NEW YORK STATE ELECTRIC & GAS CORPORATION
(Registrant)
FORM 10-K
---------
ANNUAL REPORT
For Fiscal Year Ended December 31, 1998
To
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Business
(a) General development of business. . . . . . . 3
(b) Financial information about segments . . . . . 3
(c) Narrative description of business
Principal business. . . . . . . . . . . . . . 3
New product or segment. . . . . . . . . . . . 4
Sources and availability of raw materials . . 4
Franchises . . . . . . . . . . . . . . . . . 4
Seasonal business . . . . . . . . . . . . . . 4
Working capital items . . . . . . . . . . . . 4
Single customer . . . . . . . . . . . . . . . 4
Backlog of orders . . . . . . . . . . . . . . 4
Business subject to renegotiation . . . . . . 5
Competitive conditions. . . . . . . . . . . . 5
Research and development. . . . . . . . . . . 5
Environmental matters . . . . . . . . . . . . 5
Water quality . . . . . . . . . . . . . . . 5
Waste disposal. . . . . . . . . . . . . . . 5
Number of employees. . . . . . . . . . . . . . 5
(d) Financial information about geographic areas.. 5
Item 2. Properties . . . . . . . . . . . . . . . . . . . . 6
Item 3. Legal proceedings. . . . . . . . . . . . . . . . . 6
Item 4. Submission of matters to a vote of security holders.6
Executive officers of the Registrant . . . . . . . . . . . . .7
PART II
Item 5. Market for Registrant's common equity and related
stockholder matters. . . . . . . . . . . . . . . .8
Item 6. Selected financial data. . . . . . . . . . . . . . .8
Item 7. Management's discussion and analysis of financial
condition and results of operations. . . . . . . .9
Item 7A. Quantitative and qualitative disclosures about
market risk. . . . . . . . . . . . . . . . . . . .16
<PAGE>
TABLE OF CONTENTS (Cont'd)
Page
Item 8. Financial statements and supplementary data. . . . .17
Financial Statements
Consolidated Statements of Income. . . . . . . . .17
Consolidated Balance Sheets. . . . . . . . . . . .18
Consolidated Statements of Cash Flows. . . . . . .20
Consolidated Statements of Changes in
Common Stock Equity. . . . . . . . . . . . . . .21
Notes to Consolidated Financial Statements . . . . .22
Report of Independent Accountants. . . . . . . . . .34
Financial Statement Schedules
II. Consolidated Valuation and Qualifying
Accounts . . . . . . . . . . . . . . . . .35
Item 9. Changes in and disagreements with accountants on
accounting and financial disclosure. . . . . . . .37
PART III
Item 10. Directors and executive officers of the Registrant .37
Item 11. Executive compensation . . . . . . . . . . . . . . .37
Item 12. Security ownership of certain beneficial owners
and management. . . . . . . . . . . . . . . . . .37
Item 13. Certain relationships and related transactions . . .37
PART IV
Item 14. Exhibits, financial statement schedules, and
reports on Form 8-K
(a) List of documents filed as part of this report
Financial statements . . . . . . . . . . . . .37
Financial statement schedules. . . . . . . . .37
Exhibits
Exhibits delivered with this report. . . . .38
Exhibits incorporated herein by reference. .38
(b) Reports on Form 8-K. . . . . . . . . . . . . . .42
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . .43
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______.
Commission file number 1-3103-2.
NEW YORK STATE ELECTRIC & GAS CORPORATION
(Exact name of Registrant as specified in its charter)
New York 15-0398550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3287, Ithaca, New York 14852-3287
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (607) 347-4131
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
First Mortgage Bonds, 7 5/8% Series
due 2001 (Due November 1, 2001) New York Stock Exchange
3.75% Cumulative Preferred Stock
(Par Value $100) New York Stock Exchange
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
4 1/2% Cumulative Preferred Stock (Series 1949) (Par Value $100)
4.15% Cumulative Preferred Stock (Par Value $100)
4.40% Cumulative Preferred Stock (Par Value $100)
4.15% Cumulative Preferred Stock (Series 1954) (Par Value $100)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ X ].
The number of shares of common stock (par value $6.66 2/3
per share) outstanding as of March 24, 1999, was 64,508,477. All
shares are owned by Energy East Corporation.
<PAGE>
PART I
Item 1. Business
(a) General development of business
New York State Electric & Gas Corporation was organized under the laws of
the State of New York in 1852.
The following general developments have occurred in the business of the
company since January 1, 1998:
On May 1, 1998, the company was reorganized into a holding company
structure pursuant to an Agreement and Plan of Share Exchange with Energy East
Corporation. Each outstanding share of the company's common stock was exchanged
for one share of Energy East's common stock and Energy East became the
company's parent. Energy East's common stock is listed on the New York Stock
Exchange under the symbol NEG. The company's common stock was delisted from the
New York Stock Exchange. The company's preferred stock and debt were not
exchanged and remain its securities.
An affiliate completed the sale of its interest in the Homer City
generation assets in March 1999 and expects to complete the sale of its
remaining coal-fired generation assets in several weeks. The company is
actively pursuing the sale of its 18% interest in Nine Mile Point nuclear
generating unit No. 2. In January Niagara Mohawk Power Corporation, the
operator and 41% owner of NMP2, announced its intention to pursue the sale of
its interest in NMP2. Together the company and Niagara Mohawk are
in active discussions concerning the sale to a third party who recently
completed due diligence at the site. The company will petition for all
necessary regulatory approvals if an agreement is reached to sell NMP2. (See
Item 7 - Electric Business, Sale of Affiliate's Coal-fired Generation Assets
and Item 8 - Notes 2 and 3 to the Consolidated Financial Statements.)
Regulatory and Rate Matters
(See Item 7 - Electric Business and Natural Gas Business.)
(b) Financial information about segments
(See Item 8 - Note 9 to the Consolidated Financial Statements.)
(c) Narrative description of business
(See Item 7 - Electric Business and Natural Gas Business.)
(i) Principal business
The company's principal business is purchasing, transmitting and
distributing electricity and purchasing, transporting and distributing natural
gas. The company also generates electricity from its nuclear and hydroelectric
stations. The company's service territory, 99% of which is located outside the
corporate limits of cities, is in the central, eastern and western parts of the
State of New York. The company's service territory has an area of
approximately 19,900 square miles and a population of
2,400,000. The larger cities in which the company serves both electricity and
natural gas are Binghamton, Elmira, Auburn, Geneva, Ithaca and Lockport. The
company serves approximately
817,000 electric customers and 243,000 natural gas customers. The service
territory reflects a diversified economy, including high-tech firms, light
industry, colleges and universities, agriculture and recreational facilities.
No customer accounts for 5% or more of either electric or natural gas revenues.
During 1996 through 1998 approximately 84% of operating revenue was derived
from electric service with the balance derived from natural gas service.
The 1998 peak load of 2,339 megawatts was set on December 30, 1998. This
is 272 mw less than the all-time peak of 2,611 mw set on January 19, 1994.
The 1998 maximum peak daily sendout for natural gas of 363,504 dekatherms
was set on December 30, 1998. This was 49,805 dekatherms less than the
previous year peak of 413,309 dekatherms set on January 18, 1997.
(ii) New product or segment - Not Applicable
(iii) Sources and availability of raw materials
Electric
(See Item 7 - Electric Business, Sale of Affiliate's Coal-fired Generation
Assets.)
In 1998 the company purchased the majority of its power requirements from
NGE Generation, Inc., an affiliated company. Remaining power requirements were
satisfied through generation from the company's nuclear and hydroelectric
stations or purchased from third parties. After the sale of the affiliate's
remaining coal-fired generation assets, power requirements will be satisfied
through generation from the company's nuclear and hydroelectric stations and by
purchases from third parties. The company uses electricity contracts to manage
its exposure to fluctuations in the cost of electricity.
Nuclear
In 1998 Niagara Mohawk Power Corporation, the operator of Nine Mile Point
nuclear generating unit No. 2, in which the company has an 18% interest,
installed reload No. 6 into the reactor core at NMP2. This refueling will
support NMP2 operations through the spring of 2000. Reload No. 7 is scheduled
for March 2000 and will support operations through the spring of 2002.
Enrichment services are under contract with the U.S. Enrichment Corporation for
100% of the enrichment requirements through 2000 and 75% of the requirements
through 2002. Fuel fabrication services are under contract through 2004.
Approximately 64% of the uranium and conversion requirements are under contract
through 2002.
Natural Gas
(See Item 7 - Natural Gas Business, Seneca Lake Natural Gas Storage Facility.)
The company's natural gas supply mix includes long-term, short-term and
spot natural gas purchases transported on both firm and interruptible
transportation contracts. During 1998, about 68% of the company's natural gas
supply was purchased from various suppliers under long-term and short-term
sales contracts and 32% was purchased on the monthly spot natural gas market to
maximize natural gas cost savings. The company's natural gas supply is
expected to be purchased in 1999 in a similar proportion as in 1998. The
company uses risk management techniques such as natural gas futures and options
contracts to manage its exposure to fluctuations in natural gas commodity
prices.
(iv) Franchises
The company has, with minor exceptions, valid franchises from the
municipalities in which it renders service to the public. In 1998, the company
obtained authorization from the Public Service Commission of the State of New
York for natural gas distribution service in the towns of Columbia, Lyonsdale,
Preble, Richfield, Richmondville and Warren, and the village of Richfield.
(v) Seasonal business
Sales of electricity are highest during the winter months primarily due to
space heating usage and fewer daylight hours. Sales of natural gas are highest
during the winter months primarily due to space heating usage.
(vi) Working capital items
The company has been granted, through the ratemaking process, an allowance
for working capital to operate its ongoing electric and natural gas utility
services.
(vii) Single customer - Not applicable
(viii) Backlog of orders - Not applicable
(ix) Business subject to renegotiation - Not applicable
(x) Competitive conditions
(See Item 7 - Electric Business, Natural Gas Business and Accounting
Issues.)
(xi) Research and development
Expenditures on research and development were $6 million in 1998, $11
million in 1997 and $12 million in 1996, principally for internal research
programs and for contributions to research administered by the Electric Power
Research Institute, the Empire State Electric Energy Research Corporation, the
New York Gas Group and the New York State Energy Research and Development
Authority. These expenditures are designed to improve existing technologies
and to develop new technologies for the production, distribution and customer
use of energy.
(xii) Environmental matters
(See Item 3 - Legal proceedings, Item 7 - Electric Business, Sale of
Affiliate's Coal-fired Generation Assets, and Item 8 - Notes 3, 12 and 13 to
the Consolidated Financial Statements.)
The company is subject to regulation by the federal government and by
state and local governments in New York with respect to environmental matters
and is also subject to the New York State Public Service Law requiring
environmental approval and certification of proposed major transmission
facilities. From time to time environmental laws, regulations and compliance
programs may require changes in operations and facilities and may increase the
cost of electric and natural gas service. Historically, rate recovery has been
authorized for environmental compliance costs.
Capital additions to meet environmental requirements during the three
years ended December 31, 1998, were approximately $30 million. Future capital
additions to meet environmental requirements are not expected to be material.
Water quality
The company is required to comply with federal and state water quality
statutes and regulations including the Clean Water Act. The Water Act requires
that generating stations be in compliance with state issued State Pollutant
Discharge Elimination System Permits, which reflect water quality
considerations for the protection of the environment. The company has a SPDES
Permit for NMP2.
Waste Disposal
Niagara Mohawk has contracted with the U.S. Department of Energy for
disposal of high level radioactive waste (spent fuel) from NMP2. The company is
reimbursing Niagara Mohawk for its 18%
share of the costs under the contract (currently approximately $1 per megawatt
hour of net generation). The DOE's schedule for start of operations of their
high level radioactive waste repository will be no sooner than 2010. The
company has been advised by Niagara Mohawk that the NMP2 Spent Fuel Storage
Pool has a capacity for spent fuel that is adequate until 2014. If further DOE
schedule slippage should occur, construction of pre-licensed dry storage
facilities would extend the on-site storage capability for spent fuel at NMP2
beyond 2014.
(xiii) Number of employees
The company had 3,328 employees as of December 31, 1998.
(d) Financial information about geographic areas
Not applicable
Item 2. Properties
(See Item 7 - Electric Business, Sale of Affiliate's Coal-fired Generation
Assets.)
The company's electric system includes nuclear, hydroelectric and internal
combustion generating stations, substations and transmission and distribution
lines, all of which are located in the State of New York. Generating
facilities are:
Name and location of station
Generating
capability (mw)
Nuclear - NMP2 (Oswego, N.Y.) 205 (1)
Hydroelectric (Various - 7 locations) 59
Internal combustion (Harris Lake) 2
Total - all stations 266
(1) The company's 18% share of the generating capability. The company is
actively pursuing the sale of its 18% interest in NMP2. (See Item 8 - Note 3 to
the Consolidated Financial Statements.)
The company owns 432 substations having an aggregate transformer capacity
of 13,444,525 kilovolt-amperes. The transmission system consists of 4,482
circuit miles of line. The distribution system consists of 33,858 pole miles
of overhead lines and 2,109 miles of underground lines.
The company's natural gas system consists of the distribution of natural
gas through 760 miles of transmission pipelines (over 3-inch equivalent) and
6,204 miles of distribution pipelines (under 3-inch equivalent).
The company's first mortgage bond indenture constitutes a direct first
mortgage lien on substantially all of the company's properties.
Item 3. Legal proceedings
Information regarding legal proceedings is set forth in Exhibit 99-3, which is
incorporated herein by reference. Also, see Item 7 - Electric Business and
Natural Gas Business.
Item 4. Submission of matters to a vote of security holders -
Not applicable.
<PAGE>
Executive officers of the Registrant
Positions, offices and
business experience -
Name Age January 1994 to date
Wesley W. von Schack 54 Chairman, President and Chief Executive
Officer, September 1996 to date;
Chairman, President, Chief Executive
Officer and a Director of DQE, Inc. and
Duquesne Light Company to August 1996.
Michael I. German 48 Executive Vice President and Chief
Operating Officer, April 1998 to date;
Executive Vice President, May 1997 to
April 1998; Senior Vice President-Gas
Business Unit, December 1994 to May
1997; Senior Vice President, American
Gas Association, Arlington, Virginia to
December 1994.
Kenneth M. Jasinski 50 Executive Vice President, April 1998 to
date; Partner of Huber Lawrence & Abell
(attorneys at law) to April 1998.
Gerald E. Putman 48 Senior Vice President-Economic
Development and Public Policy, May 1997
to date; Senior Vice President-Customer
Service Business Unit, January 1995 to
May 1997; Vice President-Fuel Supply
and Operation Services to January 1995.
Sherwood J. Rafferty 51 Senior Vice President and Chief
Financial Officer, February 1996 to
date; Vice President and Treasurer to
February 1996.
Jeffrey K. Smith 50 Senior Vice President-Corporate
Development, May 1997 to date; Vice
President-Generation, January 1995 to
May 1997; Executive Assistant to the
Chairman, President and Chief Executive
Officer, February 1994 to January 1995;
Assistant to the Senior Vice
President-Electric Business Unit
to February 1994.
Ralph R. Tedesco 45 Senior Vice President-Customer Service
Business Unit, May 1997 to date; Vice
President-Strategic Growth Business
Unit, February 1994 to May 1997;
Executive Assistant to the Chairman,
President and Chief Executive Officer
to February 1994.
Denis E. Wickham 50 Senior Vice President-Energy Operations
Services, June 1998 to date; Vice
President-Electric Resource Planning to
June 1998.
Daniel W. Farley 43 Vice President and Secretary.
Robert D. Kump 37 Treasurer, February 1996 to date;
Director of Financial Services,
February 1995 to February 1996;
Manager-Investor Relations to February
1995.
<PAGE>
The company has entered into an agreement with Wesley W. von Schack which
provides for his employment as Chairman, President and Chief Executive Officer
of the company and of Energy East for a term ending on September 8, 2001. The
company has also entered into an agreement with Michael I. German which
provides for his employment as Executive Vice President and Chief Operating
Officer of the company and Senior Vice President of Energy East for a term
ending on February 28, 2002 and an agreement with Kenneth M. Jasinski which
provides for his employment as Executive Vice President of the company and
Senior Vice President and General Counsel of Energy East for a term ending on
April 28, 2002. Each of these agreements provides for automatic one-year
extensions unless either party to an agreement gives notice that such agreement
is not to be extended.
Each officer holds office for the term for which he is elected or
appointed, and until his successor shall be elected and shall qualify. The
term of office for each officer extends to and expires at the meeting of the
Board of Directors following the next annual meeting of shareholders.
PART II
Item 5. Market for Registrant's common equity and related stockholder matters
Energy East owns all of the company's common stock. Information regarding
dividends declared is on page 21 of this report.
Item 6. Selected Financial Data
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
(Thousands)
Operating
revenues $2,012,757 $2,129,989 $2,067,532 $2,017,228 $1,898,855
Net income $213,798 $184,553(1) $178,241(2) $196,690 $187,645(3)
Interest
charges, net $123,144 $123,199 $122,729 $129,567 $136,092
Depreciation and
amortization $144,736 $198,559 $189,401 $184,770 $178,326
Other taxes $187,034 $206,446 $206,715 $210,910 $210,729
Capital
expenditures $126,704 $129,551 $215,731 $167,446 $282,703
Total assets $3,718,012 $5,028,681 $5,059,681 $5,114,331 $5,230,685
Long-term obligations,
capital leases
and redeemable
preferred stock $1,437,157 $1,475,224 $1,505,814 $1,606,448 $1,776,081
(1) Includes the effect of fees related to an unsolicited tender offer that
decreased net income by $17 million.
(2) Includes the effect of the writedown of the investment in EnerSoft
Corporation that decreased net income by $10 million.
(3) Includes the effect of the 1993 production-cost penalty that decreased net
income by $8 million.
<PAGE>
Item 7. Management's discussion and analysis of financial condition and
results of operations
Results of Operations
Earnings
After excluding the transfer of NGE Generation and XENERGY Enterprises to
the company's parent as part of the reorganization into a holding company
structure on May 1, 1998, earnings increased in 1998 primarily due to higher
electric wholesale prices and deliveries and cost control efforts. Those
increases were partially offset by lower natural gas retail deliveries,
primarily because of unusually warm winter weather, and lower electric retail
prices. The 1997 earnings include the effect of a nonrecurring charge of $17
million.
Excluding the net effects of nonrecurring items, earnings for 1997
increased compared to 1996 primarily due to higher electric wholesale
deliveries and lower costs of natural gas purchased. Those increases were
partially offset by a decrease in earnings due to the price of NUG power.
Operating Results for the Electric Business
Excluding the effect of the transfer of NGE Generation and XENERGY
Enterprises to the company's parent as part of the reorganization into a
holding company structure on May 1, 1998, 1998 operating revenues increased due
to higher wholesale prices and deliveries, partially offset by lower retail
prices. 1998 operating expenses increased due to an increase in electricity
purchased primarily for wholesale deliveries, partially offset by a decrease in
operations and maintenance costs primarily due to cost control efforts and the
effect of a 1997 nonrecurring charge.
1997 operating revenues increased over 1996 primarily due to higher
wholesale deliveries. 1997 operating expenses increased due to an increase in
electricity purchased, due to purchases for wholesale deliveries and the price
of NUG power. Expenses also increased as a result of operating costs, primarily
due to the effect of a 1997 nonrecurring charge, and an increase in fuel costs,
due to increased electric generation.
