SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
June 30, 1999
For the quarterly period ended. . . . . . . . . . . . . . . . . . . . .
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from. . . . . . . . . . . to . . . . . . . . .
1-3103-2
Commission file number. . . . . . . . . . . . . . . . . . . . . . . . .
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)
607 347-4131
Registrant's telephone number, including area code.
N/A
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Former name, former address and former fiscal year, if changed since last
report.
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 [ ]
The number of shares of common stock (par value $6.66 2/3 per share)
outstanding as of July 31, 1999 was 64,508,477. All shares are owned by Energy
East Corporation.
TABLE OF CONTENTS
PART I
Page
Item 1. Financial Statements. . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(a) Results of Operations . . . . . . . . . 8
(b) Liquidity and Capital Resources . . . . 8
PART II
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. . . . . . . . . . . . . . . . 13
(b) Reports on Form 8-K . . . . . . . . . . 13
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . 15
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
New York State Electric & Gas Corporation
Statements of Income - (Unaudited)
Three Months Six Months
Periods Ended June 30 1999 1998 1999 1998
(Thousands)
Operating Revenues
Electric . . . . . . . . . . . . . . $402,591 $404,768 $817,931 $910,356
Natural gas. . . . . . . . . . . . . 54,792 54,535 190,186 176,179
-------- -------- --------- ---------
Total Operating Revenues. . . . . 457,383 459,303 1,008,117 1,086,535
-------- -------- --------- ---------
Operating Expenses
Fuel used in electricity generation
and electricity purchased. . . . . 171,418 163,620 317,094 368,923
Natural gas purchased. . . . . . . . 31,150 31,251 87,632 88,388
Other operating expenses . . . . . . 51,001 67,391 121,050 140,559
Maintenance. . . . . . . . . . . . . 16,875 20,702 34,370 52,650
Depreciation and amortization. . . . 532,071 37,044 563,028 84,638
Other taxes. . . . . . . . . . . . . 52,531 45,960 99,810 100,900
Gain on sale of generation assets. . (674,572) - (674,572) -
Writeoff of Nine Mile Point 2. . . . 69,930 - 69,930 -
-------- -------- --------- ---------
Total Operating Expenses. . . . . 250,404 365,968 618,342 836,058
-------- -------- --------- ---------
Operating Income. . . . . . . . . . . 206,979 93,335 389,775 250,477
Interest Charges, Net . . . . . . . . 30,672 29,630 60,899 60,266
Other (Income) and Deductions . . . . (2,304) 706 (2,237) 3,428
-------- -------- --------- ---------
Income Before Federal Income Taxes. . 178,611 62,999 331,113 186,783
Federal Income Taxes. . . . . . . . . 136,362 26,833 189,579 72,177
-------- -------- --------- ---------
Net Income. . . . . . . . . . . . . . 42,249 36,166 141,534 114,606
Preferred Stock Dividends . . . . . . 691 2,260 1,721 4,529
-------- -------- --------- ---------
Earnings Available for Common Stock . $41,558 $33,906 $139,813 $110,077
======== ======== ========= =========
The notes on pages 6 and 7 are an integral part of the financial statements.
