UNITED STATES 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
For the quarterly period ended September 30, 1996
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 1-4315
ORANGE AND ROCKLAND UTILITIES, INC.
(Exact name of registrant as specified in its charter)
New York 13-1717729
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
One Blue Hill Plaza, Pearl River, New York 10965
(Address of principal executive offices) (Zip code)
(914) 352-6000
(Registrant's telephone number, including area code)
NONE
(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
Indicate the number of shares outstanding of each of the issuer's
class of common stock, as of the close of the latest practicable
date.
Common Stock - $5 Par Value 13,654,069 shares
(Class) (Outstanding at October 31, 1996)
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets (Unaudited) at
September 30, 1996 and December 31, 1995 1
Consolidated Statements of Income (Unaudited)
for the three months and nine months ended
September 30, 1996 and September 30, 1995 3
Consolidated Cash Flow Statements (Unaudited)
for the nine months ended September 30, 1996
and September 30, 1995 4
Notes to Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 6. Exhibits and Reports on Form 8-K 24
Signatures 25
<TABLE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
Assets
<CAPTION>
September 30, December 31,
1996 1995
(Thousands of Dollars)
<S> <C> <C>
Utility Plant:
Electric $1,009,980 $ 993,926
Gas 215,867 211,135
Common 57,364 56,796
Utility Plant in Service 1,283,211 1,261,857
Less accumulated depreciation 434,640 419,844
Net Utility Plant in Service 848,571 842,013
Construction work in progress 33,593 31,655
Net Utility Plant 882,164 873,668
Non-utility Property:
Non-utility property 20,455 34,376
Less accumulated depreciation, depletion
and amortization 3,618 12,945
Net Non-utility Property 16,837 21,431
Current Assets:
Cash and cash equivalents 6,210 5,164
Temporary cash investments - 1,335
Customer accounts receivable, less allowance for
uncollectible accounts of $2,315 and $2,307 56,862 61,653
Accrued utility revenue 17,909 22,198
Other accounts receivable, less allowance for
uncollectible accounts of $75 and $169 10,249 9,752
Gas marketing accounts receivable, less allowance
for uncollectible accounts of $628 and $133 32,819 51,198
Materials and supplies (at average cost) 36,201 32,668
Prepaid property taxes 29,223 20,687
Prepayments and other current assets 28,123 26,463
Total Current Assets 217,596 231,118
Deferred Debits:
Income tax recoverable in future rates 74,098 72,631
Deferred revenue taxes 14,442 15,596
Deferred pension and other postretirement benefits 10,299 10,422
IPP settlements 26,264 40,034
Unamortized debt expense (amortized over term
of securities) 10,394 11,417
Other deferred debits 41,292 32,821
Total Deferred Debits 176,789 182,921
Total $1,293,386 $1,309,138
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
Capitalization and Liabilities
<CAPTION>
September 30,December 31,
1996 1995
(Thousands of Dollars)
<S> <C> <C>
Capitalization:
Common stock (13,654,065 & 13,653,613 shares
outstanding) $ 68,270 $ 68,268
Premium on capital stock 133,615 133,607
Capital stock expense (6,107) (6,107)
Retained earnings 194,871 184,008
Total 390,649 379,776
Non-redeemable preferred stock (428,443 shares
outstanding) 42,844 42,844
Non-redeemable cumulative preference stock
12,221 and 12,539 shares outstanding) 399 409
Total Non-Redeemable Stock 43,243 43,253
Redeemable preferred stock (13,896 shares
outstanding) 1,390 1,390
Long-term debt 359,441 359,736
Total Capitalization 794,723 784,155
Non-current Liabilities:
Reserve for claims and damages 3,685 3,848
Postretirement benefits 15,038 13,756
Pension costs 36,144 38,740
Total Non-current Liabilities 54,867 56,344
Current Liabilities:
Notes payable and obligations due within one year 66,267 68,550
Accounts payable 84,627 62,082
Gas marketing accounts payable 27,111 44,630
Accrued Federal income and other taxes 1,707 2,050
Refundable fuel and gas costs 10,942 11,314
Refunds to customers 2,884 13,903
Other current liabilities 29,827 38,192
Total Current Liabilities 223,365 240,721
Deferred Taxes and Other:
Deferred Federal income taxes 186,687 183,396
Deferred investment tax credits 15,610 16,217
Accrued IPP settlement agreements 2,000 17,500
Other deferred credits 16,134 10,805
Total Deferred Taxes and Other 220,431 227,918
Total $1,293,386 $1,309,138
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues:
Electric $144,506$138,479 $373,297$355,622
Gas 15,589 14,533 125,681 93,943
Total Utility Revenues 160,095 153,012 498,978 449,565
Diversified Activities 55,511 78,855 214,664 339,407
Total Operating Revenues 215,606 231,867 713,642 788,972
Operating Expenses:
Operations:
Fuel used in electric production 21,615 20,927 41,816 54,772
Electricity purchased for resale 14,719 15,069 58,946 40,209
Gas purchased for resale 8,592 7,056 74,240 47,232
Non-utility gas marketing purchases 54,548 76,730 208,542 332,840
Other expenses of operation 37,464 34,582 118,773 105,479
Maintenance 8,400 9,317 26,842 29,917
Depreciation and amortization 9,489 9,486 24,060 27,775
Taxes other than income taxes 24,663 24,107 75,468 71,455
Federal income taxes 10,429 10,636 21,133 22,403