Operating Results for the Natural Gas Business
Natural gas deliveries decreased in 1998 primarily due to warmer weather,
and decreased in 1997 due to one low-margin customer that closed its
cogeneration plant. Excluding the loss of that customer, 1997 natural gas
deliveries increased 2% over 1996.
1998 natural gas operating revenues decreased by $32 million. Revenues
were reduced $48 million by lower retail deliveries, primarily due to warmer
weather. That decrease was partially offset by a $13 million increase in
wholesale deliveries. 1998 natural gas operating expenses decreased $9 million
due to a $6 million decrease in the cost of natural gas purchased and a $3
million decrease in other operating costs due to the effect of a 1997
nonrecurring charge.
1997 natural gas operating revenues decreased $7 million primarily due to
lower retail deliveries that reduced revenues $12 million and a $3 million
decrease in other revenues. Those decreases were partially offset by a more
favorable sales mix that added $9 million to revenues. 1997 natural gas
operating expenses decreased $12 million due to a decrease in the cost of
natural gas purchased of $16 million, partially offset by an increase in
operating costs of $3 million that was due to a nonrecurring charge.
<PAGE>
Liquidity and Capital Resources
Electric Business
The company's principal electric business is transmitting and distributing
electricity. The company also generates electricity from its nuclear and
hydroelectric stations.
Sale of Affiliate's Coal-fired Generation Assets: In 1998 an affiliate's seven
coal-fired stations and associated assets and liabilities were placed up for
auction. Offers totaling $1.85 billion were accepted from The AES Corporation
and Edison Mission Energy in August 1998 for those generation assets. The
affiliate completed the sale of its interest in the Homer City generation
assets in March 1999 and expects to complete the sale of its remaining
coal-fired generation assets in several weeks.
All proceeds, net of taxes and transaction costs, in excess of the net
book value of the generation assets, less funded deferred taxes, will be used
to write down the company's 18% investment in Nine Mile Point 2. This treatment
is in accordance with the company's restructuring plan approved by the Public
Service Commission of the State of New York in January 1998.
After the sale of the remaining coal-fired generation assets, the
company's power requirements will be satisfied through generation from its
nuclear and hydroelectric stations and by purchases from third parties. The
company has taken on the added risk of market prices that are sometimes
volatile, since it has capped the prices it charges to customers.
The company uses electricity contracts to manage its exposure to
fluctuations in the cost of electricity. Such contracts allow it to fix margins
on the majority of its retail and wholesale sales of electricity. The cost or
benefit of electricity contracts is included in the cost of electricity
purchased when the electricity is sold.
New York Power Pool Restructuring: The Federal Energy Regulatory Commission
issued Orders 888 and 889 in 1996 to foster the development of competitive
wholesale electricity markets by opening up transmission services and to
address the resulting stranded costs. In subsequent orders, the FERC generally
affirmed Orders 888 and 889. Various parties, including the company, have
appealed these orders in the United States Court of Appeals for the D.C.
Circuit.
In response to Order 888, the New York Power Pool submitted a compliance
filing to the FERC. Power pool members submitted additional filings to the
FERC in 1997 proposing the restructuring of the power pool by establishing a
New York Independent System Operator, a Power Exchange and a New York State
Reliability Council. The FERC conditionally authorized the formation of the
system operator and reliability council in June 1998 and conditionally accepted
the tariff and rates applicable to transmission service, and energy, capacity
and ancillary services in January 1999. FERC also set certain issues for
hearing and required additional filings to implement the restructuring
proposal. Power pool members filed the necessary applications to transfer
control of transmission facilities to the system operator in February 1999 and
are awaiting FERC's acceptance. The company is currently evaluating the FERC's
conditional acceptance and is unable to predict the effect on its financial
position or results of operations.
Electric Retail Access Program: Customers in certain sections of the company's
service territory were eligible to choose their electricity supplier in
mid-1998. All of the company's electric customers in New York will be able to
choose their electricity supplier by August 1, 1999. This is one of the most
progressive retail access programs in the country.
Throughout the first phase and continuing after August 1, 1999, the
company is responsible for delivery of customers' electricity on its
transmission and distribution system. Rates charged for use of its transmission
system are subject to FERC approval, while rates for the use of its
distribution system are subject to PSC approval. The PSC approved the company's
distribution rates in January 1998. The company's transmission rate case, which
was filed with the FERC in March 1997, has not yet been approved.
<PAGE>
Petition to the FERC on NUGs: The company continues to seek ways to provide
relief to its customers from the onerous NUG contracts that it was ordered to
sign by the PSC. NUG power purchases totaled $323 million in 1998, and the
company estimates that those purchases will total $358 million in 1999 and $376
million in 2000 and in 2001, unless it is able to change those contracts.
The company petitioned the FERC in 1995, asking for relief from having to
pay approximately $2 billion more than its avoided costs for power purchased
over the term of two NUG contracts. The FERC denied that petition and the
company's subsequent request for a rehearing. The company believes that the
overpayments under the two contracts violate the Public Utility Regulatory
Policies Act of 1978.
The company petitioned the United States Court of Appeals for the District
of Columbia in 1995 to review the FERC's decision. The Court of Appeals issued
a decision in July 1997 stating that it lacked jurisdiction to rule on the
company's appeal but that it may pursue its claim in the United States District
Court.
The company commenced an action in the United States District Court for
the Northern District of New York in August 1997. The complaint asks the
District Court to either reform the two NUG contracts by reducing the price the
company must pay for electricity under the contracts, or send the matter back
to the FERC or to the PSC with direction that they modify such contracts. The
complaint also seeks repayment of all monies paid above the company's avoided
costs. The case is still pending before the District Court.
Restructured NUG Agreement: In March 1999 the company successfully
restructured a NUG contract with KES-Chateaugay Limited Partnership. Under a
new agreement, the company will be required to purchase replacement power from
an energy marketer at a lower price than the company was paying for power from
KES-Chateaugay.
Electric Restructuring Plan: The company's restructuring plan, which included a
five-year electric rate price cap, was approved by the PSC, with minor
modifications, in January 1998. It supersedes the company's previous three-year
electric rate agreement, which was to expire on July 31, 1998.
The restructuring plan will save customers an estimated $725 million over
five years. Specifically the plan:
- eliminates a 7% increase in electricity prices previously approved by the
PSC;
- reduces prices 5% each year in the five years of the plan for eligible
industrial, commercial and public authority customers who are heavy users of
electricity;
- caps the overall average prices for all other customers for four years
and reduces their prices 5% at the beginning of the fifth year; and
- allows all of the company's retail customers to choose their electricity
supplier by August 1, 1999.
Natural Gas Business
The company's natural gas business delivers, transports and stores natural
gas in New York State.
New Franchises: The company is growing its natural gas business in New York by
expanding natural gas service in existing franchise areas and by developing new
franchises. The company began developing eight new franchises during 1998.
Natural Gas Rate Agreement: The company filed a natural gas rate agreement
with the PSC in May 1998. This agreement cuts prices for most customers by
reducing natural gas revenues by $25.6 million, or 2.1%, over the four-year
period ending September 30, 2002. The PSC approved the agreement in September
1998 after making certain modifications. After seeking clarification of the
modifications from the PSC Staff, the company accepted the PSC Order with the
clarifications and one modification that maintains present rates for certain
areas. The PSC accepted our clarifications and modification and issued an order
in December 1998.
<PAGE>
Seneca Lake Natural Gas Storage Facility: The company's Seneca Lake natural
gas storage facility includes a natural gas storage cavern, a compressor
station and a natural gas transmission pipeline. The facility is located on
Seneca Lake, north of Watkins Glen and began operations in 1996. The company
built this facility to ensure an adequate natural gas supply to customers, to
support economic growth in southern and central New York and to increase supply
flexibility.
The company expanded the facility in 1997 to increase the cavern's working
capacity from 800 million to 1.45 billion cubic feet of natural gas and the
compressor station's deliverability from 80,000 to 145,000 dekatherms per day.
This expansion allows for the sale of storage capacity.
Role of Local Distribution Companies: The PSC, on November 3, 1998, issued a
"Policy Statement Concerning the Future of the Natural Gas Industry in New York
State and Order Terminating Capacity Assignment." The policy statement includes
the PSC's vision for furthering competition in the natural gas industry in New
York State. The PSC believes the most effective way to establish a competitive
gas market is for natural gas utilities to exit the merchant function over a
three to seven year period. The PSC also established guidelines and began
several proceedings related to implementing its policy statement. The company
is participating in each of the proceedings and continues to believe the
competitive marketplace should decide who will be the suppliers of natural gas.
The company has not yet determined what effect the PSC Policy Statement will
have on it.
The PSC's Order requires local distribution companies, effective April 1,
1999, to cease assigning certain capacity costs to customers who switch from
distribution service to transportation service. The local distribution
companies will be provided a reasonable opportunity to recover any capacity
costs that may be stranded. The company expects to recover all costs associated
with its customers switching to transportation service.
Natural Gas Commodity Prices: The company uses risk management techniques such
as natural gas futures and options contracts to manage its exposure to
fluctuations in natural gas commodity prices. Such contracts allow the company
to fix margins on sales of natural gas generally expected to occur over the
next 18 months. The cost or benefit of natural gas futures and options
contracts is included in the commodity cost when the related sales commitments
are fulfilled. Gains and losses resulting from the use of those contracts for
1998, 1997 and 1996 were not material to the company's financial position or
results of operations.
Other Matters
Accounting Issues
Statement 71: Statement of Financial Accounting Standards No. 71, Accounting
for the Effects of Certain Types of Regulation, allows companies that meet
certain criteria to capitalize as regulatory assets incurred costs that are
probable of recovery in future periods. Those companies record as regulatory
liabilities obligations to refund previously collected revenue or obligations
to spend revenue collected from customers on future costs.
Although the company believes it will continue to meet the criteria of
Statement 71 for its regulated electric and natural gas operations in New York
State, it cannot predict what effect a competitive market or future PSC actions
will have on its ability to continue to do so. If the company can no longer
meet the criteria of Statement 71 for all or a separable part of its regulated
operations, it may have to record as expense or revenue certain regulatory
assets and liabilities. The company may also have to record as a loss an
estimated $1.5 billion, on a present value basis at December 31, 1998, of
above-market costs on its power purchase contracts with NUGs. These items are
currently recovered in rates.
With approval of the company's restructuring plan in January 1998, it
discontinued application of Statement 71 to its coal-fired generation
operations and applied Statement of Financial Accounting Standards No. 101,
Regulated Enterprises--Accounting for the Discontinuance of Application of FASB
Statement No. 71. Application of Statement 101 did not affect the company's
financial position or results of operations. (See Electric Business, Sale of
Affiliate's Coal-fired Generation Assets.)
<PAGE>
Statement 133: The FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, in June
1998. Statement 133 establishes standards for the accounting and reporting for
derivative instruments and for hedging activities. Statement 133 requires that
all derivatives be recognized as either assets or liabilities on a company's
balance sheet at their fair market value. The company plans to adopt Statement
133 as of the beginning of the first quarter of 2000. Based on its current risk
management strategies, this adoption is not expected to have a material effect
on its financial position or results of operations.
EITF 98-10: In November 1998 the FASB's Emerging Issues Task Force reached a
consensus on Issue 98-10, Accounting for Contracts Involved in Energy Trading
and Risk Management Activities. EITF 98-10 requires that energy trading
activity be measured at fair value on the balance sheet with gains and losses
recognized in current earnings. Based on the company's current energy
procurement strategies, implementation of EITF 98-10 in 1999 is not expected to
have a material effect on its financial position or results of operations.
Year 2000 Readiness Disclosure
Many of the company's computer systems, which include mainframe systems
and special-purpose systems, refer to years in terms of their final two digits
only. Such systems may interpret the year 2000 as the year 1900. If not
corrected, those systems could cause the company to, among other things,
experience energy delivery problems, report inaccurate data or issue inaccurate
bills.
The company is working diligently to address this problem by reviewing all
of its mainframe and special-purpose systems; identifying potentially affected
software, hardware, and date-sensitive components, often referred to as
embedded chips, of various equipment; determining and taking appropriate
corrective action; and, when appropriate, testing its systems.
The company's mainframe systems consist of hardware and software
components of its information technology systems. The company believes it has
identified, taken appropriate corrective action and tested all of its mainframe
systems. The company believes those systems are now able to process year 2000
and beyond transactions.
The company's special-purpose systems consist of its non-information
technology systems. The company has identified over 5,000 items in its
special-purpose systems that may be affected by the Year 2000 problem. Items
identified include software, hardware and embedded chips in systems such as
those that control the acquisition and the delivery of electricity and natural
gas to customers and those in its communication systems. The company believes
it has fixed, eliminated, replaced or found no problem with over 95% of the
special-purpose items it has identified, including those in its electric and
natural gas delivery systems. The company is determining and taking appropriate
corrective action for the remaining identified items. Additional items,
however, continue to be identified as the company proceeds with the review of
its special-purpose systems. The company expects to have reviewed, identified
and determined and taken the appropriate corrective action on all of its
special-purpose systems by the end of the second quarter of 1999.
Even though the company believes it will have taken corrective action with
respect to its own Year 2000 issues, the Year 2000 issue could adversely affect
it if there are items in its mainframe or special-purpose systems that may be
affected by the Year 2000 problem that it has not identified in its review of
those systems. The Year 2000 issue could also adversely affect the company if
third parties such as suppliers, customers, neighboring or interconnected
utilities and other entities fail to correct any of their Year 2000 problems.
The company has contacted key third parties to determine the status of their
Year 2000 readiness programs. Many have responded satisfactorily, some have not
responded satisfactorily and some have not responded at all. The company is
developing contingency plans, some of which are discussed below, for reasonably
likely worst case scenarios based upon an assumption that it and those third
parties will not be Year 2000 compliant.
<PAGE>
The company's Year 2000 program is progressing on schedule and the company
believes it is taking all necessary steps to address this issue successfully.
Through 1998 the company has spent approximately $11.4 million and expects to
spend an additional $0.8 million on Year 2000 readiness. The company believes
this amount is adequate to address its Year 2000 issues. These amounts are
being expensed as incurred and are being financed entirely with internally
generated funds. Addressing the Year 2000 issue has not caused the company to
delay any significant information system projects.
As part of its normal business practice the company has plans in place
for use during emergencies, some of which could arise from Year 2000 problems.
The company is completing contingency plans to specifically address reasonably
likely worst case scenarios that could arise as a result of the Year 2000
problem.
The contingency plans will address, among other scenarios, the
interruption or failure of normal business activities or operations such as a
partial electrical and/or natural gas system shutdown. If the interruption or
failure is due to embedded chips in equipment such as automatic control
devices, the company's contingency plan is to implement its normal system
restoration procedures that it utilizes during emergencies. If the
interruption or failure is due to telecommunications not being available, the
company plans to use alternative communication devices such as satellite
phones. Another scenario is the failure of its customer information system.
Should that occur, the company plans to rely on customer information previously
stored and make the appropriate adjustment to each customer's next bill after
the system is restored.
The company is dependent on others for its supply of natural gas. In
the event a supplier is not able to meet the company's needs, it plans to
purchase the needed amount of natural gas from one of many other suppliers on
the same transmission line. Since the sale of its affiliate's remaining
coal-fired generation stations is expected to be completed in several weeks,
the company will be buying from third parties the majority of the electricity
its customers need by the beginning of the year 2000. If the electricity
available in its region is not adequate for all of the customers on its system,
the company plans to operate at lower levels of power as outlined in its
established emergency procedures. Should its mainframe hardware be disabled,
it has a backup mainframe system that is capable of operating all of its
business systems. The company expects to have all of its contingency plans
ready and tested by mid-1999.
The PSC issued an Order on October 30, 1998, adopting a July 1, 1999,
deadline for New York utilities to complete their Year 2000 readiness programs
for "mission critical" systems and for contingency plans. Mission critical
systems include those systems that control the acquisition and the delivery of
electricity and natural gas to customers, emergency management systems and
certain electric generation plants. The company believes that its Year 2000
readiness program for mission critical systems and for contingency plans will
be completed by the PSC's July 1, 1999, deadline. The PSC requires the filing
of status reports with it regarding certain Year 2000 issues.
Investing and Financing Activities
Investing Activities
Capital spending, including nuclear fuel, totaled $127 million in 1998,
$130 million in 1997 and $216 million in 1996. Capital spending in those three
years was financed entirely with internally generated funds and was primarily
for the extension of service, necessary improvements to existing facilities and
compliance with environmental requirements.
Capital spending, including nuclear fuel, is projected to be $92 million
in 1999, $105 million in 2000 and $85 million in 2001, and is expected to be
paid for entirely with internally generated funds.
<PAGE>
Financing Activities
The company's current financial strength provides the flexibility required
to compete in a competitive energy market.
The company's financing-related activities during 1998 consisted of:
- redemption of $30 million of 6 1/2% Series first mortgage bonds;
- redemption, at a premium, of $30 million of 6.48% preferred stock; and
- use of interest rate swaps to fix the interest rates on its three
one-year, adjustable-rate, tax-exempt issues totaling $132 million.
During the first quarter of 1999 the company redeemed, at par, $25 million
of 7.40% preferred stock and $50 million of adjustable rate preferred stock.
The company also announced tender offers for the following series of preferred
stock: 3.75%, 4 1/2% (Series 1949), 4.15%, 4.40% and 4.15% (Series 1954). The
tender offers expired March 26, 1999.
The company uses short-term, unsecured notes, usually commercial paper, to
finance certain refundings and for other corporate purposes. The company had
$78 million of commercial paper outstanding at December 31, 1998, and $58
million outstanding at December 31, 1997. The weighted average interest rate
for commercial paper was 6.2% at December 31, 1998 and 6.3% at December 31,
1997.
The company also has a revolving credit agreement with certain banks that
provides for borrowing of up to $200 million until December 31, 2001. The
company had no amounts outstanding under this agreement during 1998 or 1997.
The company uses interest rate swap agreements to manage the risk of
increases in variable interest rates. The company records amounts paid and
received under the agreements as adjustments to the interest expense of the
specific debt issues.
In December 1998 the company's first mortgage bonds, unsecured pollution
control notes and preferred stock were upgraded by Moody's Investors Service.
This upgrade reflects Moody's expectation that the company will maintain solid
cash flow and earnings measures while managing the transition to competitive
retail markets. Moody's also noted that the company has made significant
progress in strengthening its cash flow through ongoing cost reductions,
streamlining operations and improving efficiencies.
<PAGE>
Forward-looking Statements
This Form 10-K contains certain forward-looking statements that are based
upon management's current expectations and information that is currently
available. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements in certain circumstances. Whenever
used in this report, the words "estimate," "expect," "believe," or similar
expressions are intended to identify such forward-looking statements.
In addition to the assumptions and other factors referred to specifically
in connection with such statements, factors that could cause actual results to
differ materially from those contemplated in any forward-looking statements
include, among others, the risk that more Year 2000 problems may be found as
the company continues the review of its systems; the risk that its progress in
addressing Year 2000 problems may not proceed as it expects; the fact that
despite all of its efforts, there can be no assurances that all of its Year
2000 issues can or will be remedied; the fact that there can be no assurances
that all Year 2000 issues that could affect the company can or will be totally
eliminated by its suppliers, customers, neighboring or interconnected utilities
and other entities; and the fact that its assessment of the effects of Year
2000 issues are based, in part, upon information received from its suppliers,
customers, neighboring or interconnected utilities and other entities, its
reasonable reliance upon this information and the risk that inaccurate or
incomplete information may have been supplied to it.