<PAGE>
Item 1. Financial Statements (Cont'd)
New York State Electric & Gas Corporation
Balance Sheets - (Unaudited)
June 30, Dec. 31,
1999 1998
(Thousands)
Assets
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . $111,664 $12,149
Special deposits . . . . . . . . . . . . . . . . . . . 911 4,729
Accounts receivable, net . . . . . . . . . . . . . . . 127,905 113,553
Loan receivable, affiliated company. . . . . . . . . . 289,501 134,443
Fuel, at average cost. . . . . . . . . . . . . . . . . 9,504 20,200
Materials and supplies, at average cost. . . . . . . . 7,635 8,292
Prepayments. . . . . . . . . . . . . . . . . . . . . . 152,059 102,691
---------- ----------
Total Current Assets. . . . . . . . . . . . . . . . 699,179 396,057
Utility Plant, at Original Cost
Electric . . . . . . . . . . . . . . . . . . . . . . . 3,377,253 3,361,747
Natural gas. . . . . . . . . . . . . . . . . . . . . . 611,297 602,737
Common . . . . . . . . . . . . . . . . . . . . . . . . 138,771 144,043
---------- ----------
4,127,321 4,108,527
Less accumulated depreciation. . . . . . . . . . . . . 1,982,705 1,362,501
---------- ----------
Net Utility Plant in Service . . . . . . . . . . . . 2,144,616 2,746,026
Construction work in progress. . . . . . . . . . . . . 8,764 27,741
---------- ----------
Total Utility Plant . . . . . . . . . . . . . . . . 2,153,380 2,773,767
Other Property and Investments, Net . . . . . . . . . . 62,469 62,136
Regulatory and Other Assets
Regulatory assets
Unfunded future federal income taxes. . . . . . . . . 29,164 136,404
Unamortized debt expense. . . . . . . . . . . . . . . 69,320 71,530
Demand-side management program costs. . . . . . . . . 58,558 64,466
Environmental remediation costs . . . . . . . . . . . 58,800 60,600
Other . . . . . . . . . . . . . . . . . . . . . . . . 33,207 125,693
---------- ----------
Total regulatory assets . . . . . . . . . . . . . . 249,049 458,693
Other assets . . . . . . . . . . . . . . . . . . . . . 25,329 27,359
---------- ----------
Total Regulatory and Other Assets . . . . . . . . . 274,378 486,052
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . $3,189,406 $3,718,012
========== ==========
The notes on pages 6 and 7 are an integral part of the financial statements.
Item 1. Financial Statements (Cont'd)
New York State Electric & Gas Corporation
Balance Sheets - (Unaudited)
June 30, Dec. 31,
1999 1998
Liabilities (Thousands)
Current Liabilities
Current portion of long-term debt. . . . . . . . . . . $876 $2,604
Current portion of preferred stock . . . . . . . . . . - 75,000
Commercial paper . . . . . . . . . . . . . . . . . . . - 78,300
Accounts payable and accrued liabilities . . . . . . . 116,735 101,511
Interest accrued . . . . . . . . . . . . . . . . . . . 19,017 19,556
Taxes accrued. . . . . . . . . . . . . . . . . . . . . 297,965 701
Accumulated deferred federal income taxes, net . . . . 29,777 44,274
Other. . . . . . . . . . . . . . . . . . . . . . . . . 51,086 76,302
---------- ----------
Total Current Liabilities . . . . . . . . . . . . . 515,456 398,248
Regulatory and Other Liabilities
Regulatory liabilities
Deferred income taxes . . . . . . . . . . . . . . . . 68,921 98,038
Deferred income taxes, unfunded future federal
income taxes. . . . . . . . . . . . . . . . . . . . 14,238 60,896
Other . . . . . . . . . . . . . . . . . . . . . . . . 22,968 42,182
---------- ----------
Total regulatory liabilities. . . . . . . . . . . . 106,127 201,116
Other liabilities
Deferred income taxes . . . . . . . . . . . . . . . . 214,791 432,968
Other postretirement benefits . . . . . . . . . . . . 151,862 137,681
Environmental remediation costs . . . . . . . . . . . 78,800 80,600
Other . . . . . . . . . . . . . . . . . . . . . . . . 89,655 81,540
---------- ----------
Total other liabilities . . . . . . . . . . . . . . 535,108 732,789
Long-term debt. . . . . . . . . . . . . . . . . . . . . 1,362,611 1,412,157
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . 2,519,302 2,744,310
Commitments . . . . . . . . . . . . . . . . . . . . . . - -
Preferred Stock
Preferred stock redeemable solely at the
company's option. . . . . . . . . . . . . . . . . . . 10,131 29,440
Preferred stock subject to mandatory
redemption requirements . . . . . . . . . . . . . . . 25,000 25,000
Common Stock Equity
Common stock . . . . . . . . . . . . . . . . . . . . . 430,057 430,057
Capital in excess of par value . . . . . . . . . . . . 170,080 430,329
Retained earnings. . . . . . . . . . . . . . . . . . . 34,836 58,876
---------- ----------
Total Common Stock Equity . . . . . . . . . . . . . 634,973 919,262
---------- ----------
Total Liabilities and Stockholder's Equity . . . . $3,189,406 $3,718,012
========== ==========
The notes on pages 6 and 7 are an integral part of the financial statements.