Total Operating Expenses 189,919 207,910 649,820 732,082
Income from Operations 25,687 23,957 63,822 56,890
Other Income and (Deductions):
Allowance for other funds used during
construction 4 4 13 26
Investigation costs (200) (1,535) (1,000) (3,542)
Other - net 725 (155) (367) 4,992
Taxes other than income taxes (33) (39) (216) (560)
Federal income taxes 43 709 363 202
Total Other Income and (Deductions) 539 (1,016) (1,207) 1,118
Income Before Interest Charges 26,226 22,941 62,615 58,008
Interest Charges:
Interest on long-term debt 6,040 6,649 18,143 20,501
Other interest 1,262 1,333 4,217 3,470
Amortization of debt premium, expense-net 366 349 1,097 1,029
Allowance for borrowed funds used
during construction (118) (182) (393) (827)
Total Interest Charges 7,550 8,149 23,064 24,173
Net Income 18,676 14,792 39,551 33,835
Dividends on preferred and preference
stock, at required rates 755 784 2,268 2,353
Earnings applicable to common stock $17,921 $14,008 $37,283 $31,482
Avg. number of common shares outstanding
(000's) 13,654 13,654 13,654 13,653
Earnings per average common share
outstanding $ 1.31 $ 1.03 $ 2.73 $ 2.31
Dividends declared per common share
outstanding $ - $ - $ 1.94 $ 1.93
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
Consolidated Cash Flow Statements (Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1996 1995
(Thousands of Dollars)
<S> <C> <C>
Cash Flow from Operations:
Net income $39,551 $33,835
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 24,931 27,514
Deferred Federal income taxes 5,504 8,583
Deferred investment tax credit (607) (619)
Deferred and refundable fuel and gas costs (372) (1,694)
Allowance for funds used during construction (406) (853)
Other non-cash charges 3,172 5,546
Changes in certain current assets and liabilities:
Accounts and gas marketing receivables (net) and
accrued utility revenues 26,962 27,159
Materials and supplies (3,533) 1,847
Prepaid property taxes (8,536) (12,242)
Prepayments and other current assets (1,660) 218
Operating and gas marketing accounts payable 5,026 (17,918)
Accrued Federal Income and other taxes (343) (4,867)
Accrued interest (2,767) (4,090)
Refunds to customers (11,019) 4,798
Other current liabilities (3,748) (182)
Other-net (7,548) (11,229)
Net Cash Provided from Operations 64,607 55,806
Cash Flow from Investing Activities:
Additions to plant (32,135) (36,463)
Temporary cash investments 1,335 1,839
Allowance for funds used during construction 406 853
Net Cash Used in Investing Activities (30,394) (33,771)
Cash Flow from Financing Activities:
Proceeds from:
Issuance of long-term debt 26 44,048
Retirements of:
Long-term debt (167) (63,441)
Capital lease obligations (275) (386)
Net borrowings (repayments) under
short-term debt arrangements* (4,064) 15,374
Dividends on preferred and common stock (28,687) (28,635)
Net Cash Used in Financing Activities (33,167) (33,040)
Net Change in Cash and Cash Equivalents 1,046 (11,005)
Cash and Cash Equivalents at Beginning of Period 5,164 16,081
Cash and Cash Equivalents at End of Period $ 6,210 $ 5,076
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $24,237 $26,247
Federal income taxes $14,281 $13,575
*Debt with maturities of 90 days or less.
The accompanying notes are an integral part of these statements.
</TABLE>
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of September 30, 1996, the
consolidated statements of income for the three month and
nine month periods ended September 30, 1996 and 1995, and
the consolidated cash flow statements for the nine month
periods then ended have been prepared by Orange and Rockland
Utilities, Inc. (the "Company") without an audit. In the
opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present
the financial position and results of operations at
September 30, 1996, and for all periods presented, have been
made. The amounts in the consolidated balance sheet as of
December 31, 1995 are from audited financial statements.
2. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted.
It is suggested that these unaudited consolidated financial
statements be read in conjunction with the financial
statements and notes thereto included in the Company's
December 31, 1995 Annual Report to Shareholders. The
results of operations for the period ended September 30,
1996 and September 30, 1995 are not necessarily indicative
of the results of operations for the full year.
3. The consolidated financial statements include the accounts
of the Company, all subsidiaries and the Company's pro rata
share of an unincorporated joint venture. All inter-company
balances and transactions have been eliminated.
4. Contingencies at September 30, 1996 are substantially the
same as the contingencies described in the "Notes to
Consolidated Financial Statements" included in the Company's
December 31, 1995 Annual Report to Shareholders, which
material is incorporated by reference to the Company's
December 31, 1995 Form 10-K Annual Report, except changes in
the status of regulatory matters in updated Part I, Item 2
under the caption "Rate Activities" and the status of
certain Legal Proceedings in updated Part II, Item I, "Legal
Proceedings" in any Form 10-Q filed subsequent to the
Company's December 31, 1995 Annual Report to Shareholders.
