may be related to the manufacture of gas by the Company and
a predecessor of the Company; however, these studies are not
expected to be completed until early 1998.  Inasmuch as the
Company and the City have been unsuccessful in reaching a
settlement agreement, a schedule of proceedings has been approved
by the District Court.  Such schedule calls for exchange of
documents and deposition of witnesses beginning in December 1996
and continuing into 1997.

                                     -66-
<PAGE>
     At this time, the Company can make no prediction as to the
outcome of this matter, nor can it make reasonable estimates of
the cost of the activities required under the Order on Consent. 
However, the Company has put its insurance carriers on notice and
intends to pursue reimbursement from them.  The Company cannot
predict the extent of reimbursement that will be available from
its carriers at this time.
     By letter dated September 22, 1995, the Company petitioned
the PSC for authorization to defer costs related to this matter,
including legal defense costs, but excluding the Company's labor,
related to environmental site investigation and remediation
actions that were incurred by the Company in 1995 and thereafter
in connection with this matter.  These future expenses are not
reasonably estimable by the Company at this time.  The Company
has deferred costs expended to date that it expects to be
recovered in future rates.  The cumulative deferred costs for
1996 and 1995 amounted to $1.4 million and $719,700,
respectively, and were included in "Deferred Charges-Other" in
the Consolidated Balance Sheet.

Asbestos Litigation:

     Since 1987, the Company, along with many other parties, has
been joined as a defendant or third-party defendant in 1,014
asbestos lawsuits commenced in New York State and federal courts. 
The plaintiffs in these lawsuits have each sought millions of
dollars in compensatory and punitive damages from all defendants. 
The cases were brought by or on behalf of individuals who have
allegedly suffered injury from exposure to asbestos, including
exposure which allegedly occurred at Company facilities.
     As of December 31, 1996, of the 1,014 cases that had been
brought against the Company, 738 remained pending against the
Company.  The 276 cases that were no longer pending against the
Company as of December 31, 1996 were resolved as follows: (1) the
Company negotiated voluntary dismissals in 45 cases and won
summary judgement dismissals in 9 cases; (2) 116 third-party
claims were extinguished with respect to the Company when the
third-party plaintiff, Owens-Corning Fiberglas settled the cases
with the plaintiffs; and (3) the Company settled 106 cases. 
Although the Company is presently unable to assess the validity
of the remaining asbestos lawsuits, and accordingly cannot
determine the ultimate liability relating to these cases, based
on information known to the Company at this time, including its
experience in settling asbestos cases and in obtaining dismissals
of asbestos cases, the Company believes that the cost to be
incurred in connection with the remaining lawsuits will not have
a material adverse effect on the Company's financial position.  




                                     -67-
<PAGE>
     The Company is insured under successive comprehensive
general liability policies issued by a number of insurers, has
put such insurers on notice of the asbestos lawsuits and has
demanded reimbursement for its defense costs and liability.  

Tax Matters:

     Assessments:  The Internal Revenue Service (IRS) has
completed its examination of the Company's federal income tax
returns for 1987 and 1988.  The IRS Agents' Report proposed
significant adjustments related to the tax in-service date of the
Nine Mile Point 2 Plant and various other items.  In May 1994,
the Company filed a Protest with the Appeals Office of the IRS. 
The IRS Appeals Office subsequently requested Technical Advice
from the National Office of IRS with regard to the tax in-service
date.  In May 1996, the IRS National Office issued a Technical
Advice Memorandum (TAM), in which the matter was resolved in
favor of the Nine Mile Point 2 Plant cotenants.  As a result of
the TAM, and a subsequent agreement between the Company and the
Appeals Office of the IRS on most other matters, the Company
believes it has no further tax liabilities for those years, and
in fact, the Company expects to receive a refund in 1997. 
Receipt of the refund is contingent upon review by the Joint
Committee on Taxation of the United States Congress.

Rental Expenses and Lease Commitments:

     The Company has lease commitments expiring at various dates,
principally for real property and data processing equipment. 
None of these leases involves any major facilities, any material
noncancelable rental commitments or capital leases.