<PAGE>
Item 1. Financial Statements (Cont'd)
New York State Electric & Gas Corporation
Statements of Cash Flows - (Unaudited)
Six Months
Periods Ended June 30 1999 1998
(Thousands)
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . $141,534 $114,606
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization. . . . . . . . . . 563,028 84,638
Federal income taxes and investment tax credits
deferred, net. . . . . . . . . . . . . . . . . 119,261 (5,980)
Gain on sale of generation assets. . . . . . . . (674,572) -
Writeoff of Nine Mile Point 2. . . . . . . . . . 69,930 -
Changes in current operating assets and liabilities
Accounts receivable . . . . . . . . . . . . . . (14,352) 96,414
Loan receivable, affiliated company. . . . . . . (155,058) (129,865)
Inventory. . . . . . . . . . . . . . . . . . . . 11,353 57,964
Prepayments. . . . . . . . . . . . . . . . . . . (49,368) (3,966)
Accounts payable and accrued liabilities . . . . 15,224 (26,961)
Taxes accrued. . . . . . . . . . . . . . . . . . 297,264 32,275
Other, net . . . . . . . . . . . . . . . . . . . . (65,595) 86,308
-------- -------
Net Cash Provided by Operating Activities . . . 258,649 305,433
-------- -------
Investing Activities
Sale of generation assets. . . . . . . . . . . . . 518,969 -
Utility plant additions. . . . . . . . . . . . . . (29,265) (74,087)
Other property and investments . . . . . . . . . . - 25,670
-------- -------
Net Cash Provided by (Used in)
Investing Activities. . . . . . . . . . . . . 489,704 (48,417)
-------- -------
Financing Activities
Capital distribution to parent . . . . . . . . . . (289,000) -
Repurchase of common stock . . . . . . . . . . . . - (114,023)
Repayments of preferred stock
and first mortgage bonds . . . . . . . . . . . . (144,557) (30,000)
Long-term notes, net . . . . . . . . . . . . . . . - (736)
Commercial paper, net. . . . . . . . . . . . . . . (78,300) 12,000
Dividends on common and preferred stock. . . . . . (136,981) (124,986)
-------- -------
Net Cash Used in Financing Activities . . . . . (648,838) (257,745)
-------- -------
Net (Decrease) Increase in Cash and
Cash Equivalents. . . . . . . . . . . . . . . . . 99,515 (729)
Cash and Cash Equivalents, Beginning of Period. . . 12,149 8,168
-------- -------
Cash and Cash Equivalents, End of Period. . . . . . $111,664 $7,439
======== =======
Supplemental Disclosure of Cash Flows Information
Cash paid during the period
Interest, net of amounts capitalized. . . . . . . $50,254 $52,514
Income taxes (including $262,500 related to
gain on sale of generation assets). . . . . . . $320,422 $37,346
The notes on pages 6 and 7 are an integral part of the financial statements.
Item 1. Financial Statements (Cont'd)
New York State Electric & Gas Corporation
Statements of Retained Earnings - (Unaudited)
Six Months
Periods ended June 30 1999 1998
(Thousands)
Balance, beginning of period. . . . . . . . . . $58,876 $568,844
Add net income. . . . . . . . . . . . . . . . . 141,534 114,606
-------- --------
200,410 683,450
Deduct dividends on capital stock
Preferred. . . . . . . . . . . . . . . . . . . 1,721 4,529
Common . . . . . . . . . . . . . . . . . . . . 135,260 120,391
-------- --------
136,981 124,920
Deduct
Transfer of NGE Generation, Inc. and XENERGY
Enterprises, Inc. to parent. . . . . . . . . 28,593 517,341
-------- --------
Balance, end of period. . . . . . . . . . . . . $34,836 $41,189
======== ========
The notes on pages 6 and 7 are an integral part of the financial statements.