5. Certain amounts from prior years have been reclassified to
conform with the current year presentation.
6. In March 1995, the Financial Accounting Standards Board
issued SFAS No. 121, "Accounting for Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of". This
Statement imposes criteria for the continued recognition of
regulatory assets by requiring that such assets be probable
of future recovery at each balance sheet date. The Company
adopted this standard on January 1, 1996. Based on the
current regulatory structure in which the Company operates,
the adoption did not have any effect on the financial
position or results of operations of the Company. This
conclusion may change in the future as competitive factors
influence wholesale and retail pricing in the electric
industry.
7. The Internal Revenue Service ("IRS") has completed its
examination of the Company's tax returns for 1990, 1991 and
1992. The Company and the IRS agreed, during the second
quarter, to an assessment for a tax deficiency of
approximately $1.7 million plus interest, which primarily
relates to prior financial improprieties of certain Company
officers and former employees. (Reference is made to the
caption "Rate Activities" in Part I, Item 2 of this Form 10-
Q.) After offsetting the assessment with established
reserves and other related items, this settlement had a
minimal effect on the operating results of the Company.
8. In February 1994, the Company's long-term contract with
Pittston Coal Sales Corporation ("Pittston") was terminated
due to Pittston's failure to meet coal quality
specifications of the contract and failure to provide
adequate assurance of future performance. The Company
commenced an action against Pittston for a judgment
declaring that the contract was properly terminated.
Pittston filed a counterclaim against the Company for breach
of contract. In June 1996, the Company reached a settlement
with Pittston which has been deferred on the Company's
books. The Company will seek approval from the New York
Public Service Commission, New Jersey Board of Public Utilities
and Pennsylvania Public Utilities Commission to defer and
recover the settlement amount, including associated costs,
from its ratepayers through its fuel adjustment clauses, as
a partial offset to the savings generated from lower-cost
replacement coal.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition:
Financial Performance
The Company's consolidated earnings per average common share
outstanding for the third quarter of 1996 were $1.31 as compared
to $1.03 for the third quarter of 1995. Fluctuations within the
components of earnings are discussed in the "Results of
Operations". The average number of common shares outstanding
were 13.7 million for the third quarters of both 1996 and 1995.
The current quarterly dividend rate of $.645 is equivalent to an
annual dividend rate of $2.58 per share. Dividends declared
during the twelve months ended September 30, 1996 amounted to
$2.58 with a dividend payout ratio of 85.4% as compared to $2.57
a year ago with a payout ratio of 102.8%.
The return on average common equity for the twelve months ended
September 30, 1996 was 10.85% as compared to 8.99% for the twelve
months ended September 30, 1995.
Capital Resources and Liquidity
At September 30, 1996, the Company and its utility subsidiaries
had unsecured bank lines of credit totaling $59.0 million. The
Company may borrow under the lines of credit through the issuance
of promissory notes to the banks. The Company, however, utilizes
such lines of credit to fully support commercial paper
borrowings. The aggregate amount of borrowings through the
issuance of promissory notes and commercial paper cannot exceed
the aggregate lines of credit. In addition, non-utility lines of
credit amounted to $20.0 million at September 30, 1996, and the
non-utility subsidiaries may undertake short-term borrowings or
make short-term investments. The average daily balance of short-
term borrowings for the nine months ended September 30, 1996
amounted to $58.5 million at an effective interest rate of 5.7%
as compared to $34.7 million at an effective interest rate of
6.7% for the same period of 1995. The average daily balance of
temporary cash investments for the nine months ended September
30, 1996 and 1995 was $1.4 million with an effective interest
rate of 5.1% for 1996 compared to an effective interest rate of
5.8% for the same period of 1995.
The New York Public Service Commission ("NYPSC") has authorized
the Company to issue up to 750,000 shares of common stock under
its Dividend Reinvestment and Stock Purchase Plan ("DRP") and its
Employee Stock Purchase and Dividend Reinvestment Plan ("ESPP").
Under an option of the Company, however, common stock used to
satisfy the requirements of the DRP and ESPP is being purchased
on the open market.
On August 6, 1996, Duff & Phelps Credit Rating Co. ("D&P")
downgraded the Company's debt, preferred securities and
commercial paper as follows:
Current Rating Prior Rating
First Mortgage Bonds A A+
Debentures A- A
Non-Coll PCRBs A- A
Preferred Stock BBB+ A-
Preference Stock BBB+ A-
Commercial Paper D-1- D-1
In addition, Fitch Investors Service, L.P. has withdrawn its
ratings on the Company's securities due to the absence of a
formal rating relationship.
The Company's credit ratings are subject to periodic revision or
withdrawal by the particular rating agency, and each rating
should be evaluated independently of any other rating. The
ratings assigned to the Company's securities by the rating
agencies are not a recommendation to buy, sell or hold the
Company's securities, but rather are assessments of the
respective credit-worthiness of the Company's various securities
by the rating agencies.