Some additional factors that could cause actual results to differ
materially from those contemplated in any forward-looking statements include,
among others, the deregulation and unbundling of energy services; the company's
ability to compete in the rapidly changing and increasingly competitive
electric and natural gas utility markets; its ability to control non-utility
generator and other costs; changes in fuel supply or cost and the success of
its strategies to satisfy its power requirements after its affiliate's
remaining coal-fired generation stations are sold; the ability to obtain
adequate and timely rate relief; nuclear or environmental incidents; legal or
administrative proceedings; changes in the cost or availability of capital;
growth in the areas in which it is doing business; weather variations affecting
customer energy usage; and other considerations that may be disclosed from time
to time in its publicly disseminated documents and filings. The company
undertakes no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise.
Item 7A. Quantitative and qualitative disclosure about market risk.
Not Applicable
<PAGE>
Item 8. Financial statements and supplementary data
New York State Electric & Gas Corporation
Consolidated Statements of Income
Year Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------
(Thousands)
Operating Revenues
Electric. . . . . . . . . . . . . . . . . . .$1,706,876 $1,792,164 $1,723,147
Natural Gas . . . . . . . . . . . . . . . . . 305,881 337,825 344,385
---------- ---------- ----------
Total Operating Revenues . . . . . . . . . 2,012,757 2,129,989 2,067,532
---------- ---------- ----------
Operating Expenses
Fuel used in electric generation
and electricity purchased . . . . . . . . . 657,453 643,063 582,855
Natural gas purchased . . . . . . . . . . . . 158,656 164,661 180,866
Other operating expenses. . . . . . . . . . . 293,310 364,219 342,455
Maintenance . . . . . . . . . . . . . . . . . 88,848 110,373 107,697
Depreciation and amortization . . . . . . . . 144,736 198,559 189,401
Other taxes . . . . . . . . . . . . . . . . . 187,034 206,446 206,715
---------- ---------- ----------
Total Operating Expenses. . . . . . . . . . . . 1,530,037 1,687,321 1,609,989
---------- ---------- ----------
Operating Income. . . . . . . . . . . . . . . . 482,720 442,668 457,543
Interest Charges, Net . . . . . . . . . . . . . 123,144 123,199 122,729
Other Income and Deductions . . . . . . . . . . 8,381 17,203 48,630
---------- ---------- ----------
Income Before Federal Income Taxes. . . . . . . 351,195 302,266 286,184
Federal Income Taxes. . . . . . . . . . . . . . 137,397 117,713 107,943
---------- ---------- ----------
Net Income. . . . . . . . . . . . . . . . . . . 213,798 184,553 178,241
Preferred Stock Dividends . . . . . . . . . . . 8,583 9,342 9,530
---------- ---------- ----------
Balance Available for Common Stock. . . . . . . $205,215 $175,211 $168,711
========== ========== ==========
The notes on pages 22 through 33 are an integral part of the financial
statements.
<PAGE>
New York State Electric & Gas Corporation
Consolidated Balance Sheets
December 31 1998 1997
- ---------------------------------------------------------------------------
(Thousands)
Assets
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . $12,149 $8,168
Special deposits. . . . . . . . . . . . . . . . . . 4,729 3,170
Accounts receivable, net. . . . . . . . . . . . . . 113,553 189,008
Loan receivable - affiliated company. . . . . . . . 134,443 -
Fuel, at average cost . . . . . . . . . . . . . . . 20,200 43,706
Materials and supplies, at average cost . . . . . . 8,292 41,561
Prepayments . . . . . . . . . . . . . . . . . . . . 102,691 68,452
Accumulated deferred federal income
tax benefits, net. . . . . . . . . . . . . . . . - 2,148
---------- ----------
Total Current Assets. . . . . . . . . . . . . . . 396,057 356,213
Utility Plant, at Original Cost
Electric. . . . . . . . . . . . . . . . . . . . . . 3,361,747 5,234,725
Natural gas . . . . . . . . . . . . . . . . . . . . 602,737 576,683
Common. . . . . . . . . . . . . . . . . . . . . . . 144,043 152,034
---------- ----------
. . . . . . . . . . . . . . . . . . . . . . . . . . 4,108,527 5,963,442
Less accumulated depreciation . . . . . . . . . . . 1,362,501 2,093,274
---------- ----------
Net Utility Plant in Service. . . . . . . . . . . 2,746,026 3,870,168
Construction work in progress . . . . . . . . . . . 27,741 52,104
---------- ----------
Total Utility Plant . . . . . . . . . . . . . . . 2,773,767 3,922,272
Other Property and Investments, Net. . . . . . . . . 62,136 143,449
Regulatory and Other Assets
Regulatory assets
Unfunded future federal income taxes . . . . . . . 136,404 243,129
Unamortized debt expense . . . . . . . . . . . . . 71,530 76,418
Demand-side management program costs . . . . . . . 64,466 64,466
Environmental remediation costs . . . . . . . . . 60,600 82,900
Other . . . . . . . . . . . . . . . . . . . . . . 125,693 113,637
---------- ---------
Total regulatory assets . . . . . . . . . . . . . 458,693 580,550
Other assets. . . . . . . . . . . . . . . . . . . . 27,359 26,197
---------- ----------
Total Regulatory and Other Assets . . . . . . . . 486,052 606,747
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . $3,718,012 $5,028,681
========== ==========
The notes on pages 22 through 33 are an integral part of the financial
statements.
<PAGE>
New York State Electric & Gas Corporation
Consolidated Balance Sheets
December 31 1998 1997
- ---------------------------------------------------------------------------
Liabilities (Thousands)
Current Liabilities
Current portion of long-term debt . . . . . . . . . $2,604 $38,240
Current portion of preferred stock. . . . . . . . . 75,000 -
Commercial paper. . . . . . . . . . . . . . . . . . 78,300 58,000
Accounts payable and accrued liabilities. . . . . . 101,511 124,981
Interest accrued. . . . . . . . . . . . . . . . . . 19,556 20,500
Taxes accrued . . . . . . . . . . . . . . . . . . . 701 6,146
Accumulated deferred federal income tax, net. . . . 44,274 -
Other . . . . . . . . . . . . . . . . . . . . . . . 76,302 79,631
---------- ----------
Total Current Liabilities . . . . . . . . . . . . 398,248 327,498
Regulatory and Other Liabilities
Regulatory liabilities
Deferred income taxes. . . . . . . . . . . . . . . 98,038 81,986
Deferred income taxes - unfunded future federal
income taxes . . . . . . . . . . . . . . . . . . 60,896 99,126
Other. . . . . . . . . . . . . . . . . . . . . . . 42,182 79,709
---------- ----------
Total regulatory liabilities. . . . . . . . . . . 201,116 260,821
Other liabilities
Deferred income taxes. . . . . . . . . . . . . . . 432,968 753,722
Other postretirement benefits. . . . . . . . . . . 137,681 117,760
Environmental remediation costs. . . . . . . . . . 80,600 82,900
Other. . . . . . . . . . . . . . . . . . . . . . . 81,540 73,021
---------- ----------
Total other liabilities . . . . . . . . . . . . . 732,789 1,027,403
Long-term debt. . . . . . . . . . . . . . . . . . . 1,412,157 1,450,224
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . 2,744,310 3,065,946
Commitments. . . . . . . . . . . . . . . . . . . . . - -
Preferred Stock
Preferred stock redeemable solely at
the company's option . . . . . . . . . . . . . . 29,440 134,440
Preferred stock subject to mandatory
redemption requirements. . . . . . . . . . . . . 25,000 25,000
Common Stock Equity
Common stock ($6.66 2/3 par value, 90,000
shares authorized, and 64,508 shares outstanding as
of December 31, 1998 and 67,508 shares outstanding
as of December 31, 1997) . . . . . . . . . . . . . 430,057 462,250
Capital in excess of par value. . . . . . . . . . . 430,329 811,648
Retained earnings . . . . . . . . . . . . . . . . . 58,876 568,844
Treasury stock. . . . . . . . . . . . . . . . . . . - (39,447)
---------- ----------
Total Common Stock Equity . . . . . . . . . . . . 919,262 1,803,295
---------- ----------
Total Liabilities and Stockholder's Equity. . . . $3,718,012 $5,028,681
========== ==========
The notes on pages 22 through 33 are an integral part of the financial
statements.
<PAGE>
New York State Electric & Gas Corporation
Consolidated Statements of Cash Flows
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------
(Thousands)
Operating Activities
Net income. . . . . . . . . . . . . . . . . . . .$213,798 $184,553 $178,241
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization . . . . . . . . . 144,736 198,559 189,401
Federal income taxes and investment tax credits
deferred, net . . . . . . . . . . . . . . . . 31,902 5,884 28,928
Changes in current operating assets and liabilities
Accounts receivable . . . . . . . . . . . . . . 75,455 35 6,791
Inventory . . . . . . . . . . . . . . . . . . . 56,775 (5,751) (1,025)
Prepayments . . . . . . . . . . . . . . . . . . (34,239) (21,283) (15,798)
Accounts payable and accrued liabilities. . . . (23,470) 3,858 3,486
Taxes accrued . . . . . . . . . . . . . . . . . (5,445) 6,146 (22,231)
Other, net. . . . . . . . . . . . . . . . . . . . 7,685 84,242 91,239
-------- -------- --------
Net Cash Provided by Operating Activities . . . 467,197 456,243 459,032
-------- -------- --------
Investing Activities
Utility plant additions . . . . . . . . . . . . .(126,374)(123,768)(214,373)
Proceeds from governmental and other sources. . . 1,368 1,443 2,977
Other property and investment . . . . . . . . . . 25,670 (57,803) (916)
-------- -------- --------
Net Cash Used in Investing Activities . . . . . (99,336)(180,128)(212,312)
-------- -------- --------
Financing Activities
Repurchase of common stock. . . . . . . . . . . .(114,023) (7,245) (40,198)
Treasury stock acquired, net. . . . . . . . . . . - (39,447) -
Repayments of first mortgage bonds and
preferred stock, including net premiums . . . . (60,600) (73,000)(171,478)
Changes in funds set aside for first
mortgage bond repayments. . . . . . . . . . . . - 25,000 (25,000)
Long-term notes, net. . . . . . . . . . . . . . . (3,134) (5,203) (2,581)
Commercial paper, net . . . . . . . . . . . . . . 20,300 (71,300) 100,680
Dividends on common and preferred stock.. . . . .(206,423)(105,005)(111,323)
-------- -------- --------
Net Cash Used in Financing Activities . . . . .(363,880)(276,200)(249,900)
-------- -------- --------
Net Increase (Decrease) in Cash
and Cash Equivalents . . . . . . .. . . . . . . 3,981 (85) (3,180)
Cash and Cash Equivalents, Beginning of Year . . . 8,168 8,253 11,433
-------- -------- --------
Cash and Cash Equivalents, End of Year . . . . . . $12,149 $8,168 $8,253
======== ======== ========
The notes on pages 22 through 33 are an integral part of the financial
statements.
<PAGE>
<TABLE>
<CAPTION>
New York State Electric & Gas Corporation
Consolidated Statements of Changes in Common Stock Equity
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
Common Stock
Outstanding Capital in
$6.66 2/3 Par Value Excess of Retained Treasury
Shares Amount Par Value Earnings Stock Total
Balance, January 1, 1996 71,503 $476,686 $842,442 $424,412 - $1,743,540
Net income 178,241 178,241
Cash dividends declared
Preferred stock (at serial rates)
Redeemable - optional (7,955) (7,955)
- mandatory (1,575) (1,575)
Common stock (99,611) (99,611)
Common stock repurchased (1,833) (12,217) (27,981) (40,198)
Premium paid on redemption of
preferred stock, net (4,383) (4,383)
Amortization of capital stock
issue expense 1,923 1,923
Balance, December 31, 1996 69,670 464,469 816,384 489,129 - 1,769,982
Net income 184,553 184,553
Cash dividends declared
Preferred stock (at serial rates)
Redeemable - optional (7,767) (7,767)
- mandatory (1,575) (1,575)
Common Stock (95,496) (95,496)
Common stock repurchased (333) (2,219) (5,026) (7,245)
Treasury stock transactions, net (1,829) 56 $(39,447) (39,391)
Amortization of capital stock
issue expense 234 234
Balance, December 31, 1997 67,508 462,250 811,648 568,844 (39,447) 1,803,295
Net income 213,798 213,798
Cash dividends declared
Preferred stock (at serial rates)
Redeemable - optional (7,008) (7,008)
- mandatory (1,575) (1,575)
Common stock (197,841) (197,841)
Common stock repurchased (3,000) (20,001) (94,022) (114,023)
Retirement of treasury stock, net (12,192) (27,255) 39,447 -
Transfers of subsidiaries to parent (261,984) (517,342) (779,326)
Amortization of capital stock
issue expense 1,942 1,942
Balance, December 31, 1998 64,508 $430,057 $430,329 $58,876 - $919,262
The notes on pages 22 through 33 are an integral part of the financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Principles of consolidation
The company's 1998 consolidated financial statements exclude NGE
Generation, Inc. and XENERGY Enterprises, Inc. as of May 1, 1998, the effective
date of the reorganization into a holding company structure, and exclude
Somerset Railroad as of July 31, 1998, the effective date of its transfer
to NGE Generation. The 1997 and 1996 consolidated financial statements include
assets transferred to NGE Generation in February 1998, XENERGY Enterprises and
Somerset Railroad.
Depreciation and amortization
The company determines depreciation expense using straight-line rates,
based on the average service lives of groups of depreciable property in
service. Depreciation accruals were equivalent to 3.4% of average depreciable
property for 1998 and 3.5% for 1997 and 1996. Amortization expense includes
the amortization of certain regulatory assets authorized by the PSC.
Accounts receivable
The company has an agreement that expires in November 2001 to sell, with
limited recourse, undivided percentage interests in certain of its accounts
receivable from customers. The agreement allows the company to receive up to
$152 million from the sale of such interests. At December 31, 1998 and 1997,
accounts receivable on the balance sheets are shown net of $152 million of
interests in accounts receivable sold. All fees related to the sale of
accounts receivable are included in other income and deductions on the
statements of income and amounted to approximately $9 million in 1998, 1997 and
1996. Accounts receivable on the balance sheets are also shown net of an
allowance for doubtful accounts of $6 million at December 31, 1998, and $7
million at December 31, 1997. Bad debt expense was $15 million in 1998, $17
million in 1997 and $19 million in 1996.
Income taxes
The company files a consolidated federal income tax return. Deferred
income taxes reflect the effect of temporary differences between the amount of
assets and liabilities recognized for financial reporting purposes and the
amount recognized for tax purposes. Investment tax credits are amortized over
the estimated lives of the related assets.
Utility plant
The company charges repairs and minor replacements to operating expense
accounts. The company capitalizes renewals and betterments, including certain
indirect costs. The original cost of utility plant retired or otherwise
disposed of and the cost of removal less salvage are charged to accumulated
depreciation.
Regulatory assets and liabilities
Pursuant to Statement 71, the company capitalizes, as regulatory assets,
incurred costs that are probable of recovery in future electric and natural gas
rates. The company also records, as regulatory liabilities, obligations to
refund previously collected revenue or to spend revenue collected from
customers on future costs. In accordance with its current rate agreements, the
company no longer defers most costs that were previously subject to deferral
accounting.
<PAGE>
Unfunded future federal income taxes and deferred income taxes are
amortized as the related temporary differences reverse. Unamortized debt
expense is amortized over the lives of the related debt issues. Demand-side
management program costs, other regulatory assets and other regulatory
liabilities are amortized over various periods in accordance with the company's
current rate agreements. The company earns a return on all regulatory assets
for which funds have been spent.
Statements of cash flows
The company considers all highly liquid investments with a maturity date
of three months or less when acquired to be cash equivalents. Those
investments are included in cash and cash equivalents on the balance sheets.
Total income taxes paid were $92 million in 1998, $111 million in 1997
and $98 million in 1996.
Interest paid, net of amounts capitalized, was $103 million in 1998, $107
million in 1997 and $112 million in 1996.
Risk management
The company uses natural gas futures and options contracts to manage its
exposure to fluctuations in natural gas commodity prices. Such contracts allow
it to fix margins on sales of natural gas generally expected to occur over the
next 18 months. The cost or benefit of natural gas futures and options
contracts is included in the commodity cost when the related sales commitments
are fulfilled.
The company uses electricity contracts to manage its exposure to
fluctuations in the cost of electricity. Such contracts allow it to fix margins
on the majority of its retail and wholesale sales of electricity. The cost or
benefit of electricity contracts is included in the cost of electricity
purchased when the electricity is sold.
The company uses interest rate swap agreements to manage the risk of
increases in variable interest rates. The company records amounts paid and
received under the agreements as adjustments to the interest expense of the
specific debt issues.
Gains and losses resulting from the use of risk management techniques in
1998 and 1997 were not material to the company's financial position or results
of operations. The company does not hold or issue financial instruments for
trading or speculative purposes.
Estimates
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain amounts have been reclassified on the financial statements to
conform with the 1998 presentation.
<PAGE>
Note 2. Sale of Coal-fired Generation Assets
In the spring of 1998 an affiliate's seven coal-fired generating stations
and associated assets and liabilities were put up for auction. The net book
value of those coal-fired generation assets was $1.10 billion at December 31,
1998. In August 1998 two offers totaling $1.85 billion were accepted for the
coal-fired generation assets. The PSC approved the sales in November 1998 and
the FERC approved the sales in January 1999. An affiliate completed the sale
of its interest in the Homer City generation assets and expects to complete the
sale of its remaining coal-fired generation assets in several weeks.
All proceeds, net of taxes and transaction costs, in excess of the net
book value of the generation assets, less funded deferred taxes, will be used
to write down the company's 18% investment in Nine Mile Point nuclear
generating unit No. 2. This treatment is in accordance with its restructuring
plan approved by the PSC in January 1998. (See Note 3. Jointly-owned Generating
Stations.)
Note 3. Jointly-owned Generating Stations
Nine Mile Point nuclear generating unit No. 2
The company has an 18% interest in the output and costs of NMP2, which is
operated by Niagara Mohawk Power Corporation. Ownership of NMP2 is shared with
Niagara Mohawk 41%, Long Island Power Authority 18%, Rochester Gas and Electric
Corporation 14% and Central Hudson Gas & Electric Corporation 9%.
The company's share of the rated capability is 205 megawatts. The
company's share of net utility plant investment, excluding nuclear fuel, was
approximately $573 million at December 31, 1998, and $591 million at December
31, 1997. The accumulated provision for depreciation was approximately $178
million at December 31, 1998, and $162 million at December 31, 1997.
Net proceeds from the sale of an affiliate's coal-fired generation assets
will be used to write down the company's 18% investment in NMP2. (See Note 2.
Sale of Coal-fired Generation Assets.) The company's share of operating
expenses is included in the consolidated statements of income.
The company is actively pursuing the sale of its 18% interest in NMP2. In
January Niagara Mohawk Power Corporation, the operator and 41% owner of NMP2,
announced its intention to pursue the sale of its interest in NMP2. Together
the company and Niagara Mohawk are in active discussions concerning the sale to
a third party who recently completed due diligence at the site. The company
will petition for all necessary regulatory approvals if an agreement is reached
to sell NMP2.
Nuclear insurance
Niagara Mohawk maintains public liability and property insurance for
NMP2. The company reimburses Niagara Mohawk for its 18% share of those costs.