Item 1. Financial Statements (Cont'd)
Note 1. Unaudited Financial Statements
The accompanying unaudited financial statements reflect all
adjustments which are necessary, in the opinion of management,
for a fair presentation of New York State Electric & Gas
Corporation's (company) results for the interim periods. All
such adjustments, other than those related to the sale of an
affiliate's coal-fired generation stations and the writeoff of
Nine Mile Point 2, are of a normal recurring nature. The
company's 1998 consolidated financial statements exclude NGE
Generation, Inc. and XENERGY Enterprises, Inc. beginning May 1,
1998, the effective date of the reorganization into a holding
company structure, and include Somerset Railroad Corporation,
which was transferred to NGE Generation effective July 31, 1998.
The unaudited financial statements should be read in conjunction
with the consolidated financial statements and notes contained in
the company's Form 10-K for the year ended December 31, 1998.
Due to the seasonal nature of the company's operations, financial
results for interim periods are not necessarily indicative of
trends for a 12-month period.
Note 2. Investment in Nine Mile Point nuclear generating unit
No. 2
The company wrote off its entire 18% investment in Nine Mile
Point 2 during the second quarter of 1999. An affiliate
completed the sale of its interest in the Homer City generation
assets to Edison Mission Energy in March 1999, and the sale of
its remaining coal-fired generation assets to The AES Corporation
in May 1999. The proceeds from the sale of those assets, net of
taxes and transaction costs, in excess of the net book value,
less funded deferred taxes, were used to write down the company's
18% investment in Nine Mile Point 2 by $384 million. 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. The company wrote down its investment an
additional $104 million due to the required writeoff of funded
deferred taxes related to Nine Mile Point 2. These writedowns
are reflected in depreciation and amortization in the second
quarter of 1999.
The company announced in June 1999 that it agreed to sell
its 18% interest in Nine Mile Point 2 to AmerGen Energy Company,
a joint venture of PECO Energy Company and British Energy. (See
Item 2(b) - Electric Business, Nine Mile Point nuclear generating
unit No. 2.) Based on the sale agreement, the company wrote off
$70 million, its remaining investment in Nine Mile Point 2, in
accordance with Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of.
<PAGE>
Note 3. Segment Information
Selected financial information for the company's two
business segments is presented in the following table. The
electric business segment consists of electricity generation,
transmission and distribution operations. The natural gas
business segment consists of natural gas distribution,
transportation and storage operations.
Three Months Ended Electric Natural Gas Total
June 30, 1999
Operating Revenues $402,591 $54,792 $457,383
Net Income (Loss) $45,187 $(2,938) $42,249
June 30, 1998
Operating Revenues $404,768 $54,535 $459,303
Net Income (Loss) $40,758 $(4,094) $36,664 (1)
Six Months Ended
June 30, 1999
Operating Revenues $817,931 $190,186 $1,008,117
Net Income $114,872 $26,662 $141,534
June 30, 1998
Operating Revenues $910,356 $176,179 $1,086,535
Net Income $100,545 $16,132 $116,677 (1)
Identifiable Assets
June 30, 1999 $2,015,812 $489,440 $2,505,252 (2)
December 31, 1998 $2,565,977 $497,750 $3,063,727 (2)
(1) Net Income for the three months and six months ended June 30,
1998, excludes a net loss from a subsidiary that was transferred to
the company's parent as part of the reorganization into a holding
company structure effective May 1, 1998.
(2) Identifiable Assets exclude corporate assets of $684,154 for
June 30, 1999, and $654,285 for December 31, 1998.
Note 4. Reclassifications
Certain amounts have been reclassified on the financial
statements to conform with the 1999 presentation.