Purchased Power Commitments:

     Under federal and New York State laws and regulations, the
Company is required to purchase the electrical output of
unregulated cogeneration facilities (IPPs) which meet certain
criteria for Qualifying Facilities, as such term is defined in
the appropriate legislation.  Purchases are made under long-term
contracts which require payment at rates higher than what can be
purchased on the wholesale market.  These costs are currently
fully recoverable through the Company's electric fuel adjustment
clause.  IPPs with which the Company has contracts represent 4.5%
of the Company's energy purchases in 1996.  

Other Matters:

     The Company is involved in various other legal and
administrative proceedings incidental to its business which are
in various stages.  While these matters collectively involve 

                                     -68-
<PAGE>
substantial amounts, it is the opinion of management that their
ultimate resolution will not have a material adverse effect on
the Company's financial position or results of operations.                 
     Included in such proceedings are lawsuits against the
Company arising from a November 1992 explosion in a dwelling in
Catskill, New York.  These lawsuits include: one alleging
personal injuries, including the death of an occupant, and
property damage and seeking recovery of an unspecified amount of
compensatory and punitive damages; and one alleging personal
injuries and property damage and seeking compensatory and
punitive damages in the sum of $4.0 million.
     The PSC, by Order issued and effective January 7, 1994,
approved an Agreement which provides for a program for evaluating
and replacing cast iron and unprotected steel pipeline
facilities, and for an investment in four permanent employee
training centers.  The Company's shareholders contributed $1.0
million in 1995 and $500,000 in 1994 toward the costs of such
training centers and replacement program.  No shareholder
contribution was required in 1996, however, under such Agreement
the Company's shareholders may be required to contribute in 1997
from zero to $500,000 toward the cost of such pipeline
replacement program, depending on the Company's completion of
certain tasks by specified dates.  The Company believes these
tasks have been completed by the specified dates and, therefore,
the Company's shareholders should have no further contribution
obligations under such Agreement.  
     In addition to the above, on February 12, 1994, a fire and
an explosion destroyed a residence in the Village of Wappingers
Falls, New York, in the Company's service territory.  A short
time later, a second explosion and fire destroyed a nearby
commercial facility.  Lawsuits have been commenced against the
Company arising out of the Wappingers Falls incident including: 
one alleging property damage and seeking recovery of compensatory
and punitive damages in the sum of $1.0 million; and one alleging
property damage and seeking recovery of $250,000 in compensatory
damages; and one alleging personal injuries and property damage
and seeking an unspecified amount of damages against the Company.
     The Company is investigating the above claims and presently
has insufficient information on which to predict their outcome. 
The Company believes that it has adequate insurance to cover any
compensatory damages that might be awarded.  The Company's
insurance, however, does not extend to punitive damages which, if
awarded, could have a material adverse effect on the Company's
financial position.  







                                     -69-
<PAGE>
NOTE 9 - DEPARTMENTAL INFORMATION

     The Company is engaged in the electric and natural gas
utility businesses and serves the Mid-Hudson Valley region of New
York State.  Total revenues and operating income before income
taxes (expressed as percentages), derived from electric and gas
operations for each of the last three years, were as follows:

                        Percent of              Percent of Operating
                      Total Revenues         Income Before Income Taxes

                    Electric       Gas           Electric        Gas 
1996                   81%         19%              88%          12%       
1995                   80%         20%              90%          10%
1994                   80%         20%              89%          11%

     For the year ended December 31, 1996, the Company served an
average of 263,781 electric and 60,523 gas customers.  Of the
Company's total electric revenues during that period,
approximately 44% was derived from residential customers, 31%
from commercial customers, 18% from industrial customers and 7%
from other utilities and miscellaneous sources.  Of the Company's
total gas revenues during that period, approximately 45% was
derived from residential customers, 33% from commercial
customers, 4% from industrial customers, 9% from interruptible
customers and 9% from miscellaneous sources (including revenues
from transportation of customer-owned gas).
     The Company's largest customer is International Business
Machines Corporation (IBM), which accounted for approximately 10%
of the Company's total electric revenues and approximately 4% of
its total gas revenues for the year ended December 31, 1996. 
Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further
information regarding IBM.
     Certain additional information regarding these segments is
set forth in the following table.  General corporate expenses,
property common to both segments and depreciation of such common
property have been allocated to the segments in accordance with
practice established for regulatory purposes.