The public liability limit for a nuclear incident is approximately $9.1
billion. Should losses stemming from a nuclear incident exceed the
commercially available public liability insurance, each licensee of a nuclear
facility would be liable for up to $84 million per incident, payable at a rate
not to exceed $10 million per year. The company's maximum liability for its 18%
interest in NMP2 would be approximately $15 million per incident. The $84
million assessment is subject to periodic inflation indexing and a 5% surcharge
should funds prove insufficient to pay claims associated with a nuclear
incident. The Price-Anderson Act also requires indemnification for
precautionary evacuations whether or not a nuclear incident actually occurs.
<PAGE>
Niagara Mohawk has obtained property insurance for NMP2 totaling
approximately $2.8 billion through the Nuclear Insurance Pools and Nuclear
Electric Insurance Limited. In addition, the company has purchased NEIL
insurance coverage for the extra expense that would be incurred by purchasing
replacement power during prolonged accidental outages. Under NEIL programs,
should losses resulting from an incident at a member facility exceed the
accumulated reserves of NEIL, each member, including the company, would be
liable for its share of the deficiency. The company's maximum liability per
incident under the property damage and replacement power coverage is
approximately $2 million.
Nuclear plant decommissioning costs
Based on the results of a 1995 decommissioning study, the company's 18%
share of the cost to decommission NMP2 is $161 million in 1999 dollars ($422
million in 2026 when NMP2's operating license will expire). The estimated
liability for decommissioning NMP2 using the Nuclear Regulatory Commission's
minimum funding requirement is approximately $101 million in 1999 dollars. The
company's electric rates currently include an annual allowance for
decommissioning of $4 million, which approximates the minimum funding
requirement as set forth in the 1995 decommissioning study. Decommissioning
costs are charged to depreciation and amortization expense and are recovered
over the expected life of the plant.
The company has established a Qualified Fund under applicable provisions
of the federal tax law to comply with NRC funding regulations. The balance in
the fund, including reinvested earnings, was approximately $21 million at
December 31, 1998, and $13 million at December 31, 1997. Those amounts are
included on the consolidated balance sheets in other property and investments,
net. The related liability for decommissioning is included in other
liabilities - other. At December 31, 1998, the external trust fund investments
were classified as available-for-sale.
Note 4. Holding Company Formation
On May 1, 1998, the company was reorganized into a holding company
structure pursuant to an Agreement and Plan of Share Exchange with Energy East
Corporation. Each outstanding share of the company's common stock was exchanged
for one share of Energy East's common stock and Energy East became the
company's parent. Energy East's common stock is listed on the New York Stock
Exchange under the symbol NEG. The company's common stock was delisted from the
New York Stock Exchange. The company's preferred stock and debt were not
exchanged and remain its securities. The consolidated financial statements
reflect the transfer at book value of the company's ownership interests in NGE
Generation and XENERGY Enterprises to Energy East, and the company's ownership
interest in Somerset Railroad Corporation to NGE Generation. These transfers
reduced assets by $1,101 million, liabilities by $321 million and common stock
equity by $780 million.
<PAGE>
Note 5. Long-term Debt
At December 31, 1998 and 1997, the company's long-term debt was:
Amount
Maturity Interest
Dates Rates 1998 1997
(Thousands)
First mortgage
bonds (1) 2001 to 2023 6 3/4% to 9 7/8% $800,000 $830,000
Pollution control
notes (2) 2006 to 2034 3.58% to 6.15% 613,000 613,000
Long-term notes - 28,000
Various long-term notes - 12,569
Obligations under capital leases 8,605 12,269
Unamortized premium and discount on debt, net (6,843) (7,374)
--------- ---------
1,414,762 1,488,464
Less debt due within one year - included
in current liabilities 2,604 38,240
--------- ---------
Total $1,412,158 $1,450,224
========= =========
At December 31, 1998, long-term debt and capital lease payments that
will become due during the next five years are:
1999 2000 2001 2002 2003
(Thousands)
$2,604 $581 $50,230 $150,150 $163
(1) The company's first mortgage bond indenture constitutes a direct first
mortgage lien on substantially all of its utility plant. The mortgage also
provides for a sinking and improvement fund. This provision requires the
company to make an annual cash deposit with the Trustee equal to 1% of the
principal amount of all bonds delivered and authenticated by the Trustee before
January 1 of that year (excluding any bonds issued on the basis of the
retirement of bonds). Pursuant to the terms of the mortgage, the company
satisfied the requirement in 1998 by crediting "bondable value of property
additions" against the amount of cash to be deposited. The company redeemed, in
March 1998, $30 million of 6 1/2% Series first mortgage bonds, due September 1,
1998.
(2) Fixed-rate pollution control notes totaling $306 million were issued to
secure the same amount of tax-exempt pollution control revenue bonds issued by
a governmental authority. The interest rates range from 5.70% to 6.15%.
Adjustable-rate pollution control notes totaling $132 million were issued
to secure the same amount of tax-exempt adjustable-rate pollution control
revenue bonds (Adjustable-rate Revenue Bonds) issued by a governmental
authority. The Adjustable-rate Revenue Bonds bear interest at rates ranging
from 3.58% to 4.18% through dates preceding various annual interest rate
adjustment dates. On the annual interest rate adjustment dates the interest
rates will be adjusted, or at the company's option, subject to certain
conditions, a fixed rate of interest may become effective. Bond owners may
elect, subject to certain conditions, to have their Adjustable-rate Revenue
Bonds purchased by the Trustee. The company has entered into interest rate
swaps to manage the risk of increases in the interest rates on the
Adjustable-rate Revenue Bonds, and such swaps are reflected in the above
interest rates.
<PAGE>
Multi-mode pollution control notes totaling $175 million were issued to
secure the same amount of tax-exempt multi-mode pollution control refunding
revenue bonds (Multi-mode Revenue Bonds) issued by a governmental authority.
The Multi-mode Revenue Bonds have a structure that allows the interest rates to
be based on a daily rate, a weekly rate, a commercial paper rate, an auction
rate, a term rate or a fixed rate. Bond owners may elect, while the Multi-mode
Revenue Bonds bear interest at a daily or weekly rate, to have their bonds
purchased by the Registrar and Paying Agent. The maturity dates of the
Multi-mode Revenue Bonds are February 1, 2029, June 1, 2029, and October 1,
2029, and can be extended subject to certain conditions. At December 31, 1998,
the interest rate for the multi-mode pollution control notes was at the daily
rate. The weighted average interest rate for all three series was 3.28%,
excluding letter of credit fees, for the year ended December 31, 1998.
The company has irrevocable letters of credit that support certain
payments required to be made on the Adjustable-rate Revenue Bonds and
Multi-mode Revenue Bonds, and that expire on various dates. If it is unable to
extend the letter of credit related to a particular series of Adjustable-rate
Revenue Bonds, that series will have to be redeemed unless a fixed rate of
interest becomes effective. Multi-mode Revenue Bonds are subject to mandatory
purchase when there is any change in the interest rate mode and in certain
other circumstances. Payments made under the letters of credit in connection
with purchases of Adjustable-rate Revenue Bonds and Multi-mode Revenue Bonds
are repaid with the proceeds from the remarketing of those Bonds. To the
extent the proceeds are not enough, the company is required to reimburse the
bank that issued the letter of credit.
Note 6. Bank Loans and Other Borrowings
The company uses short-term, unsecured notes, usually commercial paper,
to finance certain refundings and for other corporate purposes. The weighted
average interest rate on commercial paper balances was 6.2% at December 31,
1998 and 6.3% at December 31, 1997.
The company has a revolving credit agreement with certain banks that
provides for borrowing of up to $200 million through December 31, 2001. The
revolving credit agreement does not require compensating balances. The company
had no outstanding loans under this agreement at December 31, 1998 or 1997. At
the company's option, the interest rate on borrowings is related to the prime
rate, the London Interbank Offered Rate or the interest rate applicable to
certain certificates of deposit. The agreement provides for payment of a
commitment fee which was .125% at December 31, 1998 and 1997.
<PAGE>
Note 7. Preferred Stock
At December 31, 1998 and 1997, the company's serial cumulative preferred
stock was:
Shares
Par Value Redemption Authorized
Per Price and Amount
Series Share Per Share Outstanding(1) 1998 1997
(Thousands)
Redeemable solely at our option:
3.75% $100 $104.00 150,000 $15,000 $15,000
4 1/2%(1949) 100 103.75 40,000 4,000 4,000
4.15% 100 101.00 14,000 1,400 1,400
4.40% 100 102.00 55,200 5,520 5,520
4.15% (1954) 100 102.00 35,200 3,520 3,520
6.48% (2) 100 - - 30,000
7.40% (3) 25 25.00 1,000,000 25,000 25,000
Adjustable
Rate (3) 25 25.00 2,000,000 50,000 50,000
104,440 134,440
Less preferred stock redemptions due within one
year - included in current liabilities 75,000 -
Total $29,440 $134,440
Subject to mandatory redemption requirements:
6.30% (4) 100 102.52 250,000 $25,000 $25,000
(1) At December 31, 1998, there were 1,910,600 shares of $100 par value
preferred stock, 7,800,000 shares of $25 par value preferred stock and
1,000,000 shares of $100 par value preference stock authorized but unissued.
After giving effect to the redemptions referred to in (3) below, there will be
10,800,000 shares of $25 par value preferred stock authorized but unissued.
(2) Redeemed July 1, 1998.
(3) To be redeemed February 1, 1999.
(4) On January 1 of each year from 2004 through 2008, the company must redeem
12,500 shares at par, and on January 1, 2009, it must redeem the balance of the
shares at par. This Series is redeemable at its option at $102.52 per share
before January 1, 2000. The $102.52 price will be reduced annually by 63 cents
for the years ending 2000 through 2002; thereafter, the redemption price is
$100.00. The company is restricted in its ability to redeem this Series before
January 1, 2004.
Note 8. Fair Value of Financial Instruments
The carrying amounts and estimated fair values of some of the company's
financial instruments included in its consolidated balance sheets are shown in
the following table. The fair values are based on the quoted market prices for
the same or similar issues of the same remaining maturities.
December 31 1998 1998 1997 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Thousands)
Investments held in external
trust funds - classified as
available-for-sale $30,097 $30,230 $53,049 $53,708
Preferred stock subject
to mandatory redemption
requirements $25,000 $25,188 $25,000 $24,315
First mortgage bonds $793,157 $861,756 $822,626 $882,616
Pollution control notes $613,000 $631,421 $613,000 $625,149
<PAGE>
The carrying amounts for cash and cash equivalents, commercial paper and
interest accrued approximate their estimated fair values because they mature
within one year.
Special deposits include restricted funds set aside for preferred stock
and long-term debt redemptions. The carrying amount approximates fair value
because the special deposits have been invested in securities that mature
within one year.
Note 9. Segment Information
The company's two business segments are electric and natural gas. The
electric business segment consists of electric generation, transmission and
distribution operations. The natural gas business segment consists of natural
gas distribution, transportation and storage operations. Selected financial
information for each business segment is presented in the following table.
Natural
Year Electric Gas Other Total
(Thousands)
1998
Operating Revenues $1,706,876 $305,881 - $2,012,757
Depreciation and
Amortization $129,239 $15,497 - $144,736
Operating Income $442,977 $39,743 - $482,720
Interest Charges, Net $104,968 $17,718 $458 $123,144
Federal Income Taxes $130,496 $7,638 $(737) $137,397
Balance Available for
Common Stock $196,230 $11,056 $(2,071) $205,215
Identifiable Assets $2,983,686 $575,088 $159,238 $3,718,012
Capital Spending $94,106 $32,268 $330 $126,704
1997
Operating Revenues $1,792,164 $337,825 - $2,129,989
Depreciation and
Amortization $183,304 $15,255 - $198,559
Operating Income $380,344 $62,324 - $442,668
Interest Charges, Net $104,569 $17,113 $1,517 $123,199
Federal Income Taxes $104,575 $15,212 $(2,074) $117,713
Balance Available for
Common Stock $154,315 $26,482 $(5,586) $175,211
Identifiable Assets $4,273,100 $588,773 $166,808 $5,028,681
Capital Spending $78,667 $45,240 $5,644 $129,551
1996
Operating Revenues $1,723,147 $344,385 - $2,067,532
Depreciation and
Amortization $176,906 $12,495 - $189,401
Operating Income $400,262 $57,281 - $457,543
Interest Charges, Net $108,696 $12,735 $1,298 $122,729
Federal Income Taxes $102,223 $16,822 $(11,102) $107,943
Balance Available for
Common Stock $167,201 $24,189 $(22,679) $168,711
Identifiable Assets $4,376,814 $550,196 $132,671 $5,059,681
Capital Spending $132,190 $82,625 $916 $215,731
<PAGE>
Note 10. Income Taxes
Year ended December 31 1998 1997 1996
(Thousands)
Current $105,495 $111,829 $79,015
Deferred, net
Accelerated depreciation 12,909 29,070 52,572
Miscellaneous 21,750 (18,130) (17,307)
ITC (2,757) (5,056) (6,337)
-------- -------- --------
Total $137,397 $117,713 $107,943
======== ======== ========
The company's effective tax rate differed from the statutory rate of 35%
due to the following:
Year ended December 31 1998 1997 1996
(Thousands)
Tax expense at statutory rate $122,907 $105,792 $100,165
Depreciation not normalized 11,521 16,854 20,542
ITC amortization (4,458) (6,359) (6,337)
Other, net 7,427 1,426 (6,427)
-------- -------- --------
Total $137,397 $117,713 $107,943
======== ======== ========
The company's deferred tax assets and liabilities consisted of the
following:
December 31 1998 1997
(Thousands)
Current Deferred Tax Assets - $2,148
======== ========
Current Deferred Tax Liabilities $44,274 -
======== ========
Noncurrent Deferred Taxes
Depreciation $506,187 $775,943
Unfunded future federal income taxes 60,896 99,126
Accumulated deferred ITC 65,085 114,640
Future income tax benefit - ITC (21,868) (40,087)
Other (18,398) (16,399)
-------- --------
Total Noncurrent Deferred
Tax Liabilities 591,902 933,223
Valuation Allowance - 1,611
Less amounts classified as
regulatory liabilities
Deferred income taxes 98,038 81,986
Deferred income taxes - unfunded
future federal income taxes 60,896 99,126
-------- --------
Noncurrent Deferred Income Taxes (1) $432,968 $753,722
======== ========
(1) Decrease due to transfer of coal-fired generation assets to an affiliate.
(See Note 4. Holding Company Formation.)
<PAGE>
Note 11. Retirement Benefits
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
(Thousands)
Change in projected benefit obligation
Benefit obligation
at January 1 $746,008 $679,778 $258,884 $226,193
Service cost 19,500 19,317 6,283 7,010
Interest cost 51,556 50,951 16,606 17,075
Amendments - 4,120 - -
Actuarial loss (gain) 21,831 24,835 (3,889) 16,891
Benefits paid (35,614) (32,993) (8,432) (8,285)
---------- ---------- ---------- ---------
Projected benefit
obligation at
December 31 $803,281 $746,008 $269,452 $258,884
========== ========== ========== =========
Change in plan assets
Fair value of
plan assets
at January 1 $1,176,184 $995,795 - -
Actual return on
plan assets 155,956 213,382 - -
Benefits paid (35,614) (32,993)
---------- ---------- ---------- ----------
Fair value of
plan assets
at December 31 $1,296,526 $1,176,184 - -
========== ========== ========== ==========
Funded status $493,245 $430,176 $(269,452) $(258,884)
Unrecognized net
actuarial gain (395,780) (372,046) (12,847) (13,824)
Unrecognized prior
service cost 26,290 28,307 - -
Unrecognized net
transition (asset)
obligation (37,421) (44,660) 144,618 154,948
---------- ---------- ---------- ---------
Prepaid (accrued)
benefit cost $86,334 $41,777 $(137,681) $(117,760)
========== ========== ========== =========
The company's postretirement benefits were unfunded as of December 31, 1998
and 1997.
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
Weighted-average assumptions
as of December 31
Discount rate 6.5% 7.0% 6.5% 7.0%
Expected return on
plan assets 8.5% 8.5% N/A N/A
Rate of compensation
increase 3.75% 4.25% N/A N/A
The company assumed a 7% annual rate of increase in the costs of covered
health care benefits for 1999 that gradually decreases to 5% by the year 2003.
<PAGE>
Pension Benefits Postretirement Benefits
1998 1997 1996 1998 1997 1996
(Thousands)
Components of net periodic
benefit cost
Service cost $19,500 $19,317 $18,593 $6,283 $7,010 $6,436
Interest cost 51,556 50,951 46,070 16,606 17,075 15,795
Expected return on
plan assets (84,007) (73,777) (62,615) - - -
Amortization of prior
service cost 2,016 2,078 661 - - -
Recognized net
actuarial gain (26,384) (18,056) (11,603) (4,865) (3,565) (3,246)
Amortization of transition
(asset) obligation (7,238) (7,238) (7,238) 10,330 10,330 10,330
Deferral for future
recovery - - - (9,600)(11,766) (8,950)
-------- -------- -------- ------- ------- -------
Net periodic
benefit cost $(44,557) $(26,725) $(16,132) $18,754 $19,084 $20,365
========= ========= ========= ======= ======= =======
The net periodic benefit cost for postretirement benefits represents the
costs charged to expense for providing health care benefits to retirees and
their eligible dependents. The amount of postretirement benefit cost deferred
was $10 million as of December 31, 1998, and $14 million as of December 31,
1997. The company expects to recover any deferred postretirement costs by the
year 2002. The transition obligation for postretirement benefits is being
amortized over a period of 20 years.
A one-percent change in the health care cost inflation rate from assumed
rates would have the following effects:
One-Percent One-Percent
Increase Decrease
Effect on total of service and
interest cost components $4 million $(3 million)
Effect on postretirement
benefit obligation $45 million $(36 million)
Note 12. Environmental Liability
From time to time environmental laws, regulations and compliance programs
may require changes in the company's operations and facilities and may increase
the cost of electric and natural gas service.
The U.S. Environmental Protection Agency and the New York State Department
of Environmental Conservation, as appropriate, notified the company that it is
among the potentially responsible parties who may be liable for costs incurred
to remediate certain hazardous substances at nine waste sites, not including
sites where gas was manufactured in the past, which are discussed below. With
respect to the nine sites, seven sites are included in the New York State
Registry of Inactive Hazardous Waste Sites and three of the sites are also
included on the National Priorities list.
Any liability may be joint and several for certain of those sites. The
company recorded an estimated liability of $1 million related to five of the
nine sites. The ultimate cost to remediate the sites may be significantly more
than the estimated amount. Factors affecting the estimated remediation amount
include the remedial action plan selected, the extent of site contamination and
the portion attributed to the company.
<PAGE>
The company has a program to investigate and perform necessary remediation
at its sites where gas was manufactured in the past. In 1994 and 1996, the
company entered into Orders on Consent with the NYSDEC. These Orders require
the company to investigate and, where necessary, remediate 34 of its 38 sites.
Eight sites are included in the New York State Registry.
The company's estimate for all costs related to investigation and
remediation of the 38 sites ranges from $79 million to $178 million at December
31, 1998. That estimate is based on both known and potential site conditions
and multiple remediation alternatives for each of the sites. The estimate has
not been discounted and is based on costs in 1996 dollars that the company
expects to incur through the year 2017. The estimate could change materially,
based on facts and circumstances derived from site investigations, changes in
required remedial action, changes in technology relating to remedial
alternatives and changes to current laws and regulations.
The liability to investigate and perform remediation, as necessary, at the
known inactive gas manufacturing sites, reflected in its consolidated balance
sheets was $79 million at December 31, 1998 and $81 million at December 31,
1997. The company recorded a corresponding regulatory asset, net of insurance
recoveries, since it expects to recover the net costs in rates.