<PAGE>
Item 2. Management's discussion and analysis of financial
condition and results of operations
(a) Results of Operations
Earnings
Earnings increased for the quarter and the six months
exclusive of the nonrecurring benefit from the sale of an
affiliate's coal-fired generation assets, the writeoff of Nine Mile
Point 2 and the effect of transferring wholesale electricity
activity to an affiliate due to the reorganization into a holding
company structure in May 1998. Second quarter earnings increased
primarily due to higher retail electricity deliveries, which were
caused by warmer weather this year, and cost control efforts.
Those increases were partially offset by higher purchased power
costs. Earnings for the six months increased primarily due to
higher retail electricity and natural gas deliveries, which were
caused by weather, and cost control efforts. Those increases were
partially offset by higher purchased power costs and price
reductions provided to customers to promote competition.
Operating Results for the Electric Business
Excluding the effect of transferring wholesale activity to an
affiliate in May 1998, electric operating revenues for the second
quarter increased due to higher retail deliveries caused by warmer
weather this year. Electric operating expenses decreased for the
quarter, exclusive of the nonrecurring benefit from the sale of an
affiliate's coal-fired generation assets, the writeoff of Nine Mile
Point 2 and the effect of transferring wholesale activity to an
affiliate in May 1998, primarily due to cost control efforts
partially offset by higher purchased power costs.
Electric operating revenues increased for the six months,
excluding the effect of transferring wholesale activity to an
affiliate in May 1998, primarily due to higher retail deliveries
caused by weather, partially offset by lower retail prices.
Electric operating expenses increased for the six months, exclusive
of the nonrecurring benefit from the sale of an affiliate's coal-
fired generation assets, the writeoff of Nine Mile Point 2 and the
effect of transferring wholesale activity to an affiliate in May
1998, primarily due to higher purchased power costs partially
offset by cost control efforts.
Operating Results for the Natural Gas Business
Natural gas operating revenues for the second quarter were
flat compared to the prior year quarter. Operating expenses
decreased for the quarter primarily due to cost control efforts.
Natural gas operating revenues increased for the six months
ended June 30, 1999, primarily due to higher first quarter 1999
retail deliveries caused by milder-than-normal weather last year.
Operating expenses decreased for the six months primarily due to
cost control efforts. A higher volume of natural gas purchases was
offset by lower purchased gas costs.
(b) Liquidity and Capital Resources
Electric Business
Sale of Affiliate's Coal-fired Generation Assets: Offers totaling
$1.85 billion were accepted from The AES Corporation and Edison
Mission Energy in August 1998 for an affiliate's seven coal-fired
stations and associated assets and liabilities, which were placed
up for auction earlier in 1998. The affiliate completed the sale
of its interest in the Homer City generation assets to Edison
Mission Energy in March 1999, and the sale of its remaining coal-
fired generation assets to AES in May 1999. (See Item 1 - Note 2
to the Consolidated Financial Statements.)
Now that the sale of the affiliate's coal-fired generation
assets is complete, approximately 60% of the company's power
requirements will be satisfied through generation from its nuclear
and hydroelectric stations and by purchases under long-term
contracts from nonutility generators and the New York Power
Authority. For the remaining power requirements the company has
assumed the risk of market prices that are sometimes volatile,
since it has capped the prices it charges customers.
The company uses electricity contracts to manage its exposure
to fluctuations in the cost of electricity. These contracts allow
it to fix margins on the majority of its retail electricity sales.
The cost or benefit of electricity contracts is included in the
cost of electricity purchased when the electricity is sold.
Nine Mile Point nuclear generating unit No. 2: The company
announced in June 1999 that it agreed to sell its 18% interest in
Nine Mile Point 2 to AmerGen Energy Company, a joint venture of
PECO Energy Company and British Energy. In the same announcement,
Niagara Mohawk Power Corporation, the operator and 41% owner of
Nine Mile Point 2, announced the sale of its interest in Nine Mile
Point 2 to AmerGen. At closing, the company will receive $27.9
million in proceeds based on its 18% ownership share. (See Item 1
- - Note 2 to the Consolidated Financial Statements.) The company
may be entitled to additional payments through 2012 under a
financial sharing agreement. A power purchase agreement with
AmerGen requires the company to purchase 17.1% of all electricity
from Nine Mile Point 2 at negotiated prices for three years.