Rate Activities
New York
Gas:
On January 16, 1992, the Company filed an application for an
increase in gas rates with the NYPSC. The Settlement Agreement
in that case, which was approved by the NYPSC on September 30,
1992 provided, among other things, for multi-year rate
adjustments through 1996 and for certain gas incentives. The
second adjustment to gas rates under the Settlement Agreement,
which amounted to an increase of $3.8 million or 2.5%, was to
become effective on January 1, 1994. As a result of the NYPSC's
investigation of alleged financial improprieties of certain
former officers and former employees of the Company (the "NYPSC
Investigation"), however, the implementation of the increase was
first extended to June 30, 1994 and then further extended to
December 30, 1994. On November 4, 1994, the NYPSC issued an
Order terminating the Settlement Agreement effective December 31,
1994. The Order denied the Company the opportunity for rate
adjustments in the third and fourth years (1995 and 1996) of the
four-year settlement agreement. However, the Order authorized
the Company to defer the second-stage rate adjustments and all
previously authorized reconciliations pertaining to periods prior
to December 31, 1994, pending review and audit by the NYPSC Staff
and the conclusion of the NYPSC's Investigation. In addition, on
February 7, 1995, the Accounting and Finance Division of the
NYPSC issued an interpretation of the November 4, 1994
termination order which stated that the gas incentive mechanism
related to the attainment of certain goals was no longer
available. The Company did not contest this interpretation.
On October 2, 1995, the Company, the NYPSC Staff, the New York
State Consumer Protection Board ("CPB") and the Industrial Energy
Users Association ("IEUA"), reached a settlement which resolves
all outstanding issues relating to the NYPSC Investigation
described below. The settlement provided for, among other
things, the cancellation of the second stage gas base rate
increase discussed above. All deferred balances resulting from
expense reconciliations and deferral of the second stage rate
adjustment are to be offset with an equal amount of deferred
credits approved as part of the rate decision dated May 3, 1996,
discussed below. In addition, the settlement provides for the
recognition in gas rates of the change in accounting required by
SFAS 106, "Employer Accounting for Postretirement Benefits Other
Than Pensions". The annual cost increase due to gas operations
as a result of SFAS 106 will be offset by an equal amount of
previously deferred credits. On May 3, 1996, the NYPSC issued
an order approving the settlement ("May 3, 1996 Order").
By orders issued December 20, 1994, August 11, 1995, March 28,
1996 and September 13, 1996 the NYPSC has initiated the
restructuring of gas service in New York by requiring gas
distributors to file tariffs providing for the transportation of
third party gas supplies for residential, commercial and
industrial customers. Small customers' volumes will be
aggregated for purposes of obtaining unbundled gas distribution
service. The Company's new gas transportation tariffs became
effective October 1, 1996. The NYPSC's orders provide for
recovery of stranded costs that may be incurred over the next
three years.
Electric:
On February 17, 1995, the Company submitted a compliance filing
regarding the operation of the Revenue Decoupling Mechanism
("RDM"). The filing included a proposal to eliminate the RDM
Adjustment Factor of $7.7 million, effective May 1, 1995,
reflecting the completion of the recovery of an RDM
undercollection applicable to the year 1993. This equated to a
2.3% annual reduction in revenues. In addition, the filing
requested that a net RDM overcollection of $0.7 million for the
year 1994 be retained by the Company as a future rate moderator,
subject to NYPSC verification. On April 19, 1995, the NYPSC
approved the proposals, and the reduction of $7.7 million in the
RDM Adjustment Factor became effective on May 1, 1995.
On May 25, 1995, the Company filed with the NYPSC for a decrease
in electric revenues of $6.1 million to be effective April 1,
1996 (Case 95-E-0491). This equated to an overall reduction of
1.8% in annual retail revenues. The filing reflected a reduction
in operating expenses due to the complete recovery of the
Company's share of the Sterling Nuclear Project and other cost
reductions. The Company proposed a multi-year rate plan covering
the three-year period ending on March 31, 1999 with no base rate
increases in the second and third years of the plan. The Company
proposed an overall return on capital of 9.17% with a sharing
mechanism governing any return on common equity above 11.2%.
On August 1, 1995, the NYPSC approved a Stipulation which
provided for the early implementation of the Company's proposed
annual rate reduction of $6.1 million. As a result, reduced
rates became effective August 1, 1995, which produced a revenue
reduction of approximately $3.8 million for the period August 1,
1995 to March 31, 1996. The Stipulation also increased the
excess earnings threshold from 10.6% to 11.3%, with equal sharing
of earnings above 11.3% between shareholders and ratepayers for
the period January 1, 1995 through March 31, 1996.
The revenue reduction has been offset by the deferred revenue
associated with the customer's share of earnings related to
Commission-approved sharing mechanisms for 1994 and 1995. On
April 2, 1996, the Company, NYPSC Staff, the CPB and the IEUA
reached a settlement agreement (which was approved by the NYPSC
in its May 3, 1996 Order) which resolved all the remaining
outstanding revenue requirement issues in the electric rate
proceeding (Case 95-E-0491). Under the agreement, the Company
reduced its annual retail revenues from electric utility service
by an additional $7.75 million, or 2.3% effective May 1, 1996.
The base rate decrease will remain effective until April 30,
1999.
For the three-year term of the settlement agreement, the
authorized return on equity will be 10.4% and the Company will be
permitted to retain all earnings up to 10.9%. Earnings in excess
of 10.9% will be shared equally between customers and
shareholders.