Note 13. Commitments
Capital Spending
The company has commitments in connection with its capital spending
program and estimates that spending, including nuclear fuel, will approximate
$92 million for 1999, $105 million for 2000 and $85 million for 2001. The
capital spending program is expected to be financed entirely with internally
generated funds. The program is subject to periodic review and revision.
Capital spending will be primarily for the extension of service, necessary
improvements to existing facilities and environmental compliance requirements.
Nonutility generator power purchase contracts
The company expensed approximately $326 million in 1998, $324 million in
1997 and $320 million in 1996 for NUG power, including termination costs. The
company estimates that NUG power purchases will total $358 million in 1999 and
$376 million in 2000 and in 2001, unless it is able to change the NUG
contracts.
Note 14. Quarterly Financial Information (Unaudited)
Quarter ended March 31 June 30 Sep. 30 Dec. 31
(Thousands)
1998 1998 1998 1998
Operating Revenues $627,232 $459,303 $445,316 $480,906
Operating Income $157,142 $93,335 $103,612 $128,631
Net Income $78,440 $36,166 $41,802 $57,390
Balance Available for
Common Stock $76,171 $33,906 $39,451 $55,687
1997 1997 1997 1997
Operating Revenues $588,137 $470,370 $492,829 $578,653
Operating Income $167,527 $82,743 $80,826 $111,572
Net Income $81,977 $26,275 $28,277(1) $48,024
Balance Available for
Common Stock $79,662 $23,923 $25,929(1) $45,697
(1) Includes the effect of fees related to an unsolicited tender offer that
decreased net income and balance available for common stock by $17 million.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors,
New York State Electric & Gas Corporation
Ithaca, New York
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of New York
State Electric & Gas Corporation, "the Company," and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, 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 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.
PricewaterhouseCoopers LLP
New York, New York
January 29, 1999
<PAGE>
<TABLE>
<CAPTION>
NEW YORK STATE ELECTRIC & GAS CORPORATION
SCHEDULE II - Consolidated Valuation and Qualifying Accounts
(Thousands)
Years Ended December 31, 1998, 1997 and 1996
<S> <C> <C> <C> <C> <C>
Beginning End
Classification of Year Additions Write-offs (a) Adjustments of Year
1998
Allowance for Doubtful
Accounts - Accounts
Receivable $6,801 $14,867 $(14,861) (501)(c) $6,306 (b)
Deferred Tax Asset
Valuation Allowance $1,611 - - (1,611)(c) -
1997
Allowance for Doubtful
Accounts - Accounts
Receivable $6,806 $17,345 $(17,350) - $6,801 (b)
Deferred Tax Asset
Valuation Allowance $1,385 $226 - - $1,611
1996
Allowance for Doubtful
Accounts - Accounts
Receivable $6,785 $18,858 $(18,937) $100(d) $6,806 (b)
Deferred Tax Asset
Valuation Allowance $2,852 $158 $(1,625) - $1,385
(a) Uncollectible accounts charged against the allowance, net of recoveries.
(b) Represents an estimate of the write-offs that will not be recovered in rates.
(c) Due to the transfer of XENERGY Enterprises to Energy East Corporation.
(d) Due to acquisition of KENETECH Energy Management, Inc. in 1996.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors,
New York State Electric & Gas Corporation
Ithaca, New York
Our audits of the consolidated financial statements
referred to in our report dated January 29, 1999,
appearing in this annual report of Form 10-K also
included an audit of the financial statement schedule
listed in Item 14(a) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all
material respects, the information set forth therein when
read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
New York, New York
January 29, 1999
<PAGE>
Item 9. Changes in and disagreements with accountants on accounting and
financial disclosure - None
PART III
Item 10. Directors and executive officers of the Registrant
Information regarding Directors and compliance with Section 16(a) of the
Securities Exchange Act of 1934 is set forth in Exhibit 99-1. Information
regarding executive officers is on pages 7 and 8 of this report.
Item 11. Executive compensation
Information regarding executive compensation is set forth in Exhibits
99-1 and 99-2.
Item 12. Security ownership of certain beneficial owners and management
Energy East is the beneficial owner of 100% of the company's common
stock. Information regarding ownership of equity securities of Energy East is
set forth in Exhibits 99-1 and 99-2.
Item 13. Certain relationships and related transactions
The law firms of which Mr. Gioia and Mr. Keeler are of counsel provided
in 1998, and are expected to provide in 1999, legal services to the company.
PART IV
Item 14. Exhibits, financial statement schedules, and reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial statements
Included in Part II of this report:
a) Consolidated Balance Sheets as of December 31, 1998 and 1997
b) For the three years ended December 31, 1998:
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Common Stock Equity
c) Notes to Consolidated Financial Statements
d) Report of Independent Accountants
2. Financial statement schedule
Included in Part II of this report:
For the three years ended December 31, 1998:
II. Consolidated Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since they are
not required, are inapplicable or the required information is presented in the
Consolidated Financial Statements or notes thereto.
<PAGE>
3. Exhibits
(a)(1) The following exhibits are delivered with this report:
Exhibit No.
12 - Computation of Ratio of Earnings to Fixed Charges.
23 - Consent of PricewaterhouseCoopers LLP to incorporation by
reference into certain registration statements.
27 - Financial Data Schedule.
99-1 - Information regarding directors, Section 16 (a) compliance,
executive compensation, employment, change in control and other
arrangements, and security ownership of management.
99-2 - Information from Energy East Corporation's Proxy Statement dated
March 3, 1999, under the captions "Security Ownership of
Management," "Executive Compensation," "Employment, Change in
Control and Other Arrangements" and "Directors' Compensation."
99-3 - Information from Energy East Corporation's Form 10-K for the year
ended December 31, 1998, Item 3. Legal Proceedings.
(a)(2) The following exhibits are incorporated herein by reference:
Exhibit No. Filed in As Exhibit No.
2-1 - Agreement and Plan of Share Exchange between the
Company and Energy East Corporation - Registration
No. 333-37997 . . . . . . . . . . . . . . . . . . 2-1
3-1 - Restated Certificate of Incorporation of the
Company pursuant to Section 807 of the Business
Corporation Law filed in the Office of the
Secretary of State of the State of New York on
October 25, 1988 - Registration No. 33-50719 . . . 4-11
3-2 - Certificate of Amendment of the Certificate of
Incorporation filed in the Office of the
Secretary of State of the State of New York
on October 17, 1989 - Registration No. 33-50719 . . 4-12
3-3 - Certificate of Amendment of the Certificate of
Incorporation filed in the Office of the Secretary
of State of the State of New York on May 22, 1990 -
Registration No. 33-50719 . . . . . . . . . . . . . 4-13
3-4 - Certificate of Amendment of the Certificate of
Incorporation filed in the Office of the
Secretary of State of the State of New York
on October 31, 1990 - Registration No. 33-50719 . . 4-14
3-5 - Certificate of Amendment of the Certificate of
Incorporation filed in the Office of the
Secretary of State of the State of New York
on February 6, 1991 - Registration No. 33-50719 . . 4-15
3-6 - Certificate of Amendment of the Certificate of
Incorporation filed in the Office of the
Secretary of State of the State of New York
on October 15, 1991 - Registration No. 33-50719 . . 4-16
3-7 - Certificate of Merger of Columbia Gas of New York,
Inc. into the Company filed in the Office of the
Secretary of State of the State of New York on
April 8, 1991 - Registration No. 33-50719 . . . . . 4-20
3-8 - Certificate of Amendment of the Certificate of
Incorporation filed in the Office of the Secretary
of State of the State of New York on May 28, 1992 -
Registration No. 33-50719 . . . . . . . . . . . . . 4-17
<PAGE>
Exhibit No. Filed in As Exhibit No.
3-9 - Certificate of Amendment of the Certificate of
Incorporation filed in the Office of the Secretary
of State of the State of New York on October 20, 1992 -
Registration No. 33-50719 . . . . . . . . . . . . . 4-18
3-10 - Certificate of Amendment of the Certificate of
Incorporation filed in the Office of the Secretary
of State of the State of New York on October 14, 1993 -
Registration No. 33-50719 . . . . . . . . . . . . . 4-19
3-11 - Certificate of Amendment of the Certificate of Incor-
poration filed in the Office of the Secretary of State
of the State of New York on December 10, 1993 -
Company's 10-K for the year ended December 31, 1993 -
File No. 1-3103-2 . . . . . . . . . . . . . . . . . 3-11
3-12 - Certificate of Amendment of the Certificate of Incor-
poration filed in the Office of the Secretary of State
of the State of New York on December 20, 1993 -
Company's 10-K for the year ended December 31, 1993 -
File No. 1-3103-2 . . . . . . . . . . . . . . . . . 3-12
3-13 - Certificate of Amendment of the Certificate of Incor-
poration filed in the Office of the Secretary of State
of the State of New York on December 20, 1993 -
Company's 10-K for the year ended December 31, 1993 -
File No. 1-3103-2 . . . . . . . . . . . . . . . . . 3-13
3-14 - Certificates of the Secretary of the Company concern-
ing consents dated March 20, 1957 and May 9, 1975 of
holders of Serial Preferred Stock with respect to
issuance of certain unsecured indebtedness -
Registration No. 2-69988. . . . . . . . . . . . . . 4-7
3-15 - By-Laws of the Company as amended June 5, 1998 -
Company's 10-Q for the quarter ended June 30, 1998 -
File No. 1-3103-2 . . . . . . . . . . . . . . . . . 3-15
4-1 - First Mortgage dated as of July 1, 1921 executed by
the Company under its then name of "New York State
Gas and Electric Corporation" to The Equitable Trust
Company of New York, as Trustee (The Chase Manhattan
Bank is Successor Trustee) - Registration No. 33-4186. 4-1
Supplemental Indentures to First Mortgage dated as of July 1, 1921:
4-2 - No. 37 - Registration No. 33-31297. . . . . . . . . 4-2
4-3 - No. 39 - Registration No. 33-31297. . . . . . . . . 4-3
4-4 - No. 43 - Registration No. 33-31297. . . . . . . . . 4-4
4-5 - No. 51 - Registration No. 2-59840 . . . . . . . . . 2-B(46)
4-6 - No. 74 - Registration No. 2-59840 . . . . . . . . . 2-B(69)
4-7 - No. 75 - Registration No. 2-59840 . . . . . . . . . 2-B(70)
4-8 - No. 103- Registration No. 33-43458. . . . . . . . . 4-8
4-9 - No. 104- Registration No. 33-43458. . . . . . . . . 4-9
4-10 - No. 105- Registration No. 33-52040. . . . . . . . . 4-8
4-11 - No. 106- Company's 10-K for the year ended
December 31, 1992 - File No. 1-3103-2. . . 4-23
4-12 - No. 107- Company's 10-K for the year ended
December 31, 1992 - File No. 1-3103-2. . . 4-24
4-13 - No. 108- Registration No. 33-50719. . . . . . . . . 4-8
4-14 - No. 109- Registration No. 33-50719. . . . . . . . . 4-9
<PAGE>
Exhibit No. Filed in As Exhibit No.
10-1 - Transmission Agreement dated December 12, 1983 with
the Power Authority of the State of New York, with
respect to connection of the Kintigh (Somerset)
Generating Station to the Niagara-Edic 345 kv
transmission system - Company's 10-K for the year
ended December 31, 1988 - File No. 1-3103-2 . . . . 10-6
10-2 - Amendment dated December 21, 1989 to the Transmission
Agreement dated December 12, 1983 with the Power
Authority of the State of New York, with respect to
connection of the Kintigh (Somerset) Generating Station
to the Niagara-Edic 345 kv transmission system -
Company's 10-K for the year ended December
31, 1989 - File No. 1-3103-2. . . . . . . . . . . . . 10-7
10-3 - New York Power Pool Agreement dated July 16, 1985 -
Company's 10-K for the year ended December 31, 1988 -
File No. 1-3103-2 . . . . . . . . . . . . . . . . . 10-7
10-4 - Transmission Agreement dated January 10, 1990, between
the Company and Niagara Mohawk Power Corporation,
with respect to remote load and generation wheeling
service for the Company - Company's 10-K for the
year ended December 31, 1990 - File No. 1-3103-2. . 10-17
10-5 - Basic Agreement dated as of September 22, 1975
between the Company and others concerning Nine Mile
Point Nuclear Station, Unit No. 2 - Registration
No. 2-54903. . . . . . . . . . . . . . . . . . . . 5-0
10-6 - Nine Mile Point Nuclear Station Unit 2 Operating
Agreement effective as of January 1, 1993 among
the Company and others - Company's 10-K for the
year ended December 31, 1992 - File No. 1-3103-2. . 10-18
10-7 - Asset Purchase Agreement among Pennsylvania Electric
Company, NGE Generation, Inc., the Company and
Mission Energy Westside, Inc. dated as of August 1,
1998 - Energy East Corporation's 10-K for the year
ended December 31, 1998 - File No. 1-14766. . . . . 10-1
10-8 - Asset Purchase Agreement among NGE Generation, Inc.,
the Company and AES NY, L.L.C. dated as of August 3,
1998 - Energy East Corporation's 10-K for the year
ended December 31, 1998 - File No. 1-14766. . . . . 10-2
(A)10-9 - Retirement Plan for Directors - Company's 10-K
for the year ended December 31, 1991 -
File No. 1-3103-2 . . . . . . . . . . . . . . . . . 10-26
(A)10-10 - Retirement Plan for Directors Amendment No. 1 -
Company's 10-K for the year ended December 31, 1993 -
File No. 1-3103-2 . . . . . . . . . . . . . . . . . 10-21
(A)10-11 - Retirement Plan for Directors Amendment No. 2 -
Company's 10-K for the year ended December 31, 1995 -
File No. 1-3103-2 . . . . . . . . . . . . . . . . . 10-15
(A)10-12 - Retirement Plan for Directors Amendment No. 3 -
Company's 10-K for the year ended December 31, 1996 -
File No. 1-3103-2 . . . . . . . . . . . . . . . . . 10-16
(A)10-13 - Retirement Plan for Directors Amendment No. 4 -
Company's 10-Q for the quarter ended June 30, 1998
- File No. 1-3103-2 . . . . . . . . . . . . . . . . . 10-46
<PAGE>
Exhibit No. Filed in As Exhibit No.
(A)10-14 - Form of Deferred Compensation Plan for Directors -
Company's 10-K for the year ended December 31, 1989 -
File No. 1-3103-2 . . . . . . . . . . . . . . . . . 10-22
(A)10-15 - Deferred Compensation Plan for Directors Amendment
No. 1 - Company's 10-K for the year ended December
31, 1993 - File No. 1-3103-2. . . . . . . . . . . . 10-23
(A)10-16 - Amended and Restated Director Share Plan - Company's
10-Q for the quarter ended June 30, 1998 - File
No. 1-3103-2 . . . . . . . . . . . . . . . . . 10-47
(A)10-17 - Deferred Compensation Plan for the Director Share
Plan - Company's 10-K for the year ended December
31, 1996 - File No. 1-3103-2. . . . . . . . . . . . 10-20
(A)10-18 - Amended and Restated Supplemental Executive
Retirement Plan - Company's 10-Q for the quarter
ended June 30, 1998 - File No. 1-3103-2 . . . . . . 10-48
(A)10-19 - Amended and Restated Annual Executive Incentive Plan
- Company's 10-Q for the quarter ended June 30, 1998
- File No. 1-3103-2 . . . . . . . . . . . . . . . . 10-49
(A)10-20 - Amended and Restated Long-Term Executive Incentive
Share Plan - Company's 10-Q for the quarter ended
June 30, 1998 - File No. 1-3103-2 . . . . . . . . . 10-50
(A)10-21 - Long-Term Executive Incentive Share Plan Amendment
No. 1 - Company's 10-Q for the quarter ended September
30, 1998 - File No. 1-3103-2 . . . . . . . . . . . . 10-55
(A)10-22 - Long-Term Executive Incentive Share Plan Deferred
Compensation Agreement - Company's 10-K for the year
ended December 31, 1995 - File No. 1-3103-2 . . . . 10-44
(A)10-23 - Form of Severance Agreement for Senior Vice
Presidents - Company's 10-K for the year ended December
31, 1993 - File No. 1-3103-2. . . . . . . . . . . . 10-47
(A)10-24 - Form of Severance Agreement for Senior Vice
Presidents Amendment No. 1 - Company's 10-K for the
year ended December 31, 1995 - File No. 1-3103-2 . . 10-50
(A)10-25 - Form of Severance Agreement for Senior Vice
Presidents Amendment No. 2 - Company's Schedule
14D-9, dated July 30, 1997. . . . . . . . . . . . . 4
(A)10-26 - Form of Severance Agreement for Senior Vice
Presidents Amendment No. 3 - Company's Schedule
14D-9, dated July 30, 1997. . . . . . . . . . . . . 5
(A)10-27 - Form of Amendment to the Company's Severance
Agreements - Company's 10-Q for the quarter ended
June 30, 1998 - File No. 1-3103-2 . . . . . . . . . 10-51
(A)10-28 - Employee Invention and Confidentiality Agreement
(Existing Executive) - Company's Schedule 14D-9,
dated July 30, 1997 . . . . . . . . . . . . . . . . 9
(A)10-29 - Employee Invention and Confidentiality Agreement
(Existing Executive) Amendment No. 1 - Company's
Schedule 14D-9, dated July 30, 1997 . . . . . . . . 10
(A)10-30 - Deferred Compensation Plan for Salaried Employees -
Company's 10-K for the year ended December 31, 1995 -
File No. 1-3103-2 . . . . . . . . . . . . . . . . . 10-53
(A)10-31 - Amended and Restated Employment Agreement for W.W.
von Schack - Company's 10-Q for the quarter ended
June 30, 1998 - File No. 1-3103-2 . . . . . . . . . 10-52
<PAGE>
Exhibit No. Filed in As Exhibit No.
(A)10-32 - Amended and Restated Employment Agreement for M.I.
German - Company's 10-Q for the quarter ended
June 30, 1998 - File No. 1-3103-2 . . . . . . . . . 10-53
(A)10-33 - Amended and Restated Employment Agreement for K.M.
Jasinski - Company's 10-Q for the quarter ended
June 30, 1998 - File No. 1-3103-2 . . . . . . . . . 10-54
(A)10-34 - 1997 Stock Option Plan - Company's Schedule 14D-9,
dated July 30, 1997 . . . . . . . . . . . . . . . . 20
(A)10-35 - 1997 Stock Option Plan Amendment No. 1 - Energy East
Corporation's 10-Q for the quarter ended June 30,
1998 - File No. 1-14766 . . . . . . . . . . . . . . 10-1
(A)10-36 - Non-Statutory Stock Option Award Agreement -
Company's Schedule 14D-9, dated July 30, 1997 . . . 21
(A)10-37 - Non-Statutory Stock Option Award Agreement Amendment
No. 1 - Energy East Corporation's 10-Q for the quarter
ended June 30, 1998 - File No. 1-14766. . . . . . . 10-2
(A)10-38 - Restricted Stock Plan - Energy East Corporation's
10-K for the year ended December 31, 1998 - File
No. 1-14766 . . . . . . . . . . . . . . . . . . . . 10-36
_____________________________
(A) Management contract or compensatory plan or arrangement.