AmerGen will assume full responsibility for the
decommissioning of its ownership share of Nine Mile Point 2. The
decommissioning fund will be pre-funded to a fixed amount by the
sellers, with all potential costs above the fixed amount paid by
AmerGen. The company expects the sale of Nine Mile Point 2 to be
completed early next year.
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 members
submitted filings to the FERC proposing, among other things, to
restructure the power pool by establishing a New York Independent
System Operator and a New York State Reliability Council. In a
series of orders in June 1998, January 1999 and July 1999 the FERC
conditionally authorized the formation of the system operator and
reliability council and conditionally accepted the tariff and rates
applicable to transmission service, and energy, capacity and
ancillary services filed by the members. In February 1999 power
pool members also filed the necessary applications to transfer
control of transmission facilities to the system operator, which
the FERC accepted in April 1999. On July 29, 1999, the FERC
conditionally granted certain authorizations that would allow the
system operator to become operational on September 1, 1999, and
required an additional filing by the power pool members within 30
days to implement the restructuring proposal. The company is
currently awaiting the FERC's acceptance of the remaining power
pool member filings. The company does not expect the restructuring
to have a material adverse 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 electricity
customers were able to choose their electricity supplier by August
1, 1999.
The company is responsible for delivery of its 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.
On July 15, 1999, the PSC issued an Opinion and Order
Concerning Retail Access Credit and Customer Identification Issues.
This order addressed phase one unbundling issues related to the
company's retail access credit (the amount backed out of a
customer's transmission and distribution bill when that customer
participates in retail access), suppliers' obligations and customer
identification. As a result of the order, the company's retail
access credit was maintained at its current value, retail access
suppliers are responsible for energy and capacity for their own
customers and the company may require a deposit from customers who
are not able to provide adequate identification. The PSC also
concluded that
<PAGE>
costs for line losses, installed reserves and most ancillary
services are being recovered through the company's delivery charge
and are not part of the retail access credit. The company is
currently developing its response to this order and is unable to
predict the effect of the order on its financial position or
results of operations.
Competitive Electric Metering: In May 1999 the PSC approved a plan
to open up to competition electric metering services for certain
customers in New York State. The services include installation and
maintenance of electric meters, meter reading and meter data
retrieval and storage. Competitive metering would initially be
available to customers with peak electricity requirements of 50
kilowatts or more. Utilities will be required to file unbundled
metering tariffs by October 1, 1999, that identify their metering
costs as a component of existing electricity prices. Utilities
will continue their provider of last resort responsibilities for
metering. Stranded cost issues will be handled in individual
utility proceedings. The company is currently unable to predict
the effect of this plan on its financial position or results of
operations.
Natural Gas Business
Role of Local Distribution Companies: On November 3, 1998, the PSC
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.
In compliance with the PSC's Order, effective April 1, 1999,
the company ceased assigning certain capacity costs to customers
who switch from fully bundled sales service to transportation
service. Any capacity costs that may be stranded as a result of
terminating capacity assignment will be recovered from all
applicable customers.
Other Matters
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 has been 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 all of the special-purpose items it has identified that affect
its electricity and natural gas delivery systems and its
communication systems.
Even though the company believes it has 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 and 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 following up with key third parties who have not
responded satisfactorily or who have not responded at all. The
company has developed 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.
The company believes it has taken all necessary steps to
address the Year 2000 issue successfully. Through June 30, 1999,
the company has spent approximately $11.6 million and expects to
spend an additional $1.1 million on Year 2000 readiness including
contingency plan preparations. 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 also implementing an
emergency preparedness plan which will help it to address customer
emergencies and coordinate with other emergency service providers.
Each of the company's 13 division offices will be open from 10:00
p.m. on December 31, 1999, to 2:00 a.m. on January 1, 2000. The
company's personnel will be available to staff county emergency
preparedness offices during this same time period. Other customer
contact sites will also be established. Temporary local numbers
will be established so customers can contact the company should
long distance telephone service fail. The company has completed
over 75 contingency plans to specifically address reasonably likely
worst case scenarios that could arise as a result of the Year 2000
problem.