The agreement also provides for the recovery of all non-utility
generator contract termination costs allocated to New York
electric operations over approximately a four-year amortization
period. In addition, the settlement agreement contains several
performance mechanisms (related to service reliability and
customer service), a service guarantee program as well as a
retail access pilot program called "PowerPick(TM)". The
PowerPick(TM) pilot program will allow a limited number of
customers to choose an alternative supplier of energy. The
Company will continue to provide all other services such as
reliability, customer service and billing. PowerPick(TM) is
designed so that it will not have a material impact on
shareholders and non-participating customers.
The settlement agreement also eliminated all revenue and most
expense reconciliation provisions of the RDM.
In its order issued May 20, 1996 (the "May 20, 1996 Order") in
the Competitive Opportunities Proceeding (Case 94-E-0952) the
NYPSC ordered five of the State's investor-owned electric
utilities (including the Company) to file rate/restructuring
plans consistent with the NYPSC's "policy and vision for
increased competition." While the Company supports the NYPSC's
goal of establishing a competitive electricity market in New York
State, we believe that the May 20, 1996 Order was deficient in
certain areas. On September 18, 1996 the Company, the six other
New York investor-owned electric utilities, and the Energy
Association of New York State filed a suit in New York State
Supreme Court challenging the May 20, 1996 Order. Information
regarding this litigation is contained under the caption
"Regulatory Matters" in Part II, Item 1, Legal Proceedings, of
this Quarterly Report on Form 10-Q.
On October 1, 1996 the Company, in response to the May 20, 1996
Order, filed a rate/restructuring plan (the "Plan") with the
NYPSC. The principal component of the Company's filing, which
includes functional separation of generation, retail access with
reciprocity, base rate freeze and stranded cost recovery are
discussed below.
The Company intends to functionally separate its generation from
the remainder of its operations. This functional separation is
scheduled to be completed in 1997. The Company has no plans to
divest its generation.
The Company's Plan sets forth a two-phase approach for
implementing retail access. For the first phase, the Company
proposes to expand its PowerPick(TM) program to all customers.
This first phase would commence 12 months after a wholesale
electric market is fully operational in New York State. A second
phase, in which the Company's customers would be allowed a choice
of capacity as well as energy providers, would become effective
24 months after the beginning of the first phase.
The Company's filing indicated that reciprocity would be required
in order to implement retail access. By reciprocity, the Company
means that if other generators are allowed access to the
Company's retail customers, the Company should be permitted equal
access to the customers of those utilities within New York State
and regionally.
The Company's current three-year electric rate settlement is
effective until April 30, 1999. For those low-income, demand
side management, research and development, and other public
policy programs which the NYPSC continues to mandate, the Company
proposes that the costs of these programs be recovered through a
non-bypassable systems benefit charge.
The Company proposes that it have a reasonable opportunity to
recover its strandable costs from customers. Strandable costs
are investments and expenditures made by utilities pursuant to
their obligation under the existing regulatory framework to
provide electric service to the public, whose continued recovery
through electric rates may be jeopardized by the transition from
traditional regulation and exclusive retail franchises to a
different form of regulation and a more competitive marketplace.
Three broad categories of strandable costs are utility generation
investment, purchase power contracts, and regulatory assets. In
its filing, the Company does not attempt to quantify the amount
of its strandable costs. The Company's proposal is to recover
strandable costs through the implementation of a non-bypassable
competition transition charge ("CTC"). Under the Plan, the CTC
would be recoverable during a transition period of eight years
starting when the second phase of retail competition becomes
effective.
On October 9, 1996, the NYPSC issued an order establishing
procedures and a schedule for considering the rate/restructuring
plans filed on October 1, 1996 in the Competitive Opportunities
Proceeding. The NYPSC has established a separate proceeding for
each of the five utilities (including the Company) which filed
these plans. In each of these proceedings, during the 90-day
period ending January 7, 1997, the utility, the NYPSC staff and
other interested parties would be allowed to complete discovery
and engage in settlement negotiations. If a settlement agreement
is negotiated in a proceeding, it will be submitted to the
Commission for approval. If a settlement agreement is not
reached within this 90-day period, the parties will have an
additional 60-day period to submit any necessary briefs or other
submissions to an administrative law judge. At the end of the
150-day period the rate/restructuring plan will be submitted to
the Commission for decision.
Other:
On November 10, 1994, the Company filed with the NYPSC a
quantification of the rate-making effects of the Company's
investigation into the prior financial improprieties of certain
former Company officers and former employees. The Company
requested that the NYPSC approve a refund of approximately $3.4
million to its New York electric and gas customers. That amount
was in addition to the $369,000 previously refunded by the
Company. This amount was charged to operations in the fourth
quarter of 1994. The NYPSC had instituted a proceeding (Case 93-
M-0849) to provide the opportunity for other parties, including
the NYPSC Staff which was conducting the NYPSC Investigation, to
be heard on this matter. On July 6, 1995, the NYPSC issued an
order stating that the issues of the amount, timing and
allocation of New York ratepayer refunds as a result of the NYPSC
Investigation in Case 93-M-0849 should be considered in the
context of the Company's electric base rate case and ordered the
consolidation of the two cases.