The company agrees to furnish to the Commission, upon request, a copy of
the Revolving Credit Agreement dated as of July 31, 1992, as amended, between
the company, The Chase Manhattan Bank, as Agent, and certain banks; a copy of
the Participation Agreements dated as of June 1, 1987 and December 1, 1988
between the company and New York State Energy Research and Development
Authority (NYSERDA) relating to Adjustable Rate Pollution Control Revenue Bonds
(1987 Series A), and (1988 Series A), respectively; a copy of the Participation
Agreements dated as of March 1, 1985, October 15, 1985, and December 1, 1985
between the company and NYSERDA relating to Annual Tender Pollution Control
Revenue Bonds (1985 Series A), (1985 Series B), and (1985 Series D),
respectively; a copy of the Participation Agreements dated as of February 1,
1993, February 1, 1994, June 1, 1994, October 1, 1994 and December 1, 1994
between the company and NYSERDA relating to Pollution Control Refunding Revenue
Bonds (1994 Series A), (1994 Series B), (1994 Series C), (1994 Series D), and
(1994 Series E), respectively; a copy of the Participation Agreement dated as
of December 1, 1993 between the company and NYSERDA relating to Solid Waste
Disposal Revenue Bonds (1993 Series A); and a copy of the Participation
Agreement dated as of December 1, 1994 between the company and the Indiana
County Industrial Development Authority relating to Pollution Control Refunding
Revenue Bonds (1994 Series A). The total amount of securities authorized under
each of such agreements does not exceed 10% of the total assets of the company.
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly
authorized.
NEW YORK STATE ELECTRIC & GAS CORPORATION
Date: March 29, 1999 By: Sherwood J. Rafferty
Sherwood J. Rafferty
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER
Date: March 29, 1999 By: Wesley W. von Schack
Wesley W. von Schack
Chairman, President,
Chief Executive Officer and
Director
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
Date: March 29, 1999 By: Sherwood J. Rafferty
Sherwood J. Rafferty
Senior Vice President and
Chief Financial Officer
<PAGE>
Signatures (Cont'd)
Date: March 29, 1999 By: Richard Aurelio
Richard Aurelio
Director
Date: March 29, 1999 By: James A. Carrigg
James A. Carrigg
Director
Date: March 29, 1999 By: Alison P. Casarett
Alison P. Casarett
Director
Date: March 29, 1999 By: Joseph J. Castiglia
Joseph J. Castiglia
Director
Date: March 29, 1999 By: Lois B. DeFleur
Lois B. DeFleur
Director
Date: March 29, 1999 By: Everett A. Gilmour
Everett A. Gilmour
Director
<PAGE>
Signatures (Cont'd)
Date: March 29, 1999 By: Paul L. Gioia
Paul L. Gioia
Director
Date: March 29, 1999 By: John M. Keeler
John M. Keeler
Director
Date: March 29, 1999 By: Ben E. Lynch
Ben E. Lynch
Director
Date: March 29, 1999 By: Alton G. Marshall
Alton G. Marshall
Director
Date: March 29, 1999 By: Walter G. Rich
Walter G. Rich
Director
<PAGE>
EXHIBIT INDEX
*2-1 - Agreement and Plan of Share Exchange between the Company and Energy
East Corporation.
*3-1 - Restated Certificate of Incorporation of the Company pursuant to
Section 807 of the Business Corporation Law filed in the Office of the
Secretary of State of the State of New York on October 25, 1988.
*3-2 - Certificate of Amendment of the Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York on
October 17, 1989.
*3-3 - Certificate of Amendment of the Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York on May
22, 1990.
*3-4 - Certificate of Amendment of the Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York on
October 31, 1990.
*3-5 - Certificate of Amendment of the Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York on
February 6, 1991.
*3-6 - Certificate of Amendment of the Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York on
October 15, 1991.
*3-7 - Certificate of Merger of Columbia Gas of New York, Inc. into the
Company filed in the Office of the Secretary of State of the State of
New York on April 8, 1991.
*3-8 - Certificate of Amendment of the Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York on May
28, 1992.
*3-9 - Certificate of Amendment of the Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York on
October 20, 1992.
*3-10 - Certificate of Amendment of the Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York on
October 14, 1993.
*3-11 - Certificate of Amendment of the Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York on
December 10, 1993.
*3-12 - Certificate of Amendment of the Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York on
December 20, 1993.
*3-13 - Certificate of Amendment of the Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York on
December 20, 1993.
*3-14 - Certificates of the Secretary of the Company concerning consents dated
March 20, 1957 and May 9, 1975 of holders of Serial Preferred Stock
with respect to issuance of certain unsecured indebtedness.
*3-15 - By-Laws of the Company as amended June 5, 1998.
*4-1 - First Mortgage dated as of July 1, 1921 executed by the Company under
its then name of "New York State Gas and Electric Corporation" to The
Equitable Trust Company of New York, as Trustee (The Chase Manhattan
Bank is Successor Trustee).
Supplemental Indentures to First Mortgage dated as of July 1, 1921:
* 4-2 -- No. 37 * 4-7 -- No. 75 * 4-11 -- No. 106
* 4-3 -- No. 39 * 4-8 -- No. 103 * 4-12 -- No. 107
* 4-4 -- No. 43 * 4-9 -- No. 104 * 4-13 -- No. 108
* 4-5 -- No. 51 * 4-10 -- No. 105 * 4-14 -- No. 109
* 4-6 -- No. 74
<PAGE>
EXHIBIT INDEX (Cont'd)
*10-1 - Transmission Agreement dated December 12, 1983 with the Power
Authority of the State of New York, with respect to connection of
the Kintigh (Somerset) Generating Station to the Niagara-Edic 345
kv transmission system.
*10-2 - Amendment dated December 21, 1989 to the Transmission Agreement
dated December 12, 1983 with the Power Authority of the State of New
York, with respect to connection of the Kintigh (Somerset)
Generating Station to the Niagara-Edic 345 kv transmission system.
*10-3 - New York Power Pool Agreement dated July 11, 1985.
*10-4 - Transmission Agreement dated January 10, 1990, between the Company
and Niagara Mohawk Power Corporation, with respect to remote load
and generation wheeling service for the Company.
*10-5 - Basic Agreement dated as of September 22, 1975 between the Company
and others concerning Nine Mile Point Nuclear Station, Unit No. 2.
*10-6 - Nine Mile Point Nuclear Station Unit 2 Operating Agreement effective
as of January 1, 1993 among the Company and others.
*10-7 - Asset Purchase Agreement among Pennsylvania Electric Company, NGE
Generation, Inc., the Company and Mission Energy Westside, Inc.
dated as of August 1, 1998.
*10-8 - Asset Purchase Agreement among NGE Generation, Inc., the Company and
AES NY, L.L.C. dated as of August 3, 1998.
*(A)10-9 - Retirement Plan for Directors.
*(A)10-10 - Retirement Plan for Directors Amendment No. 1.
*(A)10-11 - Retirement Plan for Directors Amendment No. 2.
*(A)10-12 - Retirement Plan for Directors Amendment No. 3.
*(A)10-13 - Retirement Plan for Directors Amendment No. 4.
*(A)10-14 - Form of Deferred Compensation Plan for Directors.
*(A)10-15 - Deferred Compensation Plan for Directors Amendment No. 1.
*(A)10-16 - Amended and Restated Director Share Plan.
*(A)10-17 - Deferred Compensation Plan for the Director Share Plan.
*(A)10-18 - Amended and Restated Supplemental Executive Retirement Plan.
*(A)10-19 - Amended and Restated Annual Executive Incentive Plan.
*(A)10-20 - Amended and Restated Long-Term Executive Incentive Share Plan.
*(A)10-21 - Long-Term Executive Incentive Share Plan Amendment No. 1.
*(A)10-22 - Long-Term Executive Incentive Share Plan Deferred Compensation
Agreement.
*(A)10-23 - Form of Severance Agreement for Senior Vice Presidents.
*(A)10-24 - Form of Severance Agreement for Senior Vice Presidents
Amendment No. 1.
*(A)10-25 - Form of Severance Agreement for Senior Vice Presidents
Amendment No. 2.
*(A)10-26 - Form of Severance Agreement for Senior Vice Presidents
Amendment No. 3.
*(A)10-27 - Form of Amendment to the Company's Severance Agreements.
*(A)10-28 - Employee Invention and Confidentiality Agreement (Existing
Executive).
*(A)10-29 - Employee Invention and Confidentiality Agreement (Existing
Executive) Amendment No. 1.
*(A)10-30 - Deferred Compensation Plan for Salaried Employees.
*(A)10-31 - Amended and Restated Employment Agreement for W.W. von Schack.
*(A)10-32 - Amended and Restated Employment Agreement for M.I. German.
*(A)10-33 - Amended and Restated Employment Agreement for K.M. Jasinski.
*(A)10-34 - 1997 Stock Option Plan.
<PAGE>
EXHIBIT INDEX (Cont'd)
*(A)10-35 - 1997 Stock Option Plan Amendment No. 1.
*(A)10-36 - Non-Statutory Stock Option Award Agreement.
*(A)10-37 - Non-Statutory Stock Option Award Agreement Amendment No. 1.
*(A)10-38 - Restricted Stock Plan.
99-1 - Information regarding directors, Section 16(a) compliance,
executive compensation, employment, change in control and other
arrangements, and security ownership of management.
99-2 - Information from Energy East Corporation's Proxy Statement
dated March 3, 1999, under the captions "Security Ownership of
Management," "Executive Compensation," "Employment, Change in
Control and Other Arrangements" and "Directors' Compensation."
99-3 - Information from Energy East Corporation's Form 10-K for the
year ended December 31, 1998, Item 3. Legal Proceedings.
12 - Computation of Ratio of Earnings to Fixed Charges.
23 - Consent of PricewaterhouseCoopers LLP to incorporation by
reference into certain registration statements.
27 - Financial Data Schedule.
___________________________________
* Incorporated by reference.
(A) Management contract or compensatory plan or arrangement.
EXHIBIT 12
NEW YORK STATE ELECTRIC & GAS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Calendar Year
1998 1997 1996 1995 1994
(Thousands)
Net Income (Loss) . . . . . $213,798 $184,553 $178,241 $196,690 $187,645
Add:
Federal income tax -
current. . . . . . . . . 105,495 111,829 79,015 63,502 64,551
Federal income tax -
deferred . . . . . . . . 31,902 5,884 28,928 52,362 37,910
-------- -------- -------- -------- --------
Pre-tax income (loss) . 351,195 302,266 286,184 312,554 290,106
Fixed charges . . . . . . . 124,874 126,779 127,713 136,703 145,494
-------- -------- -------- -------- --------
Earnings, as defined. . . . $476,069 $429,045 $413,897 $449,257 $435,600
======== ======== ======== ======== ========
Fixed Charges:
Interest on long-term
debt . . . . . . . . . . $98,916 $104,122 $108,431 $115,687 $126,083
Other interest . . . . . . 18,132 13,192 9,752 8,744 6,628
Amortization of premium
and expense on debt. . . 6,507 6,502 6,507 6,488 7,014
Interest portion of
rental charges . . . . . 1,319 2,963 3,023 5,784 5,769
-------- -------- -------- -------- -------
Total fixed charges,
as defined. . . . . . . . $124,874 $126,779 $127,713 $136,703 $145,494
======== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges . . . . . . 3.81 3.38 3.24 3.29 2.99
======== ======== ======== ======== ========
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of New York State Electric & Gas Corporation on Form S-3
(Registration No. 33-50719) of our report dated January 29, 1999,
on our audits of the consolidated financial statements and
financial statement schedule of New York State Electric & Gas
Corporation and Subsidiaries as of December 31, 1998 and 1997, and
for the years ended December 31, 1998, 1997, and 1996, which report
is included in this Annual Report on form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> UT EXHIBIT 27
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S FINANCIAL STATEMENTS INCLUDED IN ITS FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,773,767
<OTHER-PROPERTY-AND-INVEST> 62,136
<TOTAL-CURRENT-ASSETS> 396,057
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 486,052
<TOTAL-ASSETS> 3,718,012
<COMMON> 430,057
<CAPITAL-SURPLUS-PAID-IN> 430,329
<RETAINED-EARNINGS> 58,876
<TOTAL-COMMON-STOCKHOLDERS-EQ> 919,262
25,000
29,440
<LONG-TERM-DEBT-NET> 1,412,157
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 78,300
<LONG-TERM-DEBT-CURRENT-PORT> 2,604
75,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,176,249
<TOT-CAPITALIZATION-AND-LIAB> 3,718,012
<GROSS-OPERATING-REVENUE> 2,012,757
<INCOME-TAX-EXPENSE> 137,397
<OTHER-OPERATING-EXPENSES> 293,310
<TOTAL-OPERATING-EXPENSES> 1,530,037
<OPERATING-INCOME-LOSS> 482,720
<OTHER-INCOME-NET> (8,381)
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 123,144
<NET-INCOME> 213,798
8,583
<EARNINGS-AVAILABLE-FOR-COMM> 205,215
<COMMON-STOCK-DIVIDENDS> 197,841
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 465,648
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
Directors Exhibit 99-1
Class III Directors Whose Terms Expire In 1999
Alison P. Casarett (68) Dean Emeritus, Cornell University, Ithaca, NY.
Director of Energy East, Albany, NY. Director since 1979.
Joseph J. Castiglia (64) Former Vice Chairman, President and Chief
Executive Officer of Pratt & Lambert United, Inc., Buffalo, NY. Business
Consultant and Private Investor, JBC Enterprises, East Aurora, NY.
Director of Energy East, Albany, NY and Vision Group of Funds and Vision
Fiduciary Funds, Inc., Buffalo, NY. Director since 1995.
Everett A. Gilmour (77) Chairman of the Board, The National Bank and
Trust Company of Norwich, Norwich, NY and N.B.T. Bancorp, Inc., Norwich,
NY. Director of Energy East, Albany, NY and Delaware Otsego Corporation,
Cooperstown, NY. Director since 1980. Retiring on April 23, 1999.
John M. Keeler (65) Of Counsel, Hinman, Howard & Kattell, Binghamton, NY;
attorneys at law. Director of Energy East, Albany, NY. Director since
1989.
Alton G. Marshall (77) President of Alton G. Marshall Associates, Inc.,
New York, NY, a real estate investment corporation. Director of Energy
East, Albany, NY. Director since 1971. Retiring on April 23, 1999.
Class I Directors Whose Terms Expire In 2000
Richard Aurelio (70) Former President of Time Warner Cable Group, NYC,
and NY1 News and Senior Advisor to the Chairman and CEO of Time Warner,
Inc., New York, NY. Director of Energy East, Albany, NY. Director since
1997.
Lois B. DeFleur (62) President of the State University of New York at
Binghamton, Binghamton, NY. Director of Energy East, Albany, NY. Director
since 1995.
Walter G. Rich (53) Chairman, President, Chief Executive Officer and a
Director of Delaware Otsego Corporation, Cooperstown, NY. Director of
Energy East, Albany, NY. Director since 1997.
Wesley W. von Schack (54) Chairman, President and Chief Executive Officer
of the company, Ithaca, NY. Director of: Energy East, Albany, NY; Mellon
Bank Corporation and Mellon Bank, N.A., Pittsburgh, PA; and RTI
International Metals, Inc., Niles, OH. Mr. von Schack was Chairman,
President and Chief Executive Officer of DQE, Inc. and Duquesne Light
Company prior to August 1996. Director since September 1996.
Class II Directors Whose Terms Expire In 2001
James A. Carrigg (65) Former Chairman, President and Chief Executive
Officer of the company, Ithaca, NY. Director of Energy East, Albany, NY.
Director since 1983.
Paul L. Gioia (56) Of Counsel, LeBoeuf, Lamb, Greene & MacRae, Albany,
NY; attorneys at law. Director of Energy East, Albany, NY and Berkshire
Gas Company, Pittsfield, MA. Director since 1991.
Ben E. Lynch (61) President of Winchester Optical Company, Elmira, NY.
Director of Energy East, Albany, NY. Director since 1987.
Section 16(a) Beneficial Ownership Reporting Compliance
We believe that during 1998 all filing requirements under Section 16
(a) of the Securities Exchange Act of 1934 were satisfied by our directors
and executive officers.
Executive compensation
The following sets forth certain information relating to cash and
noncash compensation for each of the last three fiscal years for Messrs.
Putman and Rafferty, who are the company's fourth and fifth highest
compensated executive officers after Messrs. von Schack, German and
Jasinski, the company's chief executive officer and the next two highest
compensated executive officers. Exhibit 99-2, filed herewith and
incorporated herein by reference, contains certain information from Energy
East's Proxy Statement dated March 3, 1999, relating to cash and noncash
compensation and benefits relating to employment, termination and change in
control arrangements for Messrs. von Schack, German and Jasinski, and
certain information relating to our directors. The following also sets
forth certain information relating to benefits and to employment,
termination and change in control arrangements for Messrs. Putman and
Rafferty.
<PAGE>
Summary Compensation Table
Long-Term
Compensation
Awards
Name and Annual Compensation Options/ All Other
Principal Position Year Salary Bonus SARs (#) Compensation (1)
Gerald E. Putman 1998 $201,800 $83,142 25,000 $2,860
Senior Vice President 1997 201,800 31,784 21,708 4,235
1996 199,850 45,504 - 2,610
Sherwood J. Rafferty 1998 198,000 67,320 25,000 2,500
Senior Vice President 1997 198,000 18,942 25,000 3,875
and Chief Financial 1996 174,414 41,998 - 2,145
Officer
Long-Term Incentive Plan Awards(2) in Last Fiscal Year (1998)
Performance
or Other Estimated Future Payout Under
Number of Period Until Non-Stock Price-Based Plans
Performance Maturation Threshold Target Maximum
Name Shares or Payout Shares(#) Shares(#) Shares(#)
Gerald E. Putman 1,753 1998-2000 438 1,753 2,630
Sherwood J. Rafferty 1,753 1998-2000 438 1,753 2,630
Options/SAR Grants in Last Fiscal Year (1998)
Individual Grants
Percentage
of Total
Number of Options/SARs
Securities Granted to Grant
Underlying Employees Exercise Date
Options/SARs In Fiscal or Base Expiration Present
Name Granted(#)(3) Year Price($/Sh) Date Value(4)
Gerald E. Putman 25,000 4.54% 35.8750 2/05/08 133,750
Sherwood J. Rafferty 25,000 4.54% 35.8750 2/05/08 133,750
__________
(1) In 1998, we contributed $2,500 each for Messrs. Putman and Rafferty under
the Tax Deferred Savings Plan and $360 for Mr. Putman under the Employees' Stock
Purchase Plan.
(2) A detailed description of the Long-Term Executive Incentive Share Plan is
contained in Exhibit 99-2, filed herewith and incorporated herein by reference.
(3) A detailed description of the 1997 Stock Option Plan is contained in Exhibit
99-2, filed herewith and incorporated herein by reference.
(4) Based on the Black-Scholes option pricing model. In determining the "Grant
Date Present Value," the following common assumptions were used: stock price
volatility, 21.34%; risk-free interest rate, 5.82%; and an expected term before
exercise of 10 years.
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year (1998)
and Fiscal Year-end Option/SAR Values
Number of Shares
Underlying Unexercised
Shares Options/SARs at
Acquired on Value Fiscal Year-End(#)
Name Exercise(#) Realized(1) Exercisable Unexercisable
Gerald E. Putman 2,445 $71,381 1,708 25,000
Sherwood J. Rafferty - - - 25,000
Value of Unexercised
In the Money Options/SARs at
Fiscal Year-End(2)
Name Exercisable Unexercisable
Gerald E. Putman $38,208 $515,625
Sherwood J. Rafferty - 515,625
_______________
(1) The "Value Realized" is equal to the difference between the
Option exercise price and the closing price of a share of Energy
East Common Stock on the NYSE on the date of exercise.