The contingency plans 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 radio systems and satellite phones. Another
scenario addressed by the company's contingency plans 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 its many other suppliers on the same transmission line.
Since the sale of its affiliate's coal-fired generation assets has
been completed, the company will be buying from third parties,
including nonutility generators and the New York Power Authority,
the majority of the electricity its customers need. 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. All of the company's contingency plans are ready
and have been tested.
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
electricity generation plants. The company completed its Year 2000
readiness program for mission critical systems and for contingency
plans before the PSC's July 1, 1999, deadline.
Investing and Financing Activities
Investing Activities
Capital spending for the first six months of 1999 was $29
million, primarily for the extension of service and necessary
improvements to existing facilities. The company's capital
spending for 1999 will be about $92 million, and is expected to be
paid for entirely with internally generated funds.
Financing Activities
On February 1, 1999, the company redeemed, at par, $25 million
of 7.40% preferred stock and $50 million of adjustable rate
preferred stock.
On April 1, 1999, the company purchased, at a discount, shares
of the following series of preferred stock: $7.2 million of 3.75%,
$2.8 million of 4 1/2% (Series 1949), $1.4 million of 4.15%, $4.8
million of 4.40%, and $3.1 million of 4.15% (Series 1954).
On April 1, 1999, the holders of a majority of the votes of
shares of the company's serial preferred stock consented to
increase the amount of unsecured debt the company may issue by up
to an additional $1.2 billion.
In June 1999 the company redeemed, at a premium, $50 million
of 7 5/8% Series first mortgage bonds.
Forward-looking Statements
This Form 10-Q 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; the fact that despite
all of the company's efforts, there can be no assurances that all
of its Year 2000 issues have been 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 electricity and natural gas
utility markets; its ability to control nonutility generator and
other costs; changes in fuel supply or cost and the success of its
strategies to satisfy its power requirements now that all of its
affiliate's coal-fired generation assets have been 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
(a) By letter dated January 21, 1992, the New York State
Department of Environmental Conservation notified the company that
it had been identified as a potentially responsible party 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. The company
believes that remediation costs at the Peter Cooper Site might rise
to $16 million. By letter dated May 12, 1992, the company notified
the NYSDEC that it believed it had no responsibility for the
alleged contamination at the Peter Cooper Site, and declined to
conduct remediation or finance remediation costs.
On July 2, 1996, the U.S. Environmental Protection Agency
notified the company of its concern regarding the stream bank
erosion along a portion of the Peter Cooper Site that is located on
the company's property. Without admitting to any liability or
responsibility, on October 24, 1996, the company entered into an
Order on Consent with the EPA to stabilize the stream bank. This
project was completed in January 1997 at a cost of $120,000. By
letter dated June 30, 1999, the EPA notified the company and 18
other companies that they are PRPs with respect to the Peter Cooper
Site, and offered them the opportunity to perform a remedial
investigation and feasibility study at the site. Although the
company is still evaluating the June 30 letter, it believes that
the ultimate disposition of this matter will not have a material
adverse effect on its financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K
A report on Form 8-K dated June 23, 1999, was filed to
report certain information under Item 5, "Other
Events."
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
NEW YORK STATE ELECTRIC & GAS CORPORATION
(Registrant)
By /s/ Sherwood J. Rafferty
Sherwood J. Rafferty
Senior Vice President and
Chief Financial Officer
Date: August 10, 1999
EXHIBIT INDEX
(a) (1) The following exhibit is delivered with this report:
Exhibit No.
27 - Financial Data Schedule.
(a) (2) The following exhibit is incorporated herein by reference:
Exhibit No. Filed in As Exhibit No.
(A)10-39 - Amended and Restated Employment Agreement
dated April 23, 1999, for M. I. German -
Energy East Corporation's Form 10-Q for
the quarter ended June 30, 1999, File No.
1-14766. 10-39
___________________________
(A) Management contract or compensatory plan or arrangement.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
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