On October 2, 1995, the Company, the NYPSC Staff, the CPB and
IEUA reached a settlement which resolved all outstanding issues
relating to the NYPSC Investigation. The settlement provided for
a total of $8.5 million in rate relief for the Company's New York
customers. The amount attributable to electric operations was
$6.5 million and the amount attributable to gas operations was
$2.0 million. The full impact of the settlement is reflected in
the Company's results of operations after recording a charge of
approximately $2.8 million during the third quarter of 1995. The
May 3, 1996 Order approved the settlement. The electric portion
was refunded to customers in May and June 1996. The gas portion
was offset by deferred base rate increases. The above parties
agreed that no further rate disallowances, rebates, refunds or
rate reductions of any kind are appropriate in connection with
the investigation referred to above or to the activities or
transactions reviewed in performing such investigations.
New Jersey
Under an agreement with the New Jersey Board of Public Utilities
("NJBPU") to return to customers any funds found to be
misappropriated or otherwise questionable as a result of the
Company's investigation of alleged financial improprieties of
certain former Company officers and former employees, Rockland
Electric Company ("RECO"), a wholly-owned utility subsidiary of
the Company, refunded to New Jersey ratepayers $93,000 through
reductions in the applicable fuel adjustment charges in February
and March 1994. In December 1994, RECO submitted a proposal to
the NJBPU to refund an additional $704,000. By order dated
January 27, 1995, the NJBPU approved this proposal and the refund
was made in February 1995.
On November 3, 1993, the NJBPU commenced its periodic management
audit of RECO. The NJBPU audit included, in addition to a
standard review of operating procedures, policies and practices,
a review of the posture of RECO management regarding business
ethics and a determination regarding the effect of such events on
RECO ratepayers. The audit findings are contained in a report
titled "Final Report on An Ethics Review of Rockland Electric
Company" (Docket No. EA900302-48) dated December 1, 1994 ("Ethics
Review Report"). The NJBPU subsequently initiated an examination
of senior management appointments and changes to the composition
of the Company's Board of Directors and the development of an
ethics program. The results of this examination are contained in
a report titled "Final Report of an Ethics Oversight Review of
Rockland Electric Company" dated June 23, 1995 ("Ethics Oversight
Report"). The final Ethics Review Report and Ethics Oversight
Report were approved by the NJBPU on July 7, 1995. The Ethics
Oversight Report acknowledges that the NJBPU had approved refunds
to the Company's New Jersey customers and generally comments
favorably about the changes instituted by the Company.
On February 21, 1996, the NJBPU approved RECO's 1996 Levelized
Energy Adjustment Clause ("LEAC") filing whereby RECO passed back
an additional $482,000 of refunds related to the investigation of
the alleged financial improprieties referred to above, making the
total amount refunded to RECO's customers $1,279,000. The
Company believes that this is the final refund applicable to
RECO. In addition, as part of this LEAC filing, RECO was granted
full recovery of its share of buyout costs associated with non-
utility generator contracts entered into by the Company.
QUARTERLY COMPARISON
Results of Operations
Earnings per average common share outstanding for the third
quarter of 1996 amounted to $1.31 per share as compared to $1.03
per share for the third quarter of 1995.
Comparative results were largely impacted by the customer refund
provision recorded in the third quarter of 1995 and by
significantly lower investigation costs in the third quarter of
1996. Third quarter 1996 earnings were also impacted by the
Company's continued success in controlling operating and
maintenance expenses and in lowering interest charges.
Electric and Gas Revenues
Electric and gas operating revenues, including fuel cost and
purchased gas cost recoveries, increased by $7.1 million.
Increased gas sales and the elimination of the New York electric
RDM adjustment had a positive effect on revenues in the third
quarter of 1996 as compared to the same quarter of 1995.
Electric operating revenues during the current quarter were
$144.5 million as compared to $138.5 million for the third
quarter of 1995, an increase of $6.0 million. This increase is
primarily the result of the 1995 revenues reflecting the impact
of the Company's RDM then in effect. In accordance with the
NYPSC's May 3, 1996 Order described in this Item 2 under the
caption "Rate Activities," electric revenues are no longer
governed by an RDM agreement. This increase was offset by base
rate reductions, lower sales and lower fuel cost recoveries.
Actual total sales of electric energy to retail customers during
the third quarter of 1996 were 1,281,021 megawatt hours ("Mwh"),
compared with 1,310,370 Mwh during the comparable period a year
ago. This decrease is attributable to decreased usage as a
result of cooler summer temperatures, partially offset by an
increase in the average number of customers when compared to the
same period a year ago. Revenues associated with these sales
were $141.9 million during the current quarter compared to $147.7
million during the third quarter of 1995. The 1995 revenues
after reflecting the RDM adjustment were $140.4 million.
Gas operating revenues during the quarter were $15.6 million
compared to $14.5 million for the third quarter of 1995, an
increase of $1.1 million. This increase is primarily the result
of increases in sales to both firm and interruptible customers
and higher gas cost recoveries.
Gas sales to firm customers during the third quarter of 1996
totaled 1,563 million cubic feet ("Mmcf"), compared with 1,556
Mmcf during the same period a year ago. Gas revenues from firm
customers were $11.7 million, compared with $11.0 million in the
third quarter of 1995.