(2) The "Value of Unexercised In-the-Money Options/SARs at Fiscal
Year-End" is equal to the difference between the Option exercise
price and the closing price of $56.50 a share of Energy East Common
Stock on the NYSE on December 31, 1998.
Pension Plan
A detailed description of benefits under the Retirement Benefit Plan
and the Supplemental Executive Retirement Plan is contained in
Exhibit 99-2, filed herewith and incorporated herein by reference.
Messrs. Putman and Rafferty have 28 and 18 credited years of
service, respectively, under the Retirement Benefit Plan and SERP.
Employment, Change In Control and Other Arrangements
A detailed description of employment, change in control and other
arrangements is contained in Exhibit 99-2, filed herewith and
incorporated herein by reference. Messrs. Putman and Rafferty each
have a severance agreement in order to provide for certain payments
if, generally, within two years following a change in control of
Energy East, the individual's employment is terminated either by us
without cause or by the individual for good reason. The severance
agreements have terms ending on December 31, 2000 with automatic
one-year extensions unless either party to an agreement gives notice
that the agreement is not to be extended. The agreements were
unanimously approved by the Board of Directors. The benefits consist
of a lump-sum severance payment equal to two and one-half times the
sum of (i) the individual's then-annual base salary, and (ii) any
award under the Annual Executive Incentive Plan with respect to the
year immediately preceding the year in which the termination occurs.
In the event of such termination, the individual's life, disability,
accident and health insurance benefits will continue for a period of
30 months and the individual will receive an amount equal to all
earned but unpaid awards under the AEIP and a pro rata portion of
any award under the AEIP with respect to the year in which the
termination occurs, provided, however, that there shall be no
duplication of payments made pursuant to the agreement and the AEIP.
Also, in the event of such termination, the individual will be given
additional age and service credit under the SERP. In the event that
any payments made on account of a change in control of Energy East,
whether under the agreement or otherwise, would subject the
individual to federal excise tax or interest or penalties with
respect to such federal excise tax, the individual will be entitled
to be made whole for the payment of any such taxes, interest or
penalties.
<PAGE>
Security ownership of management
The following table indicates the number of shares of equity
securities of Energy East, and Energy East Common Stock equivalent
units beneficially owned as of February 12, 1999 by Messrs. Putman
and Rafferty, and by the 21 current directors and executive officers
as a group and the percent of the outstanding securities so owned.
Exhibit 99-2, filed herewith and incorporated herein by
reference, contains information from Energy East's Proxy Statement
dated March 3, 1999, relating to beneficial ownership of such
securities by the current directors and Messrs. von Schack, German
and Jasinski as of February 12, 1999.
Total Energy East
Common Stock
Energy East and Energy East
Common Stock Energy East Common
Beneficially Common Stock Stock Percent
Name Owned(1) Equivalent Units(2) Equivalent Units of Class
Gerald E. Putman 17,267 8,551 25,818 (4)
Sherwood J. Rafferty 15,816 8,504 24,320 (4)
21 current directors
and executive officers
as a group 299,860(3) 141,991 441,851 (4)
___________
(1) Includes shares of Energy East Common Stock which may be
acquired through the exercise of stock options which are exercisable
currently. The number of shares which may be acquired and by whom
are as follows: Mr. Putman, 10,041; Mr. Rafferty, 8,333; and all
executive officers as a group, 214,570.
(2) Includes Energy East Common Stock equivalent units granted under the
Long-term Executive Incentive Share Plan and the Director Share Plan for
non-employee directors for which the director, nominee or executive
officer does not have voting rights.
(3) Includes 1,398 shares of Energy East Common Stock held by an officer
as nominee for the Employees Stock Purchase Plan.
(4) Less than 1% of the outstanding Energy East Common Stock.
Exhibit 99-2
The following information is from pages 6, and 8 through 16 of Energy East's
Proxy Statement dated March 3, 1999.
SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the number of shares of Common
Stock and Common Stock equivalent units beneficially owned as of
February 12, 1999 by each director and nominee, each of the executive
officers named in the Summary Compensation Table included elsewhere
herein, and by the 17 current directors and executive officers as a
group and the percent of the outstanding securities so owned.
Total
Common Stock
Common Stock and
Beneficially Common Stock Common Stock Percent
Name Owned(1) Equivalent Units(2) Equivalent Units of Class
Richard Aurelio 1,000 1,080 2,080 (3)
James A. Carrigg 15,087 18,455 33,542 (3)
Alison P. Casarett 541 10,629 11,170 (3)
Joseph J. Castiglia 5,000 2,579 7,579 (3)
Lois B. DeFleur 300 2,579 2,879 (3)
Daniel W. Farley 13,522 3,862 17,384 (3)
Michael I. German 42,284 11,892 54,176 (3)
Everett A. Gilmour 3,052 1,407 4,459 (3)
Paul L. Gioia 2,649 3,445 6,094 (3)
Kenneth M. Jasinski 18,866 4,305 23,171 (3)
John M. Keeler 1,301 6,451 7,752 (3)
Ben E. Lynch 1,219 6,247 7,466 (3)
Alton G. Marshall 200 1,407 1,607 (3)
Walter G. Rich 1,000 1,080 2,080 (3)
Robert E. Rude 7,939 1,059 8,998 (3)
Wesley W. von Schack 99,241 30,248 129,489 (3)
17 current directors
and executive officers
as a group 219,820 107,784 327,604 (3)
___________
(1) Includes shares of Common Stock which may be acquired through the
exercise of stock options which are exercisable currently. The
persons who have such options and the number of shares which may be
acquired are as follows: Mr. Farley, 10,032; Mr. German, 31,666;
Mr. Jasinski, 16,666; Mr. Rude, 5,000; Mr. von Schack, 83,333; and
all executive officers as a group, 151,697.
(2) Includes Common Stock equivalent units granted under the Long-
Term Executive Incentive Share Plan ("LTEISP") and the Director Share
Plan for non-employee directors for which the director, nominee or
executive officer does not have voting rights.
(3) Less than 2/3 of 1% of the outstanding Common Stock.
<PAGE>
EXECUTIVE COMPENSATION
Compensation for services to the Company and its subsidiaries
for each of the last three fiscal years of the chief executive
officer and the next four highest compensated executive officers of
the Company who served in such capacities on December 31, 1998, is
shown by the following:
Summary Compensation Table
Long-Term
Compensation
Awards
Name and Annual Compensation Options/ All Other
Principal Position Year Salary Bonus SARs (#) Compensation(1)
Wesley W. von Schack 1998 $575,000 $283,475 100,000 $47,006
Chairman, President 1997 575,000 257,677 69,000 66,641
and Chief Executive 1996(2) 178,766 72,033 0 75,381
Officer
Michael I. German 1998 323,878 120,750 55,459 5,000
Senior Vice 1997 237,500 74,375 30,000 6,075
President 1996 217,500 50,563 0 2,250
Kenneth M. Jasinski(3) 1998 252,885 111,750 50,000 0
Senior Vice 1997 0 0 0 0
President and 1996 0 0 0 0
General Counsel
Daniel W. Farley 1998 144,000 57,600 18,607 1,860
Secretary 1997 144,000 37,800 13,533 3,360
1996 142,875 24,465 0 1,793
Robert E. Rude 1998 127,580 42,000 15,000 1,905
Controller 1997 107,833 23,000 9,000 3,147
1996 96,650 3,912 0 1,578
___________
(1) In 1998, the Company contributed for Messrs. von Schack, German,
Farley, and Rude, $2,500, $2,500, $1,860, and $1,725, respectively,
under the Tax Deferred Savings Plan. The Company contributed for
Messrs. German and Rude, $2,500 and $180, respectively, under the
Employees' Stock Purchase Plan. For Mr. von Schack, $3,014 represents
the dollar value of the term portion, and $41,492 represents the
benefit, projected on an actuarial basis, of the whole-life portion
of a premium paid for a life insurance policy.
(2) Compensation data for Mr. von Schack is provided only for a
portion of 1996 because his employment commenced September 9, 1996.
(3) Compensation data for Mr. Jasinski is provided only for a portion
of 1998 because his employment commenced April 29, 1998.
<PAGE>
Long-Term Incentive Plan Awards(1) in Last Fiscal Year (1998)
Performance
or Other Estimated Future Payout Under
Number of Period Until Non-Stock Price-Based Plans
Performance Maturation Threshold Target Maximum
Name Shares or Payout Shares(#) Shares(#) Shares(#)
Wesley W. von Schack 6,828 1998-2000 1,707 6,828 10,242
Michael I. German 2,599 1998-2000 650 2,599 3,899
Kenneth M. Jasinski 2,265 1998-2000 566 2,265 3,398
Daniel W. Farley 786 1998-2000 197 786 1,179
Robert E. Rude 552 1998-2000 138 552 828
___________
(1) Pursuant to the LTEISP, participants, including executive
officers of the Company, were granted a certain number of Performance
Shares in 1998 depending upon their position. Performance Shares
granted earn dividend equivalents in the form of additional
Performance Shares. Payments representing the cash value of a certain
percentage of the Performance Shares are made at the end of each
three-year Performance Cycle and are based on the Company's ranking
with respect to its three-year average total stockholder return as
compared to the top 100 utilities by revenue. A new Performance Cycle
begins on January 1 of each year. Achievement of a ranking of 65th
will result in the payment of the cash value of 25% (threshold
amount) of the Performance Shares. Achievement of a ranking of 50th
will result in the payment of the cash value of 100% (target amount)
of the Performance Shares. Achievement of a ranking of 20th will
result in the payment of the cash value of 150% (maximum amount) of
the Performance Shares. There will be no payments, however, if the
Company's ranking is below 65th. The value of the Performance Shares
will be measured by reference to the average of the daily closing
prices of a share of Common Stock for the last five trading days of
the Performance Cycle.
Options/SAR Grants in Last Fiscal Year (1998)
Individual Grants
Percentage
of Total
Number of Options/SARs
Securities Granted to Grant
Underlying Employees Exercise Date
Options/SARs In Fiscal or Base Expiration Present
Name Granted(#)(1) Year Price($/Sh) Date Value(4)
Wesley W. von Schack 100,000 18.17% $35.8750 2/05/08 $535,000
Michael I. German 50,000 9.09% 35.8750 2/05/08 267,500
5,459(2) .99% 57.4375 5/21/07 51,751(5)
Kenneth M. Jasinski 50,000(3) 9.09% 40.1250 4/29/08 347,500(6)
Daniel W. Farley 18,000 3.27% 35.8750 2/05/08 96,300
607(2) .11% 57.4375 5/21/07 5,754(5)
Robert E. Rude 15,000 2.73% 35.8750 2/05/08 80,250
___________
(1) Pursuant to the 1997 Stock Option Plan, participants were granted
Options to purchase a specified number of shares of Common Stock at
specified exercise prices. These Options were granted in tandem with
Stock Appreciation Rights and are for a term of ten years from the
date of grant. The exercise price of an Option or tandem Stock
Appreciation Right may not be less than 100% of the closing price of
a share of Common Stock determined on the last trading date before
such Option and tandem Stock Appreciation Right are granted. The
exercise of an Option or a tandem Stock Appreciation Right will
result in a corresponding cancellation of the related Stock
Appreciation Right or Option to the extent of the number of shares of
Common Stock as to which the Option or the Stock Appreciation Right
was exercised. Replacement Options are granted to participants at the
time of an exercise of an Option to the extent that all or any
portion of the Option exercise price or taxes incurred in connection
with the exercise of the Option are paid for by using other common
shares of the Company or by the withholding of the Company's common
shares. The Replacement Option is granted for the number of shares
the participant tenders to pay the exercise price or taxes incurred.
Replacement Options will first be exercisable no earlier than six
months from the date of their grant and will have an expiration date
equal to the expiration date of the original Option. The Options are
transferable to family members and certain entities under certain
circumstances. Except where noted, the Options and tandem Stock
Appreciation Rights were granted on February 5, 1998. The Options and
the tandem Stock Appreciation Rights are exercisable in three
installments regarding the original number of Options granted as
follows: (a) in aggregate as to no more than 33 1/3% on January 1,
1999; (b) in aggregate as to no more than 66 2/3% on January 1, 2000;
and (c) on January 1, 2001 as to 100% of all Options which have not
been previously exercised.
(2) Represents the grant of a Replacement Option. The Replacement
Option was granted on December 7, 1998 and will be first exercisable
on June 7, 1999.
(3) The Options and tandem Stock Appreciation Rights were granted on
April 29, 1998 and have the same vesting schedule as the Options and
tandem Stock Appreciation Rights granted on February 5, 1998.
(4) Based on the Black-Scholes option pricing model. There is no
assurance the value realized will be at or near the value estimated
by the Black-Scholes option pricing model. The actual value, if any,
will depend on the excess of the stock price over the exercise price
on the date the option is exercised. In determining the "Grant Date
Present Value," the following common assumptions were used: stock
price volatility, 21.34%; risk-free interest rate, 5.82%; and an
expected term before exercise of 10 years.
(5) In determining the "Grant Date Present Value," the following
common assumptions were used: stock price volatility, 23.23%; risk-
free interest rate, 4.96%; and an expected term before exercise of
10 years.
(6) In determining the "Grant Date Present Value," the following
common assumptions were used: stock price volatility, 21.41%; risk-
free interest rate, 6.02%; and an expected term before exercise of
10 years.
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year (1998)
and Fiscal Year-End Option/SAR Values
Number of Shares
Underlying Unexercised
Shares Options/SARs at
Acquired on Value Fiscal Year-End(#)
Name Exercise(#) Realized(1) Exercisable Unexercisable
Wesley W. von Schack 19,000 $408,500 50,000 100,000
Michael I. German 15,000 535,313 15,000 55,459
Kenneth M. Jasinski 0 0 0 50,000
Daniel W. Farley 1,533 48,984 4,032 18,607
Robert E. Rude 0 0 0 15,000
Value of Unexercised
In-the-Money Options/SARs at
Fiscal Year-End(2)
Name Exercisable Unexercisable
Wesley W. von Schack $1,737,500 $2,062,500
Michael I. German 521,250 1,031,250
Kenneth M. Jasinski 0 818,750
Daniel W. Farley 140,112 371,250
Robert E. Rude 0 309,375
___________
(1) The "Value Realized" is equal to the difference between the
Option exercise price and the closing price of a share of Common
Stock on the NYSE on the date of exercise.
(2) The "Value of Unexercised In-the-Money Options/SARs at Fiscal
Year-End" is equal to the difference between the Option exercise
price and the closing price of $56.50 a share of Common Stock on the
NYSE on December 31, 1998.
<PAGE>
Pension Plan Table
The following table sets forth the maximum retirement benefits
payable to executive officers who retire at age 60 or later, in
specified compensation and years of service classifications, pursuant
to the Retirement Benefit Plan and the Supplemental Executive
Retirement Plan ("SERP") as they presently exist, and assuming no
optional payment form is elected. The amounts listed below reflect
the deduction for Social Security benefits. There are no other offset
amounts.
Average
Annual Years of Service
Salary* 10 15 20 25 30 35 40**
$700,000 $314,300 $351,000 $387,800 $424,500 $461,300 $498,000 $534,800
650,000 290,600 324,800 358,900 393,000 427,100 461,300 495,400
600,000 267,000 298,500 330,000 361,500 393,000 424,500 456,000
550,000 243,400 272,300 301,100 330,000 358,900 387,800 416,600
500,000 219,800 246,000 272,300 298,500 324,800 351,000 377,300
450,000 196,100 219,800 243,400 267,000 290,600 314,300 337,900
400,000 172,500 193,500 214,500 235,500 256,500 277,500 298,500
350,000 148,900 167,300 185,600 204,000 222,400 240,800 259,100
300,000 125,300 141,000 156,800 172,500 188,300 204,000 219,800
250,000 101,600 114,800 127,900 141,000 154,100 167,300 180,400
200,000 78,000 88,500 99,000 109,500 120,000 130,500 141,000
150,000 54,400 62,300 70,100 78,000 85,900 93,800 101,600
___________
* Average of the salaries (not including amounts listed under
"Bonus," "Long-Term Compensation Awards, Options/SARs," and "All
Other Compensation" in the Summary Compensation Table) for the
five highest paid consecutive years during the last ten years of
employment service. The average of the highest three years of
salary within the last ten years of employment for the SERP was
assumed to be 5% higher than each salary shown.
** Maximum years of employment service for Retirement Benefit Plan
and SERP purposes.
The Retirement Benefit Plan provides retirement benefits for
hourly and salaried employees, including executive officers of the
Company and certain subsidiaries, based on length of service and the
average for the five highest paid consecutive years during the last
ten years of employment service. The Retirement Benefit Plan is non-
contributory and is funded under a trust arrangement and an insurance
contract. Amounts paid into the Retirement Benefit Plan are computed
on an actuarial basis. The Retirement Benefit Plan provides for
normal or early retirement benefits.
The SERP provides that all salaried employees, including
executive officers of the Company and certain subsidiaries, shall
receive the full benefits of the Retirement Benefit Plan without
regard to any limitations imposed by the federal tax law and by
including certain amounts deferred under the Deferred Compensation
Plan for Salaried Employees. In addition, it provides that officers
and certain other key employees of the Company and certain
subsidiaries, who have at least ten years of service, who have served
in key capacities for at least five years and who retire at age 60 or
later, shall receive a total retirement benefit (including benefits
under the Retirement Benefit Plan and Social Security), based on
years of service, of up to 75% of the average of their highest three
years of salary within the last ten years of employment.
Messrs. von Schack, German and Jasinski each have an agreement
with the Company and NYSEG which provides that, for the purposes of
the Retirement Benefit Plan and the SERP, they each will be credited
with two years of service for each year actually worked for the first
five years of employment, provided that they each are employed by the
Company or NYSEG for at least five years. Mr. von Schack was employed
commencing September 9, 1996, Mr. German was employed commencing
December 5, 1994, and Mr. Jasinski was employed commencing April 29,
1998.
Messrs. von Schack, German, Jasinski, Farley and Rude have 2, 4,
1, 17, and 22 credited years of service, respectively, under the
Retirement Benefit Plan and SERP.
<PAGE>
EMPLOYMENT, CHANGE IN CONTROL AND OTHER ARRANGEMENTS
The Company and NYSEG have entered into employment agreements
with Messrs. von Schack, German and Jasinski. Mr. von Schack's
agreement provides for his employment as Chairman, President and
Chief Executive Officer of the Company and of NYSEG for a term ending
on September 8, 2001. Mr. German's agreement provides for his
employment as Senior Vice President of the Company and Executive Vice
President and Chief Operating Officer of NYSEG for a term ending on
February 28, 2002. Mr. Jasinski's agreement provides for his
employment as Senior Vice President and General Counsel of the
Company and Executive Vice President of NYSEG for a term ending on
April 28, 2002. Each agreement provides for automatic one-year
extensions unless either party to an agreement gives notice that such
agreement is not to be extended. Each agreement was unanimously
approved by the Board of Directors and provides for, among other
things, a base salary of $575,000 for Mr. von Schack, $375,000 for
Mr. German, and $375,000 for Mr. Jasinski, subject to increase by the
Board of Directors, and in the case of Mr. von Schack, the payment of
the annual premium on a life insurance policy (the "Life Insurance
Policy") on his life. The agreements also provide for eligibility for
participation in the Company's or NYSEG's other compensation and
benefit plans and for certain payments in the event of the
termination of employment for cause due to disability or termination
by the Company without cause prior to a change in control of the
Company.