                                     -70-
<PAGE>
                                                      Electric        
                                             1996        1995       1994
                                               (Thousands of Dollars)
Operating Revenues................         $418,761   $409,445    $411,082
Operating Expenses:
 Fuel and purchased electricity...          114,397    113,263     111,984
 Depreciation and amortization....           38,401     37,503      36,597
 Other, excluding income tax......          170,498    168,313     172,057
    Total.........................          323,296    319,079     320,638

Operating Income before Income Tax           95,465     90,366      90,444
Federal income tax, including
 deferred income tax - net........           28,592     26,632      25,334
Operating Income..................         $ 66,873   $ 63,734    $ 65,110

Construction Expenditures.........         $ 43,359   $ 41,195    $ 49,316

Identifiable Assets at December 31*
 Net utility plant................          784,582   $784,345    $776,169
 Construction work in progress....           39,346     38,978      46,879
   Total utility plant............          823,928    823,323     823,048
 Materials and supplies...........           22,668     23,167      27,080
   Total..........................         $846,596   $846,490    $850,128

                                                         Gas          
                                             1996        1995       1994
                                               (Thousands of Dollars)
Operating Revenues................         $ 95,210   $102,770    $104,586
Operating Expenses:
 Purchased natural gas............           50,636     62,339      60,588
 Depreciation and amortization....            4,179      3,964       3,783
 Other, excluding income tax......           27,331     26,899      29,483
    Total.........................           82,146     93,202      93,854

Operating Income before Income Tax           13,064      9,568      10,732
Federal income tax, including
 deferred income tax - net........            4,108      2,408       2,709
Operating Income..................         $  8,956   $  7,160    $  8,023

Construction Expenditures.........         $  6,501   $  9,074    $  8,729

Identifiable Assets at December 31*
 Net utility plant................         $106,348   $103,979    $ 96,652
 Construction work in progress....            9,353      9,792      11,373
   Total utility plant............          115,701    113,771     108,025
 Materials and supplies...........            5,427      4,423       6,309
   Total..........................         $121,128   $118,194    $114,334

 *Identifiable assets not included herein are considered to be    
   corporate assets and have not been allocated between the       
   electric and gas segments.
                                     -71-
<PAGE>
NOTE 10 - FINANCIAL INSTRUMENTS

     The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which
it is practicable to estimate that value:

Cash and Temporary Cash Investments:

     The carrying amount approximates fair value because of the
short maturity of those instruments.

Cumulative Preferred Stock Subject to Mandatory Redemption:

     The fair value is estimated based on the quoted market price
of similar instruments.

Long-Term Debt:

     The fair value is estimated based on the quoted market
prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities
and quality.

Notes Payable:

     The carrying amount approximates fair value because of the
short maturity of those instruments.
     The estimated fair values of the Company's financial
instruments are as follows:

                                                   December 31, 1996   
                                                Carrying           Fair
                                                 Amount            Value
                                                (Thousands of Dollars)

Cumulative preferred stock subject 
  to mandatory redemption.............          $(35,000)        $ (33,950)
Long-term debt (including
  current maturities).................          (363,402)         (355,002)

                                                   December 31, 1995   
                                                Carrying           Fair
                                                 Amount            Value
                                                (Thousands of Dollars)

Cumulative preferred stock subject 
  to mandatory redemption.............          $(35,000)        $ (34,875)   
 Long-term debt (including
  current maturities).................          (390,822)         (411,299) 


                                     -72-
<PAGE>
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<CAPTION>
     Selected financial data for each quarterly period within 1996 and 1995 are presented
below:

                                                                                  Earnings Per
                                                                   Income           Average
                                                                  Available         Share of
                                                                     for             Common
                               Operating        Operating          Common            Stock 
                               Revenues          Income             Stock         Outstanding
                                       (Thousands of Dollars)                      (Dollars)
Quarter Ended:
<S>                            <C>              <C>              <C>             <C>

       1996
  March 31............         $153,846          $27,092          $21,014           $1.20
  June 30.............          116,994           16,366           10,195             .58
  September 30........          117,684           18,000           12,857             .73
  December 31.........          125,447           14,371            8,407             .48


       1995
  March 31............         $144,686          $24,204          $18,273           $1.06
  June 30.............          118,618           14,731            9,574             .55
  September 30........          127,547           18,817           12,260             .70
  December 31.........          121,364           13,142            7,543             .43






                                                    -73-
</TABLE>
</PAGE>