Fuel, Purchased Electricity and Purchased Gas Costs, Excluding
Gas Marketing
The cost of fuel used in the production of electricity and
purchased electricity costs increased by $0.3 million during the
third quarter of 1996 when compared to the same quarter of 1995.
This increase reflects the increase in the cost of fuel and
purchased power and increased demand (including sales for
resale), offset by deferred fuel costs.
Purchased gas costs for utility operations were $8.6 million in
the third quarter of 1996 compared to $7.1 million in 1995, an
increase of $1.5 million. This increase in gas costs is
primarily attributable to the volume of gas purchased for resale
and deferred costs offset by a reduction in price.
Other Operating and Maintenance Expenses
The Company's total operating expenses excluding fuel, purchased
power, gas purchased for resale and non-utility gas marketing
purchases for the third quarter, increased by $2.3 million
compared with the same period in 1995. Utility operating
expenses increased $3.6 million, offset by a decrease in
diversified operations expenses of $1.3 million. This decrease
is due to the restructuring of operations mentioned below.
The increase in utility operating expenses is primarily the
result of the amortization of recoverable Independent Power
Producer ("IPP") costs of $2.7 million and taxes of $1.8 million
offset by reductions in other operation expenses of $0.9 million.
Diversified Activities
The Company's diversified activities consist of gas marketing and
land development businesses conducted through wholly-owned non-
utility subsidiaries.
Revenues from diversified activities decreased by $23.3 million
for the third quarter of 1996 as compared to the same quarter of
1995. The decrease in operating expenses for all diversified
activities of $23.5 million is the result of decreased gas
purchases and operation expenses. The primary reason for the
decrease in revenues and gas purchases is the continued
restructuring of the gas marketing subsidiary business from large
volume/low margin wholesale customers towards securing lower
volume/higher margin retail customers.
Other Income, Deductions and Interest Charges - Net
Other income, net of interest charges and other deductions,
increased by $2.2 million during the third quarter of 1996 when
compared to the same quarter of 1995. This is primarily the
result of lower investigation and interest charges.
YEAR TO DATE COMPARISON
Results of Operations
Earnings per average common share outstanding for the first nine
months of 1996 amounted to $2.73 per share as compared to $2.31
per share for the first nine months of 1995.
Consistent with the third quarter, the nine-month increase in
earnings is the result of customer refund provisions made in 1996
and 1995, increased electric and gas sales, lower investigation
and related litigation costs and continued success in controlling
operating and maintenance expenses. The change in results of
operations for the diversified operations had minimal impact on
the change in earnings.
Electric and Gas Revenues
Electric and gas operating revenues, including fuel cost and
purchased gas cost recoveries, increased by $49.4 million in the
first nine months of 1996 as compared to the same period of 1995.
Electric operating revenues during the current nine-month period
were $373.3 million as compared to $355.6 million for the first
nine months of 1995, an increase of $17.7 million. This increase
is the result of the termination of the RDM agreement, as
mentioned previously, and regulatory adjustments made in the
respective periods, as well as increased sales and fuel cost
recoveries. These increases were offset by base rate reductions.
Actual total sales of electric energy to retail customers during
the first nine months of 1996 were 3,513,678 Mwh, compared with
3,446,899 Mwh during the comparable period a year ago. Despite
cooler summer conditions, customer usage increased. There was
also an increase in the average number of customers compared to a
year ago. Electric revenues associated with these sales were
$361.9 million (which was reduced by $5.7 million in
investigation refunds during the current nine-month period)
compared to $366.2 million during the first nine months of 1995,
a decrease of $4.3 million. The 1995 revenues after reflecting
the RDM adjustment were $355.1 million.
Gas operating revenues during the first nine months were $125.7
million compared to $93.9 million for the first nine months of
1995, an increase of $31.8 million. Revenues were increased by
gas cost recoveries of $21.0 million, sales volume changes of
$4.4 million, interruptible sales of $7.5 million and other
operating revenue of $0.4 million. This was offset by price
decreases of $1.5 million.
Gas sales to firm customers during the first nine months of 1996
totaled 14,675 Mmcf, compared with 13,268 Mmcf during the same
period a year ago. Gas revenues from firm customers were $109.8
million, compared with $85.9 million in the first nine months of
1995.
Fuel, Purchased Electricity and Purchased Gas Costs, Excluding
Gas Marketing
The cost of fuel used in the production of electricity and
purchased electricity costs increased by $5.8 million during the
first nine months of 1996 when compared to the same period of
1995. This increase reflects the increase in the cost of fuel
and purchased power as well as increased demand.
Purchased gas costs for utility operations were $74.2 million in
the first nine months of 1996 compared to $47.2 million in 1995,
an increase of $27.0 million. This increase in gas costs is
attributable to the volume of gas purchased for resale and higher
prices.
Other Operating and Maintenance Expenses
The Company's total operating expenses, excluding fuel, purchased
power, gas purchased for resale and non-utility gas marketing
purchases, for the first nine months increased by $9.2 million
compared with the same period in 1995. The increase in expenses
associated with utility operating expenses amounted to $10.9
million. Diversified operation and maintenance expenses
decreased $1.7 million.