The agreements also provide that, if, generally, within two
years following a change in control of the Company, the officer's
employment is terminated either by the Company without cause or by
the officer for good reason, he will receive a lump-sum payment equal
to three times the sum of (i) his then-annual base salary, (ii) an
award under the Annual Executive Incentive Plan ("AEIP") for the year
in which the termination occurs, and (iii) in the case of Mr. von
Schack, the premium on the Life Insurance Policy. In the event of
such termination, the officer's life (other than the Life Insurance
Policy), disability, accident and health insurance benefits will
continue for a period of thirty-six months and he will receive an
amount equal to all earned but unpaid awards under the AEIP and a pro
rata portion of any award under the AEIP with respect to the year in
which the termination occurs, provided, however, that there will be
no duplication of payments made pursuant to the agreement and the
AEIP. Also, in the event of such termination, the officer will be
given additional age and service credit under the SERP and the
present value of any SERP benefits will be paid in a lump sum to the
officer, unless the officer elects to receive such SERP benefits in
the manner provided in the SERP. In the event that any payments made
on account of a change in control of the Company, whether under the
agreement or otherwise, would subject the officer to federal excise
tax or interest or penalties with respect to such federal excise tax,
he will be entitled to be made whole for the payment of any such
taxes, interest or penalties.
Messrs. Farley and Rude each have a severance agreement in order
to provide for certain payments if, generally, within two years
following a change in control of the Company, the individual's
employment is terminated either by NYSEG without cause or by the
individual for good reason. The severance agreements have terms
ending on December 31, 2000 with automatic one-year extensions unless
either party to an agreement gives notice that the agreement is not
to be extended. The agreements were unanimously approved by the Board
of Directors of NYSEG. The benefits consist of a lump-sum severance
payment equal to two times the sum of (i) the individual's then-
annual base salary, and (ii) any award under the AEIP with respect to
the year immediately preceding the year in which the termination
occurs. In the event of such termination, the individual's life,
disability, accident and health insurance benefits will continue for
a period of twenty-four months and the individual will receive an
amount equal to all earned but unpaid awards under the AEIP and a pro
rata portion of any award under the AEIP with respect to the year in
which the termination occurs, provided, however, that there shall be
no duplication of payments made pursuant to the agreement and the
AEIP. Also, in the event of such termination, the individual will be
given additional age and service credit under the SERP. In the event
that any payments made on account of a change in control of the
Company, whether under the agreement or otherwise, would subject the
individual to federal excise tax or interest or penalties with
respect to such federal excise tax, the individual will be entitled
to be made whole for the payment of any such taxes, interest or
penalties.
Certain employees, including senior management of the Company
and of NYSEG, have entered into Employee Invention and
Confidentiality Agreements. The agreements provide for, among other
things, payments (up to one year's salary) and certain health
insurance premiums to the individual in the event that the
individual's employment is terminated whether voluntarily or
involuntarily, and the noncompetition and nonsolicitation provisions
of the agreement prevent the individual from obtaining other
appropriate employment, so long as he or she is not entitled to
receive payments under a change in control severance agreement.
In the event of a change in control of the Company, participants
in the AEIP will be paid an amount which includes all earned but
unpaid awards, a pro rata portion of any award with respect to the
year in which such change in control occurs and an additional payment
at the end of the year in which such change in control occurs, to the
extent that the award earned under the normal terms of the AEIP
exceeds the amount paid upon such change in control. In addition,
participants in the LTEISP will be paid an amount which includes
(i) the payment of awards for all cycles in progress at the time of
such change in control computed and paid out in full (rather than pro
rata) and based on the assumption that the Company's performance was
at the 50th percentile; and (ii) any amounts earned under the normal
terms of the LTEISP through the end of each performance cycle, to the
extent those amounts exceed the amounts paid at the time of such
change in control. All change in control payments under the LTEISP
are to be valued based on the change in control price of the
Company's Common Stock. After a change in control of the Company,
officers and certain key employees of the Company and certain
subsidiaries who qualify, and whose employment is terminated at age
55 or later, other than for cause, shall receive a total retirement
benefit as determined under the SERP.
The Executive Compensation and Succession Committee of the Board
of Directors in its discretion may take certain actions in order to
preserve, in the event of a change in control of the Company, a
participant's rights under an award issued pursuant to the 1997 Stock
Option Plan or the Restricted Stock Plan.
Grantor trusts have been established to provide for the payment
of certain employee and director benefits, including any severance
<PAGE>
benefits that might become payable after a change in control of the
Company under Mr. von Schack's, Mr. German's and Mr. Jasinski's
employment agreements and the other severance agreements.
DIRECTORS' COMPENSATION
Directors of the Company, other than officers of the Company or
officers of any subsidiary of the Company, receive an annual retainer
of $22,000, plus $1,000 for each directors' and committee meeting
attended. The Chairperson of each standing committee receives
additional compensation of $1,000 for serving as Chairperson of such
committee. Under the terms of the Deferred Compensation Plan for
Directors, directors can elect to defer a portion or all of their
compensation. Such deferred compensation, together with interest
thereon, is payable in a lump sum or over a period of years following
retirement as a director.
Pursuant to the Director Share Plan for Directors, persons who
are non-employee directors are eligible for certain benefits to be
paid upon their ceasing to serve as directors of the Company. On each
January 1, April 1, July 1, and October 1, all non-employee directors
receive 150 Phantom Shares pursuant to the Director Share Plan. In
addition, all persons who were non-employee directors prior to
January 1, 1996 received an initial grant of Phantom Shares either in
an amount based on the actuarial present value of the vested accrued
benefit earned by the director in lieu of continued participation in
the Retirement Plan for Directors or in an amount equal to the number
of Phantom Shares awarded to an eligible director from January 1,
1997 to the effective date of participation in the Director Share
Plan. Phantom Shares granted earn dividend equivalents in the form of
additional Phantom Shares. Upon a director ceasing to serve as a
director of the Company, cash payments representing the value of the
Phantom Shares held by the director are to be made to the director.
The value of the Phantom Shares is to be determined by multiplying
the number of Phantom Shares by the average of the daily closing
prices of the Company's Common Stock for the five trading days
preceding the date the director ceases to serve as a director. Under
the terms of the Deferred Compensation Plan for the Director Share
Plan, a director may defer a portion or all of the cash payment to be
made under the Director Share Plan over a period of years following
the director's ceasing to serve as a director.
Pursuant to the Retirement Plan, eligible directors who opted to
continue participating in the Retirement Plan qualify for annual
retirement benefits. The Retirement Plan was amended in January 1996
to provide that any director elected after December 31, 1995 will not
participate in the Retirement Plan. An eligible director who serves
on the Board for at least five years qualifies for annual retirement
benefits equal to 50% of the highest annual retainer in effect during
such service. An eligible director who serves on the Board for ten
years or more qualifies for annual retirement benefits equal to 100%
of the highest annual retainer in effect during such service, while
an eligible director with between five and ten years of service
qualifies for prorated amounts. Payments of Retirement Plan benefits
generally commence upon the later of the eligible director's
attaining age 65 or retirement from the Board and continue for a
period equal to the greater of the eligible director's life or ten
years. Eligible directors elected prior to the effective date of the
Retirement Plan will have such prior service included in establishing
their eligibility and the amount of their retirement benefits.
Exhibit 99-3
The following information is from Item 3 of Energy East's Form 10-K for the
year ended December 31, 1998.
Legal Proceedings
Since the Public Service Commission of the State of New York has
allowed us to recover in rates remediation costs for certain of the sites
referred to in the next sentence, there is a reasonable basis to conclude
that we will be permitted to recover in rates any remediation costs that we
may incur for all of the sites referred to in the next sentence.
Therefore, we believe that the ultimate disposition of the matters referred
to below in (b), (d), (e), (f), (g), the first paragraph in (a) and the
first two paragraphs in (c) will not have a material adverse effect on our
results of operations or financial position.
(a) By letter dated June 7, 1991, the New York State Department of
Environmental Conservation notified us that we had been identified as a
potentially responsible party at the Pfohl Brothers Landfill, an inactive
hazardous waste disposal site in Cheektowaga, New York. The Pfohl Site is
listed on the National Priorities List and the New York State Registry of
Inactive Hazardous Waste Disposal Sites. The NYSDEC informed us that if we
declined to enter into negotiations with them to undertake the investiga-
tion and remediation of the Pfohl Site, the NYSDEC would perform the
necessary work at the Pfohl Site using the Hazardous Waste Remedial Fund
and would seek recovery of its expenses from us. The expected remediation
costs at the Pfohl Site are estimated to be $37 million to $55 million. In
May 1995 we agreed to participate in a process for allocating remedial
costs at the Pfohl Site with other PRPs. We contributed $26,000 toward past
costs, which sum is subject to that allocation process. In October 1997
the PRPs agreed upon an allocation formula under which we would be
responsible for approximately $296,000 to $440,000.
Five actions were commenced against us and approximately 24 other
defendants in the New York State Supreme Court, Erie County (State Court)
(on January 17, 1995, April 7, 1995, June 14, 1995, January 10, 1997 and
October 30, 1997), by plaintiffs who allegedly resided or worked near or
engaged in recreation at the Pfohl Site, claiming $103.5 million in damages
for personal injuries, wrongful death and loss of companionship allegedly
caused by exposure to hazardous chemicals from the Pfohl Site. On December
12, 1997, the action commenced on October 30, 1997, was removed to the
United States District Court for the Western District of New York (District
Court). The plaintiffs allege that the defendants disposed of hazardous
and toxic materials at the Pfohl Site. We believe that the actions against
us are without merit and will defend these actions vigorously.
On November 18, 1997, a class action was commenced in the State Court
against us and approximately 23 other defendants by plaintiffs who
allegedly resided or worked near or engaged in recreation at the Pfohl
Site, claiming unspecified damages for medical monitoring and surveillance
services for personal injuries allegedly caused by exposure to hazardous
chemicals from the Pfohl Site. This action was transferred to the District
Court on December 22, 1997. We believe this action against us is without
merit and will defend this action vigorously.
In 1995, four actions were commenced against approximately 11
defendants, and in 1996, an action was commenced against 13 defendants, by
plaintiffs who allegedly resided or worked near or engaged in recreation at
the Pfohl Site for personal injuries, wrongful death and loss of
companionship allegedly caused by exposure to hazardous chemicals from the
Pfohl Site. The plaintiffs allege that the defendants are liable for
disposing of hazardous and toxic materials at the Pfohl Site. They seek
compensatory and punitive damages. We were not named as a defendant in
those actions. However, the defendants in those actions consequently
commenced actions against us and certain other parties in the District
Court at various times in 1995 and 1996, alleging that we and such other
parties are liable for all or a part of any damages recovered by the
plaintiffs. Recovery in the actions against us and such other parties
depends on, among other things, whether the plaintiffs recover money
damages against the defendants. We believe that the actions against us are
without merit and will defend them vigorously.
On October 8, 1998, an action was commenced against us and
approximately 24 other defendants in the State Court by plaintiffs who
allegedly reside near the Pfohl Site claiming damages due to the lost use,
value, and enjoyment of their property as a result of contamination from
the Pfohl Site. The plaintiffs allege that the defendants created a
nuisance and an abnormally dangerous condition by disposing of hazardous
and toxic materials at the Pfohl Site, and they seek compensatory and
punitive damages that total $6.4 million in the aggregate. We believe that
the action against us is without merit and we will defend it vigorously.
(b) By letter dated January 21, 1992, the NYSDEC notified us that we had
been identified as a PRP at the Peter Cooper Corporation's Landfill Site
(Peter Cooper Site) in the village of Gowanda, New York. The Peter Cooper
Site is listed on the National Priorities List and the New York State
Registry. Three other PRPs were identified in the NYSDEC letter. We
believe that remediation costs at the Peter Cooper Site might rise to $16
million. By letter dated May 12, 1992, we notified the NYSDEC that we
believed we had no responsibility for the alleged contamination at the
Peter Cooper Site, and we declined to conduct remediation or finance
remediation costs.
(c) By letter dated July 21, 1992, the NYSDEC notified us that we had been
identified as a PRP at the Bern Metals Removal Site in Buffalo, New York,
which the NYSDEC defined to include an adjacent property known as the
Universal Iron & Metal Site. The Bern Metals/Universal Iron Site is listed
on the New York State Registry. The NYSDEC also identified eight other
PRPs for the Bern Metals/Universal Iron Site. By letter dated December 3,
1992, we declined to negotiate with NYSDEC to finance or conduct a Remedial
Investigation and Feasibility Study (RI/FS) for the Bern Metals/Universal
Iron Site, because we believe we were only a very small contributor to the
Bern Metals Site and had no involvement with the Universal Iron & Metal
Site.
On March 29, 1996, NYSDEC issued a decision which provided for
remedial action. The total cost of remediation is estimated to be $2.7
million. Without admitting any liability or responsibility and without
prejudice to any defenses we might have, we, on October 9, 1997, entered
into an Order on Consent with NYSDEC and four other PRPs pursuant to which
we and such PRPs will, subject to NYSDEC approval, design the remedy for
the Bern Metal/Universal Iron Site. The NYSDEC, by letter dated December 3,
1998, to us and 15 other PRPs, inquired whether we and the other PRPs were
willing to enter into a consent order to implement the remedy. By letter
dated December 18, 1998, we and the six other PRPs, who completed the
remedial design, responded that the NYSDEC should first look to the other
PRPs who have yet to finance any work at the Bern Metal/Universal Iron
Site.
On September 11, 1996, we were named as a third-party defendant by
Niagara Frontier Transportation Authority claiming contributions for costs
that might be recovered against NFTA in an action filed by EPA in the
United States District Court for the Western District of New York. Fifty-
five other third-party defendants were sued in addition to us. NFTA is
seeking contributions for response costs incurred by EPA at the Universal
Iron Site. We believe that the action against us is without merit and will
defend it vigorously.
(d) By letter dated April 20, 1992, the EPA notified us that the EPA had
reason to believe that we were a PRP for the Clinton-Bender Removal Site
(Clinton-Bender Site) in Buffalo, New York. Five other PRPs have been
identified by the EPA. Nine private residential lots and one commercial
property at the Clinton-Bender Site were contaminated with lead, allegedly
due to run-off from the adjacent Bern Metals Site. The EPA ordered us to
perform the necessary removal work at the Clinton-Bender Site and we are
remediating the site with four other identified PRPs. The total cost of
the removal actions to be performed at the Clinton-Bender Site is estimated
to be $3.2 million. The removal work is substantially complete. We along
with the other participating parties are seeking to recover from other
PRPs, not participating in the remedial action at the Clinton-Bender Site,
costs that we and other participating parties have incurred or will incur
on their behalf.
(e) By letter dated February 12, 1993, NYSDEC notified us that we had been
identified as a PRP for remediation of hazardous wastes at the Booth Oil
Site in North Tonawanda, New York. The Booth Oil Site is listed on the New
York State Registry. Nineteen other PRPs were identified in the NYSDEC
letter. According to NYSDEC, the Booth Oil Site is contaminated with
polychlorinated biphenyls, lead, and other substances. We estimate that
the present value of costs for remedial alternatives range from $8.5
million to $21.7 million. We have been actively involved both in trying to
persuade NYSDEC to name additional PRPs and in examining the process that
led to the NYSDEC treatment alternatives.
(f) On June 14, 1994, we were served with a summons and complaint joining
us as a defendant in an action that was filed in the United States District
Court for the Northern District of New York. The plaintiffs are five
companies which have been required by the EPA to conduct remedial
activities at the Rosen Brothers Site in the City of Cortland, New York.
The Rosen Site was the location of a scrap metal processing operation and
industrial waste disposal site between approximately 1971 and 1985, and it
is now allegedly contaminated with hazardous substances including heavy
metals, solvents and PCBs. The Rosen Site is listed on the National
Priorities List and the New York State Registry. The plaintiffs allege that
we were a contributor of transformers that may have contained PCBs.
By letter dated August 16, 1994, the EPA notified us that the EPA had
reason to believe that we were a PRP for the Rosen Site and requested that
we participate in the RI/FS then being prepared for the Rosen Site by the
other named PRPs.
We received an order from the EPA on March 11, 1998, ordering us and
15 other parties to perform certain removal actions at the Rosen Site. We
contributed approximately $45,000 towards the $730,000 total cost of the
removal actions.
The estimated total present-worth cost of the selected remedy is
$3,140,000. The EPA also requested reimbursement of past costs at the site
of approximately $692,000, plus interest.
On September 25, 1998, we, along with approximately 12 other parties,
entered into a consent decree with the EPA under which we and the other
settling parties will perform the selected remedy and reimburse the EPA for
the requested amount of past costs. The EPA has agreed not to sue us and
to protect us from other claims with respect to the response and
remediation costs at the Rosen Brothers Site. Our share of the remediation
costs is still being negotiated.
(g) We responded on October 3, 1995, to a request for information by the
EPA concerning alleged disposal of PCBs at facilities owned or operated by
PCB Treatment, Inc. in Kansas City, Kansas and Kansas City, Missouri. On
September 27, 1996, we entered into an Order on Consent with the EPA under
which we and at least nine other companies will perform the first phase of
remedial activity, a Removal Site Evaluation and Engineering
Evaluation/Cost Analysis, at the two facilities operated by PCB Treatment,
Inc. The cost to us of our obligations under this Order on Consent are not
expected to exceed $96,000. By letter dated September 16, 1997, the EPA
notified 1,251 entities, including us, of their potential liability at the
two facilities and informed the recipients of additional response
activities, which the recipients may be asked to perform or finance at a
later date. Our share of remediation costs at the two facilities is likely
to be approximately $100,000 to $400,000.
(h) On August 14, 1997, we were notified by the NYSDEC that they were
contemplating enforcement action against us with respect to violations of
regulations concerning opacity of air emissions at all of our New York
coal-fired stations. We are in the process of negotiating a consent decree
with NYSDEC under which we will undertake to bring our New York coal-fired
stations into compliance with the opacity regulations. We will pay a
penalty of approximately $250,000. Future violations of these regulations
will subject the operator of the New York coal-fired stations to stipulated
penalties. We anticipate this decree will become final before the end of
the second quarter of 1999.
(i) On June 15, 1998, we commenced an action in the New York State Supreme
Court, Tompkins County against Niagara Mohawk Power Corporation seeking an
order enjoining Niagara Mohawk from transferring operating responsibility
for the Nine Mile Point nuclear generating unit No. 2 to the New York
Nuclear Operating Company without our consent. We have an undivided 18%
interest in NMP2, which is operated by Niagara Mohawk. The lawsuit also
seeks to recover damages for funds used by Niagara Mohawk to promote the
establishment of NYNOC and the transfer of operating responsibility for
NMP2 to NYNOC. NYNOC was established for the purpose of assuming operation
of all of the nuclear generating units in New York State. We believe that
the establishment of NYNOC will not result in either improved operational
performance or reduced costs sufficient to offset the development and
implementation expenses likely to be incurred by its creation. On July 7,
1998, we served an amended complaint on Niagara Mohawk alleging that
Niagara Mohawk had breached its fiduciary obligation to us by engaging in
negotiations with a third party for the sale of NMP2, including our share,
without advising us of those negotiations or allowing us to participate in
the negotiations and by Niagara Mohawk conducting the negotiations in a
manner designed to limit the interest of the third party in purchasing
NMP2. On December 14, 1998, the Court granted Niagara Mohawk's motion for
summary judgment. We appealed this decision to the New York Supreme Court,
Appellate Division (Third Department).