As previously mentioned in the discussion of the third quarter
variance, the increase in utility operating expenses is primarily
the result of the amortization of recoverable IPP costs of $13.9
million, offset by a reduction in other operating expenses of
$3.0 million.
Diversified Activities
Revenues from diversified activities decreased by $124.7 million
for the first nine months of 1996 as compared to the same period
of 1995. The decrease in operating expenses for all diversified
activities of $126.0 million is the result of decreased gas
purchases of $124.3 million and decreased operation expenses of
$1.7 million. The primary reason for these decreases, as
mentioned previously, is the continuing restructuring of the gas
marketing subsidiary business from large volume/low margin
wholesale customers towards securing low volume/higher margin
retail customers.
Other Income, Deductions and Interest Charges - Net
Other income, net of interest charges and other deductions,
decreased by $1.2 million during the first nine months of 1996
when compared to the same period of 1995. The decrease reflects
the impact of the gain realized on the formation of the NORSTAR
Partnership in the first quarter of 1995 which amounted to $2.9
million and regulatory adjustments as a result of the NYPSC's May
3, 1996 Order somewhat offset by decreases in investigation
charges of $2.5 million and interest charges of $1.1 million.
Forward Looking Statements
To the extent the disclosures contained in this Form 10-Q for the
quarter ended September 30, 1996 are viewed as forward looking
statements, it should be noted that various risks and
uncertainties exist that could cause the actual results to differ
materially from that inferred by the forward looking statements.
These forward looking statements may include, among others,
statements concerning the Company's revenue and cost trends, cost
recovery, cost reduction strategies and anticipated outcomes,
changes in the utility industry, financing availability,
statements of the Company's expectations, beliefs, future plans
and strategies, anticipated events or trends and similar comments
concerning matters that are not historical facts. Forward
looking statements made by the Company are subject to risks and
uncertainties that could cause actual results to differ
materially from those expressed in, or implied by, the
statements. Some, but not all, of the risks and uncertainties
include general economic conditions in the Company's service
territory, competitive factors and federal and state regulatory
actions. Further, certain risks and uncertainties exist that
have not been mentioned herein due to their unforeseeable nature,
but which, nevertheless, may impact the Company's future
operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3, Legal Proceedings, in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995 for a description of litigations entitled United States v.
Kramer, et al. and State of New Jersey Dept. of Environmental
Protection v. Almo Anti-Pollution Services, et al. On October 2,
1996, the Company entered into a de minimis settlement agreement
with certain third-party defendants which, inter alia, provides
for (i) dismissal of the claims asserted against the Company and
a bar to future claims against the Company related to the site,
and (ii) indemnification of the Company for any future claims or
expenses related to the site, each with certain standard limited
exceptions. In exchange for this release, the Company will pay
$15,000 into a fund which will be used to pay for clean-up costs
related to the site.
Reference is made to Item 3, Legal Proceedings, in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995 for a description of the litigation entitled Hudson
Riverkeeper Fund, Inc. v. Orange and Rockland Utilities, Inc. On
September 16, 1996, the United States District Court for the
Southern District of New York entered a Stipulation and Consent
Judgment, dismissing the litigation without prejudice, and
pursuant to which, inter alia, the Company paid approximately
$175,000 to plaintiff for payment of legal fees and related
costs.
Reference is made to Item 3, Legal Proceedings, in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995 for a description of the litigations entitled Warwick
Administrative Group, et al. v. Avon Products, Inc. et al.
("Warwick") and U.S.A. v. International Paper Co., et al.
("International Paper"). On September 26, 1996, the Company
executed a consent decree prepared by the United States
Environmental Protection Agency settling the Company's
involvement in the International Paper action for approximately
$1,260. On October 2, 1996, the Company executed a settlement
agreement with the plaintiffs' group in the Warwick action in the
amount of $50,000.
Regulatory Matters
The Company, the six other New York State investor-owned electric
utilities, and the Energy Association of New York State filed a
petition in New York State Supreme Court on September 18, 1996
challenging the NYPSC's May 20, 1996 Order in the Competitive
Opportunities Proceeding (Case 94-E-0952) under Article 78 of the
New York Civil Practice Law and Rules. In their Article 78
petition, the petitioners alleged that the Order is vague,
ambiguous and procedurally defective, that the May 20, 1996 Order
fails to assure the utilities a reasonable opportunity to recover
strandable costs, and the NYPSC lacks the authority to order
retail wheeling or divestiture. The utilities and the NYPSC have
agreed to an expedited schedule in this proceeding. Briefings
have been completed and oral argument was held on October 24,
1996. Reference is made to the information contained under the
caption "Rate Activities" in Part I, Item 2, Management's
Discussion and Analysis of Financial Condition and Results of
Operations, of this Quarterly Report on Form 10-Q for a
discussion of the NYPSC's May 20, 1996 Order.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
SIGNATURES
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.
ORANGE AND ROCKLAND UTILITIES, INC.
(Registrant)
Date: November 12, 1996 By ROBERT J. McBENNETT
Robert J. McBennett
Treasurer
Date: November 12, 1996 By EDWARD M. McKENNA
Edward M. McKenna
Controller
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